Did GW Pharma Sell Out Too Low? Did GW Pharma Sell Out Too Low?
Friends,
This week’s announcement that GW Pharma is being acquired by Jazz Pharmaceutical was bittersweet for us. On the one hand, we were thrilled, as our model portfolios at 420 Investor had quite large positions. Additionally, the acquisition of the company is certainly a major validation of the medical potential of cannabis. On the other hand, we will miss following this trailblazer as closely as we have over the past eight years. GW Pharma is a one-of-a-kind company (read all news coverage) that worked for decades to achieve what no one else has done so far: FDA approval of a cannabis-derived medicine that helps patients where other treatments have failed.
The deal, valued at $7.2 billion, will be funded 91% with cash and the balance in Jazz Pharma stock. GW Pharma ended Q3 with $480 million cash and was operating at nearly cash-flow breakeven, so the enterprise value is actually lower than the reported deal price. While the purchase price of $220 per share ($20 in stock, $200 in cash) was 12% above the all-time high set in May 2019 at $196 and 53% above the close from the prior day, surely many were disappointed.
We shared our outlook for the company with subscribers at 420 Investor in mid-January, suggesting a year-end target of $236 based on 8X projected 2022 revenue. We also explained that valuing the company based on that single metric was too simplistic, recommending that it be viewed in three different pieces: the Epidiolex franchise, the near-term pipeline (Nabiximols) and the rest of the franchise. We concluded that the company could be valued at $10 billion in three years if the company filed a New Drug Application for Nabiximols. This works out to about $307. So, we thought the company was likely to be a good investment over the next few years.
In our view, GW Pharma got a nice premium to a way-too-low valuation. The market was hyper-focused on Epidiolex but not appreciating the potential for Nabiximols and the rest of the pipeline and, importantly, its unparalleled intellectual property. We listened to the joint conference call and felt like the Jazz Pharma CEO, Bruce Cozadd, really appreciated this point. The analysts seemed to suggest the company might be overpaying, while those of us who have followed the company for years felt quite the opposite. We believe that most of the analysts failed to look too far beyond the Epidiolex franchise. Investors seemed to be less than enthusiastic, as Jazz Pharma saw its stock drop 4% after the deal was announced, though it recovered over the next two days.
For those investors who feel as though the company sold out too low, especially given that the deal was primarily cash-based, we think there is good news. We had always feared that some massive pharmaceutical company would buy GW Pharma, which would become a tiny part of a massive organization. In this case, JAZZ has a market cap similar to GW Pharma. The combined companies will have significant debt but will also have more diverse revenue streams. We haven’t yet fully reviewed Jazz Pharma, but, at first glance, it looks like a good fit culturally and strategically, and investors who want to benefit from the future growth of GW Pharma should be able to do so with Jazz Pharma.
Whether or not GW Pharma sold out too low is certainly subject to debate. We think Jazz Pharma bought a gem at a very fair price. We hope that this larger combined organization can continue to deliver on the promise of cannabis-based pharmaceuticals, a market we believe is just getting started.