Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

The market is getting a little too baked on the combination of pot and biotech buyout speculation.

GW Pharmaceuticals develops a non-psychoactive drug extracted from marijuana for rare seizure disorders. Impressive recent late-stage trial results for its drug Epdiolex have sent the U.K.-based company's stock soaring this year. The company is preparing to file for FDA approval of the drug in the first half of 2017. 

The company has hired bankers after getting buyout interest, Reuters reported Wednesday, sending shares up nearly 24 percent and giving GW a $2.6 billion market value. Cantor Fitzgerald analysts in a note suggested a bidding war could push the takeover value into the realm of $165 a share (from around $107 now).

The stock cooled slightly on Thursday, rising a mere 4 percent. It could stand to get cooler.

As most takeover speculation is wont to do, the furor around GW will likely (ahem) go up in smoke. The company makes for a risky acquisition even by biotech standards, with Epdiolex's prospects still murky. And it's no bargain at the moment.

A History of Volatility
Will this latest spike last?
Source: Bloomberg

GW's first marketed cannabis drug, Sativex, has struggled. The drug is approved in many countries, but not in the U.S. Though it's been on the market for more than a decade, it hasn't managed to top £5 million in annual sales. 

Bummer
Sales of GW Pharma's cannabis-derived drug Sativex have been disappointing
Source: Bloomberg

GW's new drug isn't like Sativex, which contains the psychoactive ingredient THC. And it has looked effective in trials so far. But that's a long way from the hundreds of millions of dollars in sales required to justify a hefty buyout valuation for GW. 

Assuming the drug is approved at all, current analyst consensus has Epdiolex sales passing $700 million in 2021. But that seems optimistic. For one thing, there have been some safety issues with the drug. And GW is only seeking approval of the drug to treat rare seizure disorders at first, limiting its commercial potential.

To hit that consensus target, the FDA will likely need to eventually expand the drug's approval to treat a bigger group of patients, and doctors and insurers will have to embrace it -- uncertain outcomes at this point.  

And if marijuana gets legalized in the U.S. more broadly, then it might become easier to make competing drugs, potentially putting a ceiling on prices. 

GW is also testing drugs to treat schizophrenia, diabetes, and cancer, but all are risky and much further from market.   

Early-stage companies like GW get bought up all the time. This year has been relatively quiet for such deals, but the M&A appetite seems to be returning. Just last month Pfizer agreed to pay $81.50 a share, or about $14 billion, for Medivation, topping a $52.50 bid from Sanofi. 

Even in that context, though, GW's valuation may be a stretch. GW's current $2.7 billion market cap puts it $700 million ahead of Bluebird Bio, a company that may be able to cure debilitating genetic diseases by modifying patient DNA. GW is also within shouting distance of Kite Pharma, worth about $3 billion, a company that will likely get a next generation blood-cancer treatment to market next year. And GW is valued substantially higher than Clovis Oncology, which has a cancer drug coming up for FDA approval and which is potentially a target for cash-rich Gilead Pharmaceuticals. 

Thanks to GW, an FDA-approved cannabis-derived drug with serious commercial potential is no longer a pipe dream. But an acquisition of the company at this stage and valuation likely is. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net