The Drug Enforcement Agency (DEA) has awarded GW Pharmaceuticals' (NASDAQ:GWPH) epilepsy drug, Epidiolex, Schedule V status, its least restrictive classification. The decision clears the way for GW Pharmaceuticals to begin offering the only CBD oil that's cleared by the DEA for use nationwide, and it puts the company on a path to disrupt how doctors treat patients who fail to respond to existing anti-epilepsy medications.

A DEA first

Marijuana has been a DEA Schedule I controlled substance since Congress passed the Controlled Substance Act in 1970, and the DEA's Epidiolex decision doesn't change that. It does, however, mark the first time the DEA has recognized that marijuana's chemical cannabinoid, cannabidiol (CBD), offers health benefits.

The most common nonpsychoactive cannabinoid found in cannabis sativa plants, CBD oil has been used by patients in states that allow it for years because of anecdotal evidence of its ability to reduce seizures. However, it wasn't until today that a CBD oil derived from marijuana has been acknowledged by both the DEA and the Food and Drug Administration (FDA) to benefit epilepsy patients.

The DEA's scheduling decision on Epidiolex is based on scientifically controlled studies conducted by GW Pharmaceuticals demonstrating that Epidiolex can reduce monthly seizures in patients diagnosed with Dravet syndrome and Lennox-Gastaut syndrome, two tough-to-treat forms of childhood-onset epilepsy, by about 40%.

Why scheduling matters

After reviewing GW Pharmaceuticals' clinical trial data, the FDA approved the use of Epidiolex in Dravet syndrome and Lennox-Gastaut syndrome patients in June, but because it's a marijuana-derived medicine, GW Pharmaceuticals couldn't begin selling it to patients until the DEA weighed in with a scheduling decision.

The DEA can choose to schedule drugs in five categories. The most restrictive classification, Schedule I, includes drugs with no "currently accepted medical use in the United States, a lack of accepted safety for use under medical supervision, and a high potential for abuse." Marijuana remains scheduled in this category alongside heroin, LSD, and ecstasy.

Schedule II through Schedule V drugs have an accepted medical use. However, obstacles to prescribing and refilling prescriptions for drugs in these categories get progressively smaller, with Schedule V being the least restrictive scheduling category.

The FDA's Epidiolex approval sparked debate over which category it would wind up in.

Marinol, a medication long used to reduce chemotherapy-induced vomiting and nausea and to restore appetite in patients with HIV, is a Schedule III drug, while a more recently approved liquid formulation of marinol, Insys Therapeutics' (NASDAQ:INSY) Syndros, is a Schedule II drug.

The worst-case scenario for Epidiolex would have been Schedule II, because that classification requires written, not faxed, prescriptions by doctors, and it prohibits refills without a new separate prescription. Most believed Epidiolex would wind up in Schedule III or IV. Schedule III and IV allow for oral, written, or faxed prescriptions and up to five refills within six months from the original prescription date.

Instead, Epidiolex has nabbed Schedule V, the least-restrictive classification, which means that there aren't any barriers to prescribing it and refilling it beyond doctor's orders. This places Epidiolex in the same category as cough medicines containing codeine like Robitussin AC.

What to watch now for this medical marijuana stock

The schedule V classification only applies to Epidiolex, not to other CBD oils or products like those made by Tilray (NASDAQ:TLRY). Therefore, Epidiolex is the only CBD formulation that's available nationwide by prescription.

GW Pharmaceuticals plans to launch Epidiolex in the next few weeks, and there's good reason to think that demand for it will be significant within its approved indications. Most Dravet syndrome and Lennox-Gastaut syndrome patients fail to respond to other medications, and as a result, they suffer significantly and are in need of new treatment options like Epidiolex.

Initially, Epidiolex's list price at launch is expected to be $32,500. However, insurers are likely to bear most of that burden. There are only about 30,000 patients in the U.S. with these two types of epilepsy, so the addressable market is relatively small. Nevertheless, depending on the size of the rebates on it that insurers negotiate from GW Pharmaceuticals, it appears Epidiolex has a good shot at generating hundreds of millions of dollars in annual sales.

Over time, Epidiolex's revenue could be higher than that, though, if doctors prescribe it off label for patients with hard-to-treat seizures outside of Dravet syndrome and Lennox-Gastaut syndrome. Roughly one-third of the 2.2 million patients with epilepsy are inadequately controlled by existing medications.