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GW Pharmaceuticals
Price/Target: 130p/160p Update


(upgraded to)


22 February 2005


Choosing the moment
Despite recent setbacks, given that GW Pharmaceuticals has an ‘approvable’ product, we believe the company offers good value. We are therefore upgrading the stock to a Buy recommendation. Still ’when’… The opinion of the UK regulatory body (MHRA, Medicines and Healthcare products Regulatory Agency) that the clinical relevance of the spasticity data from the Sativex trials was questionable was clearly a blow for GW Pharma. However, what appears to be a perverse decision by the UK authority (particularly in light of the Canadian authorities Qualification Notice) should not obscure the potential value of the stock even on a short-term basis. We continue to believe it is a case of ‘when rather than if’ Sativex will be approved (see previous GW Pharma notes), but there are two potential timescales for the ‘when’. We believe there are two strategies to buying GW Medium risk: Buy between now and May and hope to capture the upside from a potential ‘early’ approval in the summer following the meeting of the Medicines Commission (MC). However, this strategy exposes the investor to the possibility that the MC does not approve Sativex and therefore GW stock will fall and will be effectively ‘dead money’ until the MHRA is presented with new data at the end of 2005 or early in 2006. Low risk: Buy after the Medicines Commission meeting. If the product is approved the revenue from Canada and UK, deals for Europe licensing rights and development in the US provide the upside to the share price. However, the major upside from the UK approval will not be captured. If the product is not approved, and the MC decides it is prudent to wait for the data from the on-going phase III trial, the share price may fall, but it will provide an opportunity to buy stock, with an expectation of an approval in the UK in the following nine months. Upgrading recommendation Using an entirely unscientific methodology, we would estimate that there is a 25% chance of Sativex being approved after the MC meeting (which could be held in May or July this year), but a 90% chance of the product being approved within the next 12 months. On this basis, taking the longer-term view, we are upgrading our recommendation on GW Pharma to a Buy.

Line chart: Absolute price performance, 12m Bar chart: Price relative to sector, 12m Evolution Sector Listing Mkt. Cap Net Cash Enterprise value Market Makers Evo is Broker Questions for the management: • What is the plan to gain approval in the UK? • What is the strategy for managing the cash? • What is the plan for Sativex in the US? Pharmaceuticals AIM £143m £18m £126m X X

Dr Jonathan Senior +44 (0) 20 7071 4355 jonathan.senior@evosecurities.com

Year end 09/03A 09/04A 09/05E

Sales £m 5.0 0.0 2.9

EBITDA £m -9.5 -15.8 -10.6

PBT adj £m -9.6 -15.7 -10.8

Tax % CR CR CR

EPS p -7.8 -12.4 -8.4

CFPS p -7.0 -12.3 -7.6

Net Cash Net Cash Cash Burn £m 32.0 17.8 8.6 p 31.2 16.1 7.8 p -7.4 -14.3 -9.2

R&D £m -12.7 -13.9 -11.0

R&D Chg % -18.0 -9.9 21.1

EV/Sales x 22.3 46.3

DCF Sensitivity WACC % 16.0 15.0 14.0 Fair Value p 120 127 134

22 February 2005

Sativex: the broader strategy
More than one product? Abbott has coined the term ‘a pipeline in one drug’ for Humira (TNF-inhibitor for the treatment of various autoimmune diseases), but the same could be said of Sativex. This is due to the ubiquitous (and not fully understood nature) and function of cannabinoid receptors in the body.

Product Sativex THC/CBD 1:1

Indication Multiple sclerosis MS spasticity MS neuropathic pain MS Bladder dysfunction Cancer pain Peripheral neuropathic pain Diabetic neuropathy Allodynia Central neuropathic pain Spinal cord injury Brachial plexus injury



Filed Filed Phase III Phase III Fully recruited, results 1H 2005

Phase III Phase III

Trial to start mid-year Trial to start

Phase III Phase II Phase II Phase II Phase II Phase II

Fully recruited, results 1H 2005 Trial completed No work on-going at present Results of IBD study awaited Study on-going

High THC High CBD ratios

Post-operative pain Rheumatoid arthritis IBD Neurogenic symptoms


Drug dependency

Trial in 1H 2005

Multiple MS trials is part of the strategy

While the reason for undertaking multiple trials addressing the various symptoms of multiple sclerosis (MS) is part of the regulatory strategy (which differs in different territories), other studies address entirely differentiated indications. For instance, trials in spinal cord injury and diabetic neuropathy are underway to address the indications of central and peripheral neuropathic pain respectively. In addition, positive phase III data on use of Sativex for the treatment of cancer pain has recently been reported. GW is to discuss the cancer pain data with the various EU regulators to see if further data is required before filing. Moreover, because of the potential sensitivity of the US to cannabis-based medicine, cancer pain is likely to be the first indication for which Sativex is filed with the FDA. In terms of the symptoms of MS, GW’s strategy is to get the product approved for one aspect and then expand the label (that is, the symptoms for which the drug can be prescribed) as further data become available. In the UK, spasticity has been the primary focus, whereas in Canada the initial submission was for neuropathic pain associated with MS. While the fact that the drug is only approved for one symptom may appear limiting, prescribing physicians have the power to use the drug when necessary even if it is not strictly indicated (so called, “off-label” use). Moreover, while reps cannot promote off-label indications, if doctors ask, they can provide supportive information. Furthermore, data from studies in indications that are currently off-label can be presented at conferences and in journals.

Off-label use can drive sales


22 February 2005

Regulatory update
United Kingdom and Europe
All the questions answered… At this point, it is worth noting the structure of the UK regulatory system and GW Pharma’s dealings with the agency to date. The process of drug approval is handled by the MHRA. However, a body called the Committee on Safety of Medicines (CSM) advises the MHRA (and ultimately decides whether drugs should be approved or not). It is the CSM that has ‘advised’ the MHRA that an issue relating to efficacy needs addressing. Following the initial batch of 46 questions raised by the MHRA in June, GW has answered all of them except one. Therefore, there are no more outstanding safety or quality issues with the product. It is worth remembering that because Sativex is a botanical product, ensuring the quality of material was always going to be one of the key challenges of the project. However, the CSM questioned the ‘clinical relevance’ of the data submitted in June 2004. By this, the CSM means that it is unclear how relevant the measured improvement in spasticity associated with MS (the initial indication for which Sativex has been submitted) actually is to patients (that is, do they actually ‘feel’ better). While some of the secondary end-points of the spasticity phase III study were not positive, this does not seem to be have been the primary concern of the MHRA. In the first instance, GW had been guided by the body to focus on spasticity (using end-points that the regulatory body was apparently happy with) rather then the wider symptoms of MS. Moreover, GW states that it was told that in 2003 and early in 2004, only one positive spasticity trial would be required to prove efficacy. After submitting the data from GWMS0106, GW had assumed it fulfilled the MHRA’s request. However, the CSM stated in December that it is not clear of the clinical relevance of the data supplied to date (despite submissions from independent experts). GW is planning to proceed to the Medicines Commission (MC), which is effectively an appeal body. The MC will look specifically at the spasticity issue, but can look at the data in a wider context. If the MC decides to approve Sativex, its decision will effectively over-ride the CSM and the drug can be licensed. Importantly, the MC cannot start looking at the issues that have effectively been cleared by the MHRA/CSM already. The MC is made up of a more eclectic group of people than the CSM and takes information from wider sources, including patient testimonies and presentations by independent clinicians. For instance, GW is hoping Professor Mike Barnes (who has no association with GW), the Chairman of the Royal College of Physicians Rehabilitation Committee, will present in favour of Sativex at the MC meeting. New interpretation on data In addition, GW Pharma has taken the data from the trials already completed and interpreted it in different ways and will submit the new analysis to the MC to support the approval of Sativex. For instance, initially in the placebo-controlled phase III study (GWMS0106) a spasticity score that was based on multiple sclerosis (MS) patients’ own impressions (that is, using a subjective rating scale) was used and analysed in the manner depicted overleaf.

….except one

Moving the goalposts?

Appeal process


22 February 2005

While the results from the trial indicated that patients treated with Sativex had statistically significant less spasticity than the patients given placebo, the MHRA were not entirely convinced that the difference was clinically meaningful. Sativex Efficacy Data

Source: Company data

Since the MHRA’s decision, GW has re-analysed the data to try and make the clinical relevance appear more obvious. In general we believe re-analysis (or rehashing) of data is not looked on favourably by regulatory bodies. However, we believe this instance is different, as the initial data was statistically significant and GW is simply trying to make the clinical improvement clearer. GW has taken the data and assessed what proportion of patients reach certain levels of improvement. For instance, 40% of patients had a 30% (or greater) reduction in their spasticity score. Clinically, a 30% improvement is taken as meaningful, a view that is supported by further analysis undertaken by the company. The percentage change in spasticity score (the same scoring system as used in the previous analysis) can be correlated with how the patients view the change in their condition (for instance, ‘much improved’ or ‘no change’). The analysis shows that a 30% improvement correlates (on average) to patients feeling between ‘much improved’ or ‘minimally improved’, an outcome we believe 40% of patients would welcome. GW is hoping that these data (along with other analyses) will help its cause with the MC. New trial to start soon In addition to the submission to the MC, GW is starting another phase III spasticity study as soon as possible. The company was intending to start another trial any way. Therefore, the machinery is in place for this to start early this year. However, the company is currently finalising the methodology with the regulator. Current opinion amongst the MS fraternity is that patient based (that is subjective scales) are the most meaningful and GW hopes that the MHRA will accept this view. The company hopes that the data from this study could be collected and analysed by the end of 2005. Hopefully, the data (if positive) would form the basis for final approval in the UK. Finally, it is worth noting that while Sativex is not approved in the UK, 500 patients receive the drug on a compassionate basis. European roll out delayed In terms of the rest of Europe, GW was aiming to use the UK as its rapporteur country for mutual recognition. This is obviously now on hold. However, the company has stated that if the process slowed down further in the UK, it might look elsewhere to make another filing.


22 February 2005

Approval in near future In our opinion, the Qualifying Notice in Canada was a key event as it indicates that Sativex is approvable in a recognised territory. The Notice (similar in concept to the FDA’s ‘approvable letter’) sets out the conditions (including post-marketing studies) for full marketing authorisation to be granted. GW was required to respond and accept the conditions within 30 days, after which, Health Canada will review the response. If GW’s answers are acceptable, marketing authorisation can be granted. According to GW, most of the issues are procedural and do not require the further submission or analysis of data. Following the receipt of full approval, the licenses for importation and storage need to be granted. This paperwork should be relatively simple to complete and allow launch of the product sometime in mid-2005. Bayer is GW’s marketing partner in Canada and it will now start instigating its strategy for selling Sativex. GW should receive a milestone when full approval is granted (we estimate the size of the milestone to be in the region of £2m). In addition, GW will receive royalties at a net rate we estimate to be around 30%. Canada offers sizeable market To a large extent, the Canadian Qualification Notice was largely ignored by the market, but there are still 50,000 MS sufferers in the country (compared with 85,000 in the UK) which we believe could support sales of US$20m-US$35m (assuming a price of US$3,500 per annum and 15%-25% penetration). Therefore, the revenue to GW Pharma (US$6m-US$10m) is still meaningful. Because of its proximity, inevitably Sativex will find its way into the US. While the FDA and the Drug Enforcement Agency (DEA) will be keen to stem the flow. However, illegal importation may provide some impetus for the authorities to look at the whole area of medicinal cannabis (and extracts) which is something of a ‘hot potato’ in the US. Moreover, as GW looks towards an approval in the US (starting with a meeting with the FDA in the near future) the various issues that may impact the regulatory pathway could be highlighted well in advance. As we stated earlier, in the US, GW may look to develop Sativex for cancer pain first because the issue of using a cannabis-based medicine may be less controversial in terminal patients.

Activity in US begins

Other projects and financing
Other projects can provide upside With all the attention focused on Sativex, the other GW projects are easily forgotten. While much research and development on the various cannabis extract configurations will be required to create value, one near term opportunity is the Advanced Dispensing System (ADS), which is initially being developed for use in methadone rehabilitation programmes (for heroin addiction). However, until further information is available (and remembering that contracts are likely to come from governments), we are not including revenue from this source. We would therefore consider cash and newsflow from the ADS could provide potential upside to the current valuation and share price. The recent re-organisation should allow costs to be kept in check over the next few months and we expect the current cash balance of £17.8m to last just less than two years even if Sativex was not approved in the UK (for which it would receive a £14m milestone from Bayer). However, with the rights to Sativex outside the UK and Canada available (plus global rights to the ADS), GW has multiple sources of cash before a return to the capital markets is necessary (rather than desirable).

Cash for just less than two years


22 February 2005

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22 February 2005

Price / Target

GW Pharmaceuticals
Business Biotechnology company deriving prescription medicines from cannabis Market info Market cap Free float 12 mth high / low Geography (Sales, Dest. %) UK:100 P&L (£m) Sales (excluding joint ventures) EBITA Net Interest Evolution PBT Exceptionals and other adjustments Per share data (p) Evolution EPS Consensus EPS DPS Evolution CFPS Cash flow (£m) EBITDA Change in working capital Interest, tax & pref dividends Capex and acquisitions net Share issues / (buybacks) Dividends (paid) Other items Change in net cash Balance sheet (£m) Closing net cash Net assets Capital employed Assumptions behind forecasts Canadian approval in 2005 UK approval 2006 US phase III trials start 2005 Risks to forecasts No Canadian approval UK approval delayed No further out-licesing deals Share Price
220 194 168 142 116 90
F M A M J J A S O N D J F Source: JCF

130p / 160p
Issued equity £143m RIC code 56% Issued shares 234p / 92p Avg weekly volume Pharmaceuticals Beta / R

Major holders GWP.L Directors 110m Morley 432,723 HSBC 2.2 / 0.09 44% 3% 2%

EVO Sector US: 0 ROW: 0 2003A 5.0 -10.3 0.7 -9.6 0.4 -7.8 -7.8 0.0 -7.0 -9.5 0.8 1.5 -0.3 19.2 0.0 0.1 11.8 32.0 37.0 4.9 No. of employees 2004A 0.0 -16.7 1.0 -15.7 0.4 -12.4 -12.4 0.0 -12.3 -15.8 -0.6 2.8 -0.8 0.1 0.0 0.0 -14.2 17.8 23.5 5.7

Eur: 0

0.00 Pensions surplus (deficit) 2005E 2.9 -11.5 0.7 -10.8 0.4 -8.4 -6.8 0.0 -7.6 -10.6 0.0 2.2 -0.8 0.0 0.0 0.0 -9.2 Valuation Matrix 8.6 14.2 5.6 WACC (%) Fair Value (p) Fair Value (£m) Evolution view With the issuance of a Qualifying Notice (similar in nature to the FDA’s ‘approvable ‘ letter) by the Canadian regulatory body, the approvability of Sativex appears to be confirmed. In the UK, GW is undertaking a two-pronged approach to try and get Sativex approved; undertaking a further phase III study and appealing to the Medicines Commission. 16.0 120 DCF sensitivity 15.0 127 14.0 134 Cash Management (£m) Closing net cash Net cash per share Gross cashflow post-capex R&D expenses Change in R&D spend (%) Graph 2003A 32.0 31.2 -7.4 -12.7 -18.0 2004A 17.8 16.1 -14.3 -13.9 -9.9 2005E 8.6 7.8 -9.2 -11.0 21.1

Significant events Canadian approval in 2005 MC meeting May/July 2005 UK approval mid-2005/2006 Out-licensing deals Clinical data

Performance 1 month 3 month 12 month 5 years

Absolute 11% -19% -43%

Relative 6% -18% -44%

PBT and EPS numbers exclude goodwill amortisation and exceptional items.

100 Wood Street London EC2V 7AN Tel: 44 (0)20 7071 4300 Fax: 44 (0)20 7071 4457 Email: research@evosecurities.com