7 June 2005

Evolution
S EC U R I T IES 7 June 2005

www.evosecurities.com

GW Pharmaceuticals
Mkt Cap £137m Net Cash
170 154 138 122 106 90
J J ASO ND JFMA M Source: JCF

(GWP.L)

Buy

(remains as)

£18m

Price/Target: 121p/160p

UK Sativex ‘appeal’ heard. US court decision favours GW.
The MC’s Sativex meeting has been held, but an opinion has yet to be released. This may explain today’s share price fall. Separately, the US Supreme Court’s ruling improves the political and commercial environment for Sativex.

Meeting held, but no decision yet

The meeting of the Medicines Commission (MC) to review the Committee on Safety of Medicines (CSM) decision not to approve Sativex was heard in May, but GW Pharma has yet to be informed of the decision. A report on the AFM newswire indicated that the MC had concurred with CSM (that is, effectively rejected the appeal). However, GW has stated it does not know the MC’s opinion and cannot confirm (or deny) the leak. If the MC decides to approve Sativex (a decision is expected in the next few weeks), its opinion will effectively over-ride the CSM and the drug can be licensed. In our update published in February we estimated that there was only a 25% chance of Sativex being approved after the MC meeting, but a 90% chance of the product being approved within the next 12 months (after submission of further data). Investors will remember that the CSM advised the MHRA (Medicines and Healthcare products Regulatory Agency) that an issue relating to efficacy needed addressing before approval of Sativex could be recommended. Following the initial batch of 46 questions raised by the MHRA in June 2005, in the eyes of the CSM, GW answered all of them except one. The CSM questioned the ‘clinical relevance’ of the data submitted in June 2004. By this, the CSM meant that it was 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, did 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. To address the issue, GW undertook a two-pronged approach to try and get Sativex approved; namely, starting a further phase III study and appealing to the MC. The MC was tasked with looking specifically at the spasticity issue and could not start looking at the issues that had effectively been cleared by the MHRA/CSM already. The MC is made up of a more eclectic group of people than the CSM and can take information from wider sources than CSM, including patient testimonies and presentations by independent clinicians. For instance, Professor Mike Barnes (who has no association with GW), the Chairman of the Royal College of Physicians Rehabilitation Committee, was expected to present in favour of Sativex at the MC meeting. In addition, GW Pharma took the data from the trials already completed

Relevance of efficacy questioned

Two-pronged approach

Evolution Securities

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7 June 2005
and interpreted it in different ways and submitted the new analysis to the MC to support the approval of Sativex. Overturns previous decision Separately, we believe the US Supreme Court’s ruling (in the case of Gonzales v Raich) that growing and using marijuana for medicinal purposes is positive for GW Pharma. Sativex (which is derived from cannabis) allows the company to provide the government and the FDA with a suitable pharmaceutical alternative to placate the pro-cannabis lobby. While approval in the US is still at least three years away, we believe the Supreme Court decision improves both the political and commercial environment (reducing the impact from home grown alternatives) for GW. Previously, a lower court had allowed two women in California to use cannabis for the treatment of certain symptoms. In fact, 10 states (including California) allowed cultivation of cannabis for medicinal use. The Supreme Court’s decision supercedes state law, which, means growers and users of the drug for medicinal purposes are open to prosecution. While it might be thought that the Court may have made its decision on the basis of either the ethical or criminal issues surrounding growing and using medicinal marijuana, the ruling was based on law surrounding the commercial regulation of locally and externally (intrastate) cultivated products. In the written opinion, the Court stated that it had ‘no difficulty’ in ruling against use of medicinal marijuana because of the enforcement difficulties in distinguishing drug cultivated locally or outside a particular state. However, the Court was also concerned about diversion into illicit channels. Whether commercial legislation was being used as a convenient tool for the Court to tackle a difficult area is not clear. It is also worth remembering that Canadian approval of Sativex could cause problems (but additional sales) for the US government. 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, illegal importation may provide some impetus for the authorities to look at the whole area of medicinal cannabis (and extracts). Moreover, as GW looks towards an approval in the US (starting with a meeting with the FDA) the various issues that may impact the regulatory pathway could be highlighted well in advance. 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.

Commercial decision?

Canadian decision could increase pressure

Dr Jonathan Senior +44 (0) 20 7071 4355 jonathan.senior@evosecurities.com Year End 09/04A 09/05E 09/06E Sales £m 0.0 2.9 6.8 EBITDA £m -15.8 -10.6 -8.3 PBT adj £m -15.7 -10.8 -8.8 Tax % CR CR EPS p -12.4 -8.4 -8.0 CFPS p -12.3 -7.6 -7.2 Net Cash Net Cash Cash Burn £m 17.8 8.6 9.8 p 16.1 7.8 8.9 p -14.3 -9.2 -8.8 R&D £m -13.9 -11.0 -11.3 R&D Chg % -9.9 21.1 -3.0 EV/Sales x 44.2 18.7 DCF Sensitivity WACC % Fair Value p 16.0 15.0 14.0 120 127 134

Evolution Securities

100 Wood Street, London, EC2V 7AN

020 7071 4300

7 June 2005

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Evolution Securities

100 Wood Street, London, EC2V 7AN

020 7071 4300