Evolution X

7 June 2005

S EC U R I T IES
www.evosecurities.com 7 June 2005

GW Pharmaceuticals (GWP.L) Buy (remains as)

Mkt Cap £137m Net Cash £18m Price/Target: 121p/160p

170 UK Sativex ‘appeal’ heard. US court decision favours GW.

154
138
122
106 The MC’s Sativex meeting has been held, but an opinion has yet to be
90
J J A S O N D J F M A M
released. This may explain today’s share price fall. Separately, the US
Source: JCF
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).

Relevance of efficacy questioned
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.

Two-pronged approach
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

Evolution Securities 100 Wood Street, London, EC2V 7AN 020 7071 4300
 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.

Commercial decision? 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.

Canadian decision could increase It is also worth remembering that Canadian approval of Sativex could cause
pressure 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.

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

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

Evolution Securities 100 Wood Street, London, EC2V 7AN 020 7071 4300
 7 June 2005

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