GW Pharmaceuticals plc
Annual Report 2012

Plain-text annual report

Improving lives Annual Report and Accounts 2012 G W P h a r m a c e u t i c a l s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 2 GW has made strong progress in 2012. Sativex® is now launched in seven countries as a treatment for spasticity due to multiple sclerosis and up to 12 additional launches are in planning. We are also undertaking our largest ever Phase III clinical programme to expand the market for Sativex to cancer pain. Our strong financial position allows us to invest in advancing our promising product pipeline and we look forward to making further progress in 2013. www.gwpharm.com Contents 01 Highlights 2012 02 GW Today 04 Major Market Opportunities: Target Therapeutic Areas Sativex in MS Spasticity: Strong Commercial Progress Cancer Pain: Expanding the Potential of Sativex® Pipeline: Realising the Value of our Cannabinoid Platform 06 10 12 14 Chairman’s Statement 16 Managing Director’s Review 22 26 28 Directors’ Report 31 Finance Director’s Review Board of Directors Chairman’s Corporate Governance Report 35 Directors’ Remuneration Report 40 Statement of Directors’ Responsibilities Independent Auditor’s Report 41 42 Consolidated Income Statement 43 Statements of Changes in Equity 44 Balance Sheets 45 Cash Flow Statements 46 Notes to the Financial Statements IBC Advisers 01 Highlights 2012 Commercial Sativex in-market sales growth follows new country launches 22Sativex® is now approved/ recommended for approval in 22 countries R&D Sativex Phase III cancer trial programme, positive Phase II diabetes data highlight breadth of clinical activity 1,000 Sativex Phase III cancer pain trials will involve over 1,000 patients Financials Revenue growth and net cash inflow provides strong balance sheet to support R&D investment £33.1m Total revenue of £33.1m in 2012 • Sativex net in-market sales grow to £10.0m (2011: £5.3m), reflecting 108% volume growth • 22 countries have now approved/recommended approval for Sativex – 12 new European launches in planning – Regulatory submissions under way in a further eight countries • Positive reimbursement decision received in Germany • Milestone payment of €11.9m (£9.8m) received from Almirall and extension of Almirall’s rights to Mexico • Patient recruitment into the two pivotal Sativex Phase III cancer pain trials ongoing. A third Phase III cancer pain trial also now under way • Positive data from a Phase IIa exploratory trial of GWP42004 in type-2 diabetes • Phase IIa trial of GWP42003 in ulcerative colitis ongoing and due to complete in H1 2013 • Additional product candidates earmarked for entry to the clinic in 2013 in glioma and epilepsy • Total revenue increased to £33.1m (2011: £29.6m) • Net profit before tax of £1.2m (2011: £2.5m) • Cash and short-term deposits at 30 September 2012 increased to £29.3m (30 September 2012: £28.3m) GW Pharmaceuticals plcAnnual Report and Accounts 201202 GW Today World Leading Science GW has a world leading position in cannabinoid science We commercialised the world’s first plant-derived cannabinoid prescription drug, Sativex® We have a deep pipeline of new cannabinoid products in a range of therapeutic areas 28 academic collaborators 3,000 patients participated in clinical trials 41 patent families Substantial Operations We have 182 staff of which 50% are in technical, manufacturing, supply chain, quality control and quality assurance and 35% in clinical research and drug safety We have commercial production facilities approved by the UK regulatory authority and are responsible for the manufacture and supply of Sativex to global markets Leading Industry Partners We have entered into collaborations with major pharmaceutical companies which have to date yielded £69 million in upfront fees and milestone payments Almirall is Spain’s largest pharmaceutical company with sales approximating €1 billion. In December 2005, GW and Almirall entered into a licence agreement, whereby GW granted Almirall an exclusive license to market Sativex in the European Union (excluding the UK), EU accession countries as well as Switzerland, Norway and Turkey. GW is responsible for the manufacture and supply of Sativex to Almirall. Novartis is one of the world’s leading pharmaceutical companies. GW has entered into an exclusive licence agreement for Novartis to commercialise Sativex in Australia and New Zealand, Asia (excluding Japan, China and Hong Kong), Middle East (excluding Israel/ Palestine) and Africa. GW Pharmaceuticals plcAnnual Report and Accounts 201203 GW is a biopharmaceutical company focused on developing and commercialising new medicines derived from our proprietary cannabinoid product platform in multiple disease areas. Global Reach Sativex is approved/ recommended for approval for the treatment of MS spasticity in 22 countries Sativex is in global Phase III trials for the treatment of cancer pain, our lead indication for the US market We have exported Sativex to 34 countries for prescription or clinical trial use The Otsuka Group comprises 153 companies and employs approximately 36,000 people in 23 countries and regions worldwide. In 2007, GW entered into a strategic alliance with Otsuka which comprised two separate agreements – a Sativex US licence and a global cannabinoid research collaboration. 22 countries approved/ recommended approval Strong Financials Approved Regulatory filing ongoing Commercial rights licensed 8 regulatory applications under review 34 countries exported £29.3m cash £33.1m revenue Bayer HealthCare, a subsidiary of Bayer AG, is one of the world’s leading, innovative companies in the healthcare and medical products industry. In 2003, GW and Bayer entered into a licence agreement, whereby GW granted Bayer an exclusive license to market Sativex in the UK and Canada. GW Pharmaceuticals plcAnnual Report and Accounts 201204 Major Market Opportunities: Target Therapeutic Areas GW’s research focuses on the development of innovative new medicines in high profile therapeutic areas in which there are significant unmet needs. MS Spasticity (p6) Spasticity is one of the most common and disabling of the symptoms, affecting up to 80% of MS patients over their lifetime. There is no cure for spasticity and it is widely recognised that currently available treatments for spasticity are inadequate. Market information 1.3m MS affects more than 1.3 million people worldwide. Cancer pain (p10) Chronic pain affects the majority of cancer patients and approximately. 75% of those with advanced stage cancer. Of those, 38% of patients are inadequately controlled or are non-responsive to opioid treatment. 38% 38% of patients with advanced cancer are inadequately controlled by opioid treatment. Diabetes Type 2 diabetes mellitus occurs when the body cannot produce enough insulin or the insulin is not working efficiently enough. Patients with type 2 diabetes mellitus face a three times higher level of mortality than the general population. 360m it is estimated that 360 million people are living with diabetes in the world, 8.5% of the world’s population. Ulcerative Colitis Ulcerative colitis is a chronic, relapsing inflammatory bowel disease affecting the colon. This inflammation of the bowel can cause pain, urgent diarrhoea, severe tiredness and loss of weight. Subjects with chronic intestinal inflammation have an increased risk of developing bowel cancers. 0.7m In the United States, about 700,000 people are affected by ulcerative colitis. Epilepsy Epilepsy is a central nervous system disorder affecting approximately. 1% of the global population, and is symptomatically characterised by chronic, recurrent seizures. Approximately 30% of cases are not adequately treated by currently available anti-epileptic drugs. 50m Epilepsy is estimated to affect 50 million people worldwide. Schizophrenia Schizophrenia is a chronic disease that manifests through disturbances of perception, thought, cognition, emotion, motivation and motor activity. It affects approximately 1% of the population. For the majority of patients, the disease has a profound impact on personal growth and development, with progressive deterioration of cognitive performance and social functioning. 1% Schizophrenia affects approximately 1% of the population. GW Pharmaceuticals plcAnnual Report and Accounts 201205 Current status 2013 objectives Pre-clinic Phase I Phase II Phase III Submit Approval Approved – Sativex® is approved/recommended for approval as a treatment for MS spasticity in 22 countries, of which 18 are in Europe. Sativex has been launched in seven countries and launches in up to 12 further European countries are being planned from early 2013 onwards. We are aiming to achieve continued sales growth, multiple new launches, further approvals and regulatory submissions. – Sativex is the subject of eight ongoing regulatory submissions in the Middle East and Switzerland. Pre-clinic Phase I Phase II Phase III Submit Approval 3 Phase III trials – We have completed two positive Phase II trials for Sativex in a total of over 530 patients with advanced cancer who had failed to gain adequate pain relief despite the use of strong opioids – Three Phase III randomised, placebo-controlled, multi-centre, multinational clinical trials are now under way in partnership with, and funded by, our US licensing partner for Sativex, Otsuka. We aim to progress recruitment in all three Phase III clinical trials in order to support regulatory filings for Sativex in cancer pain in the United States, Europe and the rest of the world. Pre-clinic Phase I Phase II Phase III Submit Approval Pre-clinic Phase I Phase II Phase III Submit Approval Pre-clinic Phase I Phase II Phase III Submit Approval Pre-clinic Phase I Phase II Phase III Submit Approval – We have reported promising results from our first Phase IIa clinical trial for the GW cannabinoid GWP42004 in the treatment of type 2 diabetes. The completed Phase IIa study was a multi-centre, randomised, double blind, placebo controlled, parallel group pilot study in 62 patients with insulin resistance. Following promising data from our first Phase II trial, we are planning a follow-up Phase II trial in 2013 to further explore the anti-diabetic effects of GWP42004 at different doses. – Following pre-clinical research demonstrating that cannabinoids show potential in the treatment of Inflammatory Bowel Disease in standard in vivo models, a Phase IIa clinical study is now under way investigating GWP42003 in the treatment of ulcerative colitis. This study aims to include 62 patients. We expect to complete the Phase IIa ulcerative colitis study and report results during 2013. – A lead candidate, GWP42006, has been identified, supported by strong intellectual property and additional confirmatory pre-clinical tests are under way prior to progression into clinical trials. Pre-clinical research has shown GWP42006 has the ability to treat seizures in models of epilepsy with significantly fewer side effects than existing anti-epileptic drugs. We aim to complete pre-clinical research for GWP42006 in epilepsy and commence a Phase I trial during 2013. – We have shown that GWP42003 has notable anti-psychotic effects in accepted pre-clinical models of schizophrenia and importantly has also demonstrated the ability to reduce the characteristic movement disorders induced by currently available anti-psychotic agents. Plans are now under way for a Phase II trial investigating GWP42003 as a treatment for psychiatric illness. This trial is due to commence in 2013. GW Pharmaceuticals plcAnnual Report and Accounts 201206 Sativex® provides significant benefits to patients’ spasticity and quality of life. Sativex also offers benefits to carers and to the healthcare system. Sativex in MS Spasticity: Strong Commercial Progress MS Spasticity Multiple Sclerosis (“MS”) is the most common disabling neurological condition affecting young adults, affecting more than 1.3 million people worldwide. Spasticity is one of the most common and disabling of the symptoms, affecting up to 80% of MS patients over their lifetime, being moderate to severe in most of them and leading to significant impairment. Some of the features of spasticity include muscle stiffness, difficulty straightening joints, reduced mobility, limb weakness, shaking, intermitted spasms and pain. As a result of the increased muscle tone due to spasticity, “simple”, every-day movements become difficult or impossible altogether. In addition, painful muscle spasms can lead to difficulty with sleeping, sitting in a chair or lying in bed. The consequences of spasticity not only cause huge distress, but quality of life, self-image and mood can be greatly affected. Sativex – a Valuable New Treatment Sativex addresses an unmet need by treating patients with moderate to severe MS spasticity who have failed current oral anti-spasticity therapies. Sativex has been studied in five Phase III double-blind, randomised, placebo-controlled trials. In total, these studies involved approximately 1,300 patients. Each of these studies has been published in peer-reviewed journals. In clinical trials, Sativex has been shown to provide effective relief of spasticity symptoms in patients for whom existing anti-spasticity treatments have failed, reduce spasms, improve sleep and improve function. 34% of MS patients have moderate-severe spasticity GW Pharmaceuticals plcAnnual Report and Accounts 201207 “ Because my pain is more controllable with Sativex, my spasticity is greatly improved. I have more days when I was mobile than I was before Sativex; more days with less pain means a better quality of life for myself and those around me who are affected by my well being.” GW Pharmaceuticals plcAnnual Report and Accounts 201208 Sativex in MS Spasticity continued Commercial Launches The commercialisation of Sativex in this indication has recently commenced in seven countries – UK, Spain, Germany, Denmark, Norway, Canada, Israel. We have also received regulatory approval in a further 11 countries and four additional countries have recommended approval for Sativex – Italy, Sweden, Austria, Czech Republic, Belgium, Finland, Iceland, Ireland, Luxembourg, the Netherlands, Poland, Portugal, Slovakia and New Zealand. Launches are anticipated in the next 12 months in many of these countries. In addition, regulatory filings are ongoing in eight countries, seven in the Middle East and Switzerland. Published UK Survey Demonstrates Sativex Use Can lead to Significant Cost Savings A survey of Sativex prescription use in the UK has been the subject of a peer-reviewed publication (Notcutt W, Primary Health Care Research & Development, 2012). 124 patients took part in the survey and the mean duration of treatment with Sativex was 30 months. The majority of respondents and their caregivers reported improvements across a range of daily functional activities, alongside a reduction in the use of concomitant anti-spasticity medication and in the use of other healthcare resources. Also of importance was the fact that the vast majority of caregivers reported that, because of Sativex “ My life as a carer is greatly enhanced by my wife taking Sativex – I get more sleep and have less of a struggle helping her to dress, feed, bath, toilet.” UK survey of Sativex patients includes the following findings: 31% of patients had reduced visits to the doctor 31% of patients had fewer accidents requiring medical attention 21% of patients reduced the use of other anti-spasticity medication 16% of patients reduced their visits to the physiotherapist 14% of patients able to undertake activities without the need for help or equipment GW Pharmaceuticals plcAnnual Report and Accounts 201209 treatment, there had been a benefit to them. In particular, almost 50% of caregivers reported an improvement in their own sleep quality. This suggests a reduction in the caregiver’s burden, which could also impact on their well-being and also the patients. Taken together, these findings suggest Sativex provides important long-term clinical benefit, both to patients and their caregivers and has the potential to yield significant cost savings for healthcare systems. As shown in the graph below, the annual costs of treatment of severe spasticity patients in the UK is £21,873 and this reduces to £2,836 for patients with moderate spasticity. GW’s pivotal Phase III trial showed that 91% of severe spasticity patients who responded to Sativex became moderate or mild at the end of the 16 week trial. There is therefore the potential for Sativex to yield significant cost savings in the treatment of such patients. Treating Spasticity Reduces Financial Burden on the Healthcare System As the severity of spasticity increases, the greater the financial burden due to the high demands on health and social care. In particular, severe spasticity can lead to complete immobility and patients frequently require hospital stays for several months for treatment of related problems as well as support from carers to assist with personal needs such as dressing, washing, eating etc. German Study Confirms Clinical Benefits of Sativex A formal prospective study of prescription use in Germany was presented in October 2012 at the 28th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS) in Lyon, France. This study involved 300 patients with moderate to severe MS spasticity and showed that one month’s treatment with Sativex reduced moderate to severe spasticity by 20% or more in more than 4 out of 10 patients previously unresponsive to conventional therapies. After three months, the improvement observed was 30% or more. Overall, 55% of the initial patients were eligible for continuing treatment beyond the third month. Quality of life measurements also improved. By reducing severity of spasticity, Sativex can reduce costs for the healthcare system “ I wasn’t sleeping due to my leg spasms. With Sativex I now sleep well which means I can work full time.” 91% of Sativex responders with severe spasticity at baseline become moderate or mild after 16 weeks treatment. m e t s y s e r a c h t l a e h o t s t s o c t n e i t a p r e p l a u n n A £21,873 £2,836 Severe Moderate £413 Mild GW Pharmaceuticals plcAnnual Report and Accounts 2012 10 Cancer Pain: Expanding the Potential of Sativex® 38% of advanced cancer patients experience persistent pain that is inadequately controlled by opioid medications. Cancer Pain Chronic, unremitting pain in deep tissues that results from cancer adversely affects a significant patient population. Approximately 75% of those with advanced metastatic cancer experience pain, of which 38% are inadequately controlled by opioid medications. Unmet Need The primary treatment for cancer pain is analgesic narcotics, also known as opioids, which are prescribed to approximately 80% of all cancer patients. More than half of early stage cancer pain patients and 87% of advanced stage cancer patients receive opioids. Opioids are often added to non-opioid analgesics and other adjuvant medications to control cancer pain. Patients that are treated with opioids may either not attain adequate pain relief or experience side effects that limit the opioid dose below that which would enable pain relief. These undesirable side effects include constipation, sedation, respiratory depression and analgesic tolerance. Sativex in Cancer Pain There is currently no non-opioid treatment indicated to treat patients who do not respond to, or experience negative side effects with, opioid treatments. Sativex is specifically being developed to address this need. GW’s cancer pain clinical programme is being wholly funded by Otsuka. WHO Pain Relief Ladder Strong opioid for severe pain +/- non-opioid +/- adjuvant 3 Weak opioid for moderate pain + non-opioid +/- adjuvant 2 Non-opioid for mild pain +/- adjuvant 1 Sativex treatment for advanced cancer patients The treatment for cancer pain is governed by the World Health Organisation Pain Relief Ladder. As pain severity increases, the treatment options at each step on the ladder become stronger. Sativex is being developed to treat patients who do not respond to opioids. At present, for such patients, there are few, if any, treatment options available. GW Pharmaceuticals plcAnnual Report and Accounts 201211 Sativex has shown positive results in two Phase II trials involving over 530 patients. Phase III trials programme Lead indication for Sativex in the US 1,000 Three Phase III trials involving over 1,000 patients Trial sites in North America, Europe, Latin America and Asia Trials fully funded by Otsuka Key design features of first two Phase III trials mirror Phase II trials Phase III primary endpoint yielded statistically significant results in both Phase II trials Two Phase II trials published in peer-reviewed journals Sativex Phase II Data GW has completed two Phase II multinational, randomised, placebo-controlled studies for Sativex in cancer pain. In each of the two studies, patients received Sativex or placebo as add-on treatment to strong opioid therapy while remaining on stable doses of their background optimised opioid therapy. Both studies showed consistent positive results. Positive results from GW’s Phase IIa trial in 177 patients have been published in the Journal of Pain and Symptom Management, the official journal of the American Academy of Hospice and Palliative Medicine. The most recent Phase IIb study in 360 patients was published this year in the Journal of Pain, journal of the American Pain Society. Results from a long-term open-label follow-up trial in 43 cancer pain patients who had previously participated in the Phase IIa trial were published this year by Johnson J et al. in the Journal of Pain and Symptom Management. Phase III Programme The pivotal Phase III programme comprises three randomised placebo-controlled multi-centre multinational trials as well as a long-term extension study. Patient recruitment for all studies is ongoing. The first two pivotal Phase III trials are both intended to recruit 380 patients and evaluate the efficacy and safety of Sativex versus placebo over a five week treatment period. Regulatory filings are intended to be made upon completion of the first two studies. The primary efficacy analysis in the first two pivotal Phase III trials is the “Cumulative Proportion of Responders Analysis” (an analysis of all response levels characterised by percent improvement in pain from baseline to end of study). This analysis showed statistically significant results in favour of Sativex in both the Phase IIb and Phase IIa trials. A third supportive Phase III trial commenced in May 2012. The purpose of this trial is to provide, as needed, supplementary data to that generated in the two pivotal studies. GW Pharmaceuticals plcAnnual Report and Accounts 201212 Pipeline: Realising the Value of our Cannabinoid Platform Therapeutic targets Metabolic Disease Oncology Inflammation Psychiatric Illness Epilepsy Pain Mechanism Cannabinoid Receptors Anti- inflammation Adenosine Uptake TRP Channels Serotonin Receptors Cannabinoid THCV CBC CBG THC CBD CBDV CBDA Proprietary Cannabinoid Platform GW Pharmaceuticals plcAnnual Report and Accounts 201213 We are at the forefront of the commercialisation of cannabinoid therapeutics using our proprietary product platform to identify, validate and develop innovative first-in-class drugs that meet significant unmet medical needs. Platform Overview We have assembled a world leading position in cannabinoid therapeutics through our proven proprietary cannabinoid product platform. Our platform consists of a continually evolving library of internally generated novel cannabis plant types that produce selected cannabinoids, discovery of novel cannabinoid pharmacology through our network of world leading scientists, a broad intellectual property portfolio, in-house formulation, processing and manufacturing capabilities, and development and regulatory expertise. Cannabinoid Science In recent decades, there have been major scientific advances that have led to the discovery of new plant-derived cannabinoids and the cannabinoid receptor system in the human body, known as the endocannabinoid system. In addition, research suggests the cannabinoid system interacts with other important neurotransmitter and neuromodulatory systems in the human body, including TRP channels, adenosine uptake, and serotonin receptors. We are at the forefront of this new area of science and our research into a large number of these cannabinoids suggests that each has distinct pharmacological effects and potential therapeutic applications. Areas of interest for cannabinoids extend to the treatment of central nervous system disorders, cancer, diabetes, psychiatric illness, inflammation, gastro-intestinal disorders, and neurodegenerative disease. Although one cannabinoid, THC, is known to cause psychoactive effects associated with the use of illicit herbal cannabis, none of the other cannabinoids are known to share these properties. GW’s research has primarily focused on approximately 15 non-psychoactive plant-based cannabinoids. We have focused particularly on CBD, which has shown in pre-clinical and clinical testing to have anti-inflammatory, anti-convulsant, anti-psychotic, anti-oxidant, neuroprotective and immunomodulatory effects. We have also identified important pharmacological effects of other cannabinoids, such as the anti-convulsant effects of CBDV, anti-diabetic effects of THCV, anti-nausea effects of CBDA and anti-cancer effects of CBG. Key Target Areas Diabetes This year GW reported encouraging results from a Phase IIa exploratory study identifying GW’s novel cannabinoid, GWP42004, as a promising new treatment for type 2 diabetes. GW will now move ahead and explore the clinical relevance of these desirable anti-diabetic features of a range of doses of GWP42004 in a larger Phase II study. Ulcerative Colitis (“UC”) UC is a chronic, relapsing inflammatory bowel disease affecting the colon which can cause pain, urgent diarrhoea, severe tiredness and loss of weight. Several GW cannabinoids have shown anti-inflammatory properties and a 62-patient Phase IIa trial is under way to investigate the efficacy and safety of GWP42003 compared to placebo for the treatment of UC. This trial is due to report results in 2013. Epilepsy Our lead epilepsy drug candidate, GWP42006, has shown the ability to treat seizures in animal models of epilepsy with significantly fewer side effects than existing anti-epileptic drugs. We are currently conducting a final round of confirmatory pre-clinical tests, expected to complete in the first half of 2013. We plan to initiate Phase I trials for GWP42006 in 2013. Cancer Our most advanced cancer research is in glioma. We have identified the putative mechanism of action for our cannabinoid product candidates and have shown cannabinoids to have a synergistic effect with temozolomide, a standard treatment for glioma. In light of this promising pre-clinical research, we are now planning an early proof of concept Phase Ib clinical trial to commence in 2013. Schizophrenia Our product candidate, GWP42003, has shown notable anti-psychotic effects in accepted pre-clinical models of schizophrenia and has also demonstrated the ability to reduce the characteristic movement disorders induced by currently available anti-psychotic agents. We are currently preparing to commence a Phase IIa trial of GWP42003 in the treatment for schizophrenia in 2013. Selected 2012 Publications CBDV is anticonvulsant in mouse and rat Neuropharmacology CBD after hypoxia-ischemia to newborn rats reduces long-term brain injury PER SPEC T I VE S Towards the use of cannabinoids as antitumour agents BJCP CBD for neurodegenerative disorders Symptom relieving and neuroprotective effects of THCV in animal models of Parkinson’s disease Cannabinoid actions at TRPV channels GW Pharmaceuticals plcAnnual Report and Accounts 201214 Chairman’s Statement Our cannabinoid product platform offers the promise of a range of valuable new medicines with significant commercial potential and I believe GW is ideally placed to maintain a world leading position in this area of science for many years to come. Dr Geoffrey W Guy Executive Chairman I am pleased to report another year of excellent progress for the Group. Before turning to this year’s achievements I wish to reflect on the important competitive and strategic strengths which now underpin our business. Having founded GW 14 years ago, I am proud of the progress made over this time. More importantly, I believe that GW has established for itself a position which offers the prospect of a truly exciting future. I see the Group’s key strengths as follows: – The successful development and regulatory approval of Sativex® in 22 countries in MS spasticity not only offers near-term commercial growth potential but also provides important validation of our cannabinoid product platform. – The substantial Phase III cancer pain in the United States, the world’s largest pharmaceutical market. – As a company at the forefront of the commercialisation of cannabinoid therapeutics, we have the opportunity to develop first-in-class treatments across a large number of therapeutic targets. – We have formed several collaborations with major global pharmaceutical companies, including with Otsuka, Almirall, Novartis and Bayer. – We hold a strong competitive position within the highly specialised cannabinoid area, including 41 patent families. – We have a highly skilled in-house research and development team and operate in-house commercial manufacturing facilities capable of servicing global markets. programme, fully funded by Otsuka, offers the prospect of expanding significantly the global market for Sativex and in particular is designed to support a regulatory submission – We collaborate closely with a broad network of leading scientists in the cannabinoid field, including 28 academic institutions in eight countries. GW Pharmaceuticals plcAnnual Report and Accounts 2012“I am pleased to report another year of excellent progress for the Group.” 15 – Our focus on complex cannabinoid pharmacology is well suited to address the treatment of chronic diseases, and is consistent with an increasing recognition that improved treatments will involve the need to demonstrate multiple pharmacology. recently Vice President Global Marketing Operations at UCB Pharmaceuticals and his previous experience includes 18 years at GlaxoSmithKline in senior commercial roles in both the European and UK organisations. It is my ambition to harness these strengths in order to drive the future growth of our Group. I consider cannabinoids to offer the basis of a range of valuable new medicines with significant commercial potential and believe GW is ideally placed to maintain a world leading position in this area of science for many years to come. This past year has seen progress which reflects the broad scope of these strengths. In particular, we have seen strong growth of Sativex in-market sales and further regulatory approvals of this important medicine. In addition, we have achieved solid recruitment into our Phase III trials programme for Sativex in cancer pain, which now comprises three global trials and is expected to involve over 1,000 patients. Beyond Sativex, we have generated encouraging data from our first Phase II trial for GWP42004, a novel cannabinoid drug candidate, in type 2 diabetes. We have also commenced a Phase II study for GWP42003 in the treatment of ulcerative colitis and generated pre-clinical data in a number of other therapeutic areas, in particular in epilepsy and glioma. During the year, there were a number of changes to the Board. In June 2012, Adam George became Finance Director, having previously served as GW’s Company Secretary and Group Financial Controller since 2007. Adam replaced David Kirk who elected to stand down from the Board after 10 successful years as Finance Director. In addition, in October 2012, we were pleased to welcome Chris Tovey to the Board in the newly created role of Chief Operating Officer. The decision to appoint a Chief Operating Officer reflects the significant expansion in the Group’s operations over recent years. Chris was most At our forthcoming Annual General Meeting on 18 January 2013, Richard Forrest, a non- executive Director, will be retiring by rotation. After six years of service, Richard has chosen not to seek re-election at the AGM for a third third-year term and will therefore formally step down from the Board on that date. I would like to take this opportunity to thank Richard for his valuable contribution to the Board over the last six years. We can look forward to continued progress in 2013. Further Sativex launches in up to 12 countries in Europe are planned for next year and, with eight additional regulatory applications under way, we expect to announce further approvals. The Sativex Phase III cancer pain programme will also continue to advance towards completion. In addition, next year holds great promise for our cannabinoid product pipeline, notably through further Phase II development of GWP42004 in type 2 diabetes, Phase II data for GWP42003 in ulcerative colitis and new product candidates entering the clinic in epilepsy, glioma and schizophrenia. Finally, I should like to thank our dedicated staff for their hard work and considerable achievements this year. The Group’s operations have expanded significantly in the last few years and I am delighted that the newer members of our team share the enthusiasm and commitment which has been characteristic of our company since inception. Dr Geoffrey W Guy Executive Chairman 27 November 2012 GW Pharmaceuticals plcAnnual Report and Accounts 201216 Managing Director’s Review GW has made strong progress in 2012. Commercial launches of Sativex® are now under way and we look forward to several further launches next year. Beyond MS, our Phase III cancer pain trials provide the opportunity to enhance the market potential for Sativex. The product pipeline is also showing great promise and we look forward to continued progress in 2013. Justin Gover Managing Director Sativex Commercial GW is increasingly a commercial business generating sales revenues through supply of commercial product to GW’s marketing partners. Sativex is now launched in seven countries, an additional 12 launches are in planning, and eight further regulatory applications are in progress. With Sativex having now entered the early phase of its commercial life and with a large number of new markets expected to launch in the next two years, in-market sales growth generated by marketing partners is expected to drive GW revenue growth from product sales. Sativex R&D Sativex is currently approved/recommended for approval in 22 countries for spasticity due to MS but with three large Phase III studies in cancer pain ongoing, we believe that the MS indication represents only the start of Sativex’s commercial potential. GW is seeking to maximise the potential of Sativex through these cancer pain trials which are fully funded by Otsuka Pharmaceutical Co. Ltd. This programme is targeted at the important US market but we also intend to use the data for global regulatory filings in order to address this major unmet need across the world. Cannabinoid Platform/ Pipeline R&D GW occupies a world leading position in cannabinoid science. We believe that there is significant opportunity to leverage this strategic position to develop a number of new medicines. This is underlined by the encouraging results from a Phase II exploratory trial of a novel cannabinoid, GWP42004, in type 2 diabetes while a Phase II trial in ulcerative colitis for another cannabinoid, GWP42003, is ongoing. In addition, following highly promising pre-clinical data in cancer and epilepsy, an initial Phase Ib/IIa clinical trial in glioma is in planning for 2013 and a lead drug candidate for the epilepsy programme has been identified and is expected to enter Phase I trials in 2013. GW Pharmaceuticals plcAnnual Report and Accounts 2012“ The volume of Sativex sold in-market by our partners increased year on year by 108%.” 17 finalise their approvals in the coming months. In prior years, Sativex had received approvals/ recommendations for approval in the UK, Spain, Germany, Denmark, Italy, Sweden, Austria, and the Czech Republic. A regulatory application is ongoing in Switzerland and due to complete in 2013. Beyond Europe, we have now received notification of regulatory approval in Australia for Sativex in MS spasticity. Earlier this year, Sativex received approval in Israel for the two indications of MS Spasticity and MS neuropathic pain. Sativex has also previously received regulatory approval for MS spasticity in Canada and New Zealand. In addition, regulatory submissions have been filed in seven countries in the Middle East. A regulatory application is also under way in Switzerland. Commercialisation Total Sativex in-market net sales rose to £10.0m (equivalent to £11.1m gross sales) in 2012 from £5.3m last year. The volume of Sativex 10ml vials sold in-market by our partners increased year on year by 108%. Almirall launched the medicine this month in Norway having previously launched in Germany, Spain and Denmark in 2011. We expect Sativex launches in up to an additional 12 countries in Europe in the next 12 to 24 months following completion of mandatory pricing and reimbursement procedures in each country. The next important market expected to launch is Italy, expected in Q1 2013. The drug is currently commercialised in 7 countries – Germany, Spain, UK, Denmark, Norway, Canada and Israel. New Data from Germany and UK Confirm Benefits and Support Cost-Effectiveness At the European Congress of Multiple Sclerosis (“ECTRIMS”) in October 2012, Almirall hosted a satellite symposium highlighting the key benefits of Sativex, which was attended by some 900 delegates. At this symposium results of the MObility ImproVEments with Spasticity in Multiple Sclerosis (MOVE) 2 observational study performed in 300 patients in Germany were presented. Results from this study are provided on page 9 of this report and show that the clinical response rate on Sativex is consistent with, and somewhat better than, that seen in clinical trials. GW has made strong progress in 2012. We are pleased with the significant growth of Sativex in-market sales and look forward to further launches in up to 12 countries in Europe next year. In addition, we are now undertaking our largest ever clinical programme to expand the market opportunity for Sativex beyond multiple sclerosis to cancer pain. This programme comprises three global Phase III cancer pain trials and is fully funded by our partner, Otsuka. Importantly, success in this indication is intended to lead to our first commercial launch in the United States market. Our strong financial position allows us to invest in advancing our product pipeline and we are encouraged by the recent data reported from our first Phase II trial for GWP42004, a novel cannabinoid drug candidate, in type 2 diabetes. We look forward to progressing this and other clinical programmes in 2013. Sativex Commercial In March 2012, we signed an amendment to the Sativex licence agreement with our European partner Almirall. As a result, we received a new milestone of €11.9m (£9.8m) in May 2012 based on achievement of a cancer pain trial patient recruitment target. Including this payment, GW has to date received £69m in signature fees, technical access fees and milestone payments from its various licence agreements. GW is eligible to receive up to a further £201m in additional milestone payments and also generates royalty/product supply income derived from sales by its existing commercial partners. The 2012 Almirall amendment also granted Almirall extended commercial rights to Sativex beyond Europe to include Mexico. GW also agreed to reduce the Sativex supply price charged by GW to Almirall over the next few years until the launch of Sativex in the cancer pain indication in Europe and agreed to cancel future cancer pain launch milestones of £5.5m. Regulatory Progress – MS Spasticity Sativex is currently approved/recommended for approval in 22 countries, including 18 countries in Europe where it is the first new therapeutic solution to treat MS symptoms in over 10 years. It is indicated as a treatment for symptom improvement in patients with moderate to severe MS spasticity who have not responded adequately to other anti-spasticity medication and who demonstrate clinically significant improvement in spasticity related symptoms during an initial trial of therapy. In May 2012, GW successfully completed the Mutual Recognition Procedure (“MRP”) in 10 additional European countries for approval of Sativex. Of these 10 countries, Belgium, Finland, Iceland, the Netherlands, Norway, Portugal and Slovakia have now finalised their national regulatory approvals. We expect the remaining countries (Ireland, Luxembourg, Poland) to GW Pharmaceuticals plcAnnual Report and Accounts 2012Pre-clinic Phase I Phase II Phase III Submit Approval 18 Managing Director’s Review continued Sativex MS Spasticity Sativex Cancer pain Sativex Neuropathic pain Type 2 diabetes GWP42004 Type 2 Diabetes Inflammation GWP42003 Ulcerative Colitis Otsuka funded GWP42002 GWP42003 Glioma/Breast cancer GWP42006 Epilepsy GWP42003 Psychiatric illness £69m GW has recived £69m in upfront and milestone payments from its license agreements In the UK, Sativex prescription use in the UK has been the subject of a recent peer-reviewed publication (Notcutt W, Primary Health Care Research & Development, 2012). Results from this 124 patient survey are provided on page 8 of this report and suggest Sativex provides important long-term clinical benefit, both to patients and their caregivers and has the potential to yield significant cost savings for healthcare systems. In addition, a recent publication (Sativex in multiple sclerosis spasticity: a cost-effectiveness model – Slof J et al, Expert Rev. Pharmacoecon. Outcomes 2 Res. 12(4), (2012)) has shown that Sativex is a cost effective treatment. Germany In June 2012 the commercial prospects for Sativex in Germany were significantly enhanced following receipt of a positive resolution from the Federal Joint Committee (G-BA) supporting reimbursement of the product. This resolution allows Almirall to proceed with the next and final step in the process, agreement of a long-term price with the German pricing authorities, a process which is expected to conclude in the coming months. Sativex was launched in Germany by Almirall in July 2011. With over 120,000 people with MS, Germany represents the largest European market opportunity for Sativex. The market performance since launch has been strong with Almirall’s ex-factory net sales in the 12 months to 30 September 2012 reaching €4.9m (2011: €0.9m). Spain Despite the challenges posed by the economic climate in Spain, GW and Almirall are pleased with initial sales performance of Sativex since its launch in March 2011. Almirall’s ex-factory net sales in the 12 months to 30 September 2012 reached €2.1m (2011: €0.7m). Formulary listings have now been achieved in the majority of key target hospitals and sales growth is expected to continue during the coming year. Sativex is a fully reimbursed medicine under Spain’s National Health System. UK In the UK, Sativex generated in-market net sales in the 12 months to 30 September 2012 of £2.4m (2011: £2.4m). The drug was launched in this market in 2010 by GW’s UK marketing partner, Bayer HealthCare. The pace of sales growth in the UK is expected to be determined by Bayer’s efforts to secure NHS funding for Sativex from local Primary Care Trusts (“PCTs”). A significant body of work has been undertaken this year to demonstrate the positive budget impact that Sativex may have for PCTs in terms of the reduced cost burden on the NHS for patients who benefit from Sativex treatment. This new pharmaco-economic data was introduced by Bayer in summer 2012 and will be the focus of their strategy for next year. GW Pharmaceuticals plcAnnual Report and Accounts 2012In addition, the NICE is reviewing Sativex as part of a proposed updated set of NICE MS Treatment Guidelines. This review process is now under way. Norway/Denmark Launch in Norway took place in November 2012. Sales to date in Denmark have been modest. New European Launches The next major Sativex launch is expected in Italy in early 2013. Launches are also in planning for Sweden, Austria, Czech Republic, Belgium, Finland, Iceland, Ireland, Luxembourg, the Netherlands, Poland, Portugal and Slovakia. In each country, Sativex requires pricing and reimbursement to be agreed with the national authorities prior to launch. The length of time required for pricing/reimbursement varies considerably across countries. SATIVEX R&D – Entry into the US Market and Expanding the Sativex Label Sativex in Cancer Pain Market research suggests the commercial potential of Sativex in the treatment of cancer pain is significant. It is estimated that approximately 38% of advanced cancer patients suffer pain which is not adequately treated by opioid therapy, the current standard of care. GW’s cancer pain clinical programme is being wholly funded by Otsuka, which has licensed the US commercialisation rights to this product. The programme is the largest ever undertaken by GW and involves trial sites in Europe, North America, Latin America and Asia. The trials are designed to obtain approval in this indication from the Food & Drug Administration (“FDA”) in the US, and these data are also intended to be used by GW for future regulatory applications in this indication in Europe and around the world. Prior to commencing the Phase III programme, GW completed two Phase II studies including over 530 patients with positive results. Both of these have been published in peer-reviewed journals, the most recent being published earlier this year in the Journal of Pain, the official journal of the American Pain Society (Portenoy R et al. 2012, Journal of Pain, Vol 13, Issue 5, pp 438–449). In addition, a study confirming the efficacy and safety of Sativex in long-term use in patients with cancer pain has recently been published (Johnson J et al. J Pain Sympt Management. 2012 Nov 7 doi:pii S0885-00439- 3.10.1016/j.painsymman 2012.07.14). Pivotal Phase III Programme The pivotal Phase III programme comprises two randomised placebo-controlled multi-centre multinational trials as well as a long-term extension study. Patient recruitment for both studies is ongoing. Initial recruitment focused on European trial sites and operations have expanded over recent months to a large number 19 Welcome to our Chief Operating Officer In October 2012, we were pleased to welcome Chris Tovey to the Board in the newly created position of Chief Operating Officer. This new role reflects the significant expansion of GW’s operations in recent years. Chris has extensive and diverse commercial experience from more than 25 years in the pharmaceutical industry. He was most recently Vice President Global Marketing Operations at UCB Pharmaceuticals, responsible for worldwide marketing activities on a portfolio of UCB products generating over €2 billion in annual sales. This portfolio encompassed a broad range of therapeutic areas (including epilepsy, other CNS, cardiovascular, anaemia, allergy) spread across most regions of the world. Previous experience and roles at UCB included two years spent as Managing Director Greece and Cyprus and prior to that a role leading all UCB activities on the orphan narcotic medication Xyrem, used in the treatment of Narcolepsy. Previous experience includes 18 years at GlaxoSmithKline, in senior commercial roles in both the European and UK organisations. GW Pharmaceuticals plcAnnual Report and Accounts 201220 Managing Director’s Review continued “ GW has reported encouraging results from a Phase IIa exploratory study identifying GW’s novel cannabinoid, GWP42004, as a promising new treatment for type 2 diabetes.” of US sites which are due to contribute significant patient numbers for the remainder of the studies. Regulatory filings are intended to be made upon completion of these two studies. Each Phase III trial is intended to recruit 380 patients and will evaluate the efficacy and safety of Sativex versus placebo over a five week treatment period. The primary efficacy analysis is the continuous response analysis, the same analysis that has yielded statistically significant results in both Phase II trials. Third Phase III Trial A third supportive Phase III trial commenced in May 2012. The purpose of this trial is to provide, as needed, supplementary data to that generated in the two pivotal studies. The third Phase III trial differs in design from the first two studies, employing an “enriched study design” akin to that which was successfully employed in the MS spasticity trials programme. The study involves exposing patients to Sativex in a single blind phase of two weeks duration (“Phase A”), following which responders will be randomised either to stay on Sativex or switch to placebo in a double blind phase for a five week treatment period (“Phase B”). The primary efficacy analysis will be the mean change from baseline in Phase B. The study will aim to recruit 540 patients into Phase A and target 216 patients to enter Phase B. Sativex Investigator Studies As with any new medicine, the availability of Sativex has provoked interest in its potential for other neurological conditions, particularly motor disorders and neurodegenerative diseases. GW is working with a number of leading academic centres around Europe studying Sativex in conditions such as amyotrophic lateral sclerosis (the most common form of motor neurone disease), Huntington’s disease, cervical dystonia and Tourette’s syndrome. Cannabinoid Platform/Pipeline R&D GW occupies a world leading position in cannabinoid science. The Company has developed a proprietary and validated cannabinoid technology platform and formed constructive collaborations with leading international scientists, universities and institutions in the field. GW’s research network now extends to 28 academic institutions in eight countries and involves research in a wide range of therapeutic areas, including oncology, neuroscience, metabolic disease, inflammatory disease, gastroenterology, and dermatology. The objective of this research effort is to progress a number of GW’s new cannabinoid pipeline candidates to full clinical development. In March 2012, GW announced that Professor Vincenzo Di Marzo has joined the Company’s research team as Research Director of GW Research Ltd and GW’s Cannabinoid Research Institute and is now directing GW’s global pre-clinical research programme. Alongside Professor Roger Pertwee, GW’s Director of Pharmacology, Professor Di Marzo is one of the world’s most eminent cannabinoid scientists. In-House Funded Research The principal areas of GW’s investment are in diabetes/metabolic disease and inflammatory conditions. GW is selectively investing its resources to advance this part of the cannabinoid pipeline with a view to signing new out-licensing agreements in due course. Diabetes/Metabolic Disease GW has reported encouraging results from a Phase IIa exploratory study identifying GW’s novel cannabinoid, GWP42004, as a promising new treatment for type 2 diabetes. In the study, which examined a number of clinically relevant endpoints in patients with type 2 diabetes, GWP42004, an oral cannabinoid treatment, showed consistent evidence of anti-diabetic effects. These findings are consistent with pre-clinical data showing that GWP42004 protects the insulin-producing cells of the pancreatic islets, a highly desirable feature of a new anti-diabetic medicine, increases insulin sensitivity and reduces fasting plasma glucose levels. GW will now move ahead and explore the clinical relevance of these desirable anti-diabetic features of a range of doses of GWP42004 in a larger Phase II study. Initial findings from a separate pilot study exploring the effect of GWP42003 on liver fat in 24 patients with Non-alcoholic Fatty Liver Disease has not showed any meaningful clinical effect. A third Phase IIa study investigating whether GWP42003 and GWP42004 can prevent weight gain in 60 patients taking anti-psychotic therapy has been unsuccessful in achieving a sufficient pace of patient recruitment. In light of the positive findings for GWP42004 in the type 2 diabetes study, it has been decided to terminate this study and to refocus our anti-psychotic clinical research on investigating GWP42003 as a treatment for psychiatric illness. A Phase II study is in planning for 2013 (see below). Ulcerative Colitis Following pre-clinical research demonstrating that cannabinoids show potential in the treatment of Inflammatory Bowel Disease in standard in vivo models, GW commenced this year a Phase IIa clinical study investigating the efficacy and safety of GWP42003 in the treatment of ulcerative colitis. This study aims to include 62 patient and the chief investigator is Dr Peter Irving at Guy’s and St Thomas’s Hospital, London. This trial is expected to report preliminary results in mid-2013. GW Pharmaceuticals plcAnnual Report and Accounts 201221 drugs (Hill AJ, et al. 2012, Cannabidivarin is anticonvulsant in mouse and rat in vitro and in seizure models, Br J Pharmacol). In the study, GWP42006 strongly suppressed seizures in six different experimental models commonly used in epilepsy drug discovery. GWP42006 was also found to work when combined with drugs currently used to control epilepsy. As mentioned above, plans are now under way for a Phase II trial investigating GWP42003 as a treatment for psychiatric illness. This trial is due to commence in 2013. There is extensive laboratory evidence in human and animal models indicating that GWP42003 has antipsychotic activity, including both dopamine and glutamate models of psychosis, studies targeting endophenotypes and sophisticated naturalistic observations. Pre-clinical data generated by GW/ Otsuka shows that GWP42003 has the potential not only to enhance symptom improvement, but also to reduce the unwanted motor side-effects of antipsychotic agents. Importantly, unlike current anti-psychotic medications, the mechanism of GWP42003 does not rely on the dopamine D2 receptor for its effect offering the prospect of augmenting the effect of current anti-psychotics without the side effect profile of such treatments. Summary GW has made strong progress in 2012. We are pleased with the significant growth of Sativex in-market sales and look forward to further launches in up to 12 countries in Europe next year. In addition, the Sativex global Phase III cancer pain trials programme is making good progress and we remain excited about the outcome of these trials and the prospect for a future regulatory submission for Sativex in the US market. Our product pipeline is showing great promise as evidenced by the encouraging data reported from our first Phase II trial for GWP42004 in type 2 diabetes. We look forward to making further significant progress across all aspects of our business in 2013. Justin Gover Managing Director 27 November 2012 “To date, Otsuka’s total investment in GW’s research activities under this collaboration totals £21.8m.” Otsuka Funded Research GW’s research activities in the field of CNS disorders and oncology are supported by income from the global cannabinoid research collaboration with Otsuka. This collaboration was originally signed in July 2007 with a three year term, and was extended for a further three years to June 2013. To date, Otsuka’s total investment in GW’s research activities under this collaboration totals £21.8m. Cancer A major focus of the GW-Otsuka research collaboration lies in the area of cancer treatment. Pre-clinical studies are most advanced in the specific areas of glioma and breast cancer. In light of our promising pre-clinical research in glioma (the most common form of brain cancer), GW has received interest from clinicians in conducting an early proof of concept clinical trial. A Phase Ib/IIa study is due to commence in 2013 which will evaluate GW cannabinoids in combination with temozolomide in patients with recurrent glioblastoma, the most common form of brain cancer. We have identified the putative mechanism of action for cannabinoids in glioma, where autophagy and programmed cell death are stimulated via inhibition of the akt/mTORC1 axis. In vivo studies have shown cannabinoids to have a synergistic effect with temozolomide, a standard treatment for glioma. GW has also generated promising pre-clinical research evaluating cannabinoids in the treatment of breast cancer. Efforts are now focused on identifying the precise molecular mechanism of action of cannabinoids in breast cancer and to define the optimum cannabinoid treatment regimen. Neuroscience The second major area of focus in the GW- Otsuka research collaboration lies in nervous system disorders, primarily epilepsy and psychiatric illness. In the area of epilepsy, a lead candidate, GWP42006, has been identified and is supported by strong intellectual property. Additional confirmatory pre-clinical tests are under way prior to progression into clinical trials. Plans are now in place for GWP42006 to enter Phase I clinical trials during 2013. GWP42006 has shown the ability to treat seizures in models of epilepsy with significantly fewer side effects than existing anti-epileptic drugs. In a paper published in September 2012 in the British Journal of Pharmacology by scientists at the University of Reading, GWP42006 was reported to have the potential to prevent more seizures, with few side effects such as uncontrollable shaking, caused by many existing anti-epileptic GW Pharmaceuticals plcAnnual Report and Accounts 201222 Finance Director’s Review GW is pleased to report a healthy set of financial results for the year and a strong cash position. Adam George Finance Director Revenue Analysis £m Analysis of R&D Spend £m 40 35 30 25 20 15 10 5 0 § Licensing Fees § R&D Fees § Sativex Sales § Milestones 2011 2012 30 25 20 15 10 5 0 § GW-funded R&D § Partner-funded R&D 2011 2012 GW Pharmaceuticals plcAnnual Report and Accounts 2012“Total revenues, at £33.1m, were £3.5m higher than the £29.6m recorded in 2011.” 23 Revenues Total revenues, at £33.1m, were £3.5m higher than the £29.6m recorded in 2011. This reflects increased milestone income and increased R&D fees from our Sativex® development partners. Milestone income of £9.8m (2011: £5.3m) resulted from an amendment to the Almirall license agreement signed in March 2012. In return for GW’s agreement to reduce the Sativex supply price for an agreed period and in return for waiving certain future cancer pain related milestones, Almirall agreed to pay a milestone of £9.8m upon achievement of a Phase III cancer pain patient recruitment target. The target was achieved in April and the payment was subsequently received in May 2012. The prior year milestone income comprised a £2.5m milestone from Almirall upon achievement of Spanish pricing approval, £0.25m upon German approval and £2.55m milestone from Otsuka upon the commencement of Phase III cancer pain trials. Sativex has made good progress during the year. The volume of Sativex 10ml vials sold in-market by our partners increased year on year by 108%. This principally reflects the growth achieved by Almirall in Germany and Spain during 2012. We can expect continued growth as Almirall conduct commercial launches in up to 12 new countries during 2013. GW’s Sativex sales revenues are based on the volume of vials delivered to our commercial partners during the financial year. As there were no major new territory launches in this period, our Sativex revenues decreased to £2.5m (2011: £4.4m). This is in line with guidance provided at the time of our interim results. We delivered substantial launch stocks to Almirall in the second half of 2011 which have been used to meet in-market demand during 2012. As partner inventory levels reduce, we can expect Sativex deliveries to result in an upward trend in GW’s revenues as in-market sales continue to grow. License, collaboration and technical access fee revenues of £1.3m (2011: £3.8m) consist of revenue recognised from signature and technical access fees received from Almirall, Otsuka and Novartis in previous years. The £2.5m reduction compared to 2011 reflects the fact that 2011 included a £1.9m technical access fee, received upon signature of the new Novartis license in that year. The remaining £0.6m reduction is due to a reduction in the rate of income recognition on the Otsuka license fee. This was being recognised at the rate of £1.1m per year for the first 4.5 years of the license agreement, reducing to £0.3m per year for the remainder of the license. This step-down in the rate of income recognition took effect from the start of the 2012 financial year. Research and development fee revenues have increased to £19.5m (2011: £16.0m). These fees consist of research and development costs incurred by GW and charged to Otsuka under the Sativex US development agreement, totalling £14.1m (2011: £10.8m) and the global cannabinoid research collaboration agreement of £5.4m (2011: £5.2m). The growth in US development fees reflects progress with patient recruitment into the Phase III cancer pain trials, which are wholly funded by Otsuka. Research & Development Expenditure Total research and development expenditure, which is expensed as incurred, was £27.6m (2011: £22.7m), of which £19.5m (2011: £16.0m) was funded by Otsuka. Otsuka fundeded research includes both the Sativex Phase III cancer pain programme as well as pre-clinical research in CNS and oncology. GW-funded research totalled £8.1m (2011: £6.7m) representing 29% (2011: 29%) of overall research and development spend. Research and development expenditure is stated net of a £1.3m credit (2011: £0.4m credit) arising from the reduction to our provision for inventories in recognition of the increasing net realisable value of our surplus inventory as our Sativex forward sales estimates increase. GW Pharmaceuticals plcAnnual Report and Accounts 201224 Finance Director’s Review continued £29.3m The Group held cash and short-term deposits of £29.3m at 30 September 2012. Segmental Results In note 3 to the financial statements a segmental analysis of our business is provided showing the income statement split into the three business segments of the Group: Sativex Commercial, Sativex R&D and Pipeline R&D. The Sativex Commercial business generated a contribution of £14.1m (2011: £12.5m) from product sales, milestones and license fee revenues received from commercial partners. Investment in Sativex R&D was £18.4m (2011: £14.8m), of which £14.1m (£10.8m) was Otsuka funded Phase III cancer pain expenditure. The remaining £4.3m (2011: £4.0m) was funded by GW. Cash Flow The Group recorded a net cash inflow for the year of £1.0m (2011: £3.1m inflow). Receipts include £9.8m of milestone income (2011: £5.3m) from Almirall and the exercise of share options by GW staff which generated proceeds of £0.1m (2011: £1.4m). Capital expenditure of £1.3m (2011: £0.9m) consisted mainly of upgrades to our research and development premises and new laboratory and manufacturing equipment. Financial Position The Group’s net funds comprise cash balances together with amounts held on short-term deposit totalling £29.3m (2011: £28.3m). Investment in Pipeline R&D was £9.9m (2011: £7.8m), of which Otsuka funded £5.4m (2011: £5.2m). The remaining £4.5m (2011: £2.6m) was funded by GW. Inventory of £3.5m (2011: £1.4m) consists of finished goods, consumable items and work in progress and is stated net of a realisable value provision of £2.1m (2011:£3.4m). Expenditure Management and administration expenditure increased to £3.7m (2011: £3.3m) This includes £0.6m (2011: £0.4m) of share-based payment charges. Interest income of £0.2m in 2012 (2011: £0.3m) reflects the combined effects of an increasing cash balance and improving rates of interest. GW continues to take a conservative approach to managing counterparty credit risk on its cash deposits. Taxation The Group plans to submit a research and development tax credit claim for the year ended 30 September 2012 of £0.8m (2011: £nil). A taxation recoverable debtor of £0.8m has therefore been recognised on the September 2012 balance sheet. The £1.2m tax credit shown in the 2012 income statement includes £0.4m successfully claimed in respect of a 2011 claim, plus the accrued credit of £0.8m in respect of 2012. This 2012 credit remains subject to the agreement of HMRC. GW welcomes the forthcoming implementation of the Government’s patent box scheme. Under this scheme we expect most of GW’s future product revenues, milestone income and license fees to be eligible for the 10% rate of taxation. The combination of this low rate of taxation and the enhanced expenditure reliefs available under the R&D tax credit scheme should result in a long-term low rate of future corporation tax. Profitability Pre-tax profit for the year was £1.2m (2011: £2.5m). This is in line with guidance. This was further increased by the research and development tax credit, resulting in a post-tax profit for the year of £2.5m (2011: £2.7m). This provision is calculated in accordance with the inventory accounting policy set out in note 2. Trade and other receivables at 30 September 2012 were £1.6m (2011: £2.3m), consisting of £0.8m (2011: £1.5m) of trade debtors (from sales of Sativex) and £0.8m (2011: £0.8m) of other receivables and prepayments. At 30 September 2012 the Group had received £1.1m (2011: £2.1m) of advance payments for research activities to be carried out on behalf of Otsuka in the next six months. This has been disclosed as an advance payment received, within deferred revenue due within one year. Deferred license, collaboration and technical access fee income amounts to £11.5m (2011: £12.7m) and represents the balance of non- refundable Sativex license agreement and technical access fees. £1.4m (2011: £1.3m) is shown as due within one year and £10.1m (2011: £11.4m) is shown as due after more than one year. These will be recognised as revenue in future periods. Average headcount of the Group for the year was 177 (2011: 152). The increase in staff numbers reflects the expansion of operations necessary to support the commercial growth of Sativex and the increasing levels of research and development activity for both Sativex and our growing pipeline of promising product candidates. 2013 Guidance: Sales As Sativex increases its market penetration and undergoes further launches, GW can expect to look forward to continued growth in in-market sales by our commercial partners. GW’s sales revenues are generated as sales of bulk product to licensing partners. As a result and as previously GW Pharmaceuticals plcAnnual Report and Accounts 201225 “ We expect further product approvals and commercial launches in Italy and up to 12 new European countries during 2013.” indicated, the rate of GW’s product sales growth in the next few years is likely to be influenced by a variety of factors, including the timing of new commercial launches, the timing of delivery of batches to partners, partner stock-holding policies, pricing and reimbursement discussions and the rate of market uptake. Until the pattern of batch deliveries becomes regular, there is likely to be variability in the level of GW’s Sativex sales from one period to the next. Having successfully achieved a large number of additional approvals in Europe during 2012, we expect further commercial launches in up to 12 European countries during 2013. These launches are dependant on the conclusion of pricing and reimbursement procedures in each country. R&D Spend As a result of GW’s strategic decision to advance further pipeline product candidates into clinical development, we expect GW-funded R&D spend for the coming year to increase by 10–20% over 2012. Milestones In early 2013, Sativex pricing approval in Italy is expected to result in a £0.25m milestone payment from Almirall. No other milestones from existing Sativex license agreements are currently expected during the 2013 financial year. Profitability In the last few years, significant milestone income receipts from Sativex agreements have led the Group reporting small pre-tax profits. In line with market expectations, we are not expecting significant milestones receipts in 2013 and this factor, together with our increasing R&D spend in the pipeline, leads us to expect to report a loss for the 2013 financial year. This is consistent with market expectations and is in accordance with our strategic plan to create long-term value from our pipeline of products by investing in R&D. It should be noted however that a loss in 2013 should enable the Group to claim an R&D tax credit for the year. Adam George Finance Director 27 November 2012 GW Pharmaceuticals plcAnnual Report and Accounts 201226 Board of Directors 1 2 3 4 1. Justin Gover BSc, MBA Managing Director Aged 41. Mr Gover has been Managing Director of GW since January 1999. In this time, he has been responsible for managing the Group’s operations, equity financing and business development activities. Mr Gover has 16 years’ experience in the biotech industry and was previously Head of Corporate Affairs at Ethical Holdings plc, the NASDAQ-quoted drug delivery company. In this role, he was responsible for the company’s strategic corporate activities, including mergers and acquisitions, strategic investments, equity financing and investor relations. He holds a MBA from the INSEAD business school. 2. Dr Geoffrey W Guy BSc, MB BS, MRCS Eng, LRCP, LMSSA, Dip Pharm Med Executive Chairman Aged 58. Dr Guy founded Ethical Holdings plc, in 1985 and led that company as Chairman and Chief Executive to its NASDAQ flotation in 1993 before leaving in 1997. He received 3i’s “Venturer of the Year” award in the science and technology category. In 1990, Dr Guy co-founded the plant-medicines company that became Phytopharm plc, of which he was Chairman until 1997. Dr Guy served as Director of Clinical Development at Napp Laboratories from 1983 to 1985 and as International Clinical Research Co-ordinator at Laboratories Pierre Fabre from 1981 to 1983. 3. Adam George, BSc, ACA Finance Director Aged 42. Adam George joined GW in 2007 and was Group Financial Controller until 1 June 2012, at which time he joined the Board as Finance Director. Adam also acts as Company Secretary, a role he has played since he first joined the company. Prior to joining GW, Adam occupied several senior finance roles within both listed and privately owned high growth businesses. From 2004 to 2007, Adam was Finance Director of Believe It Group Limited (now 4Com plc), a telecommunications service provider, having been Group Financial Controller from 2001 to 2004. 4. Dr Stephen Wright MA, MD, FRCPE, FFPM Research & Development Director Aged 60. Dr Wright joined GW’s senior management team in January 2004 as Research & Development Director and was promoted to the Board in March 2005. Dr Wright has more than 20 years of experience in medicines development. He joined GW from Ipsen, where he was Senior Vice President of Clinical Research & Development and a member of the UK Board of Directors. In this role he led teams responsible for regulatory success in both the US and EU. Prior to this, he was Venture Head of Neuroscience at Abbott Laboratories, based in the US, and was also formerly Associate Medical Director at Glaxo in the UK. GW Pharmaceuticals plcAnnual Report and Accounts 201227 5 6 7 8 5. James Noble MA, FCA Non-executive Deputy Chairman Aged 53. James Noble has served as our Non-executive Director since January 2007. Mr Noble has extensive experience in the biotech industry and currently serves as Chief Executive Officer of Immunocore Limited and Adaptimmune Limited, two companies involved in T cell receptor technology. Mr Noble was previously Chief Executive Officer of Avidex Limited, a private biotech company. Mr Noble qualified as a chartered accountant with Price Waterhouse in 1980 and then spent seven years at investment bank Kleinwort Benson Limited, where he became a Director in 1990. He then joined British Biotech plc as Chief Financial Officer and secured the company’s IPO on NASDAQ and London in 1992. From 1997 to 2001, he held numerous non-executive director positions, including at PowderJect Pharmaceuticals plc, Oxford GlycoSciences plc (OGS), MediGene AG, and Advanced Medical Solutions plc. Mr Noble graduated from the University of Oxford in 1980. 6. Chris Tovey, BSc Chief Operating Officer Aged 47. Mr Tovey joined GW in October 2012 in the newly created position of Chief Operating Officer. He has gained a wealth of commercial experience from more than 25 years in the pharmaceutical industry and was most recently Vice President Global Marketing Operations at UCB Pharmaceuticals, responsible for worldwide marketing activities on a portfolio of UCB products generating over €2 billion in annual sales. Prior to joining UCB, Chris was Vice President Managing Director UK & Ireland at Nabi Biopharmaceuticals, a US based biopharmaceutical company. Before joining Nabi, Chris spent 18 years at GlaxoSmithKline, in senior commercial roles in both the European and UK organisations. 7. Richard Forrest BSc Non-executive Director Aged 64. Mr Forrest has 30 years’ commercial experience in the international pharmaceutical industry. This included 19 years with the Rhone- Poulenc Rorer Group (now Sanofi-Aventis), where his most senior position was Senior Vice-President, Europe. His roles included responsibility for General Management, Marketing and Sales and Business Development in Europe and Rest of the World (South America, Africa, Middle East and South-East Asia). Mr Forrest was also a member of the global committees responsible for worldwide operational performance, as well as R&D portfolio decisions and licensing. More recently he was Chief Operating Officer of Novuspharma, an Italian biotech company, prior to its merger with Cell Therapeutics Inc. (USA). 8. Thomas Lynch BSc (Econ), FCA Non-executive Director Aged 55. Mr Lynch most recently served as Chairman and Chief Executive Officer of Amarin Corporation plc, a NASDAQ listed company specialising in cardiovascular disease, until December 2009. From 1993 to 2004, Mr Lynch worked in a variety of capacities in Elan Corporation plc, including Chief Financial Officer and Executive Vice-President, as well as Vice-Chairman. In 1994, Mr Lynch founded a company which became Warner Chilcott plc, of which he was a Director until 1999, and from then until 2002 served as a Director of Galen plc, which acquired Warner Chilcott in 1999. Mr Lynch currently serves as a Director of the IDA Ireland (an Irish government investment agency); senior independent Director of ICON plc (clinical research); Profectus BioSciences Inc., (immunological diseases); and is Chairman of Chronetech AB (infectious diseases). GW Pharmaceuticals plcAnnual Report and Accounts 201228 GW Pharmaceuticals plc Annual Report and Accounts 2012 Directors’ Report The Directors present their report and the audited financial statements for the Company and for the Group for the financial year ended 30 September 2012. Principal Activity and Business Review The principal activity of the Group is the research, development and commercialisation of a range of cannabinoid prescription medicines to meet patient needs in a wide range of medical conditions. A review of the results for the year and of future developments in the business is given in the Chairman’s Statement, Managing Director’s Review and in the Finance Director’s Review, which form part of this Annual Report. The subsidiary undertakings principally affecting the results and net assets of the Group are listed in note 28 to the financial statements. Results and Dividends The consolidated income statement for the year is set out on page 42. The Group’s profit for the financial year after taxation was £2.5m (2011: £2.7m). The Directors do not recommend the payment of a dividend (2011: £nil). Group Research and Development Activities The research and development undertaken by the Group amounted to £27.6m (2011: £22.7m), all of which was expensed during the year. This included £19.5m (2011: £16.0m) of research and development expenditure which was carried out under contract for and was fully funded by our development partners. Substantial Shareholdings On 27 November 2012 the Company had been notified, in accordance with the Companies Act 2006, of the following interests in the ordinary share capital of the Company: Prudential plc group of companies Dr Geoffrey W Guy Dr Brian Whittle Preston L Parish Trust Mr Justin Gover Number of shares held held 18,861,389 17,187,654 8,087,491 6,095,685 3,983,398 % 14.1 12.9 6.1 4.7 3.0 Share Capital Information relating to changes to the issued share capital during the year is given in note 20 to the financial statements. The Group is funded entirely by ordinary share capital and has no debt (2011: £7,000). Directors and Their Interests Details of the beneficial interests of Directors in the ordinary shares of the Company are disclosed within the Director’s Remuneration Report on page 35. Details of the Directors’ share options and service contracts are shown in the Directors’ Remuneration Report. Biographical details of the Directors are given on pages 26 and 27. In accordance with the Articles of Association of the Company, James Noble and Richard Forrest will retire at the forthcoming Annual General Meeting and, being eligible, James Noble offers himself for re-election. After six years of service Richard Forrest has chosen not to seek reappointment for a third three-year term and will therefore step down from the Board on 18 January 2013. In addition, having both been appointed to the Board since the last AGM, Adam George and Chris Tovey will also offer themselves for election. Principal Risks and Uncertainties In common with other pharmaceutical development companies GW faces a number of risks and uncertainties. Internal controls are in place to help identify, manage and mitigate these risks. Further details of these controls are outlined on page 31 in the Chairman’s Corporate Governance Report. The main risks have been identified as follows: Clinical Clinical trials may encounter delays or fail to achieve their endpoints. 29 Regulatory Regulatory bodies around the world have different requirements for the approval of therapeutic products. This may result in the restriction of indication, denial of approval or demands for additional data. Legislative GW’s lead product is a controlled drug and as such is subject to both national and international legislation, which can change at any time. Manufacturing GW may encounter problems in its manufacturing process which may delay product development programmes or restrict the commercial quantities of product that can be made. Marketing and Commercialisation Following regulatory approval, GW’s products may not achieve commercial success or may be subject to competition. Reimbursement agencies may not agree to cover the full cost of an approved product. GW is reliant upon its commercial licensing partners to actively market Sativex within their respective territories. Safety During post-marketing surveillance, quality, safety or efficacy issues may emerge which may result in the withdrawal or restriction of the product licence. Intellectual Property The Group may not be able to secure and maintain the intellectual property protection for its products. Funding The Group may require access to additional funding in the future. If it fails to obtain such funding the Group may need to delay or scale back some of its research and development programmes or the commercialisation of some of its products. Risk in Relation to the use of Financial Instruments The Group is exposed to a number of financial risks, including credit risk, liquidity risk, market price risk and exchange rate risk. It is the Group’s policy that no speculative trading in financial instruments shall be undertaken. Credit Risk The Group’s principal financial assets are cash and short-term money market investments. Risk is minimised through an investment policy restricting the investment of surplus cash to interest bearing deposits principally held with the major UK banking groups and with UK subsidiaries of banking groups with high credit ratings. Trade receivables are concentrated to a small number of large customers, where the risk of default is low. Liquidity Risk This risk is minimised by placing surplus funds in a range of low risk cash deposits and short-term liquid investments for periods up to 365 days and at call. This portfolio of deposits is managed to ensure that a rolling programme of maturity dates is managed in accordance with Group expenditure plans in order to ensure available liquid cash funds when required. Market Price Risk Market price risk primarily comprises interest rate exposure risk, which is managed by maintaining a rolling programme of varying deposit maturity dates, up to a maximum of 365 days, on a breakable deposit basis. The majority of funds are deposited for terms of less than 90 days. This allows the Group to react to rate changes within a reasonable timeframe and to mitigate pricing risk accordingly. Exchange Rate Risk The Group’s principal functional currency is Pounds Sterling (“GBP”). However, during the year the Group had exposure to Euros (“€”), US Dollars (“US$”) and Canadian Dollars (“CAD”). The Group’s policy is to maintain natural hedges, where possible, by matching revenue and receipts with expenditure. GW Pharmaceuticals plcAnnual Report and Accounts 201230 Directors’ Report continued Going Concern The financial position of the Group, its cash flows and liquidity position are fully described in the Finance Director’s Review on pages 22 to 25. The Group’s business activities and the key factors affecting the likely development of the business in 2013 are described in the Managing Director’s Review on pages 16 to 21. In addition, the key policies for managing financial risks are set out above. Having reviewed cash flow forecasts for the 12 month period following the date of signing the financial statements, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing these financial statements despite the current uncertain economic climate. Charitable and Political Contributions The Group made charitable donations of £50,000 during the year (2011: £nil). No political donations were made in either year. Supplier Payment Policy It is the Group’s policy to settle debts with its creditors on a timely basis, taking into consideration the terms and conditions offered by each supplier. The number of accounts payable days outstanding at the year end, based on the average monthly outstanding Group accounts payable balances, was 31 days (2011: 43 days). Employee Consultation The Group places considerable value on the involvement of its employees. They are regularly briefed on the Group’s activities. Their contribution is a key element to the future success of the Group and accordingly, from time to time, some employees are given the opportunity to participate in the Company’s share capital by joining one or more of the share option schemes operated by the Company. Details of the share options issued under these plans are set out in note 21 to the financial statements. Equal opportunity is given to all employees regardless of their age, sex, colour, race, disability, religion or ethnic origin. Disabled Employees Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical with that of other employees. Annual General Meeting The Annual General Meeting will be held at 2pm on 18 January 2013 at Porton Down Science Park, Salisbury, Wiltshire SP4 0JQ. Auditors and Audit Information Each of the persons who is a Director at the date of approval of this Annual Report confirms that: (a) so far as the Director is aware, there is no relevant audit information of which the Company’s auditors is unaware; and (b) the Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. Deloitte LLP have expressed their willingness to continue in office as auditor and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. By order of the Board Adam George Company Secretary 27 November 2012 GW Pharmaceuticals plcAnnual Report and Accounts 201231 Chairman’s Corporate Governance Report As a company that has securities which are traded on the Alternative Investment Market (“AIM”), we are not required to comply with the principles of the UK Corporate Governance Code. However, the Board has sought to robustly apply the principles of the Code as far as practicable given the size of the Company and the nature of its operations. In this report I will explain how we have managed our corporate governance during 2012 and how we intend to maintain practices consistent with the requirements of the Code in future. I will also identify those provisions of the Code with which we are not fully compliant. Our Strategy, Business Model and Approach to Risk The nature of our business is to take product development risk in order to create valuable medicines targeted to address areas of significant unmet medical need. We invest our efforts and financial resources into the process of identifying suitable pharmaceutical product candidates which we then take through an extensive development process. This is an inherently risky process. Not all of our product candidates will progress successfully to become marketable products. However, our in-house development expertise and unique knowledge of the cannabinoids with which we work should allow us to develop valuable products in an efficient manner that will significantly reduce, but which cannot eliminate this risk in future. We manage the extent of retained risk by: • when appropriate, licensing our products to pharmaceutical partners with the expertise, resources and contacts to market our approved products, reducing the need for investment in sales infrastructure, allowing us to focus upon our own areas of expertise; • managing the development process of our products, in conjunction with our partners, to ensure optimal management of each stage of development, utilising our in-house resource wherever possible to ensure compliance with good clinical practice, maintenance of our knowledge base and close control; • seeking funding from partners for early stage research by entering into collaboration agreements, sharing the financial risks associated with our pipeline development; • negotiating licensing terms with partners that require our partners to fund most of the latter stages of product development, Phase III trials, indication expansion and product lifecycle management; and • controlling the manufacturing of our products, in house, to ensure that quality is maintained, processes optimised and manufacturing expertise is maintained within GW. All of the above result in a business model that allows us to create value by developing a broad pipeline of potential future products whilst sharing the financial risk with our partners. By maintaining close internal control over most aspects of research and development, product manufacture and regulatory compliance we mitigate the other risks associated with our business by continuing to maintain a robust internal controls process and risk management framework. Having carried out a review of the level of risks that we are taking in pursuit of the Group’s strategy, the Board is satisfied that the level of retained risk is appropriate and commensurate with the financial rewards that should result from achievement of our strategy. The Board of Directors The Company is controlled by the Board of Directors which currently comprises five Executive and three independent non-executive Directors. The Board of Directors has overall responsibility for the Group. Its aim is to represent the interests of the Group’s shareholders and to provide leadership and control in order to ensure the growth and long-term success of the business. Provision A2.1 of the Code recommends separation of the roles of Chairman and Chief Executive. Due to the current size of the Group, it is the Board’s view that the existing arrangement, whereby I continue to provide leadership to the Board in my role as Executive Chairman, continues to be in the best interests of the Group. The Board is satisfied that the presence of Mr James Noble, Mr Thomas Lynch and Mr Richard Forrest, who are all considered by the Board to be independent Directors provides sufficient independent influence to ensure that the Board is balanced and that good corporate governance practice is maintained. Provision B1.2 of the Code states that, except for smaller companies, at least half the Board, excluding the Chairman, should comprise independent non-executive Directors. As a smaller company, with three independent non-executive Directors, the Group is fully compliant with this provision of the Code. Mr James Noble acts as the Company Deputy Chairman and senior independent non-executive. All Directors are able to take independent advice in furtherance of their duties if necessary. The Board is responsible to shareholders for the proper management of the Group. Board meetings are held at least six times a year to set the overall direction and strategy of the Group and to review financial and operating performance. Financial policy and budgets, including capital expenditure, are approved and monitored by the Board. All key strategic decisions are subject to Board approval. The Company Secretary is responsible for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. GW Pharmaceuticals plcAnnual Report and Accounts 201232 Chairman’s Corporate Governance Report continued Directors are subject to election by shareholders at the first opportunity after their appointment. In addition, one third of the Directors are subject to retirement by rotation at each Annual General Meeting. The Board have considered the recommendation within Provision B7.1 of the UK Corporate Governance Code, aimed at FTSE350 companies and above, that all Directors should be reappointed annually. However the Board has concluded that it is not appropriate for a company of GW’s size to adopt annual reappointment. For the foreseeable future we will continue with the existing practice of retirement by rotation every three years. During the year, there were six full meetings of the Board of Directors. All members of the Board of Directors attended each of the six meetings, with the exception of James Noble and Stephen Wright, who each attended five Board meetings. Committees of the Board The detailed terms of reference of each of the Board committees can be found on the Group website at www.gwpharm.com. Remuneration Committee The Remuneration Committee comprises all the non-executive Directors under the chairmanship of Mr Thomas Lynch. It reviews, inter alia, the performance of the Executive Directors and sets the scale and structure of their remuneration and the basis of their service agreements with due regard to the interests of the shareholders. The Remuneration Committee also determines the allocation of awards under the Long-Term Incentive Plan (“LTIP”) to Executive Directors. No Director has a service agreement with a notice period exceeding one year. During the year, there were three full meetings of the Remuneration Committee. All members of the Committee attended these meetings. It is a policy of the Remuneration Committee that no individual participates in discussions or decisions concerning his own remuneration. The Directors’ Remuneration Report is set out on pages 35 to 39. Audit Committee The Audit Committee comprises all the non-executive Directors under the chairmanship of James Noble. It meets at least three times per year and overviews the monitoring of the Group’s internal controls, accounting policies and financial reporting and provides a forum through which the external auditors report. It meets at least once a year with the external auditors without executive Board members present. The Audit Committee is also responsible for overseeing the activities of the external auditors including their appointment, reappointment, or removal as well as monitoring of their objectivity and independence. The Committee also considers the fees paid to the external auditors and whether the fee levels for non-audit services, individually and in aggregate, relative to the audit fee are appropriate so as not to undermine their independence. James Noble is a qualified chartered accountant with recent financial experience. The Board is satisfied that his expertise ensures compliance with Code 3.1 of the UK Corporate Governance Code, whereby at least one member of the Committee must have recent and relevant financial experience. During the year, there were three full meetings of the Audit Committee which were fully attended. Nominations Committee The Nominations Committee comprises Mr James Noble and Mr Richard Forrest, under my chairmanship. It meets at least twice a year and reviews the structure, size and composition of the Board, supervising the selection and appointment process in relation to Directors, making recommendations to the Board with regard to any changes, using an external search consultancy if considered appropriate. For new appointments, which are made on merit, against objective criteria and with due regard to the benefits of diversity on the Board, including gender, the Nominations Committee will make a recommendation to the Board. Members of the Board then have the opportunity to meet the candidate prior to approving the appointment. Once appointed, the Nominations Committee oversees the induction of new Directors as well as ensuring that the Board as a whole receive the appropriate training during the course of the year in order to ensure that they have the knowledge and skills necessary to operate effectively. During 2012, the Nominations Committee oversaw the appointment of Adam George as Finance Director, following the retirement of David Kirk. As an internal candidate, with five years’ experience of working as GW’s Company secretary and Group financial controller, Adam was considered to be the most appropriate candidate for this role. At the same time, having closely considered the job descriptions and responsibilities of each member of the Executive team, the Nominations Committee recommended to the Board that a new Executive role of Chief Operations Officer should be recruited. An external search agency was engaged, resulting in the appointment of Chris Tovey, who joined the Company subsequent to the year end on 1 October 2012. GW Pharmaceuticals plcAnnual Report and Accounts 2012 33 The Nominations Committee also retains responsibility for the Board appraisal process whereby the performance of all Directors is appraised annually both on an individual basis, for the Board as a whole taking into account such factors as attendance record, contribution during Board meetings and the amount of time that has been dedicated to Board matters during the course of the year. In addition, the Nominations Committee oversees the appraisal of each of the Board sub-committees. I oversee the appraisal process, while my performance as Chairman is reviewed by James Noble, in his capacity as senior independent Director, taking into account feedback from other members of the Board. Provision B6.2 of the UK Corporate Governance Code recommends that the Board should consider utilising an independent third party to facilitate the Board appraisal process, noting that this may not be appropriate for companies smaller than FTSE350. Having considered this recommendation, the Board has decided that the current appraisal process is operating satisfactorily and that, in recognition of GW’s size, it is not considered necessary to utilise the services of an independent facilitator at this time. The Nominations Committee will reconsider this in future and may appoint an independent facilitator if it determines that this is appropriate. During 2012 there have been four Nominations Committee meetings. These meetings were fully attended. Executive Management Committees Operational decision making is delegated to a number of Executive Management Committees which are committees consisting of certain Directors and members of senior management. These Executive Management Committees meet as required and on average every six weeks. Communication with Shareholders The Board attaches great importance to effective communication with shareholders and encourages dialogue with both its institutional and private investors and we aim to respond promptly to all questions received verbally or in writing. Regular communication is maintained with all shareholders through Company announcements, the Annual Report and Accounts, Preliminary Results and the Interim Report. In addition the Company operates a website which can be found at www.gwpharm.com. The website contains further details of the Group, its products and its activities, details of regulatory announcements and Company announcements, Annual and Interim Reports, and details of the Company’s share price, share trading activity and graphs. The Executive Directors regularly attend meetings with analysts and institutional shareholders throughout the year. With private shareholders this is not always practical. The Board has therefore sought to use the Company’s Annual General Meeting as the opportunity for both the Executive and the non-executive Directors to meet shareholders, after which the Board gives a presentation on the activities of the Group and there is also an opportunity to ask questions of all Directors on a formal and informal basis. At other times during the year, the non-executive members of the Board and I are available to meet with our institutional shareholders upon request. We welcome the opportunity to develop a mutual understanding of objectives with our shareholders. All shareholders have at least 21 days’ notice of the Annual General Meeting. Maintenance of a Sound System of Internal Control The Directors have overall responsibility for ensuring that the Group maintains a system of internal control to provide them with reasonable assurance that the assets of the Group are safeguarded and that the shareholders’ investments are protected. The system includes internal controls covering financial, operational and compliance areas, and risk management. There are limitations in any system of internal control, which can provide reasonable but not absolute assurance with respect to the preparation of financial information, the safeguarding of assets and the possibility of material misstatement or loss. During 2012 the Board has considered and reviewed the system of internal controls in place. An assessment of the major risk areas for the business and methods used to monitor and control them was also undertaken with a particular focus upon the changing profile of the risks facing the business as the commercialisation of Sativex® progresses and as our clinical efforts encompass research involving a much broader range of new cannabinoid product candidates in a wide range of disease areas. In addition to financial risk, the review covered operational, commercial, environmental, regulatory and research and development risks. The risk review is an ongoing process with regular review by the Board at least annually with appropriate input from the Audit Committee. The prime purpose of this review is to ensure that, having considered the controls that are in place to mitigate risks, the Board is satisfied with the residual level of risk being taken in pursuit of the Group strategy. The key procedures designed to provide an effective system of internal control that have operated throughout the year and up to the date of the sign-off of this report are described below. Control Environment There is an organisational structure with clearly defined lines of responsibility and delegation of accountability and authority. GW Pharmaceuticals plcAnnual Report and Accounts 201234 Chairman’s Corporate Governance Report continued Risk Management The Group employs Directors and senior executives with the appropriate knowledge and experience for a pharmaceutical group such as GW Pharmaceuticals plc. A formal risk management review is performed annually as part of the process of determining the adequacy of the Group’s system of internal controls and risk mitigation procedures. Financial Information The Group prepares detailed budgets and working capital projections, which are approved annually by the Board and are updated regularly throughout the year. Detailed management accounts and working capital cash flows are prepared on a monthly basis and compared to budgets and projections to identify and manage any significant variances. Management of Liquid Resources The Board is risk averse when investing the Group’s surplus cash funds. The Group’s treasury management policy sets out strict procedures and limits on how surplus funds are invested. The Board has considered it inappropriate to establish an internal audit function, given the size of the Group. However, we will review this decision as the operations of the Group develop. Dr Geoffrey Guy Executive Chairman 27 November 2012 GW Pharmaceuticals plcAnnual Report and Accounts 201235 Directors’ Remuneration Report Introduction Companies that have securities that trade on AIM are not required to comply with the disclosure requirements of Directors’ Remuneration Report Regulations 2002 or to comply with the UKLA Listing Rules and the disclosure provisions under Schedule 8 of the Companies Act 2006. However, the Remuneration Committee is committed to maintaining high standards of corporate governance and has taken steps to comply with best practice in so far as it can be applied practically given the size of the Company and the nature of its operations. Unaudited Information Remuneration Report The Board has applied the Principles of Good Governance relating to Directors’ remuneration as described below: The Remuneration Committee The Remuneration Committee comprises all the non-executive Directors under the chairmanship of Mr Thomas Lynch. The constitution and operation of the Committee is in compliance with the provisions of the UK Corporate Governance Code. When setting its remuneration policy for Executive Directors the Committee gives full consideration to the provisions and principles of the UK Corporate Governance Code. Remuneration Policy for Executive Directors The remuneration policy has been designed to ensure that Executive Directors should receive appropriate incentive and reward given their performance, responsibility and experience. In determining this, the Remuneration Committee has regard to ensure that the policy aligns the interests of Executive Directors with those of the shareholders. The Group remuneration policy for Executive Directors is to: • have regard to the individuals’ experience and the nature and complexity of their work in order to pay a competitive salary that attracts and retains management of the highest quality, while avoiding remunerating those Directors more than is necessary; link individual remuneration packages to the Group’s long-term performance through the award of share options, bonus schemes and via participation in the Group’s Long-Term Incentive Plan; • • provide post-retirement benefits through defined contribution pension schemes; and • provide employment-related benefits including the provision of life assurance and medical insurance. Directors’ Service Contracts It is Group policy that Executive Directors should have contracts with an indefinite term providing for a maximum of one year’s notice. Details of Directors’ service contracts are as follows: Director Executive Geoffrey W Guy Justin Gover Stephen Wright Adam George1 Chris Tovey1 Non-executive James Noble Richard Forrest Thomas Lynch Date of Contract Notice Period November 2000 November 2000 March 2005 June 2012 October 2012 January 2007 March 2007 July 2010 12 months 12 months 12 months 6 months 6 months 3 months 3 months 3 months 1 Subject to the agreement of the Remuneration Committee, notice period will increase to 12 months upon completion of two years’ service as a Director. GW Pharmaceuticals plcAnnual Report and Accounts 201236 Directors’ Remuneration Report continued Remuneration Package for Executive Directors Executive Directors’ remuneration packages are considered annually and comprise a number of elements, as follows: i) Basic Salary Basic salaries are reviewed annually at the end of each calendar year. The review process is undertaken having regard to the development of the Group and the contribution that individuals will continue to make. Consideration is also given to the need to retain and motivate individuals and information on the salary levels in comparable organisations. In this respect the Remuneration Committee draws upon the findings of external salary surveys and undertakes its own research. ii) Annual Performance Incentive Executive Directors are eligible for an annual bonus at the discretion of the Remuneration Committee. Bonus awards are reviewed at the end of each calendar year and any such awards are determined by the performance of the individual and the Group as a whole based upon the achievement of strategic objectives set at the beginning of the year. The awards are normally limited to a maximum of 50% of basic salary, however in exceptional circumstances the annual maximum may increase up to 100% of basic salary. iii) Pensions and Other Benefits The Group does not operate a Group pension scheme. Instead Directors are entitled to receive a Company contribution to their individual private pension arrangements. In order to take account of the varying status of each individuals personal pension arrangements, the Remuneration Committee have agreed that, subject to there being no incremental cost to the Company, Directors may, at their sole discretion, elect to receive their Company pension contribution as taxed income as an alternative to a pension scheme contribution. Other benefits provided are life assurance, permanent health insurance, private medical insurance and car allowance. iv) Share Options/Long-Term Incentive Plan Executive Directors are awarded share options at the discretion of the Remuneration Committee. Share options are granted at the closing mid-market value of the Company’s ordinary shares on the day prior to grant and vest after a period of three years. Under the terms of the Long-Term Incentive Plan Executive Directors are awarded options to subscribe for the Company’s ordinary shares at an exercise price equal to the nominal value. These options are subject to performance conditions which must be achieved before the options vest and become exercisable. In the event that the performance conditions are not achieved within the required three year vesting period these options will lapse. Once vested, an award may be exercised at any time prior to the tenth anniversary of the date of grant. The following annual awards have yet to vest: The 2010 award is subdivided into four equal tranches, each of which will vest on 19 July 2013 upon achievement of the following performance conditions: • one quarter will vest upon achievement of regulatory approvals of the Company’s lead product in a further six European countries (excluding UK and Spain) and three non-EU countries; • one quarter will vest upon the conclusion of one new significant non-Sativex® license agreement; • one quarter will vest upon the successful completion of a Phase II proof of concept clinical trial in one non-Sativex product; and • one quarter will vest if, on the vesting date, the GW Pharmaceuticals plc share price has both increased and outperformed the FTSE AIM All Share Index over the period from the date of grant until vesting of the option. The 2011 award is subject to a performance condition whereby the number of options vesting on the third anniversary of the date of grant will be determined according to the performance of the Company share price relative to a comparator group consisting of the constituents of the FTSE small cap index. Awards will only vest if the Company is ranked at median or above. 25% of the award will vest if the Company achieves median ranking, with 100% vesting if an upper quartile ranking is achieved. A straight line approach will be used to calculate the percentage vesting between these two extremes. GW Pharmaceuticals plcAnnual Report and Accounts 201237 The 2012 award is subdivided into four equal tranches, each of which will vest on 6 June 2015 upon achievement of the following performance conditions: • one quarter of the award will vest upon achievement of first positive cancer pain clinical trial results; • one quarter of the award will vest upon filing of a New Drug Application (“NDA”) for Sativex with the US Food and Drug Administration (“FDA”); • one quarter of the award will vest upon signature of a new non-Sativex product license agreement; and • one quarter of the award will vest subject to the Company share price performance over the three year vesting period. This will be ranked against the share price performance of a comparator group made up of the constituents of the FTSE Smallcap index. Awards will only vest if the Company is ranked at Median or above. 25% of this element of the award will vest if the Company achieves a Median ranking and 100% will vest if the Company achieves an Upper Quartile ranking, with a straight line approach used to calculate the percentage vesting between these two extremes. The Remuneration Committee considered that, at the date of grant of these awards, the performance measures used represented the key value drivers for the business and that achievement of these performance measures should deliver significant value to the Group and to shareholders, such that the interests of the Executive Directors, the Group and our shareholders are appropriately aligned. Remuneration Policy for non-executive Directors The remuneration of the non-executive Directors is determined by the Board as a whole, based on a review of independent salary survey data. The non-executive Directors do not receive any pension from the Company, nor do they participate in any of the bonus or share option schemes. The non-executive Directors have service agreements which are reviewed by the Board annually. They are included in the one third of Directors subject to retirement by rotation at each Annual General Meeting. Audited Information Directors’ Remuneration The Directors received the following remuneration during the year: Name of Director Executive Dr Geoffrey W Guy Justin Gover David Kirk1 Dr Stephen Wright Adam George2 Chris Tovey3 Non-executive James Noble Richard Forrest Thomas Lynch4 Salary and fees £ Bonus £ Taxable benefits £ Pension contributions £ 2012 Total £ 2011 Total £ 348,675 278,262 182,279 234,145 53,152 – 52,213 38,213 – 154,891 127,369 103,000 106,090 – – – – – 3,619 2,662 2,291 3,902 1,077 – – – – 50,395 45,917 21,780 40,182 – – 557,580 454,210 309,350 384,319 54,229 – 478,674 388,296 316,734 327,038 – – – – – 52,213 38,213 – 50,050 36,050 – Aggregate emoluments 1,186,939 491,350 13,551 158,274 1,850,114 1,596,842 1 David Kirk retired from the Board on 1 June 2012. 2 Adam George was appointed to the Board on 1 June 2012. 3 Chris Tovey was appointed to the Board after the year end, on 1 October 2012. 4 Since his appointment as a non-executive Director in July 2010, Thomas Lynch has waived his right to receive remuneration for this role. GW Pharmaceuticals plcAnnual Report and Accounts 201238 Directors’ Remuneration Report continued Directors’ Share Options Aggregate emoluments disclosed above do not include any amounts for the value of options to acquire ordinary shares in the Company granted to or held by the Directors. Details of the options are as follows: Name of Director Dr Geoffrey W Guy Justin Gover David Kirk Adam George Dr Stephen Wright At 1 Oct 2011 216,080 302,344 171,315 364,675 170,000 170,000 259,836 259,493 – 175,000 170,854 239,063 135,458 299,844 153,000 153,000 213,666 213,384 – 500,000 155,778 217,969 123,506 238,883 137,000 137,000 170,228 172,558 150,000 10,000 70,000 90,593 – 100,000 400,000 200,000 107,570 229,610 140,000 140,000 177,970 177,735 – Granted Exercised Lapsed At 30 Sept 2012 Exercise Price Date of exercise Date of expiry – – – – – – 208,915 – – – – – – – – – 187,381 – – – – – – – – – – – – – 134,743 – – – – – – – – – 170,731 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (140,000) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 216,080 302,344 171,315 364,675 170,000 170,000 259,836 259,493 208,915 175,000 170,854 239,063 135,458 299,844 153,000 153,000 213,666 213,384 187,381 500,000 155,778 217,969 123,506 238,883 137,000 137,000 170,228 172,558 150,000 10,000 70,000 90,593 134,743 100,000 400,000 200,000 107,570 229,610 – 140,000 177,970 177,735 170,731 199.00p 128.00p 125.50p 95.50p 0.1p 0.1p 0.1p 0.1p 0.1p 171.00p 199.00p 128.00p 125.50p 95.50p 0.1p 0.1p 0.1p 0.1p 0.1p 171.00p 199.00p 128.00p 125.50p 95.50p 0.1p 0.1p 0.1p 0.1p 54.00p 0.1p 0.1p 0.1p 0.1p 199.00p 99.00p 119.50p 125.50p 95.50p 0.1p 0.1p 0.1p 0.1p 0.1p 22/01/07 02/03/08 10/02/09 26/03/10 19/03/11 27/03/12 19/07/13 08/06/14 06/06/15 16/01/06 22/01/07 02/03/08 10/02/09 26/03/10 19/03/11 27/03/12 19/07/13 19/07/13 06/06/15 16/01/06 22/01/07 02/03/08 10/02/09 26/03/10 19/03/11 27/03/12 19/07/13 08/06/14 16/01/06 26/11/11 19/07/13 08/06/14 06/06/15 22/01/07 02/09/07 21/01/08 10/02/09 26/03/10 19/03/11 27/03/12 19/07/13 08/06/14 06/06/15 22/01/14 02/03/15 10/02/16 26/03/17 19/03/18 27/03/19 19/07/20 08/06/21 06/06/21 16/01/13 22/01/14 02/03/15 10/02/16 26/03/17 19/03/18 27/03/19 19/07/20 19/07/20 06/06/22 16/01/13 22/01/14 02/03/15 10/02/16 26/03/17 19/03/18 27/03/19 19/07/20 08/06/21 16/01/13 26/11/18 19/07/20 08/06/21 06/06/22 22/01/14 02/09/14 21/01/15 10/02/16 26/03/17 19/03/18 27/03/19 19/07/20 08/06/21 06/06/22 GW Pharmaceuticals plcAnnual Report and Accounts 201239 Options Granted The options granted during 2012 represent an award under the Group LTIP scheme. The options are subject to performance conditions which must be achieved within three years from date of grant in order for the options to vest. The options will lapse in the event that the performance conditions are not achieved. Full details of the performance conditions are given on page 37. Options Exercised During the year 140,000 options (2011: 1,050,000) were exercised. These had an average exercise price of 0.1p (2011: 95p) and an average market price at date of exercise of 87p (2011: 116p), resulting in a notional gain at exercise of £121,660 (2011: £225,000). In addition the following ordinary shares have been conditionally gifted under the rules of the GW Pharmaceuticals All Employee Share Scheme as follows: Name of Director Executive Mr Justin Gover Dr Stephen Wright Mr Adam George Directors’ Shareholdings The interests of the Directors in the shares of the Company as at 30 September 2012 were: Name of Director Executive Dr Geoffrey W Guy1 Justin Gover2 David Kirk3 Adam George4 Dr Stephen Wright5 Non-executive James Noble Tom Lynch Richard Forrest At 1 Oct 2011 and 30 Sept 2012 Vested 14,384 2,450 1,507 1,500 2,065 02/10/03 23/01/05 22/01/07 21/01/08 01/06/12 Ordinary shares of 0.1p 30 Sept 2012 Ordinary shares of 0.1p 30 Sept 2011 17,187,654 17,552,654 3,983,668 3,983,668 59,500 61,950 – 21,696 5,000 5,000 72,500 236,344 100,000 72,500 236,344 90,000 Justin Gover’s holding includes 33,147 ordinary shares held by his wife. 1 Dr Geoffrey Guy’s holding includes 25,000 ordinary shares held by his immediate family and 1,174,958 shares held by his personal pension plan. 2 3 David Kirk’s holding includes 6,750 ordinary shares held by his wife and 40,000 shares held by his personal pension plan. David Kirk retired as a Director on 1 June 2012. 4 Adam George’s holding is held by his personal pension scheme. 5 Dr Stephen Wright’s holding of 5,000 ordinary shares is held by his wife. The market price of the Company’s shares as at 30 September 2012 was 75p (2011: 98p) and the range during the year was 68p to 100p (2011: 88p to 130p). By order of the Board Thomas Lynch Chairman of the Remuneration Committee 27 November 2012 GW Pharmaceuticals plcAnnual Report and Accounts 201240 Statement of Directors’ Responsibilities The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union and have also chosen to prepare the Parent Company financial statements under IFRSs as adopted by the European Union. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors: • properly select and apply accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and • make an assessment of the Company’s ability to continue as a going concern. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. GW Pharmaceuticals plcAnnual Report and Accounts 201241 Independent Auditor’s Report For the year ended 30 September 2012 Independent Auditor’s Report to the Members of GW Pharmaceuticals plc We have audited the financial statements of GW Pharmaceuticals plc for the year ended 30 September 2012 which comprise the Group Income Statement, the Group and parent company Balance Sheets, the Group and parent company Cash Flow Statements, the Group and parent company Statements of Changes in Equity and the related notes 1 to 28. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective Responsibilities of Directors and Auditor As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (“APB’s”) Ethical Standards for Auditors. Scope of the Audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on Financial Statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and the parent company’s affairs as at 30 September 2012 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on Other Matters Prescribed by the Companies Act 2006 In our opinion: • the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are Required to Report by Exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Other Matters In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the provisions of the Companies Act 2006 that would have applied were the Company a quoted company. Although not required to do so, the Directors have voluntarily chosen to make a corporate governance statement detailing the extent of their compliance with the UK Corporate Governance Code. We reviewed: • the Directors’ statement contained within the Directors’ report in relation to going concern; and • the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review. Anna Marks (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Reading, United Kingdom 27 November 2012 GW Pharmaceuticals plcAnnual Report and Accounts 201242 Consolidated Income Statement For the year ended 30 September Revenue Cost of sales Gross profit Research and development expenditure Management and administrative expenses Operating profit Interest expense Interest income Profit before tax Tax Profit for the year Earnings per share – basic Earnings per share – diluted Notes 3 4 9 9 5 10 11 11 2012 £000’s 33,120 (839) 32,281 (27,578) (3,660) 1,043 (1) 200 1,242 1,248 2,490 1.9p 1.8p 2011 £000’s 29,627 (1,347) 28,280 (22,714) (3,298) 2,268 (3) 263 2,528 221 2,749 2.1p 2.0p The accompanying notes are an integral part of these consolidated income statements. All activities relate to continuing operations. The Group has no recognised gains or losses other than the gains and losses shown above and therefore no separate consolidated statement of comprehensive income has been presented. GW Pharmaceuticals plcAnnual Report and Accounts 2012Statements of Changes in Equity For the year ended 30 September 43 Group Balance at 30 September 2010 Exercise of share options Share-based payment transactions Profit for the year Balance at 30 September 2011 Exercise of share options Share-based payment transactions Profit for the year Balance at 30 September 2012 Company At 1 October 2010 Exercise of share options Share-based payment transactions Loss for the year Balance at 30 September 2011 Exercise of share options Share-based payment transactions Dividend received from subsidiary Profit for the year Balance at 30 September 2012 Called-up share capital £000’s 131 2 – – 133 – – – 133 Called-up share capital £000’s 131 2 – – 133 – – – – 133 Share premium account1 £000’s 64,433 1,433 – – 65,866 81 – – 65,947 Share premium account £000’s 64,433 1,433 – – 65,866 81 – – – 65,947 Other reserves1 £000’s Accumulated deficit £000’s 20,184 – – – 20,184 – – – 20,184 (72,075) – 795 2,749 (68,531) – 1,009 2,490 (65,032) Other reserves £000’s Retained earnings £000’s 922 – – – 922 – – – – 922 3,365 – 795 (300) 3,860 – 1,009 30,000 79 34,948 Total £000’s 12,673 1,435 795 2,749 17,652 81 1,009 2,490 21,232 Total £000’s 68,851 1,435 795 (300) 70,781 81 1,009 30,000 79 101,950 1 The Group has reclassified certain equity account balances at 1 October 2009. The impact of this reclassification was a decrease in the share premium account and an increase in other reserves, in the amount of £922,000 at this date. Further information regarding this reclassification is included in note 23. This reclassification had no impact on total equity or income for the year. The accompanying notes are an integral part of these statements of changes in equity. GW Pharmaceuticals plcAnnual Report and Accounts 201244 Balance Sheets As at 30 September Non-current assets Intangible assets – goodwill Investments Property, plant and equipment Current assets Inventories Taxation recoverable Trade receivables and other current assets Cash and cash equivalents Total assets Current liabilities Trade and other payables Obligations under finance leases Deferred revenue Non-current liabilities Deferred revenue Total liabilities Net assets Equity Share capital Share premium account1 Other reserves1 Accumulated deficit/retained earnings Total equity Notes 12 28 13 14 10 15 19 16 17 18 Group Company 2012 £000’s 5,210 – 2,432 7,642 3,537 820 1,588 29,335 35,280 42,922 2011 £000’s 5,210 – 1,868 7,078 1,424 – 2,281 28,319 32,024 39,102 2012 £000’s 2011 £000’s – 95,105 – 95,105 – – 27 8,848 8,875 – 77,495 – 77,495 – – 31 1,000 1,031 103,980 78,526 (9,114) – (2,449) (6,562) (7) (3,459) (11,563) (10,028) (2,030) – – (2,030) (7,745) – – (7,745) 18 (10,127) (11,422) – – (21,690) (21,450) (2,030) (7,745) 21,232 17,652 101,950 70,781 20 23 133 65,947 20,184 (65,032) 133 65,866 20,184 (68,531) 133 65,947 922 34,948 21,232 17,652 101,950 133 65,866 922 3,860 70,781 1 The Group has reclassified certain equity account balances at 1 October 2009. The impact of this reclassification was a decrease in the share premium account and an increase in other reserves as presented in the consolidated balance sheet above, of £922,000 at 30 September 2011. Further information regarding this reclassification is included in note 23. This reclassification had no impact on total equity or income for the year. The financial statements of GW Pharmaceuticals plc, registered number 04160917, on pages 42 to 69 were approved by the Board on 27 November 2012 and were signed on its behalf by: Dr Geoffrey W Guy Executive Chairman 27 November 2012 The accompanying notes are an integral part of these balance sheets. GW Pharmaceuticals plcAnnual Report and Accounts 2012Cash Flow Statements For the year ended 30 September Profit/(loss) for the year Adjustments for: Interest expense Interest income Tax Depreciation of property, plant and equipment Other gains and losses Increase in allowance for doubtful debts Decrease in provision for inventories Share-based payment charge Increase in inventories Decrease/(increase) in trade receivables and other current assets Increase/(decrease) in trade and other payables Cash generated/(used) by operations Research and development tax credits received Net cash inflow/(outflow) from operating activities Investing activities Interest received Increase in loan to subsidiary Dividend received from subsidiary Purchase of property, plant and equipment Net cash (outflow)/inflow from investing activities Financing activities Proceeds on exercise of share options Expenses of share issue Interest paid Capital element of finance leases Net cash inflow from financing activities Effect of foreign exchange rate changes Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of the year 45 Group Company 2012 £000’s 2,490 1 (200) (1,248) 754 (202) 26 (1,300) 1,009 1,330 (813) 609 247 1,373 428 1,801 258 – – (1,318) (1,060) 81 – (1) (7) 73 202 1,016 28,319 29,335 2011 £000’s 2,749 3 (263) (221) 589 7 – (425) 795 3,234 (219) (1,043) 168 2,140 221 2,361 244 – – (891) (647) 1,435 – (3) (39) 1,393 (7) 3,100 25,219 28,319 2012 £000’s 79 2011 £000’s (300) – – – – – – – – 79 – 4 5,419 5,502 – 5,502 – (16,601) 18,866 – 2,265 81 – – – 81 – 7,848 1,000 8,848 – – – – – – – – (300) – (11) (124) (435) – (435) – – – – – 1,435 – – – 1,435 – 1,000 – 1,000 The total dividend received by the Company from its subsidiary GW Pharma Ltd was £30.0m. Total cash paid was £18.9m and the remaining £11.1m was settled by non-cash movements through the intercompany balances. The accompanying notes are an integral part of these cash flow statements. GW Pharmaceuticals plcAnnual Report and Accounts 201246 Notes to the Financial Statements For the year ended 30 September 2012 1. General Information GW Pharmaceuticals plc (the “Company”) and its subsidiaries (the “Group”) are primarily involved in the development of cannabinoid prescription medicines using botanical extracts derived from the Cannabis Sativa plant. The Group’s vision is to be the global leader in cannabinoid prescription medicines through the rapid, cost-effective development of pharmaceuticals products that address clear unmet medical needs. The Group is developing a portfolio of cannabinoid medicines, of which the lead product is Sativex®, an oromucosal spray for the treatment of MS symptoms, cancer pain and neuropathic pain. The Company is a public limited company, which has been listed on the Alternative Investment Market (“AIM”), which is a sub- market of the London Stock Exchange, since 28 June 2001. The Company is incorporated and domiciled in the United Kingdom. The address of the Company’s registered office and principal place of business is Porton Down Science Park, Salisbury, Wiltshire. 2. Significant Accounting Policies The principal Group accounting policies are summarised below. Basis of Accounting The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”). The financial statements have also been prepared in accordance with IFRSs as endorsed by the European Union and therefore the Group financial statements comply with Article 4 of the EU IAS regulation and IFRS as issued by the International Accounting Standards Board (“IASB”). The financial statements have been prepared under the historical cost convention, except for the revaluation of financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The principal accounting policies are set out below. Going Concern The Directors have considered the financial position of the Group, its cash position and forecast cash flows for the 12 month period from the date of signing these financial statements when considering going concern. They have also considered the Group’s business activities, the key policies for managing financial risks and the key factors affecting the likely development of the business in 2013. In the light of this review, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing these financial statements despite the uncertain economic climate. Basis of Consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 30 September each year. Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies of the entity concerned, generally accompanying a shareholding of more than one half of the voting rights. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Acquisitions are accounted for under the purchase method. Non-controlling interests in subsidiaries are identified separately from the Group’s equity therein. Those interests of non-controlling shareholders that are present ownership interests entitling their holders to a proportionate share of net assets upon liquidation may initially be measured at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets. The choice of measurement is made on an acquisition-by-acquisition basis. Other non-controlling interests are initially measured at fair value. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance. Changes in the Group’s interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions. The carrying amount of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the Company. When the Group loses GW Pharmaceuticals plcAnnual Report and Accounts 201247 2. Significant Accounting Policies continued control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), less liabilities of the subsidiary and any non-controlling interests. Amounts previously recognised in other comprehensive income in relation to the subsidiary are accounted for (ie reclassified to profit or loss or transferred directly to retained earnings) in the same manner as would be required if the relevant assets or liabilities are disposed of. The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 Financial Instruments: Recognition and Measurement or, when applicable, the costs on initial recognition of an investment in an associate or jointly controlled entity. No income statement is presented for GW Pharmaceuticals plc as permitted by Section 408 of the Companies Act 2006. The Company’s profit for the financial year was £79,000 (2011 loss: £300,000). Intangible Assets – Goodwill Goodwill arising in a business combination is recognised as an asset at the date that control is acquired. Goodwill is measured as the excess of the sum of consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest (if any) in the entity over the net of the acquisition date amounts of the identifiable assets and liabilities assumed. Goodwill is not amortised but is tested for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Revenue Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business net of value added tax and other sales-related taxes. The Group recognises revenue when the amount can be reliably measured; when it is probable that future economic benefits will flow to the Group; and when specific criteria have been met for each of the Group’s activities, as described below. The Group’s revenue arises from product sales, licensing fees, collaboration fees, technical access fees, development and approval milestone fees, research and development fees and royalties. Agreements with commercial partners generally include a non-refundable up-front license and collaboration fees, milestone payments, the receipt of which is dependent upon the achievement of certain clinical, regulatory or commercial milestones, as well as royalties on product sales of licensed products, if and when such product sales occur. For these agreements, total arrangement consideration is attributed to separately identifiable components on a reliable basis that reasonably reflects the prices that might be expected to be achieved in stand-alone transactions. The then allocated consideration is recognised as revenue in accordance with the principles described below. Product Sales Revenue from the sale of products is recognised when the Group has transferred to the buyer the significant risks and rewards of ownership of the goods, the Group no longer has effective control over the goods sold, the amount of revenue and costs associated with the transaction can be measured reliably, and it is probable that the Group will receive future economic benefits associated with the transaction. Product sales have no rights of return. Provisions for rebates are established in the same period that the related sales are recorded. Licensing Fees License fees received in connection with product out-licensing agreements, even where such fees are non-refundable, are deferred and recognised over the period of the license term. Collaboration Fees Collaboration fees are deferred and recognised as services are rendered based on the percentage of completion method. GW Pharmaceuticals plcAnnual Report and Accounts 201248 Notes to the Financial Statements continued For the year ended 30 September 2012 2. Significant Accounting Policies continued Technical Access Fees Technical access fees represent amounts charged to licensing partners to provide access to and to commercially exploit data that the Group possesses or which can be expected to result from Group research programmes that are in progress. Non-refundable technical access fees that involve the delivery of data that the Group possesses and that permit the licensing partner to use the data freely and where the Group has no remaining obligations to perform are recognised as revenue upon delivery of the data. Non-refundable technical access fees relating to data where the research programme is ongoing are recognised based on the percentage of completion method. Development and Approval Milestone Fees Development and approval milestone fees are recognised as revenue based on the percentage of completion method on the assumption that all stages will be completed successfully, but with cumulative revenue recognised limited to non-refundable amounts already received or reasonably certain to be received. Research and Development Fees Revenue from partner funded contract research and development agreements is recognised as research and development services are rendered. Where services are in-progress at period end, the Group recognises revenues proportionately, in line with the percentage of completion of the service. Where such in-progress services include the conduct of clinical trials, the Group recognises revenue in line with the stage of completion of each trial so that revenues are recognised in line with the expenditures. Royalties Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant agreement, provided that it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably. Research and Development Expenditure on research and development activities is recognised as an expense in the period in which it is incurred. An internally generated intangible asset arising from the Group’s development activities is recognised only if the following conditions are met: • an asset is created that can be identified • • the development cost of the asset can be measured reliably. it is probable that the asset created will generate future economic benefits, and The Group has determined that regulatory approval is the earliest point at which the probable threshold can be achieved. All research and development expenditure incurred prior to achieving regulatory approval is therefore expensed as incurred. Property, Plant and Equipment Property, plant and equipment are stated at cost, net of accumulated depreciation and any recognised impairment loss. Depreciation is provided so as to write off the cost of assets, less their estimated residual values, over their useful lives using the straight line method, as follows: Motor vehicles Plant, machinery and lab equipment Office and IT equipment Leasehold improvements 4 years 4–10 years 4 years 5–10 years or term of the lease if shorter Assets under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. The gain or loss arising on disposal or scrappage of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in operating profit. Investments in subsidiary companies Investments are shown at cost less any provision for impairment. Investments in subsidiary companies which are accounted for under merger accounting principles are shown at the nominal value of shares issued in accordance with the provisions of Section 131 of the Companies Act 2006. The carrying value of investments in subsidiary companies in the Company balance sheet is increased annually by the value of the capital contribution deemed to have been made by the Company in its subsidiary by the grant of equity-settled share-based payments to the employees of the subsidiary company. The value attributable to these equity-settled share-based payments is calculated in accordance with IFRS 2, Share-based payments. GW Pharmaceuticals plcAnnual Report and Accounts 201249 2. Significant Accounting Policies continued Inventories Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average cost method. Cost includes materials, direct labour, depreciation of manufacturing assets and an attributable proportion of manufacturing overheads based on normal levels of activity. Net realisable value is the estimated selling price, less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. If net realisable value is lower than the carrying amount, a write down provision is recognised for the amount by which the carrying amount exceeds its net realisable value. Inventories manufactured prior to regulatory approval are capitalised as an asset but provided for until there is a high probability of regulatory approval of the product. At the point when a high probability of regulatory approval is obtained, the provision is adjusted appropriately to adjust the carrying value to expected net realisable value, which may not exceed original cost. Adjustments to the provision against inventories manufactured prior to regulatory approval are recorded as a component of research and development expenditure. Adjustments to the provision against commercial product related inventories manufactured following achievement of regulatory approval are recorded as a component of cost of goods. Taxation The tax expense represents the sum of the tax currently payable or recoverable and deferred tax. The tax payable or recoverable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised only to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Earnings per Share Basic earnings or loss per share represents the profit or loss for the year, divided by the weighted average number of ordinary shares in issue during the year, excluding the weighted average number of ordinary shares held in the GW Pharmaceuticals All Employee Share Scheme (the “ESOP”) during the year to satisfy employee share awards. Diluted earnings or loss per share represents the profit or loss for the year, divided by the weighted average number of ordinary shares in issue during the year, excluding the weighted average number of shares held in the ESOP during the year to satisfy employee share awards, plus the weighted average number of dilutive shares resulting from share options or warrants where the inclusion of these would not be antidilutive. GW Pharmaceuticals plcAnnual Report and Accounts 201250 Notes to the Financial Statements continued For the year ended 30 September 2012 2. Significant Accounting Policies continued Retirement Benefit Costs The Group does not operate any pension plans, but makes contributions to personal pension arrangements of its Executive Directors and employees. The amounts charged to the income statement in respect of pension costs are the contributions payable in the year. Differences between contributions payable in the year and contributions paid are shown as either accruals or prepayments in the balance sheet. Foreign Currency The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency), which for all companies forming part of the Group, is Pounds Sterling. The presentation currency of the consolidated financial statements is also Pounds Sterling. In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated at the rates of exchange prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the income statement as a component of operating profit. Share-based Payment Equity-settled share-based payments to employees and others providing similar services are measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. At each balance sheet date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves. Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date of grant. Warrants Warrants issued by the Group are recognised and classified as equity when upon exercise, the Company would issue a fixed amount of its own equity instruments (ordinary shares) in exchange for a fixed amount of cash or another financial asset. Consideration received, net of incremental costs directly attributable to the issue of such new warrants, is shown in equity. Changes in fair value of such warrants are not recognised in the financial statements. When the warrants are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Rentals under operating leases are charged on a straight-line basis over the term of the relevant lease except where another more systematic basis is more representative of the time pattern in which economic benefits from the lease are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. GW Pharmaceuticals plcAnnual Report and Accounts 201251 2. Significant Accounting Policies continued Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the finance lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs. Contingent rentals are recognised as an expense in the periods in which they are incurred. Financial Instruments Financial assets and liabilities are recognised in the Group’s balance sheet when the Group becomes party to the contractual provisions of the instrument. All financial assets are recognised and derecognised on a trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned and are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value. Financial assets are classified into the following specified categories: financial assets “at fair value through profit or loss”, “held-to- maturity” investments, “available-for-sale” financial assets and “loans and receivables”. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. For each reporting period covered herein, the Group’s financial assets were restricted to “loans and receivables”. Loans and Receivables Trade receivables that have fixed or determinable payments that are not quoted in an active market are classified as “loans and receivables”. Loans and receivables are measured at amortised cost, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Trade receivables are assessed for indicators of impairment at each balance sheet date. Trade receivables are impaired where there is objective evidence that, as a result of one or more events that occurred after initial recognition, the estimated future cash flows of the receivables have been affected. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Cash and Cash Equivalents Cash and cash equivalents comprise cash in hand and on-call deposits held with banks and other short-term highly liquid investments with a maturity of three months or less. Financial Liabilities Financial liabilities are classified as either financial liabilities “at Fair Value Through Profit and Loss” or “other financial liabilities”. For each reporting period covered herein, the Group’s financial liabilities were restricted to “other financial liabilities”. Other Financial Liabilities Trade payables are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost, using the effective interest rate method. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Critical Judgements in Applying the Group’s Accounting Policies In the application of the Group’s accounting policies, which are described above, the Board of Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revisions and future periods if the revision affects both current and future periods. GW Pharmaceuticals plcAnnual Report and Accounts 201252 Notes to the Financial Statements continued For the year ended 30 September 2012 2. Significant Accounting Policies continued The following are the critical judgements, apart from those involving estimations (which are dealt with separately below), that the Directors have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. Recognition of Clinical Trials Expenditure The Group recognises expenditure incurred in carrying out clinical trials during the course of conduct of each clinical trial in line with the state of completion of each trial. This involves the calculation of clinical trial accruals at each period end to account for expenditure which has been incurred. This requires estimation of the expected full cost to complete the trial and also estimation of the current stage of trial completion. Clinical trials usually take place over extended time periods and typically involve a set-up phase, a recruitment phase and a completion phase which ends upon the receipt of a final report containing full statistical analysis of trial results. Accruals are prepared separately for each in-process clinical trial and take into consideration the stage of completion of each trial including the number of patients that have entered the trial, the number of patients that have completed treatment and whether the final report has been received. In all cases, the full cost of each trial is expensed by the time the final report has been received. Revenue Recognition The Group recognises revenue from product sales, licensing fees, collaboration fees, technical access fees, development and approval milestone fees and research and development fees. Agreements with commercial partners generally include a non-refundable up-front fee, milestone payments, the receipt of which is dependent upon the achievement of certain clinical, regulatory or commercial milestones, as well as royalties on product sales of licensed products, if and when such product sales occur. For these agreements, the Group is required to apply judgement in the allocation of total agreement consideration to the separately identifiable components on a reliable basis that reasonably reflects the prices that might be expected to be achieved in stand-alone transactions. The Group applies the percentage of completion revenue recognition method to certain classes of revenue. The application of this approach requires the judgement of the Group with regards to the total costs incurred and total estimated costs expected to be incurred over the length of the agreement. Key Sources of Estimation Uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. Provision for inventories The Group maintains inventories which, based upon current sales levels and the current regulatory status of the product in each indication, is in excess of the amount that is expected to be utilised in the manufacture of finished product for future commercial sales. Provision is therefore made to reduce the carrying value of the excess inventories to their expected net realisable value. The provision for inventories, and adjustments thereto, are estimated based on evaluation of the status of the regulatory approval, projected sales volumes and growth rates. The timing and extent of future provision adjustments will be contingent upon timing and extent of future regulatory approvals and post-approval in-market sales demand, which remain uncertain at this time. Deferred taxation At the balance sheet date, the Group has accumulated tax losses of £40.9m (2011: £46.0m) available to offset against future profits. If the value of these losses were recognised within the Group balance sheet at the balance sheet date, the Group would be carrying a deferred tax asset of £9.7m (2011: £11.8m). However, as explained in the tax accounting policy note, the Group policy is to recognise deferred tax assets only to the extent that it is probable that future taxable profits, feasible tax-planning strategies and deferred tax liabilities will be available against which the brought forward trading losses can be utilised. Estimation of the level of future taxable profits is therefore required in order to determine the appropriate carrying value of the deferred tax asset at each balance sheet date. GW Pharmaceuticals plcAnnual Report and Accounts 201253 2. Significant Accounting Policies continued Adoption of New and Revised Standards In the current year, the following revised standard has been adopted in these financial statements. Adoption has not had a significant impact on the amounts reported in these financial statements but may impact the accounting for future transactions and arrangements. Amendments to IAS 12 (Dec 2010) Deferred Tax: Recovery of Underlying Assets IAS 24 Related Party Disclosures At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective and in some cases had not been adopted by the EU: Annual Improvements to IFRSs: 2009–2011 Cycle (May 2012) Amendments to IAS 32 (Dec 2011) Offsetting Financial Assets and Financial Liabilities Amendments to IFRS 7 (Dec 2011) Disclosures – Offsetting Financial Assets and Financial Liabilities IFRS 9 Financial Instruments Amendments to IAS 1 (June 2011) Presentation of Items of Other Comprehensive Income IAS 19 (revised June 2011) Employee Benefits IFRS 13 Fair Value Measurement IFRS 12 Disclosure of Interests in Other Entities IFRS 11 Joint Arrangements IFRS 10 Consolidated Financial Statements IAS 28 (revised May 2011) Investments in Associates and Joint Ventures IAS 27 (revised May 2011) Separate Financial Statements Improvements to IFRSs 2010 (May 2010) Improvements to IFRSs 2010 The Directors do not expect that the adoption of these Standards and Interpretations in future periods will have a material impact on the financial statements of the Group. 3. Segmental Information Information reported to the Group’s Board of Directors for the purposes of resource allocation and assessment of segment performance is focused on the stage of product development. The Group’s reportable segments are as follows: • Sativex Commercial: The Sativex Commercial segment promotes Sativex through strategic collaborations with major pharmaceutical companies for the currently approved indication of spasticity due to multiple sclerosis. The Group entered into licensing agreements with Otsuka Pharmaceutical Co. Ltd., Almirall S.A., Bayer HealthCare AG, Neopharm Group and Novartis Pharma AG for the commercialisation of Sativex in the United States, Europe, Australia, New Zealand, Asia (excluding Japan, China and Hong Kong), Middle East and Africa. Sativex Commercial segment revenues include product sales, and license, collaboration and technical access fees and development and approval milestones fees. • Sativex Research and Development: The Sativex Research and Development segment seeks to maximise the potential of Sativex through the development of new indications. The current focus for this segment is the Phase III clinical development programme of Sativex for use in treatment of cancer pain. Sativex Research and Development segment revenues consist of research and development fees charged to Sativex licensees. • Pipeline Research and Development: The Pipeline Research and Development segment seeks to develop cannabinoid medications other than Sativex across a range of therapeutic areas using the Group’s proprietary cannabinoid technology platform and partnerships with international scientists. The Group has two product candidates in Phase II trials in the field of diabetes and inflammation, as well as pre-clinical research programmes evaluating the use of selected cannabinoids for the treatment of glioma, epilepsy and psychiatric illness. Pipeline Research and Development segment revenues consist of research and development fees charged to Otsuka under the terms of our pipeline research collaboration agreement. The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 2. Segment result represents the result of each segment without allocation of share-based payment expenses, and before management and administrative expenses, interest expense, interest income receivable and tax. This is the measure reported to the Group’s Board of Directors for the purpose of resource allocation and assessment of segment performance. No measures of segment assets and segment liabilities are reported to the Board of Directors in order to assess performance and allocate resources. Intersegment activity has been eliminated. There are no intersegment sales and all revenue is generated from external customers. GW Pharmaceuticals plcAnnual Report and Accounts 201254 Notes to the Financial Statements continued For the year ended 30 September 2012 3. Segmental Information continued Segmental revenues and result For the Year Ended 30 September 2012 Revenue: Product sales Research and development fees License, collaboration and technical access fees Development and approval milestone fees Total revenue Cost of sales Research and development credit/(expenditure) Segmental result Management and administrative expenses Operating profit Interest expense Interest income Profit before tax Tax Profit for the year Sativex Commercial year ended 2012 £’000 Sativex R&D year ended 2012 £’000 Pipeline R&D year ended 2012 £’000 Total reportable segments year ended 2012 £’000 Unallocated Costs1 year ended 2012 £’000 Consolidated year ended 2012 £’000 2,514 – 1,294 9,812 13,620 (839) 1,300 14,081 – 14,080 – – 14,080 – (18,415) (4,335) – 5,420 – – 5,420 – (9,904) (4,484) 2,514 19,500 1,294 9,812 33,120 (839) (27,019) 5,262 – – – – – – (559) (559) 2,514 19,500 1,294 9,812 33,120 (839) (27,578) 4,703 (3,660) 1,043 (1) 200 1,242 1,248 2,490 1 Unallocated costs represent share-based payment transactions which are not allocated to segments. The following is an analysis of depreciation and the movement in the provision for inventories by segment: Depreciation Decrease in provision for inventories Sativex Commercial year ended 2012 £’000 Sativex R&D year ended 2012 £’000 Pipeline R&D year ended 2012 £’000 Total reportable segments year ended 2012 £’000 Unallocated Costs1 year ended 2012 £’000 Consolidated year ended 2012 £’000 – 1,300 (394) – (360) – (754) 1,300 – – (754) 1,300 1 Unallocated costs represent share-based payment transactions which are not allocated to segments. GW Pharmaceuticals plcAnnual Report and Accounts 201255 3. Segmental Information continued Segmental revenues and result For the Year Ended 30 September 2011 Revenue: Product sales Research and development fees License, collaboration and technical access fees Development and approval milestone fees Total revenue Cost of sales Research and development credit/(expenditure) Segmental result Management and administrative expenses Operating profit Interest expense Interest income Profit before tax Tax Profit for the year Sativex Commercial year ended 2011 £’000 Sativex R&D year ended 2011 £’000 Pipeline R&D year ended 2011 £’000 Total reportable segments year ended 2011 £’000 Unallocated costs1 year ended 2011 £’000 Consolidated year ended 2011 £’000 4,409 – 3,843 5,337 13,589 (1,347) 266 12,508 – 10,822 – – 10,822 – (14,757) (3,935) – 5,216 – – 5,216 – (7,834) (2,618) 4,409 16,038 3,843 5,337 29,627 (1,347) (22,325) 5,955 – – – – – – (389) (389) 4,409 16,038 3,843 5,337 29,627 (1,347) (22,714) 5,566 (3,298) 2,268 (3) 263 2,528 221 2,749 The following is an analysis of depreciation and movement in provision for inventories by segment: Depreciation Decrease in provision for inventories Sativex Commercial year ended 2011 £’000 Sativex R&D year ended 2011 £’000 Pipeline R&D year ended 2011 £’000 Total reportable segments year ended 2011 £’000 Unallocated costs1 year ended 2011 £’000 Consolidated year ended 2011 £’000 – 266 (248) 159 (341) – (589) 425 – – (589) 425 1 Unallocated costs represent share-based payment transactions which are not allocated to segments. Revenues from the Group’s largest customer, the only customer where revenues amount to more than 10% of the Group’s revenues, are included within the above segments as follows: Year ended 30 September 2012 Year ended 30 September 2011 Geographical analysis of revenue by destination of customer: UK Europe (excluding UK) United States Canada Asia Sativex Commercial £’000 – 3,687 Sativex R&D £000’s 13,994 10,729 Pipeline R&D £000’s 5,420 5,216 2012 £000’s 248 12,712 14,274 436 5,450 33,120 Total £000’s 19,414 19,632 2011 £000’s 1,469 10,317 11,830 795 5,216 29,627 All revenue, profits and losses before tax originated in the UK. All assets and liabilities are held in the UK. GW Pharmaceuticals plcAnnual Report and Accounts 201256 Notes to the Financial Statements continued For the year ended 30 September 2012 4. Research and Development Expenditure GW-funded research and development Development partner-funded research and development 2012 £000’s 8,078 19,500 27,578 2011 £000’s 6,676 16,038 22,714 GW-funded research and development consists of payroll costs for research staff and associated overhead, cost of growing botanical raw material, sponsorship of collaborative scientists and external third party costs incurred in conducting clinical trials. Development partner-funded research and development expenditures include the costs of employing staff to work on joint research and development plans, plus the costs of subcontracted pre-clinical studies and sponsorships of academic scientists who collaborate with the Group. These expenditures are charged to the Group’s commercial partners, principally Otsuka. The Group is the primary obligor for these activities and under the terms of the Sativex development agreements and the Otsuka research collaboration agreement, the Group uses both its internal resources and third party contractors to provide contract research and development services to its commercial partners. 5. Profit before Tax Profit before tax is stated after charging/(crediting): Operating lease rentals – land and buildings Depreciation of property, plant and equipment – owned Depreciation of property, plant and equipment – leased Inventories recognised as an expense Provision for inventories decrease Allowance for doubtful debts – trade receivables, increase Foreign exchange loss/(gain) Staff costs (see note 7) The auditors for the years ending 30 September 2012 and 2011 were Deloitte LLP Fees payable to the Company’s auditor were: – Audit of the Company – Audit of subsidiaries – Interim review procedures – Other services 6. Dividends Company Dividends received from subsidiary companies Dividends received per share No Dividends were paid by the Company (2011: nil). 7. Staff Costs The average number of Group employees (including Executive Directors) for the year ended 30 September was: Research and development Management and administration The Company had no employees during the year (2011: nil). Their aggregate remuneration comprised: Wages and salaries Social security costs Other pension costs Share-based payment The Company incurred no staff costs during the year (2011: nil). 2012 £000’s 1,036 744 10 839 (1,300) 26 301 10,098 51 42 5 13 2011 £000’s 782 541 48 1,210 (425) – (96) 8,532 8 37 5 – 2012 £000’s 30,000 22.5p 2011 £000’s – – 2012 Number 2011 Number 162 15 177 136 16 152 2012 £000’s 2011 £000’s 7,700 926 463 1,009 10,098 6,443 865 429 795 8,532 GW Pharmaceuticals plcAnnual Report and Accounts 20128. Directors’ Remuneration The total amounts for Directors’ remuneration and other benefits for the year ended 30 September were as follows: Emoluments Money purchase contributions to Directors’ pension arrangements Gain on exercise of share options 57 2012 £000’s 1,692 158 122 1,972 2011 £000’s 1,426 171 225 1,822 During 2012, four Directors were members of defined contribution pension schemes (2011: four). Further details concerning the Directors’ remuneration, shareholdings and share options which form part of these financial statements are set out in the Directors’ Remuneration Report on pages 35 to 39. 9. Interest Interest expense – Finance lease interest Interest income – Bank interest 10. Tax a) Analysis of tax credit for the year UK corporation tax credit Adjustments in respect of prior years UK corporation tax R&D tax credit 2012 £000’s (1) 200 2011 £000’s (3) 263 2012 £000’s (820) (428) (1,248) 2011 £000’s – (221) (221) The tax credit relates to UK research and development tax credits claimed under the Finance Act 2000. b) Factors affecting the tax credit for the year The tax credit for the year can be reconciled to the tax charge on the Group profit at the standard UK Corporation tax rate as follows: Group profit on ordinary activities before tax Tax charge on Group profit at standard UK corporation tax rate of 25% (2011: 27%) Effects of: Expenses not deductible in determining taxable profit Income not taxable in determining taxable profit Effects of unrecognised temporary differences (Over)/under provision in respect of previous years R&D enhanced tax relief Group tax credit for the year 2012 £000’s 1,242 311 – (4) (395) (428) (732) (1,248) 2011 £000’s 2,528 682 3 (45) 635 (221) (1,275) (221) The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting periods: At 1 October 2010 (Charged)/credited to profit or loss At 1 October 2011 (Charged)/credited to profit or loss At 30 September 2012 Accelerated tax depreciation £000’s Other temporary differences £000’s Tax losses £000’s Total £000’s (149) (53) (202) (75) (277) 71 131 202 75 277 78 (78) – – – – – – – – GW Pharmaceuticals plcAnnual Report and Accounts 201258 Notes to the Financial Statements continued For the year ended 30 September 2012 10. Tax continued Deferred tax assets and liabilities have been offset in full (netting to nil in all reporting periods), as the Group has a legally enforceable right to do so, and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. All entities in the Group operate in the same taxation jurisdiction and the taxing authority permits the Group to make or receive a single net payment. At 30 September 2012 the Group had tax losses available for carry forward of approximately £40.9m (2011: £46.0m). The Group has not recognised deferred tax assets relating to carried forward losses, of approximately £9.4m (2011: £11.4m) relating to such carry forward losses. In addition, the Group has not recognised deferred tax assets relating to other temporary differences of £0.3m (2011: £0.4m). These deferred tax assets have not been recognised as the Group’s management considers that there is insufficient future taxable income, taxable temporary differences and feasible tax-planning strategies to overcome cumulative losses and therefore it is probable that the relevant deferred tax assets will not be realised in full. In March 2012, the UK Government announced a reduction in the standard rate of UK corporation tax to 24% effective 1 April 2012 and to 23% effective 1 April 2013. These rate reductions became substantively enacted in March 2012 and July 2012 respectively. The UK Government also proposed changes to further reduce the standard rate of UK corporation tax by 1% per annum to 22% by 1 April 2014, but these changes have not yet been substantively enacted. The effect of these tax rate reductions on the deferred tax balance will be accounted for in the period in which the tax rate reductions are substantively enacted. 11. Earnings Per Share The calculations of earnings per share are based on the following data: Profit for the year – basic and diluted Weighted average number of ordinary shares Less ESOP trust ordinary shares Weighted average number of ordinary shares for purposes of basic earnings per shares Effect of potentially dilutive shares arising from Share options Effect of potentially dilutive shares arising from warrants Weighted average number of ordinary shares for purposes of diluted earnings per share Earnings per share – basic Earnings per share – diluted 2012 £000’s 2,470 2011 £000’s 2,749 Number of shares 2012 m 133.2 (0.2) 133.0 4.5 – 137.5 1.9p 1.8p 2011 m 131.9 (0.2) 131.7 3.9 0.2 135.7 2.1p 2.0p The 2011 weighted average number of shares have been adjusted to reflect the ESOP shares and the potentially dilutive effects of warrants. This did not impact the basic or diluted earnings per share presented. 12. Intangible Assets – Goodwill Group Cost – As at 1 October Accumulated impairment losses Net Book Value – As at 30 September 2012 £000’s 5,210 – 5,210 2011 £000’s 5,210 – 5,210 As at 30 September 2012 the Company had no intangible assets (2011: nil). Goodwill arose upon the acquisition of GW Research Ltd (formerly G-Pharm Ltd) by GW Pharma Limited in 2001. For impairment testing purposes, all goodwill has been allocated to the Sativex Commercial segment as a separate cash generating unit. The recoverable amount of this cash-generating unit is determined based on a value in use calculation which uses cash flow projections based on financial budgets covering a five year period, with a 2% growth rate thereafter (2011: 2%) and a discount rate of 12% per annum (2011: 12% per annum). These projections take into account projected future product sales revenues, expected milestone receipts from licensees and projected development expenditures. Any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the carrying amount to exceed the recoverable amount of the cash-generating unit. An impairment loss is recognised only if the goodwill carrying value exceeds the value in use. GW Pharmaceuticals plcAnnual Report and Accounts 201259 Plant, machinery and lab equipment £000’s Motor vehicles £000’s Office and IT equipment £000’s Leasehold improvements £000’s 11 – – 11 – (11) – 11 – – 11 – (11) – – – 3,140 405 – 3,545 500 (403) 3,642 1,993 403 – 2,396 392 (403) 2,385 1,257 1,149 778 344 – 1,122 235 (490) 867 544 125 – 669 195 (490) 374 493 453 968 142 – 1,110 583 (504) 1,189 783 61 – 844 167 (504) 507 682 266 Total £000’s 4,897 891 – 5,788 1,318 (1,408) 5,698 3,331 589 – 3,920 754 (1,408) 3,266 2,432 1,868 13. Property, Plant and Equipment Group Cost At 1 October 2010 Additions Disposals At 1 October 2011 Additions Disposals At 30 September 2012 Accumulated Depreciation At 1 October 2010 Charge for the year Disposals At 1 October 2011 Charge for the year Disposals At 30 September 2012 Net Book Value At 30 September 2012 At 30 September 2011 The net book value of property, plant and equipment at 30 September 2012 includes £nil in respect of assets held under finance leases (2011: £10,000). The Company does not own any property, plant and equipment. 14. Inventories Raw materials Work in progress Finished goods Group Company 2012 £000’s 312 2,951 274 3,537 2011 £000’s 70 771 583 1,424 2012 £000’s 2011 £000’s – – – – – – – – Inventory with a carrying value of £2.3m is considered to be recoverable after more than one year from the balance sheet date, but within the Group’s normal operating cycle (2011: nil). The movement in the provision for inventories is as follows: Opening balance – as at 1 October Decrease in provision for inventories As at 30 September 2012 £000’s 3,431 (1,300) 2,131 2011 £000’s 3,856 (425) 3,431 GW Pharmaceuticals plcAnnual Report and Accounts 201260 Notes to the Financial Statements continued For the year ended 30 September 2012 15. Financial Assets Trade and Other Receivables Amounts falling due within one year Trade receivables Provision for impairment – trade receivables Prepayments and accrued income Other receivables Group Company 2012 £000’s 2011 £000’s 2012 £000’s 2011 £000’s 784 (26) 758 595 235 1,588 1,521 – 1,521 430 330 2,281 – – – 22 5 27 – – – 24 7 31 Trade receivables disclosed above are classified as loans and receivables and are therefore measured at amortised cost. Trade receivables at 30 September 2012 represent 8 days of sales (2011: 19 days). The average trade receivable days during the year ended 30 September 2012 was 31 days (2011: 18 days). The credit period extended to customers is 30 to 60 days. The provision for impairment – trade receivables is comprised of an individual receivable of £26,000 considered to be impaired at 30 September 2012. All trade receivables were current at the balance sheet date as at 30 September 2012 and 2011. The trade receivables balance at 30 September 2012 consisted of balances due from six customers (2011: six customers) with the largest single customer representing 38% (2011: 36%) of the total amount due. Given that the Group’s customers consist of a small number of large pharmaceutical companies, counterparty credit risk is considered to be low. The Group seeks to mitigate credit risk by seeking payments in advance from pharmaceutical partners for expenditure to be incurred on their behalf. No interest is charged on trade receivables. The Directors consider that the carrying value of trade receivables equals their fair value. 16. Financial Liabilities Trade and Other Payables Amounts falling due within one year Other creditors and accruals Trade payables Other taxation and social security Group Company 2012 £000’s 2011 £000’s 2012 £000’s 2011 £000’s 4,437 4,090 587 9,114 3,695 2,381 486 6,562 1,999 31 – 2,030 7,710 35 – 7,745 Trade payables principally comprise amounts outstanding for trade purchases and ongoing costs. Trade payables at 30 September 2012 represent the equivalent of 51 days purchases (2011: 46 days). The average credit period taken for trade purchases during the year ended 30 September 2012 was 31 days (2011: 43 days). For most suppliers, no interest is charged on invoices that are paid within a pre-agreed trade credit period. The Group has procedures in place to ensure that invoices are paid within agreed credit terms so as to ensure that interest charges by suppliers are minimised. The Directors consider that the carrying value of trade payables approximates to their fair value. GW Pharmaceuticals plcAnnual Report and Accounts 201261 17. Obligations under Finance Leases Amounts payable under finance leases: Within one year In the second to fifth years inclusive Less: future finance charges Present value of lease obligations Less: Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months Minimum lease payments Present value of lease payments 2012 £000’s 2011 £000’s 2012 £000’s 2011 £000’s – – – – – 8 – 7 1 7 – – – n/a – – – 7 – 7 n/a 7 7 – Historically, it has been the Group’s policy to lease certain of its property, plant and equipment under finance leases. The average lease term has been three years. For the year ended 30 September 2012, the average effective borrowing rate was 11% (2011: 11%). Interest rates are fixed at the contract date. All leases to date have been on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. All lease obligations are denominated in Sterling. The fair value of the Group’s lease obligations is approximately equal to their carrying amount. The Group’s obligations under finance leases are generally secured by the lessors’ rights over the leased assets. 18. Deferred Revenue Amounts falling due within one year Deferred license, collaboration and technical access fee income1 Advance research and development fees2 Amounts falling due after one year Deferred license, collaboration and technical access fee income1 Group Company 2012 £000’s 1,378 1,071 2,449 2011 £000’s 1,294 2,165 3,459 10,127 11,422 2012 £000’s 2011 £000’s – – – – – – – – 1 These deferred revenues result mainly from up-front license fees received in 2005 of £12.0 million from Almirall S.A. (deferred revenue balance as at 30 September 2012 – £6.6 million, and 30 September 2011 – £7.4 million) and collaboration and technical access fees from other Sativex licensees. Amounts deferred under each agreement will be recognised in revenue as discussed in Note 2. 2 Advance payments received represents payments for research and development activities to be carried out in the next year on behalf of Otsuka. These amounts will be recognised as revenue in future periods as the services are rendered. GW Pharmaceuticals plcAnnual Report and Accounts 201262 Notes to the Financial Statements continued For the year ended 30 September 2012 19. Financial Instruments The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising return to shareholders. The Group’s overall strategy remains unchanged from 2011. Group senior management are responsible for monitoring and managing the financial risks relating to the operations of the Group, which include credit risk, market risks, arising from interest rate risk and currency risk and liquidity risk. The Board of Directors and the Audit Committee review and approve the internal policies for managing each of these risks, as summarised below. The Group is not subject to any externally imposed capital requirements. The Group’s financial instruments as at 30 September, are summarised below. Categories of Financial Instruments Financial Assets Cash and cash equivalents Taxation recoverable Trade receivables – at amortised cost Prepayments and accrued income Other receivables Total Financial Assets Financial Liabilities Other creditors and accruals Trade payables – at amortised cost Other taxation and social security Obligations under finance leases Total Financial Liabilities 2012 £000’s 2011 £000’s 29,335 820 758 595 235 31,743 4,437 4,090 587 – 9,114 28,319 – 1,521 430 330 30,600 3,695 2,381 486 7 6,569 All financial assets and financial liabilities are current in nature. In all instances the fair value of financial assets and financial liabilities approximates the carrying value due to the short-term nature of these instruments. It is, and has been throughout the period under review, the Group’s policy that no speculative trading in financial instruments shall be undertaken. Credit Risk: Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties, principally involving the major UK clearing banks and their wholly owned subsidiaries, when placing cash on deposit. In addition the Group operates a treasury policy that dictates the maximum cash balance that may be placed on deposit with any single institution or group. This policy is reviewed and approved from time to time by the Audit Committee and the Board of Directors. Trade receivables represent amounts due from customers for the sale of commercial product and research funding from development partners, consisting primarily of a small number of major pharmaceutical companies where the credit risk is considered to be low. The Group seeks to minimise credit risk by offering only 30 days credit to commercial customers and by requesting payment in advance from its development partners for the majority of its research activities. At the balance sheet date the maximum credit risk attributable to any individual counterparty was £13.0m (2011: £7.2m). Trade receivables to the value of £26,000 (2011: nil) were past their due date and were provided against in full. The carrying amount of the financial assets recorded in the financial statements represents the Group’s maximum exposure to credit risk as no collateral or other credit enhancements are held. GW Pharmaceuticals plcAnnual Report and Accounts 2012 63 19. Financial Instruments continued Market Risk: The Group’s activities expose it primarily to financial risks of changes in interest rates and foreign currency exchange rates. These risks are managed by maintaining an appropriate mix of cash deposits in various currencies, placed with a variety of financial institutions for varying periods according to the Group’s expected liquidity requirements. There has been no material change to the Group’s exposure to market risks or the manner in which it manages and measures risk. i) Interest Rate Risk The Group is exposed to interest rate risk as it places surplus cash funds on deposit to earn interest income. The Group seeks to ensure that it consistently earns commercially competitive interest rates by using the services of an independent broker to identify and secure the best commercially available interest rates from those banks that meet the Group’s stringent counterparty credit rating criteria. In doing so the Group manages the term of cash deposits, up to a maximum of 365 days, in order to maximise interest earnings while also ensuring that it maintains sufficient readily available cash in order to meet short-term liquidity needs. Interest income of £200,000 (2011: £263,000) during the year ended 30 September 2012 was earned from deposits with a weighted average interest rate of 1.00% (2011: 0.86%). Therefore, a 100 basis point increase in interest rates would have increased interest income, and increased the profit for the year, by £200,000 (2011: £306,000). The Group does not have any balance sheet exposure to assets or liabilities which would increase or decrease in fair value with changes to interest rates. ii) Currency Risk The functional currency of the Company, and each of its subsidiaries is Pounds Sterling and the majority of transactions in the Group are denominated in that currency. However, the Group receives revenues and incurs expenditures in foreign currencies and is exposed to the effects of foreign exchange which are recorded in the income statement. The Group seeks to minimise this exposure by passively maintaining foreign currency cash balances at levels appropriate to meet foreseeable foreign currency expenditures, converting surplus foreign currency balances into pounds as soon as they arise. The Group does not use derivative contracts to manage exchange rate exposure. The table below shows an analysis of year end cash and cash equivalents balances by currency: Cash at bank and in hand: Pounds Sterling Euro US Dollar Canadian Dollar Total Short-term deposits: Sterling Total cash and cash equivalents 2012 £000’s 2011 £000’s 7,779 683 4,600 228 13,290 16,045 29,335 2,183 1,219 2,848 5 6,254 22,065 28,319 The table below shows those transactional exposures that give rise to net currency gains and losses recognised in the income statement. Such exposures comprise the net monetary assets and monetary liabilities of the Group that are not denominated in the functional currency of the Group. As at 30 September these exposures were as follows: Net Foreign Currency Assets/(Liabilities): Euro US Dollar Canadian Dollar Other 2012 £000’s 2011 £000’s 396 355 464 (24) 902 986 218 (39) 1,191 2,067 GW Pharmaceuticals plcAnnual Report and Accounts 201264 Notes to the Financial Statements continued For the year ended 30 September 2012 19. Financial Instruments continued Foreign Currency Sensitivity Analysis: The most significant currencies in which the Group trades, other than Pounds Sterling, are the US Dollar and the Euro. The Group also trades in the Canadian Dollar; the Czech Crown and the Polish Zloty. The following table details the Group’s sensitivity to a 10% change in the key foreign currency exchange rates against Pounds Sterling: Year Ended 30 September 2012 Profit before tax Equity Year Ended 30 September 2011 Profit before tax Equity Euro £’000 US Dollar £’000 Can Dollar £’000 Other £’000 40 40 36 36 46 46 Euro £’000 US Dollar £’000 Can Dollar £’000 90 90 99 99 22 22 (2) (2) Other £’000 (4) (4) Liquidity Risk: Responsibility for liquidity risk management rests with the Board of Directors, which has built a liquidity risk management framework to enable the monitoring and management of short, medium and long-term cash requirements of the business. The Board of Directors actively monitor Group cash flows and regularly review projections of future cash requirements to ensure that appropriate levels of liquidity are maintained. The Group manages its short-term liquidity primarily by planning the maturity dates of cash deposits in order to time the availability of funds as liabilities fall due for payment. The Group does not maintain any borrowing facilities. Cash deposits, classified as cash and cash equivalents on the balance sheet, comprise deposits placed on money markets for periods of up to three months and on call. The weighted average time for which the rate was fixed was 50 days (2011: 64 days). All of the Group’s financial liabilities at each balance sheet date have maturity dates of less than 12 months from the balance sheet date. There have been no material changes to the Group’s exposure to liquidity risks or the manner in which it manages and measures liquidity risk. 20. Share Capital As at 30 September 2012 the authorised share capital of the Company and the allotted, called-up and fully paid amounts were as follows: Authorised 200,000,000 ordinary shares of 0.1p each Allotted, called-up and fully paid Changes to the number of ordinary shares in issue have been as follows: As at 1 October 2010 Exercise of share options As at 30 September 2011 Exercise of share options As at 30 September 2012 The Company has one class of ordinary shares which carry no right to fixed income. 2012 £000’s 2011 £000’s 200 133 200 133 Number of shares 131,197,792 1,857,362 133,055,154 315,200 133,370,354 Total nominal value £000’s 131 2 133 – 133 Total share premium £000’s Total consideration £000’s 1,433 1,435 81 81 GW Pharmaceuticals plcAnnual Report and Accounts 201265 21. Share-based Payments The Company operates various equity-settled share option schemes for employees of the Group. In addition, options have been issued to a small number of expert consultants in return for services provided to the Group. All options granted under these schemes are exercisable at the share price on the date of the grant, with the exception of options issued under the GW Pharmaceuticals Long-Term Incentive Plan (“LTIP”) which are issued with an exercise price equivalent to the par value of the shares under option. The vesting period for all options granted is three years from the date of grant and the options lapse after 10 years. Options generally lapse if the employee leaves the Group before the options vest. However, at the discretion of the Remuneration Committee, under the “Good Leaver” provisions of the share option scheme rules, employees may be allowed to retain some or all of the share options upon ceasing employment by the Group. Vested options usually need to be exercised within six months of leaving. Under the terms of the LTIP employees are awarded options to subscribe for the Company’s ordinary shares at an exercise price equivalent to the par value of the shares under option. These options are subject to performance conditions which must be achieved before the options vest and become exercisable. In the event that the performance conditions are not achieved within the required three year vesting period these options will lapse. Once vested, an award may be exercised at any time prior to the tenth anniversary of the date of grant. LTIP awards granted to Executive Directors are subject to performance conditions which are determined by the Remuneration Committee. These are usually a mixture of market-based and non-market-based performance conditions which are intended to link executive compensation to the key value drivers for the business whilst aligning the interests of the Executive Directors with those of shareholders and employees. LTIPs are also granted to other Group employees from time to time. These grants are usually made subject to performance conditions which are linked to a combination of corporate objectives and personal objectives for the individual to achieve prior to the vesting date. The number of outstanding options under each scheme can be summarised as follows: Employee Share option schemes Employee Long Term Incentive Plan awards Consultant Share options Options outstanding at 30 September 30 Sept 2012 Number of share options 30 Sept 2011 Number of share options 6,462,379 4,591,765 612,456 6,867,829 3,458,345 714,956 11,666,600 11,041,130 The movement in share options in each scheme during the year can be summarised as follows: Employee options Number of share options 10,579,516 – (1,758,562) (1,953,125) 6,867,829 – (95,200) (310,250) Employee LTIP Number of share options 2,572,582 913,763 – (28,000) 3,458,345 1,326,770 (190,000) (3,350) Weighted average exercise price £ 1.31 – 0.79 2.06 1.23 – 0.76 1.14 Outstanding at 1 October 2010 Granted during the year Exercised during the year Expired during the year Outstanding at 1 October 2011 Granted during the year Exercised during the year Expired during the year Outstanding at 30 September 2012 6,462,379 1.24 4,591,765 Consultant options Number of share options 1,060,256 – (98,800) (246,500) 714,956 – (30,000) (72,500) 612,456 Total options Number of share options Weighted average exercise price £ – 1.42 14,212,354 913,763 0.48 (1,857,362) 2.10 (2,227,625) 1.32 11,041,130 1,326,770 (315,200) (386,100) – 0.29 1.22 0.76 11,666,600 Weighted average exercise price £ 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 Weighted average exercise price £ 1.08 0.001 0.77 2.04 0.85 0.001 0.26 1.15 0.76 GW Pharmaceuticals plcAnnual Report and Accounts 201266 Notes to the Financial Statements continued For the year ended 30 September 2012 21. Share-based Payments continued Share options outstanding at 30 September 2012 can be summarised as follows: Employee options Number of share options 10,000 3,025,117 1,656,372 918,498 852,392 Range of exercise prices £0.01–£0.50 £0.51–£1.00 £1.01–£1.50 £1.51–£2.00 £2.01–£2.50 Outstanding at 30 September 2012 6,462,379 Exercisable at 30 September 2012 6,462,379 Employee LTIP Consultant options Weighted average remaining contractual life/years 6.0 3.5 2.8 0.3 1.3 2.6 2.6 Weighted average remaining contractual life/years 7.9 – – – – 7.9 6.1 Number of share options 4,591,765 – – – – 4,591,765 1,443,132 Number of share options 30,000 85,000 375,096 72,360 50,000 612,456 612,456 Total options Number of share options Weighted average remaining Contractual life/years Weighted average remaining contractual life/years 7.2 0.8 2.6 0.8 0.8 4,631,765 3,110,117 2,031,468 990,858 902,392 1.9 11,666,600 1.9 7,674,835 7.9 3.4 2.8 0.3 1.3 4.7 3.1 Share options outstanding at 30 September 2011 can be summarised as follows: Employee options Number of share options 10,000 3,127,817 1,953,322 1,776,690 – Range of Exercise prices £0.01–£0.50 £0.51–£1.00 £1.01–£1.50 £1.51–£2.00 £2.01–£2.50 Outstanding at 30 September 2011 6,867,829 Exercisable at 30 September 2011 6,867,829 Employee LTIP Consultant options Weighted average remaining contractual life/years 7.0 4.5 3.3 1.8 – 3.5 3.5 Weighted average remaining contractual life/years 8.2 – – – – 8.2 6.5 Number of share options 3,458,345 – – – – 3,458,345 600,000 Number of share options 60,000 85,000 360,996 158,960 50,000 714,956 714,956 Total options Number of share options Weighted average remaining Contractual life/years Weighted average remaining contractual life/years 8.2 1.8 2.9 1.8 1.8 3,528,345 3,212,817 2,314,318 1,935,650 50,000 2.9 11,041,130 2.9 8,182,785 8.2 4.4 3.2 1.8 1.8 4.4 3.7 Charges for share-based payments have been allocated to the Research and Development and Management and administrative expenses lines of the consolidated income statement as follows: Research and development expenditure Management and administrative expenses 2012 £000’s 450 559 1,009 2011 £000’s 389 406 795 In the year ended 30 September 2012, options were granted on 15 December 2011, 23 March 2012, 31 May 2012, 6 June 2012 and 1 July 2012. The aggregate of the estimated fair values of the options granted on those dates is £1.1m and the weighted average fair value of the awards made during 2012 was £0.82 per option. In the year ended 30 September 2011, options were granted on 8 June 2011 and 1 September 2011. The aggregate of the estimated fair values of the options granted on those dates is £1.2m and the weighted average fair value of the awards made during 2011 was £1.19 per option. Fair values were calculated using the Black-Scholes share option pricing model. The following weighted average assumptions were used in calculating these fair values: Weighted average share price Weighted average exercise price Expected volatility Expected life Risk-free rate Expected dividend yield 2012 2011 83p 0.1p 52% 5.0 Years 0.5% Nil 108p 0.1p 68% 5.0 Years 0.5% Nil Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, performance conditions and behavioural considerations. GW Pharmaceuticals plcAnnual Report and Accounts 201267 22. Warrants Warrants to subscribe for ordinary shares in the Company are as shown below: Warrant Holder Great Point Partners Great Point Partners Total At 1 Oct 2011 Number Warrants granted Number Warrants exercised Number Warrants lapsed Number At 30 Sept 2012 Number Date of issue Exercise price Date of expiry 1,888,480 1,888,480 3,776,960 – – – – – – – – – 1,888,480 1,888,480 3,776,960 13/08/09 13/08/09 105.0p 175.0p 13/08/14 13/08/14 The above warrants were issued to Great Point Partners on 13 August 2009 at a time when the mid-market price for GW Pharmaceuticals ordinary shares of the Company was 78.0p. The warrant issue was concurrent with the issue of 7,553,920 new ordinary shares to Great Point partners at 78.0p per share. The warrants can be exercised at any time prior to their expiry on 13 August 2014. The fair value of the warrants on the date of issue was £0.9 million which was previously recorded as a component of the share premium account. Having reassessed the rights of the warrants, the Directors have considered it appropriate to restate equity to reflect the inclusion of the fair value of the warrants as a component of Other reserves, rather than the share premium account. This reclassification did not result in any change to profit or total equity for any reporting period presented herein. 23. Other Reserves Other reserves of £20.2m relate to £19.3m of merger reserve and £0.9m of warrants reserve. The warrants reserve is discussed in note 22. The merger reserve was created as a result of the acquisition by the Company of the entire issued share capital of GW Pharma Ltd in 2001. This acquisition was effected by a share for share exchange which was merger accounted under UK Generally Accepted Accounting Practice, or UK GAAP, in accordance with the merger relief provisions of section 131 of the Companies Act 1985 (as amended) relating to the accounting for business combinations involving the issue of shares at a premium. Merger relief provided relief from the requirement to create a share premium account in a Parent Company’s balance sheet. In preparing consolidated financial statements, the amount by which the fair value of the shares issued exceeded their nominal value was recorded within a merger reserve on consolidation, rather than in a share premium account. The merger reserve was retained upon transition to IFRS, as allowed under UK law. This reserve is not considered to be distributable. ESOP Reserve The Group’s “ESOP” is an Inland Revenue approved all employee share scheme constituted under a trust deed. The trust holds shares in the Company for the benefit of and as an incentive for the employees of the Group. The trustee of the ESOP is GWP Trustee Company Limited, a wholly owned subsidiary of the Company. Costs incurred by the trust are expensed in the Group’s financial statements as incurred. Distributions from the trust are made in accordance with the scheme rules and on the recommendation of the Board of Directors of the Company. Shares held in trust represent issued and fully paid up 0.1p ordinary shares and remain eligible to receive dividends. The shares held by the ESOP were originally acquired in 2000 for nil consideration by way of a gift from a shareholder and hence the balance on the ESOP reserve is nil (2011: nil). As at 30 September the ESOP held the following shares: Unconditionally vested in employees Conditionally gifted to employees Shares available for future distribution to employees Total 2012 Number 228,607 173,951 34,706 2011 Number 260,331 186,341 22,316 437,264 468,988 The valuation methodology used to compute the share-based payment charge was based on fair value at the grant date, which is determined by the application of a Black-Scholes share option pricing model. The assumptions underlying the Black-Scholes model for the ESOP shares are as detailed in Note 21 relating to the LTIP awards. The exercise price for shares granted under the ESOP is nil and the vesting conditions include employment by the Group over the three year vesting period from the date of grant. The share-based payment charge for shares granted under the ESOP plan amounted to £33,441 in the year ended 30 September 2012 (2011: £50,231). As at 30 September 2012 the number and market value of shares held by the trust which have not yet unconditionally vested in employees is 208,657 (2011: 208,657) and £0.2m (2011: £0.2m) respectively. GW Pharmaceuticals plcAnnual Report and Accounts 201268 Notes to the Financial Statements continued For the year ended 30 September 2012 24. Financial Commitments The Group had capital commitments for property, plant and equipment contracted but not provided for at 30 September 2012 of £0.1m (2011: £0.2m). At the balance sheet date the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: – within one year – between two and five years – after five years Group 2012 £000’s 987 2,375 – 3,362 Group 2011 £000’s 955 3,442 – 4,397 Company 2012 £000’s Company 2011 £000’s – – – – – – – – The minimum lease payments payable under operating leases recognised as an expense in the year were £1.0m (2011: £0.8m). Operating lease payments represent rentals payable by the Group for certain of its leased properties. Manufacturing and laboratory facilities are subject to 10 year leases with a seven year lease break at the Group’s option. Office properties are usually leased for one year or less with the exception of the London property, which is on a five year lease and the Histon property which is on a 10 year lease with a five year break. 25. Contingent Liabilities The Group may, from time to time, be involved in legal proceedings that are incidental to the Group’s operations. The Group is not currently involved in any legal or arbitration proceedings which may have, or have had in the 12 months preceding the date of this report, a material effect on the consolidated financial position, results of operations or liquidity of the Group. 26. Subsequent events Subsequent to the year-end the Group has entered into an arrangement for the construction of some new lease premises for occupation during 2014. If the lease premises are not taken up the Group is liable to repay costs of up to £1.05m to the landlord. 27. Related Party Transactions Remuneration of Key Management Personnel: The remuneration of the Directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Short-term employee benefits Post-employment benefits Share-based payments 2012 £000’s 1,664 158 831 2,653 2011 £000’s 1,426 171 625 2,222 Other Related Party Transactions: Group: During the year the Group purchased services in the ordinary course of business from Brian Whittle Associates Limited, a company controlled by Brian Whittle, a former Director and substantial shareholder of the Company, at a cost of £3,000 (2011: £19,000). As at 30 September 2012 there was no amount due to Brian Whittle Associates Limited (2011: nil). Upon the retirement of David Kirk from the Board of Directors of the Company, on 1 June 2012, the Remuneration Committee agreed that, in accordance with the “Good Leaver” provisions of the share option scheme rules, David Kirk would be allowed to retain all of his outstanding share options after leaving the employment of the Group. This includes: • 1.2m share options, with a weighted average exercise price of £1.48 and a weighted average time to expiry of 1.9 years. • 0.3m of vested LTIP awards with a 0.1p exercise price and a weighted average time to expiry of 6.0 years. • 0.3m of unvested LTIP award, with a 0.1p exercise price and weighted average time to expiry of 8.25 years. The unvested options remain subject to the performance conditions and shall only become exercisable if the Group achieves the performance conditions before the vesting date. All vested options shall remain available to exercise at any time prior to their expiry upon the tenth anniversary of their date of grant. GW Pharmaceuticals plcAnnual Report and Accounts 201269 27. Related Party Transactions continued Company: During 2012, the Company advanced funds to GW Research Limited, in order to fund Group pipeline research and development activities. This took the form of a long-term loan, bearing interest at 5% per annum. The balance due to the Company at 30 September 2012 was £16.6m (30 Sept 2011: £nil). As a long-term loan, this has been disclosed within the Company balance sheet as an investment – see note 27. During 2012, the Company was a net borrower of funds from GW Pharma Limited. At 30 September 2012, the amount due from the Company to GW Pharma Limited was £2.0m (30 Sept 2011: £0.6m). As noted in note 6, on 1 September 2012, the Company received a dividend payment of £30.0m from GW Pharma Limited. No dividends were received in the prior year. 28. Investments Principal Group Investments The Company has investments in the following significant subsidiary undertakings: Company At 1 October 2011 Add capital contribution in respect of share-based payment charge Additional funds advanced during year At 30 September 2012 Loans to Group undertakings £000’s – – 16,601 16,601 Investments £000’s 77,495 1,009 – 78,504 Total £000’s 77,495 1,009 16,601 95,105 The Group has investments in the following significant subsidiary undertakings: Name of undertaking Country of registration Activity % holding GW Pharma Limited GW Research Limited Cannabinoid Research Institute Limited Guernsey Pharmaceuticals Limited GWP Trustee Company Limited G-Pharm Trustee Company Limited G-Pharm Limited England and Wales England and Wales England and Wales Guernsey England and Wales England and Wales England and Wales Research and Development Research and Development Research and Development Research and Development Employee Share Ownership Dormant Dormant 100 100 100 100 100 100 100 All the subsidiary undertakings are included in the consolidated accounts. GW Pharmaceuticals plcAnnual Report and Accounts 201270 Notes GW Pharmaceuticals plcAnnual Report and Accounts 2012Notes 71 GW Pharmaceuticals plcAnnual Report and Accounts 201272 Notes GW Pharmaceuticals plcAnnual Report and Accounts 2012Principal Bankers HSBC Bank plc 70 Pall Mall London SW1Y 5EZ Public Relations Advisers FTI Consulting Holborn Gate Southampton Buildings London WC2A 1PB Registrars Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersfield West Yorkshire HD8 0LA Advisers Registered Office GW Pharmaceuticals plc Porton Down Science Park Salisbury Wiltshire SP4 0JQ United Kingdom T: +44 (0)1980 557000 F: +44 (0)1980 557111 E: info@gwpharm.com Registered Number 04160917 England and Wales Nominated Adviser and Broker Peel Hunt LLP 120 London Wall London EC2Y 5ET Financial Adviser N M Rothschild & Sons Limited New Court St. Swithin’s Lane London EC4P 4DU Solicitors to the Company Mayer Brown LLP 201 Bishopsgate London EC2M 3AF Auditors Deloitte LLP Abbots House Abbey Street Reading Berkshire RG1 3BD Cautionary statement: This annual report contains forward-looking statements that reflect GW’s current expectations regarding future events, including development and regulatory clearance of GW’s products. Forward-looking statements involve risks and uncertainties. Actual results and events could differ materially from those projected herein and depend on a number of factors, including (inter alia), the success of GW’s research strategies, the applicability of the discoveries made therein, the successful and timely completion of uncertainties related to the regulatory process, and the acceptance of Sativex® and other products by consumer and medical professionals. The forward-looking statements reflect knowledge and information available at the date of preparation of this annual report and the Company undertakes no obligation to update these forward-looking statements. Nothing in this annual report should be construed as a profit forecast. G W P h a r m a c e u t i c a l s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 2 GW Pharmaceuticals plc Porton Down Science Park Salisbury Wiltshire SP4 0JQ UK T: +44 (0)1980 557000 F: +44 (0)1980 557111 www.gwpharm.com 

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