GW Pharmaceuticals plc
Annual Report 2017

Plain-text annual report

Annual Report and Accounts 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 7 2017 www.gwpharm.com GW Pharmaceuticals plc | Annual report and accounts 2017 Contents 01 Strategic Report 10 Directors’ Report 12 Directors’ Remuneration Report 32 Directors’ Responsibility Statement 33 Independent Auditor’s Report 38 Consolidated Income Statements 38 Consolidated Statements of Comprehensive Loss 39 Consolidated Statement of Changes in Equity 40 Company Statement of Changes in Equity 41 Consolidated Balance Sheets 42 Consolidated Cash Flow Statements 43 Notes to the Consolidated Financial Statements 74 Advisers www.gwpharm.com Strategic Report The Directors present their Strategic Report for the Group for the financial year ended 30 September 2017. and LGS. We have also received Orphan Designation from the European Medicines Agency, or EMA, for Epidiolex® for the treatment of Dravet syndrome and LGS. Strategy, Objectives and Business Model The strategy of the Group is to research, develop and commercialise a range of plant-derived cannabinoid prescription medicines to meet unmet patient needs in a wide range of medical conditions. We believe that we have unique expertise and occupy a leading position in cannabinoid science. Over the last 19 years we have selectively bred our library of cannabis plants to create plant varieties which contain high concentrations of selected cannabinoids. We then extract these cannabinoids, formulate them and, in collaboration with a network of scientific collaborators, we take these product candidates through a battery of pharmacology, toxicology, in vitro and in vivo models of disease in order to identify disease areas where these cannabinoids show promise. Using our in-house clinical management expertise we then take these product candidates through a series of Phase 1, Phase 2 and Phase 3 clinical trials, gathering evidence of safety, efficacy and control over chemistry and manufacturing of our products in order to compile and present regulatory dossiers to healthcare regulators to seek pharmaceutical marketing authorisations, pricing and reimbursement from healthcare authorities. We expect to retain marketing rights for niche, orphan opportunities where our reputation as leaders in cannabinoid science will be a key part of the targeted marketing of our prescription medications to specialist clinicians in focused areas of medicine. These opportunities include Epidiolex®, our treatment for paediatric epilepsy for two orphan indication syndromes, Dravet syndrome and Lennox-Gastaut syndrome (“LGS”). During 2016 we reported a series of positive results from three pivotal Phase 3 trials of Epidiolex® in Dravet syndrome and LGS, which laid the groundwork for the rolling submission of a New Drug Application (“NDA”) to the Food and Drug Administration (“FDA”) during 2017. This submission was completed in October 2017. We remain on track for potential FDA approval and US commercial launch in 2018. We expect to submit our application to the European Medicines Agency for Epidiolex® in late 2017. GW Pharmaceuticals plc (“GW”) is also building an experienced commercial team in the US and Europe in preparation for the future commercial launch of Epidiolex®. This team has been enhanced throughout the period with a number of key hires as we move closer to launch. During 2017 we have been continuing our orphan epilepsy programme with our Phase 3 clinical trial in the treatment of Tuberous Sclerosis Complex (“TSC”) and commenced Part A of a clinical trial for the treatment of Infantile Spasms (“IS”). We have received Orphan Drug Designation from the FDA for Epidiolex® in the treatment of all four infant- onset, drug-resistant epilepsy syndromes. Additionally, we have received Fast Track Designation from the FDA for the treatment of Dravet syndrome and conditional grant of rare paediatric disease designation by FDA for Dravet syndrome We have a deep pipeline of additional cannabinoid product candidates with an increasing focus on orphan paediatric neurologic conditions and oncology. Our pipeline includes cannabidivarin (“CBDV”) which is in Phase 2 development in the field of epilepsy and is also being researched within the field of autism spectrum disorders. In February 2017, we reported positive Phase 2 data for our CBD:THC product in the treatment of glioblastoma multiforme. In addition, we have received Orphan Drug Designation and Fast Track Designation from the FDA for intravenous CBD for the treatment of Neonatal Hypoxic Ischemic Encepholapthy, for which a Phase 1 safety study has now been completed. Previously, we developed the world’s first plant-derived cannabinoid prescription drug, Sativex® (nabiximols), which is approved for the treatment of spasticity due to multiple sclerosis in numerous countries outside the US. In the US, we expect to recover commercial rights to this product from our US licensing partner and then intend to advance plans to supplement our ex-US data with a view to submitting a future NDA for Sativex® in the US. We also collaborate with other pharmaceutical companies. Where appropriate, we out-license the marketing rights to our products to large pharmaceutical partner companies, who have appropriate marketing expertise, in return for licence, technical access and collaboration fees, funding of our research and development (“R&D”) programmes, development and approval milestones, royalties and product revenues. We manufacture our medicines, acting as the sole source of supply to our marketing partners, in return for a product supply price based upon an agreed share of their in-market sales revenues. We have been conducting cannabinoid research for 19 years and believe that our accumulated knowledge and expertise in the field of cannabinoid science gives us a distinct competitive advantage. We aim to protect our leadership position by maintaining our professional reputation, by continuing our open collaboration efforts with other cannabinoid scientists, using a combination of confidentiality and non-compete agreements to protect our know- how, registration of plant variety rights and further enhancing our broad range of patent rights. The Group operates a business model that allows us to create value by developing a broad pipeline of potential future products. Where we consider that the risk reward ratio is sufficiently attractive and where development costs and timelines are manageable, it is our intention to seek to develop certain pipeline programmes in-house with a view to retaining the valuable commercialisation rights to such products ourselves. Such programmes are most likely to be orphan programmes where opportunities exist to develop valuable and worthwhile medicines to address unmet patient need in defined, readily addressable patient populations and where there is sufficient intellectual property or regulatory protection from competition to enable a healthy commercial return to be earned over the medium to long term. Where we consider it to be appropriate, we will out-license in order to share risks with our partners. By maintaining close 01 GW Pharmaceuticals plc | Annual report and accounts 2017Strategic Report continued internal control over most aspects of R&D, 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. The nature of our business is to take product development risk in order to create valuable medicines targeted to address areas of significant unmet patient need which healthcare authorities will reimburse in an affordable manner. 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, with a view to creating valuable medicines that maximise our financial opportunities. 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 the future. Business Strategy Our goal is to capitalise on our leading position in the field of plant-derived cannabinoid therapeutics by pursuing the following strategies: > Secure regulatory approval and launch using our own commercial organisation and our lead product candidate Epidiolex® in Dravet syndrome and LGS in the United States and around the world. We have reported positive Phase 3 data in Dravet syndrome and LGS, and submitted an NDA to the FDA for which we expect a mid-2018 PDUFA date. We also expect to submit a regulatory application in Europe at the end of 2017, and also have future plans to submit applications elsewhere around the world. We are building US and European commercial organisations in preparation for potential launch of Epidiolex®. > Expand the market opportunity for Epidiolex® within the field of epilepsy. We have commenced Phase 3 clinical development of Epidiolex® for TSC and clinical development of Epidiolex® for IS. We evaluating additional indications for Epidiolex® within the field of epilepsy. > Develop additional product candidates within the field of epilepsy and paediatric neurology. We have a second product candidate, GWP42006 (CBDV), for which a Phase 2 clinical trial in epilepsy is underway with data expected in early 2018. A physician-led expanded access IND to treat seizures associated with autism has been granted by FDA to treat 10 patients with CBDV. An investigator-led 100 patient placebo- controlled trial in autism is also due to commence in the first half of 2018. For patients with Rett Syndrome, a condition in which treatment-resistant seizures are a common problem, CBDV has received Orphan drug Designation from the FDA. An open label study in Rett Syndrome and a Phase 2 placebo- controlled trial in this condition are expected to commence in 2018. We have received scientific advice from both the FDA and EMA on the study design. We also commenced a Phase 1 clinical trial in 2016 for an intravenous of CBD formulation in the treatment of NHIE. In addition, following positive proof-of-concept data in a Phase 2 schizophrenia trial, we 02 expect to conduct further research within the field of psychistric disease in children. We retain global commercial rights to these programmes. > Expand the market opportunity for Sativex®. We have recently launched Sativex® in Australia and New Zealand, following the return of rights to this product by Novartis. If we recover the rights to Sativex® in the United States, we plan on pursuing a clinical programmes to obtain approval for this product from the FDA. > Leverage our proprietary cannabinoid product platform to discover, develop and commercialise additional novel first-in- class cannabinoid products. We believe our established platform, including our in-house development expertise, allows us to achieve candidate selection and proof-of-concept in an efficient manner. > Further strengthen our competitive position. We will continue to develop our extensive international network of the most prominent scientists in the cannabinoid field and secure additional intellectual property rights. Review of the Business Revenue Total revenue for the year ended 30 September 2017 was £8.2 million, compared to £10.3 million for the year ended 30 September 2016. The decrease of £2.1 million comprises: > £3.3 million decrease in research and development fees due to recharges for partner-funded Sativex® Phase 3 cancer pain clinical trials having now ended. > £1.0 million increase in Sativex® product sales revenues to £6.2 million due to increased shipments. In-market sales volumes sold by GW’s commercial partners for the year ended 30 September 2017 were 23% higher than the year ended 30 September 2016. Sales volumes to partners increased by 29% over the same period. > £0.2 million increase in licence, collaboration and technical access fees to £1.4 million for the year ended 30 September 2017 compared to £1.2 million for the year ended 30 September 2016. This increase is due to the acceleration of signature fee revenue arising from the termination with Novartis during the period. Cost of Sales Cost of sales for the year ended 30 September 2017 of £3.5 million represents an increase of £0.8 million compared to the £2.7 million recorded in the year ended 30 September 2016. This increase reflects the growth in the volume of Sativex® inventory shipped to commercial partners in the year ended 30 September 2017. Research and Development Expenditure Total R&D expenditure for the year ended 30 September 2017 of £111.2 million increased by £11.4 million compared to the £99.8 million incurred in the year ended 30 September 2016. GW-funded R&D expenditure increased by £14.7 million to £110.7 million for the year ended 30 September 2017 from £96.0 million for the year ended 30 September 2016. The increase is due to: GW Pharmaceuticals plc | Annual report and accounts 2017 > £7.4 million increase in research and development staff and employment-related expenses linked to increased global headcount operating the Epidiolex® development programme and preparing for NDA submission, combined with the transition of the Group’s clinical headcount from partner- funded Sativex® trials to the GW-funded pipeline activities. > £7.1 million increase in costs of growing an increased volume of high CBD plant material for the Epidiolex® development programme. > £3.0 million increase in other overheads associated with running clinical trials such as depreciation of R&D assets, consumables and other property-related overheads. > £2.8 million decrease in epilepsy and other GW-funded clinical programme costs – reflecting the completion of the three successful Epidiolex® Phase 3 studies in Dravet syndrome and LGS during the prior financial year. We track all R&D expenditures against detailed budgets but do not seek to allocate and monitor all R&D costs by individual project. As noted in the segmental analysis below, we do analyse GW-funded R&D into Sativex-related expenditures and pipeline- related expenditures. External third-party costs of running clinical trials totalling £25.2 million for the year ended 30 September 2017 and £28.1 million for the year ended 30 September 2016 were tracked as individual projects while the remaining £85.5 million for the year ended 30 September 2017 and £67.9 million for the year ended 30 September 2016 consisting largely of internal overhead costs were not allocated to individual projects, but to the overall clinical programme. We believe that our existing liquidity is sufficient to complete our currently ongoing GW-funded R&D projects. Development partner-funded R&D projects are funded in advance by our development partners, which involves the receipt of advanced funds, sufficient to cover projected expenditure for the next three months. Development partner-funded R&D decreased by £3.3 million to £0.5 million during the year ended 30 September 2017 as compared to £3.8 million for the year ended 30 September 2016. This reflects decreased expenditure following the completion of the Sativex® Phase 3 cancer pain trials during the prior financial year. Sales, General and Administrative Expenses Sales, general and administrative expenses for the year ended 30 September 2017 of £41.7 million increased by £21.8 million compared to the £19.9 million incurred in the year ended 30 September 2016. This net increase is due to: > £9.3 million increase in employee-related expenses, comprising a £6.4 million increase in payroll costs driven by increased commercialisation staff headcount and a £2.9 million increase in the charge in respect of related staff share-based payment expenses. > £9.2 million increase in respect of pre-launch commercialisation preparation costs. These costs relate to discrete commercialisation projects. > £2.8 million increase in property and travel costs, primarily due to the expansion of US based operations. > £0.5 million increase in accountancy, audit and investor relation costs due to GW’s US listing and Sarbanes-Oxley compliance. Net Foreign Exchange (Losses)/Gains Net foreign exchange movements resulted in a £5.0 million loss for the year ended 30 September 2017 compared to £25.6 million gain for the year ended 30 September 2016. This foreign exchange loss mostly arises due to unrealised gains on our US Dollar denominated cash deposits at the closing balance sheet exchange rate. Interest Expense Interest expense of £0.7 million for the year ended 30 September 2017 increased by £0.5 million compared to the £0.2 million recorded for the year ended 30 September 2016. This increase reflects an increase in interest paid on leases for manufacturing facilities and interest on repayments of the fit-out funding previously received. Interest and other Income Interest and other income increased by £1.0 million to £1.6 million for the year ended 30 September 2017 compared to £0.6 million for the year ended 30 September 2016. The increase reflects growth in interest income earned on the Group’s cash and cash equivalents balance throughout the period. Tax Our tax benefit decreased by £1.8 million, or 8%, to £20.7 million for the year ended 30 September 2017 compared to £22.5 million for the year ended 30 September 2016. This benefit consists of: > Accrual for an expected R&D tax credit claim of £19.9 million in respect of the year ended 30 September 2017 for GW Research Limited. We expect to submit this claim in the quarter ending 31 March 2018 and this claim is subject to agreement by HMRC. > Recognition of an additional £0.5 million of R&D tax credit received in the current period in respect of the year ended 30 September 2016 for GW Research Limited. > Recognition of US tax credits of £0.3 million in respect of the year ended 30 September 2017 for the Group’s US subsidiary, Greenwich Biosciences, Inc., following the submission of an orphan drug tax credit claim. R&D tax credits recognised vary depending on our available tax losses, the eligibility of our R&D expenditure and the level of certainty relating to the recoverability of the claim. Summary of Cash Flows Operating Activities Net cash outflow from operating activities for the year ended 30 September 2017 of £110.2 million was £25.6 million higher than the £84.6 million outflow from operating activities for the year ended 30 September 2016, principally reflecting the increase in investment in the Epidiolex® development and commercialisation activities, offset by the receipt of additional tax benefit. 03 GW Pharmaceuticals plc | Annual report and accounts 2017Strategic Report continued Investing Activities The net cash outflow from investing activities increased by £6.5 million to £15.3 million for the year ended 30 September 2017 from £8.8 million for the year ended 30 September 2016, reflecting an increase in capital expenditure of £7.4 million during the year ended 30 September 2017 due to the commencement of the next phase of construction of our manufacturing facilities. This is offset by an increase of £1.0 million in interest received compared to the prior year. In the year to 30 September 2017 we have seen a continued decline in our R&D fee income, as the level of rechargeable activity associated with our recently completed cancer pain trials programme has concluded during the course of the year. We consider our license, collaboration and technical access fees and our product sales revenues to be recurring revenues. The milestone revenues recognised in each of the financial years below tend to be individual items linked to specific development milestones achieved in a particular financial year. Financing Activities Net cash flow from financing activities decreased by £208.9 million to a £2.1 million outflow in the year ended 30 September 2017 compared to a £206.8 million inflow for the year ended 30 September 2016 due to a £206.9 million decrease in net new equity funding inflows, a £0.9 million increase in interest costs, a £0.7 million increase in fit out funding repayments and a £0.4 million decrease in proceeds on exercise of share options. Our Key Business Trends The following information provides a summary of the development and performance of the Company’s business during the financial year and the position of the business as at 30 September 2017. The Group considers that the primary key performance indicator is the progress on the regulatory approval and launch of our lead product candidate, Epidiolex®, in Dravet syndrome and LGS in the US and around the world. This is not an easily quantifiable key performance indicator. We therefore believe that this information below best represents the Group’s key performance indicators for the year ended 30 September 2017, as they are reported to the Directors at each Board meeting. Our revenues consist of R&D fees, product sales revenues, license collaboration and technical access fees and development and approval milestone fees. For the year ended 30 September 2017, we recorded revenues of £6.2 million for Sativex® product sales, an increase of £1.0 million from the £5.2 million recorded for the year ended 30 September 2016. This increase was due primarily to an increase in the volume of shipments to partners of 29%. In 2013, we received one €250,000 development and approval milestone, linked to the signature of an agreement with Ipsen, our commercial partner in Latin America. In 2014, we received no development and approval milestones. In 2015, we received two €125,000 development and approval milestones linked to regulatory filings by Ipsen. In 2016, we received one €125,000 development and approval milestone linked to a regulatory submission filing by Ipsen in Venezuela. In 2017, we received one €125,000 development and approval milestone linked to a regulatory submission filing by Ipsen in Argentina. The Sativex® In-market vial sales volumes graph below illustrates the trend in in-market commercial sales volumes of Sativex® by our commercial marketing partners Bayer in UK/Canada, Almirall in Europe and Neopharm in Israel. In-market sales volumes grew by 23% from 2016 to 2017. In 2013 commercial sales by Almirall commenced in Norway, Austria, Italy, Poland and by Neopharm in Israel. In 2014, Almirall launched Sativex® in Switzerland and Finland. 2015 and 2016 saw volume growth driven primarily by increased prescribing in Germany and Italy, as well as launch in Belgium. In 2017, we launched in New Zealand following the return of the rights for Sativex® from Novartis. As illustrated in the Total Group Expenditure graph below, our R&D expenditures have shown a consistent growth trend over the last five financial years from £32.7 million in 2013 to £111.2 million in 2017. The growth during 2017 of £11.4 million from the £99.8 million of R&D incurred in 2016 demonstrates the continuation of our epilepsy Phase 3 clinical research with Epidiolex®, as well as progress with a number of other pipeline product candidates. In addition, SG&A expenditure has increased from £19.9 million in 2016 to £41.7 million in 2017, reflecting the increased activity in respect of pre-launch commercialisation in the US and Europe. Total Group Revenue (£000s) Year ended 30 September Sativex In-market Vial Sales Volumes (units) Financial year ended 30 September n Development and approval milestone fees n License, collaboration and technical access fees n Product sales n Research and Development fees 2013 2014 2015 2016 2017 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 04 d e p p h s i l s a v i l m 0 1 t e k r a m n - i l t a o T 300,000 250,000 200,000 150,000 100,000 50,000 0 2013 2014 2015 2016 2017 GW Pharmaceuticals plc | Annual report and accounts 2017 In the last five years, a significant proportion of the partner- funded R&D expenditure has been driven by our US Phase 3 cancer pain clinical trials programme, which included three pivotal Phase 3 cancer pain trials plus a series of supporting Phase 1 clinical trials and regulatory activities. All of this clinical activity was funded by our development partner Otsuka. These activities concluded during the year ended 30 September 2017. In 2013, Otsuka also funded a significant amount of pre-clinical activity as part of our six-year pre-clinical research collaboration. This pre-clinical collaboration ended on 30 June 2013. GW now has a worldwide license to all data and product candidates generated under this collaboration. From 2013 to 2017 GW-funded R&D increased from £9.1 million in 2013 to £110.7 million in 2017. In 2014 GW-funded R&D increased significantly to £19.2 million, reflecting our investment in the development of Epidiolex®, cannabidivarin (“CBDV”) and other pipeline candidates. In 2015 GW-funded R&D increased further to £54.0 million, as we initiated five Phase 3 clinical trials in several forms of refractory childhood epilepsy, including Dravet syndrome and Lennox-Gastaut syndrome. In 2016 GW-funded R&D increased to £96.0 million as we completed three Phase 3 clinical trials, and continued to invest in our wider epilepsy programme to support the forthcoming NDA filing in the US. In 2017, GW-funded R&D increased to £110.7 million as we continued to invest in our wider epilepsy program to support the NDA filing in the US, and forthcoming EMA filing in Europe. We have also continued our Phase 3 clinical trial in Tuberous Sclerosis Complex, as well as continuing to progress multiple active Phase 1/2 clinical trials in other disease areas such as epilepsy partial seizures and Glioma. The Closing Group Cash graph below illustrates the trend in our financial year-end closing cash position for each of the last five years. Since 2013, having taken the decision to invest in the development of Epidiolex® to treat a number of refractory forms of childhood onset epilepsy we have consistently recorded operating cash outflows, offset by the proceeds of a series of fundraisings, each of which have been conducted following the achievement of key product development milestones. Our aim has been to ensure that the Group remains well funded with sufficient working capital to successfully execute our Epidiolex® and other pipeline product development plans. These equity fundraisings, together with proceeds from share options and warrants, have generated net financing cash inflows as follows: – £18.1 million of net new funds from issue of equity as part of our NASDAQ initial public offering in May 2013 – £136.6 million in 2014 – £128.7 million in 2015 – £207.2 million in 2016 As a result of this series of successful equity fundraisings the Group has made excellent progress with the execution of our Epidiolex® development and commercialisation strategy, leading to the completion of our NDA filing with FDA on 27 October 2017. 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. A Risk Committee has been established who, based upon input from programme directors and subject matter experts, prepare a risk matrix outlining the status of risks, mitigating controls and action plans. This matrix is reviewed by the Directors of the Company as part of their annual assessment of the principal risks. Further details of risk factors considered by GW for the year ended 30 September 2017 are included on Form 20-F to be filed with the US Securities and Exchange Commission on 4 December 2017. The risks have been identified as follows: Marketing and Commercialisation > We are dependent on the success of our product candidates, none of which may receive regulatory approval or be successfully commercialised. > Our product candidates, if approved, may be unable to achieve the expected market acceptance and, consequently, limit our ability to generate revenue from new products. > We have, to date, commercialised only one product, Sativex®. > We expect to face intense competition, often from companies with greater resources and experience than we have. > Product shipment delays could have a material adverse effect on our business, results of operations and financial condition. Total Group Expenditure (£000s) Year ended 30 September Closing Group Cash (£000s) As at 30 September 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2013 2014 2015 2016 2017 n SG&A n GW-funded R&D n Development partner-funded R&D 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 2013 2014 2015 2016 2017 05 GW Pharmaceuticals plc | Annual report and accounts 2017Strategic Report continued > If the price for Sativex® or any future approved products > The anticipated development of a Risk Evaluation and decreases or if governmental and other third-party payers do not provide adequate coverage and reimbursement levels, our revenue and prospects for profitability will suffer. > Counterfeit versions of our products could harm our business. > We depend substantially on the commercial expertise of our collaboration partners for Sativex®. > We have relied on Otsuka for funding of our Sativex® R&D programmes in the US and as we expect Otsuka to terminate its agreement with us we will have to fund any future development of Sativex® in the US ourselves. Mitigation Strategy (“REMS”) for our product candidates could cause delays in the approval process and would add additional layers of regulatory requirements that could impact our ability to commercialise our product candidates in the US and reduce their market potential. > If we are found in violation of federal or state “fraud and abuse” laws, we may be required to pay a penalty and/or be suspended from participation in federal or state healthcare programmes, which may adversely affect our business, financial condition and results of operations. > Our existing collaboration arrangements and any that we may enter into in the future may not be successful, which could adversely affect our ability to develop and commercialise Sativex® and our product candidates. > Our ability to research, develop and commercialise Sativex® and our product candidates is dependent on our ability to maintain licenses relating to the cultivation, possession and supply of controlled substances. Clinical > Clinical trials for our product candidates are expensive, > Controlled substance legislation differs between countries and legislation in certain countries may restrict or limit our ability to sell Sativex® and our product candidates. time-consuming, uncertain and susceptible to change, delay or termination. The results of clinical trials are open to differing interpretations. > Information obtained from expanded access studies may not reliably predict the efficacy of our product candidates in Company-sponsored clinical trials and may lead to adverse events that could limit approval. > The product candidates we are developing will be subject to US-controlled substance laws and regulations and failure to comply with these laws and regulations, or the cost of compliance with these laws and regulations, may adversely affect the results of our business operations, both during clinical development and post-approval, and our financial condition. > There is a high rate of failure for drug candidates proceeding > The approval and use of medical and recreational marijuana in through clinical trials. Regulatory and Legislative > Sativex® and our product candidates contain controlled substances, the use of which may generate public controversy. > If product liability lawsuits are successfully brought against us, we will incur substantial liabilities and may be required to limit the commercialisation of Sativex® and our product candidates. > Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements. > If we are unable to use net operating loss carry-forwards and certain built-in losses to reduce future tax payments, or benefit from favourable tax legislation, our business, results of operations and financial condition may be adversely affected. > Changes in US tax legislation could adversely affect our business, financial condition and results of operations. > We are subject to the UK Bribery Act, the US Foreign Corrupt Practices Act and other anti-corruption laws, as well as export control laws, customs laws, sanctions laws and other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could adversely affect our business, results of operations and financial condition. > Our proprietary information, or that of our customers, suppliers and business partners, may be lost or we may suffer security breaches. > Legislative or regulatory reform of the health care system in the US and foreign jurisdictions may affect our ability to profitably sell our products, if approved. > Any failure by us to comply with existing regulations could harm our reputation and operating results. various US states may impact our business. > As a foreign private issuer, we are not subject to certain NASDAQ Global Market corporate governance rules applicable to US listed companies and are subject to reporting obligations that are different and less frequent than those of a US-listed Company. As a result, investors in our securities may not have the same protections afforded to shareholders of companies that are not foreign private issuers. > We expect to lose our foreign private issuer status in the future, which could result in significant additional costs and expenses. > US investors may have difficulty enforcing civil liabilities against our Company, our Directors, Executive Officers or members of senior management and the experts named in this Annual Report on Form 20-F. > The rights of our shareholders may differ from the rights typically offered to shareholders of a US corporation. > We may identify a material weakness in our internal control over financial reporting for future fiscal years. If we do not remediate material weaknesses or are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected. Orphan Drug Designation and Intellectual Property > In respect of our product candidates targeting rare indications, orphan drug exclusivity may afford limited protection, and if another party obtains orphan drug exclusivity for the drugs and indications we are targeting, we may be precluded from commercialising our product candidates in those indications during that period of exclusivity. > If third parties claim that intellectual property used by us infringes upon their intellectual property, our operating profits could be adversely affected. > We may not be able to adequately protect Sativex®, our product candidates or our proprietary technology in the marketplace. 06 GW Pharmaceuticals plc | Annual report and accounts 2017Manufacturing and Technology > Problems in our manufacturing process, failure to comply with manufacturing regulations or unexpected increases in our manufacturing costs could harm our business, results of operations and financial condition. > Product recalls or inventory losses caused by unforeseen events, cold chain interruption and testing difficulties may adversely affect our operating results and financial condition. > Business interruptions could delay us in the process of developing our product candidates and could disrupt our product sales. > Failure of our information technology systems could significantly disrupt the operation of our business. > We depend on a limited number of suppliers for materials and components required to manufacture Sativex® and our other product candidates. The loss of these suppliers, or their failure to supply us on a timely basis, could cause delays in our current and future capacity and adversely affect our business. Safety > Serious adverse events or other safety risks could require us to abandon development and preclude, delay or limit approval of our product candidates, limit the scope of any approved label or market acceptance, or cause the recall or loss of marketing approval of products that are already marketed.  Staffing > We have recently grown our business and will need to further increase the size and complexity of our organisation in the future, and we may experience difficulties in managing our growth and executing our growth strategy. > We depend upon our key personnel and our ability to attract and retain employees. Funding and Operational > We have significant and increasing liquidity needs and may require additional funding. > We are exposed to risks related to currency exchange rates. > We may acquire other companies which could divert our management’s attention, result in additional dilution to our shareholders and otherwise disrupt our operations and harm our operating results. > The UK’s vote in favour of withdrawing from the European Union and the result of the US presidential election could lead to increased market volatility which could adversely impact the market price of our ADSs and make it more difficult for us to do business in Europe or have other adverse effects on our business. > A significant portion of our cash and cash equivalents are held at a small number of banks. > The liquidity of our ADSs may have an adverse effect on share price. > The market price of our ADSs may be volatile. > Our largest shareholder owns a significant percentage of the share capital and voting rights of GW. > Substantial future sales of our ADSs in the public market, or the perception that these sales could occur, could cause the price of the ADSs to decline. > We incur significant increased costs as a result of operating as a Company whose ADSs are publicly traded in the US, and our management is required to devote substantial time to new compliance initiatives. > We may be classified as a passive foreign investment Company, or a PFIC, in any taxable year and US holders of our ordinary shares could be subject to adverse US federal income tax consequences. 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, and as such the Group does not enter into contracts for complicated or compound financial instruments. Further details are provided in note 21 to the financial statements. Credit Risk > The Group’s principal financial assets are cash and short-term cash equivalents. 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 acceptable credit ratings. > Trade receivables are concentrated in a small number of large customers with well-established relationships, where the risk and history of default is considered to be 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 90 days. 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 90 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 individual financial statements of each Group Company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group Company are expressed in Pounds Sterling. Exchange rate fluctuations between local currencies and the Pound Sterling create risk in several ways, including the following: – Weakening of the Pound Sterling may increase the Pound Sterling cost of overseas R&D expenses and the cost of sourced product components outside the UK; – Strengthening of the Pound Sterling may decrease the value of our revenues denominated in other currencies; – Exchange rates on non-Sterling transactions and cash deposits can distort our financial results; and – Commercial pricing and profit margins are affected by currency fluctuations. 07 GW Pharmaceuticals plc | Annual report and accounts 2017Strategic Report continued During the year the Group had exposure to US Dollars (“US$”), Euros (“€”) and Canadian Dollars (“CAD”). The Group’s policy is to maintain natural hedges, where possible, by matching revenue and receipts with expenditure. The Group continues to hold a large balance of US$, to match future anticipated US$-denominated expenditure on continuing pre-launch activities and our clinical trial programmes. Our Employees We aim to recruit, retain and motivate intelligent people who will share our passion for developing medicines that meet the needs of patients and who will strive to help us to achieve strategic aims. We recognise that the accumulated knowledge and experience of our staff is one of our greatest assets and we recognise and reward loyalty. Going Concern 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. Employee Consultation and Human Rights The Group places considerable value on the involvement of its employees. They are regularly briefed on the Group’s activities in Company-wide meetings and updates, and have regular opportunities to share their views with Executive Officers. Their contribution is a key element to the future success of the Group and accordingly, the majority of 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 23 to the financial statements. Equal opportunity is given to all employees regardless of their age, sex, colour, race, disability, religion or ethnic origin. The Group maintains and operates a Code of Conduct and Business Ethics called “i-CARE”. This sets out the Group’s approach to ensure that our corporate values are maintained throughout our global business through five main arms: > Integrity > Compliance > Accountability > Respect > Ethics As at 30 September 2017, 119 (2016: 102) of our staff have worked for the Group for more than five years. 57 (2016: 50) of these have been with us for more than 10 years. We seek to encourage staff retention by offering participation in staff share option schemes, bonus schemes and the GW Spirit Award scheme with which we reward those members of staff who have demonstrated exceptional achievements, innovative ideas, great teamwork and/or other praiseworthy achievements that go beyond the day-to-day requirements of their role. We recruit individuals who have the skills, experience and positive attitude needed to optimally perform the roles that we need in order to help us to drive our business forward. We recruit without regard to sex or ethnic origin, appointing and thereafter promoting staff based upon merit, positive attitude and success. The profile of the Group’s employees at 30 September 2017 was as follows: Male 30 September 2017 Female 30 September 2017 Total 30 September 2017 Number of persons who were Directors of the Company (including non-Executive) Number of persons who were Executive Officers of the Company Number of persons who were senior managers of the Company Number of persons who were employees of the Company 5 6 16 270 297 – – 9 280 289 5 6 25 550 586 This Code applies to all employees of GW companies, who are required to comply with this policy. Total employees at 30 September 2017 The Group considers that respecting human rights is a global standard of expected conduct for all business enterprises. The Group aims to comply with all applicable laws, especially health and safety, to prevent abuses of human rights. Regular dialogue is held between employees at each of the Group’s sites and senior management to ensure that any issues are identified and resolved. 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. Environmental Matters We have reported on all of the emission sources required under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. Our sources of emission relate principally to our growing and manufacturing facilities, the costs of which are included within our consolidated financial statements. We have responsibility for any emission sources where we bear the associated costs in our consolidated statements. We have used the Greenhouse Gas (“GHG”) Protocol Corporate Accounting and Reporting Standard (revised edition) data gathered to fulfil our requirements under the CRC Energy Efficiency scheme, and emission factors from UK Government’s GHG Conversion Factors for Company Reporting 2016. 08 GW Pharmaceuticals plc | Annual report and accounts 2017We have used the most recent evidence or estimates provided by our energy supply partners to generate our disclosure of emissions for the year ended 30 September 2017. These include the purchase of electricity, heat, steam or cooling. The annual quantity of emissions for the Group for 2017 was 2,417 tonnes of carbon dioxide (2016: 3,052 tonnes), produced by activities for which the Group is responsible. The Group considers that the intensity ratio of tonnes of carbon dioxide per employee is a suitable metric for its operations. This was 4.5 tonnes per head average (2016: 6.9 tonnes) for the year ended 30 September 2017. The Group actively looks to minimise indirect areas of emissions by encouraging remote working and promoting online conferencing facilities to reduce business-related travel and is actively exploring ways to reduce the light energy used in some of its plant growing facilities. As a business whose core activity starts with the growing of plants which are actively absorbing carbon dioxide, we have a natural carbon capture process within our business operations. We have not sought to quantify the extent to which this offsets the carbon footprint of our business but we take some comfort from the fact that this helps to mitigate the environmental impact of our business and we expect this to increase as the scale of our growing operations expands to meet future demand for our plant-derived medicines. This report was approved by the Board of Directors on 4 December 2017 and signed on its behalf by Adam George Company Secretary 4 December 2017 09 GW Pharmaceuticals plc | Annual report and accounts 2017Directors’ Report The Directors present their report and the consolidated financial statements for the Company and for the Group for the financial year ended 30 September 2017. The Company has chosen to set out some of the matters otherwise required by regulations made under section 416(4) of the Companies Act 2006 to be disclosed in the Strategic Report as the Directors consider they are of strategic importance to the Company. Principal Activities The principal activity of GW Pharmaceuticals plc (“GW”) is the development and commercialisation of prescription cannabinoid medicines, which address clear unmet patient needs. We are the global leader in the development of cannabinoid prescription medicines. Our lead product, Epidiolex® (cannabidiol) has achieved successful results in Phase 3 clinical development trials for treating rare and catastrophic forms of childhood-onset epilepsy. A regulatory New Drug Application (“NDA”) has been submitted to the US Federal Drug Administration (“FDA”), with filing expected in Europe in early 2018, in advance of commercial launch. Group Research and Development (“R&D”) Activities The R&D undertaken by the Group amounted to £111.2 million (2016: £99.8 million), all of which was expensed during the year. This included £0.5 million (2016: £3.8 million) of R&D expenditure which was carried out under contract for, and was fully funded by, our development partners. Results and Dividends The Consolidated Income Statement for the year is set out on page 38. The Group’s loss for the financial year after tax was £131.7 million (2016: £63.7 million). The Directors do not recommend the payment of a dividend (2016: £nil). Share Capital Information relating to changes to the issued share capital during the year is given in note 22 to the financial statements. The Group is funded principally by ordinary share capital and has no bank debt as at 30 September 2017 (2016: £nil). The Group had a fit out funding liability of £8.3 million at 30 September 2017 (2016: £9.2 million) and a finance lease liability of £5.0 million (2016: £5.2 million), reflecting funding provided by our landlords to fit out leased properties of a number of our manufacturing premises. 10 Substantial Shareholdings On 4 December 2017 the Company had been notified, in accordance with the Companies Act 2006, of the following interests in the ordinary share capital of the Company: Capital Research Global Investors Scopia Capital Management LP Prudential Plc Janus Price T Rowe Associates Inc FMR LLC Dr. Geoffrey W. Guy Blackrock Number of shares held Percentage 44,594,160 35,856,228 23,972,808 16,251,564 11,521,512 10,915,524 10,647,856 9,966,096 14.7 11.8 7.9 5.3 3.8 3.6 3.5 3.3 Directors and Their Interests The following Directors held office during the period: Dr Geoffrey W Guy Justin Gover Dr Stephen Wright (Resigned as Statutory Director on 13 February 2017) Adam George (Resigned as Statutory Director on 13 February 2017) Chris Tovey (Resigned as Statutory Director on 13 February 2017) Julian Gangolli (Resigned as Statutory Director on 13 February 2017) James Noble Thomas Lynch Cabot Brown The resignations on 13 February 2017 resulted from a decision taken by the Board to restructure Board membership to create an independent Director majority, consistent with US expectations of governance best practice. With the exception of Dr Stephen Wright, who has since retired from the role of Chief Medical Officer, each of the other Directors who stepped down from the Board continue to serve the Group in their capacity as Executive Officers of the Company. Details of the beneficial interests of Directors in the ordinary shares of the Company are disclosed within the Directors’ Remuneration Report on page 18. Details of the Directors’ share options and service contracts are shown in the Directors’ Remuneration Report. In accordance with the Articles of Association of the Company, Justin Gover will retire by rotation at the forthcoming Annual General Meeting (“AGM”) and, being eligible, offer himself for re-election. GW Pharmaceuticals plc | Annual report and accounts 2017Annual General Meeting The AGM will be held in London in March 2018. Further details will be provided to shareholders in early 2018. Auditor 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 auditor 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 section 418 of the Companies Act 2006. The Audit Committee has recommended the reappointment of the Group’s existing auditor, Deloitte, which will be proposed at the forthcoming AGM. By order of the Board Adam George Company Secretary 4 December 2017 11 GW Pharmaceuticals plc | Annual report and accounts 2017Directors’ Remuneration Report The information provided in this part of the Directors’ Remuneration Report is not subject to audit. Our approach to remuneration: The Group remuneration policy for Executive Directors aims to: Remuneration Committee Chairman’s Annual Statement Dear Shareholder On behalf of the Board I am pleased to present the Remuneration Committee’s report for the financial year ended 30 September 2017. Following another year of excellent corporate progress I would like to take this opportunity to provide you with an overview of the Remuneration Committee’s major decisions taken during 2017, together with the context in which these decisions were taken. We were pleased to receive a high level of shareholder voting support at the Annual Genera Meeting (“AGM”) in March 2017, with over 83% of proxy voting in support of the resolution to adopt the 2016 Remuneration Report. We remain confident that, for 2018, the Policy remains appropriate for the business and therefore only minor changes to the Policy are proposed at the forthcoming AGM in March 2018. Context of the Committee’s Decisions in 2016 2017 has been another year of excellent progress towards the successful execution of the Board’s strategy. Following the successful completion of a series of successful Epidiolex® Phase 3 clinical studies in 2016 the Directors and Executive Officers have successfully led the GW Pharmaceuticals plc (“GW”) team to complete the submission of an Epidiolex® New Drug Application (“NDA”) to the Food and Drug Administration (“FDA”) in October 2017. The team continue to work on preparations for Epidiolex® approval and US launch in 2018. Looking forwards, 2018 is likely to be demanding but has the potential to continue to create significant shareholder value if executed successfully. It is in this context that the committee have made our major decisions during 2017. We have been able to reward success via the 2016 short-term bonus incentive award paid in February 2017 and by approving, in August 2017, the vesting of 100% of the Long Term Incentive Plan (“LTIP”) options granted in August 2014. We have taken action to retain the Directors and Executive Officers by making additional LTIP option awards and we have sought to align their remuneration incentives with the key value drivers for the business by linking the vesting of the majority of these awards to the successful filing of an NDA with the FDA and achievement of a US marketing approval for Epidiolex®. The Remuneration Committee In accordance with best practice, the GW remuneration committee, consisting of independent non-executive Directors under my Chairmanship, manages the remuneration of the Executive Directors within the framework of the shareholder approved Policy and shareholder approved LTIP option scheme rules. 12 > align the interests of Executive Directors with those of shareholders; > 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 short-term and long-term performance through the award of incentives via participation in the Group’s cash and equity- based incentive schemes; > provide post-retirement benefits through defined contribution pension schemes; and > provide employment-related benefits including the provision of life assurance and medical assurance. I believe that these aims, which remain unchanged from previous years, have been working well, continue to be relevant and provide a firm framework within which future remuneration will be determined. The shareholder approved Policy provides a set of parameters within which we work whilst still allowing the remuneration committee sufficient flexibility to adapt remuneration packages in line with the development of the business. This should allow the Company to attract, retain and motivate Directors and Executive Officers with the skills, talent and motivation to deliver upon our strategy and to continue to create value for our shareholders. Key Remuneration Committee Activities in 2017: During 2017 the Remuneration Committee’s key activities have been as follows: > At the start of the 2017 financial year we engaged Willis Towers Watson as independent advisers to benchmark the remuneration of the Directors against the selected peer group and to provide recommendations for basic salaries, LTIP awards and the structure of bonus incentive awards for the year. > In January 2017, in line with inflationary increases given to the majority of GW staff, the Executive Directors were given an inflationary basic salary increase of 3%, effective from 1 January 2017. > In February 2017, the Remuneration Committee met to consider the extent of achievement of 2016 calendar year objectives by the Executive Team and to determine the level of short-term bonus incentive award to be paid in respect of the 2016 calendar year. The consensus was that 2016 had been a very successful year with significant progress having been made against the majority of the objectives that had been agreed at the start of 2016. The consensus reached by the committee was that each member of the Executive Team should receive a short-term incentive bonus award, in respect of achievements in the 2016 calendar year, equivalent to 100% of their 2016 basic salary. > At the same time, the Remuneration Committee approved the objectives to be achieved by the Executive Directors during 2017. These are considered to be commercially sensitive and will not be disclosed here in detail but are primarily linked to scale up of Epidiolex® manufacturing capability, inspection readiness and NDA filing with FDA. These are considered by GW Pharmaceuticals plc | Annual report and accounts 2017the Remuneration Committee to be the key value drivers for the business and therefore represent the optimum objectives for Executive Team incentive schemes to be based upon in 2017. > In February 2017, the Remuneration Committee met and agreed the terms of the 2017 grant of LTIP awards to the Directors and Executive Officers. These were segmented so that: – 50% of the value of the award is linked to specific performance conditions which must be achieved in the three-year vesting period. Half of the share options will vest upon receipt from the FDA of their confirmation of acceptance of an Epidiolex® NDA filing, and half will vest upon the FDA grant of Epidiolex® regulatory approval; – 25% of the value of the award is in the form of market- priced share options with a three-year vesting period; and – 25% of the value of the award took the form of restricted Acadia Pharmaceuticals Inc., Agios Pharmaceuticals Inc., Alder Biopharmaceuticals Inc., Alnylam Pharmaceuticals Inc., Bluebird Bio Inc., Clovis Oncology, Inc.,Intercept Pharmaceuticals Inc., Juno Therapeutics Inc.,Neurocrine Biosciences Inc., Pacira Pharmaceuticals Inc., Portola Pharmaceuticals Inc., Puma Biotechnology Inc., Radius Health Inc., Sage Therapeutics Inc., Sarepta Therapeutics Inc., Spark Therapeutics, Inc., Tesaro Inc. and Ultragenyx Pharmaceuticals Inc. Looking forwards we expect that the committee will meet in January 2018 to consider: > Short-term bonus incentives payable in respect of performance objectives achieved by the Executive Team in the 2017 calendar year; stock options which vest at the rate of 25% per annum over a four-year vesting period. > Potential changes to 2018 basic salaries; and > Performance objectives to be used for 2018 short-term bonus incentives during 2018. On the pages that follow I welcome the opportunity to set out the Remuneration Policy that we propose to use for determining Directors’ remuneration for the next three years. We will seek shareholder approval of this policy at the Annual General Meeting on 14 March 2018. The Policy was last approved by shareholders in 2015. As you will see, the proposed changes from the previously approved policy are minor and are explained within the “Changes to Policy” column of the table. We believe that the Policy set out on the following pages gives the Remuneration Committee transparent powers to implement appropriate incentive rewards, in line with US market practice, enabling us to continue to maintain appropriate remuneration for the existing Executive and non-executive Directors as they work to continue the success of the Company. Thomas Lynch Remuneration Committee Chairman 4 December 2017 The selected performance conditions that are required to be achieved in order to trigger vesting of 50% of this award are again considered to be directly linked to key business value drivers creating alignment with shareholders’ interests. The restricted stock option element of the award is considered to encourage long-term retention, considered to be a key factor critical to future success, and the market priced options are intended to align further the interests of the Executive Directors with shareholders’ interests. At the grant date these awards had expected values at grant equivalent to 500% of basic salary for the Chief Executive, 400% of basic salary for President, North America and 300% for the Chief Financial Officer and Chief Operations Officer. A similar equity incentive award to the Executive Chairman was granted in August 2017. This grant, with an expected value at grant equating to 350% of basic salary was structured identically to the grants made to other Executive Directors in February. > In March 2017 the members of the Remuneration Committee attended the AGM in order to make themselves available to answer shareholder questions about remuneration policy and to receive feedback from shareholders represented at the meeting. > Between March and September the remuneration committee met on multiple occasions to consider and approve the remuneration packages to be offered to the new Chief Financial Officer, the new Chief Medical Officer and the new Chief Legal Officer. In each case we were able to construct a remuneration offer that enabled us to successfully recruit talented individuals to these roles who have the skills and experience necessary to help to advance the Company through its next phase of growth. > Since 30 September, in preparation for the end of 2017 remuneration review the remuneration committee have again engaged Willis Towers Watson as independent consultants to advise the Committee. As the Company continues to grow in size and complexity, the Committee requested that Willis Towers Watson reviewed the peer group of comparable US-listed biotech/pharmaceutical development companies. The latest peer group consists of: 13 GW Pharmaceuticals plc | Annual report and accounts 2017Directors’ Remuneration Report continued Annual Report on Remuneration The information provided in this part of the Directors’ Remuneration Report is subject to audit. Single Total Figure of Remuneration for Each Director The Directors received the following remuneration for the year ended 30 September 2017: Name of Director Executive Dr Geoffrey W Guy Justin Gover Adam George3 Dr Stephen Wright3 Chris Tovey3 Julian Gangolli3 Non-executive James Noble Cabot Brown Thomas Lynch1 Salary and fees £ Taxable benefits £ Short-term incentives £ Long-term incentive plans2 £ Pension contributions £ 2017 total £ 421,027 406,765 79,957 94,954 83,985 135,565 69,600 68,181 – 11,878 38,393 5,951 6,874 6,008 1,350 355,603 362,329 198,248 243,564 215,234 324,830 837,415 787,350 411,546 506,492 446,804 316,955 18,228 1,644,151 1,610,329 15,492 705,864 10,162 864,369 12,485 763,064 11,033 790,095 11,395 – – – – – – – – – – – – 69,600 68,181 – Aggregate emoluments 1,360,034 70,454 1,699,808 3,306,562 78,795 6,515,653 1 Since his appointment as a non-executive Director in July 2010, Thomas Lynch has waived his right to receive fees, taxable benefits, short-term incentives and pension contributions for this role. 2 LTIP gains represent the unrealised gains on LTIPs that vested during the year ended 30 September 2017, calculated according to the share price at the date of vesting. These gains have not been realised by 30 September 2017 as the Directors have not exercised or sold these LTIPs. 3 The indicated Directors resigned their Statutory Directorships on 13 February 2017. All remained in employment with the Company until 30 September 2017, but no longer constitute voting Board members. In respect of their post-Directorship periods, not included in the table above, Adam George received a total of £172,425, Dr Stephen Wright received £131,066, Chris Tovey received £172,523 and Julian Gangolli received £196,311. The Directors received the following remuneration for the year ended 30 September 2016: Name of Director Executive Dr Geoffrey W Guy Justin Gover Adam George Dr Stephen Wright Chris Tovey Julian Gangolli Non-executive James Noble Cabot Brown Thomas Lynch1 Salary and fees £ Taxable benefits £ Short-term incentives £ Long-term incentive plans2 £ Pension contributions £ 2016 total £ 353,860 311,921 197,276 242,370 214,179 274,997 63,500 51,294 – 28,475 32,852 17,699 20,180 17,817 1,159 167,342 3,127,209 146,720 2,585,049 93,293 1,734,260 114,618 2,130,678 101,287 1,882,849 53,666 72,658 3,731,302 54,416 52,993 3,129,535 30,337 2,072,865 2,547,676 39,830 2,251,330 35,198 404,144 1,664 – – – – – – – – – – – – 63,500 51,294 – Aggregate emoluments 1,709,397 118,182 695,918 11,513,711 214,438 14,251,646 Since his appointment as a non-executive Director in July 2010, Thomas Lynch has waived his right to receive remuneration for this role. 1 2 LTIP gains represent the unrealised gains on LTIPs that vested during the year ended 30 September 2016, calculated according to the share price at the date of vesting. These gains have not been realised by 30 September 2016 as the Directors have not exercised or sold these LTIPs. 14 GW Pharmaceuticals plc | Annual report and accounts 2017Long-Term Incentive Awards Vesting During the Financial Year On 12 August 2017 the vesting period for the 2014 LTIP award ended. The vesting of this award was linked to continuing employment with the Company throughout the vesting period. The intrinsic value of these vested options has been included in the 2017 remuneration table above based on the share price at the vesting date of £6.53 per ordinary share. On 24 June 2017 the vesting period for the second tranche of the Restricted Stock Option (RSO) LTIPs awarded during 2015 ended. The vesting of this award was linked to continuing employment with the Company throughout the vesting period. The intrinsic value of these vested options has been included in the 2017 remuneration table above based on the share price at the vesting date of £6.80 per ordinary share. On 15 February 2017 the vesting period for the first tranche of the Restricted Stock Option (RSO) LTIPs awarded during 2016 ended. The vesting of this award was linked to continuing employment with the Company throughout the vesting period. The intrinsic value of these vested options has been included in the 2017 remuneration table above based on the share price at the vesting date of £8.93 per ordinary share. Long-Term Incentive Awards Granted to the Directors and Executive Officers in 2017 Directors and Executive Officers are awarded LTIPs at the discretion of the remuneration committee. Awards are typically calculated with reference to the closing mid-market ordinary share price of the Company’s ordinary shares on the day prior to grant. During periods of volatility, the price used to determine award size is determined by reference to the average closing mid-market ordinary share price of the previous five trading days. Following the completion of the review of the Group’s remuneration strategy, the Directors and Executive Officers were awarded options to subscribe for the Company’s ordinary shares split into three different types of options: > market-priced options, whereby the options have an exercise price equivalent to the market price at market close on the day prior to grant; > performance stock options, whereby the options will vest upon the third anniversary of the date of grant subject to certain corporate performance conditions having been achieved; and > restricted stock options, whereby the options are subject to a four-year service condition and vesting period. 25% of the options will vest on the each anniversary of the date of grant over the four-year period. In general, the awards may be exercised at any time between the vesting date and the 10th anniversary of the date of grant. Our US-based Directors and Executive Officers will be required to exercise their performance stock and restricted stock options before 15 March of the year following the year of vesting. The exercise price of the performance stock options and restricted stock options is 0.1p per ordinary share, being the par value of the shares. Awards which do not vest at the end of the vesting period will lapse permanently. The Company’s share options are traded on NASDAQ as American Depositary Shares (“ADS”), for which twelve ordinary shares equate to one ADS. The table below sets out the LTIPs awarded in the year to 30 September 2017 to Directors: Granted Value at date of grant Valuation method Exercise price Performance period end Date of expiry % of award vesting for minimum performance Name of Director Justin Gover Market-priced options 142,344 542,046 Fair value Performance stock options Restricted stock options year 1 – 25% Restricted stock options year 2 – 25% Restricted stock options year 3 – 25% Restricted stock options year 4 – 25% 233,568 1,860,953 Face value 139,567 Face value 139,567 Face value 139,567 Face value 139,567 Face value 17,517 17,517 17,517 17,517 792.4p ($117.74 per ADS) 0.1p 0.1p 0.1p 0.1p 0.1p 06/01/2020 06/01/2027 100% 06/01/2020 06/01/2018 06/01/2019 06/01/2020 06/01/2021 15/03/2021 15/03/2019 15/03/2020 15/03/2021 15/03/2022 0% 100% 100% 100% 100% 15 GW Pharmaceuticals plc | Annual report and accounts 2017Directors’ Remuneration Report continued Granted Value at date of grant Valuation method Exercise price Performance period end Date of expiry % of award vesting for minimum performance Name of Director Dr Geoffrey W Guy Market-priced options 138,672 563,979 Fair value Performance restricted stock units Restricted stock units year 1 – 25% Restricted stock units year 2 – 25% Restricted stock units year 3 – 25% Restricted stock units year 4 – 25% 204,552 1,343,129 Face value 100,699 Face value 100,699 Face value 100,699 Face value 100,699 Face value 15,336 15,336 15,336 15,336 Chris Tovey Market-priced options 52,560 200,148 Fair value Performance restricted stock units Restricted stock units year 1 – 25% Restricted stock units year 2 – 25% Restricted stock units year 3 – 25% Restricted stock units year 4 – 25% 86,244 6,468 6,468 6,468 6,468 687,149 Face value 51,534 Face value 51,534 Face value 51,534 Face value 51,534 Face value Adam George Market-priced options 52,560 200,148 Fair value Performance restricted stock units Restricted stock units year 1 – 25% Restricted stock units year 2 – 25% Restricted stock units year 3 – 25% Restricted stock units year 4 – 25% 86,244 6,468 6,468 6,468 6,468 687,149 Face value 51,534 Face value 51,534 Face value 51,534 Face value 51,534 Face value Julian Gangolli Market-priced options 87,660 333,809 Fair value Performance restricted stock units Restricted stock units year 1 – 25% Restricted stock units year 2 – 25% Restricted stock units year 3 – 25% Restricted stock units year 4 – 25% 143,832 1,145,981 Face value 85,953 Face value 85,953 Face value 85,953 Face value 85,953 Face value 10,788 10,788 10,788 10,788 645.6p ($100.52 per ADS) 0.1p 0.1p 0.1p 0.1p 0.1p 792.4p ($117.74 per ADS) 0.1p 0.1p 0.1p 0.1p 0.1p 792.4p ($117.74 per ADS) 0.1p 0.1p 0.1p 0.1p 0.1p 792.4p ($117.74 per ADS) 0.1p 0.1p 0.1p 0.1p 0.1p 10/08/2020 10/08/2027 100% 10/08/2020 10/08/2018 10/08/2019 10/08/2020 10/08/2021 10/08/2027 10/08/2027 10/08/2027 10/08/2027 10/08/2027 0% 100% 100% 100% 100% 06/01/2020 06/01/2027 100% 06/01/2020 06/01/2018 06/01/2019 06/01/2020 06/01/2021 06/01/2027 06/01/2027 06/01/2027 06/01/2027 06/01/2027 0% 100% 100% 100% 100% 06/01/2020 06/01/2027 100% 06/01/2020 06/01/2018 06/01/2019 06/01/2020 06/01/2021 06/01/2027 06/01/2027 06/01/2027 06/01/2027 06/01/2027 0% 100% 100% 100% 100% 06/01/2020 06/01/2027 100% 06/01/2020 06/01/2018 06/01/2019 06/01/2020 06/01/2021 15/03/2021 15/03/2019 15/03/2020 15/03/2021 15/03/2022 0% 100% 100% 100% 100% The vesting of the above awards is subject to the following performance conditions. Grant Relating to Justin Gover, Chris Tovey, Adam George and Julian Gangolli 25% of the awards are in the form of market-priced options, whereby the options have an exercise price equivalent to the market price at market close on the day prior to grant ($117.74 per ADS, equivalent to 792p per ordinary share). These options become exercisable on the third anniversary of the date of grant. Future gains upon exercise of these options will be linked to the extent of share price growth over the vesting period. The committee consider that this element of the awards will help to ensure continuing alignment between Executive and shareholders’ interests. The Black Scholes option pricing model was used to derive the fair values. 16 GW Pharmaceuticals plc | Annual report and accounts 201750% of the awards are in the form of performance stock options, whereby the options will vest upon the third anniversary of the date of grant subject to certain corporate performance conditions having been achieved. In this case, vesting of half of the performance stock options will occur upon receipt from FDA of their confirmation of acceptance of an Epidiolex® NDA filing and half will vest upon FDA grant of Epidiolex® regulatory approval. The Remuneration Committee considers these particular milestones to be important elements of our agreed strategy and the key value drivers for the business at this time. Each option has a face value equal to 797p, the share price on the date of grant. 25% of the awards are in the form of restricted stock options whereby these options are subject to a four-year service condition and vesting period. 25% of the options will vest on each anniversary of the date of grant over the next four years. The committee consider that this element of the awards should help to ensure retention of our team of Executive Directors, a key factor for GW’s future success. Each option has a face value equal to 797p, the share price on the date of grant. Grant Relating to Dr Geoffrey W Guy 25% of the awards are in the form of market-priced options, whereby the options have an exercise price equivalent to the market price at market close on the day prior to grant ($100.52 per ADS, equivalent to 646p per ordinary share). These options become exercisable on the third anniversary of the date of grant. Future gains upon exercise of these options will be linked to the extent of share price growth over the vesting period. The Remuneration Committee consider that this element of the awards will help to ensure continuing alignment between executive and shareholders’ interests. 50% of the awards are in the form of performance stock options, whereby the options will vest upon the third anniversary of the date of grant subject to certain corporate performance conditions having been achieved. In this case, vesting of the performance stock options will occur upon FDA grant of Epidiolex® regulatory approval. The Remuneration Committee considers this milestone to be an important element of our agreed strategy and the key value driver for the business at this time. Each option has a face value equal to 657p, the share price on the date of grant. 25% of the awards are in the form of restricted stock options whereby these options are subject to a four year service condition and vesting period. 25% of the options will vest on each anniversary of the date of grant over the next four years. The Remuneration Committee consider that this element of the awards should help to ensure retention of our team of executive Directors and Officers, a key factor for the Company’s future success. Each option has a face value equal to 657p, the share price on the date of grant. Long-Term Incentive Awards Granted to the Non-Executive Directors in 2017 The Policy, approved by shareholders in March 2015, allows the grant of LTIP awards to the non-executive Directors. During January 2017, the executive members of the Board met to discuss and approve the latest such award. The table below sets out the LTIPs awarded in the year to 30 September 2017 to non-executive Directors: Granted Value at date of grant Valuation method Exercise price Performance period end Date of expiry % of award vesting for minimum performance Name of Director James Noble Market-priced options 18,636 70,966 Fair value Restricted stock options 9,168 73,046 Face value Cabot Brown Market-priced options 18,636 70,966 Fair value Restricted stock options 9,168 73,046 Face value Thomas Lynch Market-priced options 18,636 70,966 Fair value Restricted stock options 9,168 73,046 Face value 792.4p ($117.74 per ADS) 0.1p 792.4p ($117.74 per ADS) 0.1p 792.4p ($117.74 per ADS) 0.1p 06/01/2020 06/01/2027 100% 06/01/2020 06/01/2027 100% 06/01/2020 06/01/2027 100% 06/01/2020 15/03/2021 100% 06/01/2020 06/01/2027 100% 06/01/2020 06/01/2027 100% 17 GW Pharmaceuticals plc | Annual report and accounts 2017Directors’ Remuneration Report continued 50% of the awards are in the form of market-priced options, whereby the options have an exercise price equivalent to the market price at market close on the day prior to grant ($117.74 per ADS, equivalent to 792p per ordinary share). These options become exercisable on the third anniversary of the date of grant. Future gains upon exercise of these options will be linked to the extent of share price growth over the vesting period. The committee consider that this element of the awards will help to ensure continuing alignment between Executive and shareholders’ interests. The Black-Scholes option pricing model was used to derive the fair values. 50% of the awards are in the form of restricted stock options whereby these options are subject to a three-year service condition and vesting period. 100% of the options will vest on the third anniversary of the date of grant. The committee consider that this element of the awards should help to ensure retention of our team of non-executive Directors, a key factor for GW’s future success. Each option has a face value equal to 797p, the share price on the date of grant. In structuring these grants, the Directors were mindful of best practice advice received from Willis Towers Watson whereby the award of options with vesting linked to performance is considered to have the potential to impair the independence of the non-executive members of the Board. It is for this reason that the vesting of awards is not linked to specific future performance conditions. In accordance with the equity retention policy the non-executives will generally be required to retain their options for as long as they continue to serve as a non-executive Director. However, vested awards must be exercised by the 10th anniversary of the date of grant. Also, in the event that vesting triggers a tax liability, the option holders may seek prior approval to exercise and dispose of sufficient shares to cover the tax liability. Statement of Directors’ Shareholding and Share Interests The table below shows, for each Director, the total number of ordinary shares owned, the total number of share options with and without performance conditions, those vested but unexercised and those exercised during the year. Details of the share retention policy applicable to the Directors is set out on page 27. Name of Director Executive Dr Geoffrey W Guy Justin Gover Adam George4 Dr Stephen Wright4 Chris Tovey4 Julian Gangolli4 Non-executive James Noble Cabot Brown Thomas Lynch Nominal-cost options: Unvested with performance measures Unvested without performance measures2 Shares owned1 Vested not yet exercised3 Exercised during the Year 10,647,856 679,938 780,414 2,513,759 262,929 27,617 217,071 4,359 278,069 2,501 650,867 26,892 548,611 613,891 207,993 159,175 219,093 502,410 128,053 108,968 507,572 106,954 68,734 – 440,388 372,816 – 569,052 266,557 48,624 27,500 7,200 – – – – 110,405 110,405 110,405 – – – – – – 1 This comprises the Directors’ holding of ordinary shares as at 30 September 2017. Further details are given in the table below. 2 Unvested awards in this column are solely subject to a service performance requirement, which the regulations treat differently from other types of performance measure. 3 This includes vested share options, LTIPs and vested shares held in trust under the GW Pharmaceuticals All Employee Share Scheme. Further details are given in the table below. 4 The indicated Directors resigned from their Statutory Directorships on 13 February 2017. They remain in employment with the Company, but no longer constitute voting Board members Note: Each NASDAQ listed ADS represents 12 ordinary 0.1 pence shares. 18 GW Pharmaceuticals plc | Annual report and accounts 2017The table below shows the total number of Directors’ interests in the ordinary shares of GW Pharmaceuticals plc: Name of Director Executive Dr Geoffrey W Guy1 Justin Gover2 Adam George3 Dr Stephen Wright3 Chris Tovey3 Julian Gangolli3 Non-executive James Noble Cabot Brown Thomas Lynch Ordinary shares of 0.1p 30 September 2017 Ordinary shares of 0.1p 30 September 2016 10,647,856 2,513,759 27,617 4,359 2,501 26,892 13,797,852 2,513,759 27,617 5,915 2,500 – 27,500 7,200 – 27,500 7,200 2,074 Justin Gover’s holding includes 2,143,314 ordinary shares held by The Gover Family Investment LLP, of which Justin owns 99% and the remaining 1% is held by his wife. 1 Dr Geoffrey Guy’s holding includes 523,925 ordinary shares held by his personal pension plan. 2 3 The indicated Directors resigned their Directorships on 13 February 2017. Note: Each NASDAQ listed ADS represents 12 ordinary 0.1 pence shares. The interests of the Directors in share options over the ordinary shares of the Company as at 30 September 2017 were: Name of Director Geoffrey Guy At 1 Oct 2016 11 440,397 82,639 69,202 9,740 9,740 9,740 129,869 9,740 182,171 25,914 25,914 25,914 345,517 25,914 – – – – – – Granted Exercised Lapsed At 30 Sep 2017 Nominal value Exercise price Date of vesting Date of expiry – – – (440,388) – – – – – – – – – – – – – – – – – – – – – – – – – – – 138,672 – 15,336 – 15,336 – 15,336 – 15,336 – 204,552 – – – – – – – – – – – – – – – – – – – – – 11 9 82,639 69,202 9,740 9,740 9,740 129,869 9,740 182,171 25,914 25,914 25,914 345,517 25,914 138,672 15,336 15,336 15,336 15,336 204,552 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 671.0p 0.1p 0.1p 0.1p 0.1p 0.1p 257.0p 0.1p 0.1p 0.1p 0.1p 0.1p 645.6p 0.1p 0.1p 0.1p 0.1p 0.1p 06/06/2015 24/09/2016 12/08/2017 24/06/2018 24/06/2016 24/06/2017 24/06/2018 24/06/2018 24/06/2019 15/02/2019 15/02/2017 15/02/2018 15/02/2019 15/02/2019 15/02/2020 10/08/2020 10/08/2018 10/08/2019 10/08/2020 10/08/2021 10/08/2020 06/06/2022 24/09/2023 12/08/2024 24/06/2025 24/06/2025 24/06/2025 24/06/2025 24/06/2025 24/06/2025 15/02/2026 15/02/2026 15/02/2026 15/02/2026 15/02/2026 15/02/2026 10/08/2027 10/08/2027 10/08/2027 10/08/2027 10/08/2027 10/08/2027 Total 1,392,422 404,568 (440,388) – 1,356,602 19 GW Pharmaceuticals plc | Annual report and accounts 2017 Directors’ Remuneration Report continued Granted Exercised Lapsed At 30 Sep 2017 Nominal Value Exercise Price Date of Vesting Date of Expiry Name of Director Justin Gover At 1 Oct 2016 362,144 67,955 75,874 10,679 10,679 10,679 142,391 10,679 213,245 30,334 30,334 30,334 404,455 30,334 – – – – – – – (362,144) – – – – (10,672) – – – – – – – – – – – – – – – – – – – – – – 142,344 – 17,517 – 17,517 – 17,517 – 17,517 – 233,568 – – – (7) – – – – – – – – – – – – – – – – – 67,955 75,874 – 10,679 10,679 142,391 10,679 213,245 30,334 30,334 30,334 404,455 30,334 142,344 17,517 17,517 17,517 17,517 233,568 Total James Noble Total Cabot Brown Total Thomas Lynch Total 1,430,116 445,980 (372,816) (7) 1,503,273 68,122 14,479 – – 82,601 68,122 14,479 – – 82,601 68,122 14,479 – – 82,601 – – 18,636 9,168 27,804 – – 18,636 9,168 27,804 – – 18,636 9,168 27,804 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 68,122 14,479 18,636 9,168 110,405 68,122 14,479 18,636 9,168 110,405 68,122 14,479 18,636 9,168 110,405 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 0.1p 671.0p 0.1p 0.1p 0.1p 0.1p 0.1p 257.0p 0.1p 0.1p 0.1p 0.1p 0.1p 792.4p 0.1p 0.1p 0.1p 0.1p 0.1p 383.0p 0.1p 792.4p 0.1p 383.0p 0.1p 792.4p 0.1p 383.0p 0.1p 792.4p 0.1p 24/09/2016 12/08/2017 24/06/2018 24/06/2016 24/06/2017 24/06/2018 24/06/2018 24/06/2019 15/02/2019 15/02/2017 15/02/2018 15/02/2019 15/02/2019 15/02/2020 06/01/2020 06/01/2018 06/01/2019 06/01/2020 06/01/2021 06/01/2020 24/09/2023 12/08/2024 24/06/2025 24/12/2016 24/12/2017 24/12/2018 24/12/2018 24/12/2019 15/02/2026 15/08/2017 15/08/2018 15/08/2019 15/08/2019 15/08/2020 06/01/2027 15/03/2019 15/03/2020 15/03/2021 15/03/2022 15/03/2021 29/12/2018 29/12/2018 06/01/2020 06/01/2020 29/12/2025 29/12/2025 06/01/2027 06/01/2027 29/12/2018 29/12/2018 06/01/2020 06/01/2020 29/06/2019 29/06/2019 06/01/2027 15/03/2021 29/12/2018 29/12/2018 06/01/2020 06/01/2020 29/12/2025 29/12/2025 06/01/2027 06/01/2027 During the year 1,697,437 options (2016: 1,729,792) over ordinary shares were exercised. The average exercise price for the year ended 30 September 2017 was £0.001 (2016: £0.36) and the average market price per US-listed ADR, each equivalent to 12 Ordinary shares and denominated in US Dollars, at date of exercise was $114.11 (2016: $70.84), resulting in a notional gain at exercise of £12,975,713 (2016: £6,452,124). The market price of the Company’s US-listed ADRs as at 30 September 2017 was $101.49 (2016: $132.73) and the range during the year was $94.14 to $134.02 (2016: $36.67 to $132.73). 20 GW Pharmaceuticals plc | Annual report and accounts 2017Illustration of Total Shareholder Return The information provided in this part of the Directors’ Remuneration Report is not subject to audit. The graph below shows the Company’s performance, measured by total shareholder return, for the ADSs listed on NASDAQ as compared to the NASDAQ Biotech Index (“NASDAQ BTI”). GW’s ADSs are a constituent of the NASDAQ BTI, so this is considered to be the most suitable comparator index. Total shareholder return_ADR (£000s) ) £ ( e u a V l 1750 1500 1250 1000 750 500 250 0 31 Mar 13 30 Sep 13 31 Mar 14 30 Sep 14 31 Mar 15 30 Sep 15 31 Mar 16 30 Sep 16 31 Mar 17 30 Sep 17 n GW Pharmaceuticals plc ADR n Nasdaq Biotech Index This graph shows the daily movements to 30 September 2017 of £100 invested in GW Pharmaceuticals plc ADRs on 1 May 2013 compared with the value of £100 invested in the Nasdaq Biotech Index. Chief Executive Officer Total Remuneration History The table below sets out total remuneration details for the Chief Executive Officer. Year 2017 2016 2015 2014 2013 2012 2011 2010 2009 1 This total includes unrealised gains on share options vesting in each of the financial years shown above. CEO Single Figure of Total Remuneration1 1,610,329 3,129,535 1,295,928 1,390,235 482,084 586,171 541,294 535,325 354,871 Short-Term Incentive Pay-out Against Maximum Long-Term Incentive Vesting Rates Against Maximum Opportunity 100% 48% 50% 100% 35% 50% 30% 70% 23% 100% 100% 50% 100% 50% 100% 100% 100% 100% 21 GW Pharmaceuticals plc | Annual report and accounts 2017 Directors’ Remuneration Report continued The table below shows the percentage change in remuneration of the Chief Executive Officer and the Company’s employees as a whole between 2016 and 2017. Basic salary Taxable benefits Short-term incentives Percentage increase in remuneration in 2017 compared with remuneration in 2016 CEO % All employees % 21 17 147 3 33 44 The employee comparator Group comprises employees in the UK and the US. We consider this to be an appropriate comparator Group because it is representative of the Group and the employee populations are well balanced in terms of seniority and demographics. To provide a meaningful comparison of salary increases, a consistent employee comparator Group is used by which the same individuals appear in the 2016 and 2017 Group. Relative Importance of Spend on Pay The committee has determined that total expenditure is the most relevant comparator for staff costs of the Group. Dividend distribution and share buy-back comparators have not been included as the Group has no history of such transactions. The graph below shows the Group actual staff costs as compared to total expenditure for the last two financial years and illustrates the year-on-year growth in both. Staff costs continue to grow faster than total spend as, in addition to headcount growth we have been expanding our manufacturing and commercialisation team headcount in preparation for future commercialisation of Epidiolex®. Relative Importance of Spend on Pay (£000s) 120,000 100,000 80,000 60,000 40,000 20,000 0 +11% n 2016 n 2017 +38% Total expenditure Staff costs Proposed Application of the Remuneration Policy for the Year Ended 30 September 2017 Executive Directors’ remuneration packages are considered annually and comprise a number of elements, as follows: i) Fixed Elements of Remuneration Fixed elements of remuneration including basic salary, pension contributions and other benefits will be set and paid in accordance with our Remuneration Policy. Any changes to salary will be considered in the context of a number of factors including the annual peer Group based benchmarking exercise carried out for the remuneration committee by Willis Towers Watson, home-market location, any changes to executive responsibilities since the last review and broader employee increases. ii) Short-Term Incentive We anticipate that the remuneration committee will meet in January 2018 to assess Director performance for the calendar year ended 31 December 2017. Based upon this assessment and in accordance with the Remuneration Policy Report below, the remuneration committee may award a cash bonus payment to each Director. The level of award will depend upon the extent of achievement of strategic objectives that were set by the remuneration committee in 2017. These included specific objectives linked to what were considered, at the date that these were established, to be the key value drivers for the business and which included progress with our Epidiolex® NDA process and clinical development programme, pipeline development activities, operational and business development objectives, financial position and equity valuation. 22 GW Pharmaceuticals plc | Annual report and accounts 2017At the date of signing of this report, objectives for the 2018 calendar year have not yet been set. It is anticipated that details pertaining to the performance targets will comprise commercially sensitive information. However, to the extent that this is not the case, targets will be disclosed in next year’s report. iii) Long-Term Incentive Plan The June 2015 LTIP award will vest on 24 June 2018. This is award is divided into a number of tranches: > 25% of the awards are in the form of market-priced options, whereby the options have an exercise price equivalent to the market price at market close on the day prior to grant ($127.26 per ADS). These options become exercisable on the third anniversary of the date of grant. > 50% of the awards are in the form of performance stock options, whereby the options will vest upon the third anniversary of the date of grant subject to certain corporate performance conditions having been achieved. – Vesting of half of the performance stock options will occur upon receipt from FDA of their confirmation of acceptance of an Epidiolex® NDA filing. – Vesting of half of the performance stock options will occur upon FDA grant of Epidiolex® regulatory approval. > 25% of the awards are in the form of restricted stock options whereby these options are subject to a four-year service condition and vesting period. 25% of the options will vest on each anniversary of the date of grant over the next four years. It is expected that 100% of the LTIP awards will vest on 24 June 2018. Long-term incentive awards for 2018, to be determined by the remuneration committee in January 2018, will be informed by the peer group benchmarking data provided to the committee by Willis Towers Watson and vesting will be linked to share price performance and/or subject to appropriate performance objectives linked to value drivers for the business. Details of the 2018 LTIP awards to Directors and Executive Officers will be disclosed upon grant and in next year’s Annual Report. iv) Non-Executive Director Fees and Equity-Based Incentives We do not expect the level of cash-based fees to change during 2018 but we do expect there to be a further grant of equity-based incentives. This grant will be subject to approval by the executive members of the Board and is likely to be linked to a combination of share price performance and service-based conditions. Remuneration Committee Approach to Remuneration Matters The remuneration committee comprises James Noble and Cabot Brown under the chairmanship of Thomas Lynch. The constitution of the committee is in compliance with the provisions of the UK Corporate Governance Code (the “Code”). During the year the committee received advice from Adam George in his capacity as Company Secretary. The committee also retains Willis Towers Watson to provide ongoing peer group remuneration benchmarking, option valuations and remuneration policy related advice. The committee is satisfied that Willis Towers Watson, signatories of the Remuneration Consultants’ Code of Conduct, provides independent and objective advice. When setting its remuneration policy for Executive Directors the committee gives consideration to the provisions and principles of the Code. Operation of this remuneration policy will largely be compliant with the remuneration elements of the Code but we are aware that in certain areas we will consciously differ from the Code. These instances reflect significant differences in US market practice when compared to the UK. Any departures from the Code are intentional and are driven by accepted market practice in the US. We consider that these design features are pivotal to our ability to offer competitive incentive packages in the markets that we compete and operate in. The terms of reference of the remuneration committee can be found on the GW website at www.gwpharm.com. Statement of Voting at Annual General Meeting The Group is committed to ongoing shareholder dialogue and the remuneration committee takes an active interest in voting outcomes. Voting at our shareholder meetings is generally conducted by a show of hands by shareholders who are in attendance at the meeting. Such votes have resulted in unanimous approval of the Directors’ Remuneration Report at each of the last three AGMs. No votes were withheld. On 5 February 2015 the Group put the Remuneration Policy to shareholders for approval, with 97.7% of proxy votes submitted prior to the meeting approving this Policy. At the 2017 AGM held on 14 March 2017, 83.9% of shareholders’ proxy votes approved the 2016 Directors’ Remuneration Report. 23 GW Pharmaceuticals plc | Annual report and accounts 2017Directors’ Remuneration Report continued In the event that we experience significant levels of shareholder votes against any remuneration-related resolutions we will seek to investigate the reasons for such votes and in the event that the remuneration committee consider that changes to the Remuneration Policy are appropriate, we will disclose details of proposed changes in a timely manner. Remuneration Policy Report The information provided in this part of the Directors’ Remuneration Report is not subject to audit. The Remuneration Policy has been designed to ensure that Executive Directors are appropriately incentivised and rewarded for their performance, responsibility and experience. The Remuneration Committee aims to ensure that the policy aligns the interests of Directors and Executive Officers with those of shareholders. In a similar process to the Remuneration Policy approved in February 2015, the Remuneration Policy that follows will be presented to shareholders at the AGM in March 2018 for a binding vote. Following shareholder approval this policy then became effective from the date of the AGM and will remain in use for three years, or until a revised policy is approved by shareholders. There will continue to be an advisory vote on the Directors’ Remuneration Report presented to shareholders at the AGM on an annual basis. For the avoidance of doubt, in approving this Directors’ Remuneration Policy, authority is given to the Company to honour any commitments entered into with current or former Directors (such as the payment of a pension or the vesting/exercise of past share awards). Details of any payments to former Directors will be set out in the Annual Report on Remuneration as they arise. Future Policy Table The policy table below describes GW’s shareholder-approved Remuneration Policy for Directors and Executive Officers and seeks to explain how each element of the Directors’ remuneration packages operates: Summary Remuneration Policy –Directors and Executive Officers Element of remuneration Salary Purpose and link to strategy Operation Rewards skills and experience and provides the basis for a competitive remuneration package Salaries will be reviewed annually by reference to market practice and market data, on which the committee receives independent advice, rates of inflation, broader employee increases, the individual’s experience and scope of the role Salaries will be benchmarked against comparable roles in a selected peer group of other US-listed pharmaceutical development companies with similar market capitalisations and/or scale of operational complexity. We typically expect to align salaries with the 50th percentile of peer group comparator data but may vary from this general rule where we consider that special circumstances apply or where recruitment or retention of a particular role is required The Committee may also decide to approve future increases following changes to job responsibilities or to reflect experience within the role Company contribution to a personal pension/401(k) scheme or salary supplement. Levels will be reviewed annually and the committee may decide to increase future contribution levels should the review indicate such a change is appropriate. Statutory limits to employer contributions will be applied Retirement savings plan Enables Executive Directors to build long-term retirement savings 24 Performance targets Not applicable Changes to policy No changes proposed The peer group used for benchmarking will be annually reviewed and updated under guidance from Willis Towers Watson Maximum Salaries will not exceed the 75th percentile of peer group comparator data for the relevant role. The committee will reference alternative comparator data for roles not widely represented in the core peer group Up to 5% of basic salary Not applicable Reduced from 17.5% to 5% GW Pharmaceuticals plc | Annual report and accounts 2017Element of remuneration Benefits Purpose and link to strategy Operation Protects against risks and provides other benefits in line with market practice Benefits currently include death-in-service life insurance, family private medical cover, ill-health income protection and a taxed cash car allowance. The committee will review benefits offered from time to time and retains the discretion to add or substitute benefits to ensure they remain market competitive In the event that the Group requires an Executive Director to relocate, we would offer appropriate relocation assistance and would be likely to update the package of benefits to align with local market practice, eg increased health insurance benefits if relocating to US Maximum The disclosed taxable value of benefits and allowances is not expected to exceed 15% of salary per annum The Committee may exceed this in the event of relocation, both on a one-off and ongoing basis to align with local market norms Element of remuneration Purpose and link to strategy Operation Maximum Performance targets Performance targets Not applicable Changes to policy Benefits previously included entitlement to taxed cash car allowance. This is no longer provided Short-term incentive awards Incentivises and rewards achievement of the near-term business objectives, reflecting individual and team performance of the Executive Directors Objectives are set at the start of each calendar year Up to 150% of salary The remuneration committee retains the ability to set performance objectives annually The choice of annual performance objectives will reflect the committee’s assessment of the key milestones/ metrics required to be achieved within the calendar year in order to make progress towards achieving GW’s strategic plan Payable in cash Clawback provisions will apply (see details below) These objectives can be Group- based and/or individual, financial and/or non-financial, and are likely to include various milestones linked to: > successful execution of key elements of the Epidiolex® development programme and identification and execution of other new orphan drug developments; > key regulatory steps (IND grants, NDA filings, regulatory approvals); > successful commercialisation of approved products, either by our own commercial organisation or by our partners; > the Group’s financial position; and > equity liquidity and valuation Changes to policy No changes proposed 25 GW Pharmaceuticals plc | Annual report and accounts 2017Directors’ Remuneration Report continued Changes to policy No changes proposed Element of remuneration Purpose and link to strategy Operation Maximum Performance targets Long-term incentive awards Rewards execution of GW’s strategic plan and growth in shareholder value over a multi-year period. Encourages achievement of strategy over the medium to long term and aligns Executive Directors’ interests with those of shareholders Conditional awards of nominal- cost options, share options, performance shares and/or restricted shares Awards normally vest over periods of three or more years. The committee is able to grant awards which permit phased vesting over the period Clawback provisions will apply (see details below) Individual awards in any one year will have an expected value of no more than 600% of basic salary Expected values are calculated in accordance with generally accepted methodologies based on Black- Scholes or binomial stochastic models Performance conditions are set at the discretion of the remuneration committee and will generally consist of a mixture of: > service requirements; > milestone-based events, linked to the successful execution of GW’s strategic plan, likely to include items such as positive trial results, or regulatory approvals; and > market-based measures such as absolute or relative share price performance Major shareholders may be consulted as part of the process of setting performance conditions Notes to the Policy Table Clawback of incentives: The following clawback policy was implemented with effect from 5 February 2015, applying to future eligible executive incentive grants. The policy provides that certain incentive compensation is recoverable from a Director if the Company is required to restate financial statements due to the misconduct of that particular Director, and that misconduct has significantly contributed to the need for the restatement. Generally, eligible incentive grants shall include cash short-term incentive awards and equity-based long-term incentive awards that have been awarded and/or vested based upon achievement of specific financial or operational goals which were deemed to have been achieved but which, following restatement, are considered to no longer have been achieved. To be effective, intention to claw back awards which have already vested and been exercised must be notified to the Director within 24 months of the award having vested. The committee may effect a clawback either through a cash or equity repayment by the individual, or via an adjustment to an outstanding award that is yet to vest or that has vested but is not yet exercised. Equity retention policy: To encourage executives to retain a meaningful amount of equity in the Company the following equity retention policy for Executive Directors took effect from 5 February 2015. The purpose of this policy is to encourage ownership of the Company’s shares, promote alignment of the long-term interests of the Executive Directors with those of our shareholders, and promote our commitment to sound corporate governance. The policy is applicable to our Executive Directors and certain other members of our leadership team, as nominated by our Chief Executive Officer. Under the policy, covered Directors and officers must retain an agreed proportion of each new equity grant issued to them after 1 January 2015, subject to the payment of any applicable taxes, for a period of five years from vesting until an overall level of share ownership is achieved. The target level of ownership equates to four times basic salary for the Chief Executive Officer and two times basic salary for the other Directors and Officers. The target deadline for achieving the ownership requirement is intended to be five years from implementation of the policy. Existing shareholdings or direct purchases of equity by executives shall contribute towards attainment of the targeted shareholding cap. The committee retains the power to consider an individual ineligible for future equity incentive grants if the required target has not been achieved in a timely manner, subject to the consideration of individual circumstances. General discretions relating to the operation of incentive plans: The committee will operate all incentive plans in accordance with Plan Rules and will retain full discretion over a number of areas relating to the operation and administration of these plans. This includes, but is not limited to, determining eligibility, setting performance conditions, determining the extent to which performance conditions are achieved, leaver terms and the vehicle of delivery. 26 GW Pharmaceuticals plc | Annual report and accounts 2017Summary Remuneration Policy – Non-Executive Directors Element of remuneration Purpose and link to strategy Operation Non-executive fees Reflects time commitments and responsibilities of each role The remuneration of the non-executive Directors will be determined by the Board as a whole by reference to market practice and market data, on which the committee receives independent advice, and reflects the individual’s experience, scope of the role, time commitment and changes to the job responsibilities Reflects fees paid by similarly sized companies Fees typically consist of a basic fee for non-executive Director responsibilities plus incremental fees for additional roles/responsibilities such as chairmanship of Board sub-committees, senior non-executive Director and US representative Director roles Performance targets Not applicable Maximum The value of individuals’ aggregate fees will not exceed the 75th percentile of peer group comparator data Changes to policy No changes proposed Future equity-based awards will be subject to the equity retention policy set out above. Fees can be paid in the form of cash or shares to be held until the individual retires from the Board. Any element of fees paid in the form of shares will not be subject to performance conditions The non-executive Directors do not receive any pension from the Company, nor do they participate in any performance-related incentive plans All-Employee Comparison The following differences exist between the Company’s policy for the remuneration of Directors and Executive Officers as set out above and its approach to the payment of employees generally: > Benefits offered to other employees are consistent with those offered to the Executive Directors. > All US-based employees are entitled to a contribution from the Company towards a 401(k) scheme. This is generally at the same level as contributions paid to the personal pension/401(k) schemes of the US-based Executive Director. UK-based employees are entitled to a personal pension scheme contribution equating to 6.67% of basic salary. UK-based directors do not currently receive an employer’s pension contribution. > All employees are able to participate in the LTIP schemes although the size of LTIP awards tends to increase with seniority as there is a greater emphasis on performance-related pay for senior members of staff. > A lower level of maximum annual bonus/short-term incentive opportunity typically applies to other employees. 27 GW Pharmaceuticals plc | Annual report and accounts 2017Directors’ Remuneration Report continued Approach to Recruitment Remuneration The remuneration package for a new Director or Executive Officer, to include basic salary, benefits, pension, annual bonus/short-term incentive and long-term incentive awards, will be set in accordance with the terms of the Company’s prevailing approved Remuneration Policy at the time of appointment. The committee will consider the role, responsibility and experience of the candidate and will seek independent advice and market data to help derive an appropriate level of remuneration in order to secure the right candidate with the required skills and experience for the role. To facilitate recruitment, the committee may offer additional cash and/or share-based remuneration to take account of, and compensate for, remuneration that the Director is required to relinquish when leaving a former employer. Any such offer would take into account the nature, time horizon and performance conditions attached to any such remuneration and would seek to offer no more than the potential value of the remuneration opportunity being relinquished. For an internal Executive Director appointment, any variable pay element awarded in respect of the prior role will be allowed to pay out according to its terms. In addition, any other contractual remuneration obligations existing prior to appointment may continue. For external and internal appointments, the committee may agree that the Group will provide reasonable relocation support. In all cases, the committee will ensure that decisions made are in the best interests of the Group. The remuneration for any non-executive appointments will be set in accordance with the prevailing Remuneration Policy. Typically, the first grant of equity-based incentive awards made after appointment of a new non-executive to the Board will be increased by 50%. No additional cash payments will usually be made. Service Contracts It is Group policy that Executive Directors should have contracts with an indefinite term providing for a maximum of 12 months’ notice. New appointees to the Board are typically given a six-month notice period which can then be increased to 12 months’ notice, at the discretion of the remuneration committee, once the new appointee is considered to be established within their role. Details of Directors’ service contracts are as follows: Director Executive Dr Geoffrey W Guy Justin Gover Non-executive James Noble Thomas Lynch Cabot Brown Date of contract Notice period November 2000 November 2000 12 months 12 months February 2016 July 2010 January 2016 3 months 3 months 3 months The non-executive Directors have service agreements which are subject to a three-month notice period. Their remuneration is reviewed by the Board annually. In accordance with the Company’s Articles of Association, non-executive Directors are included in the requirement that one-third of Directors are subject to retirement by rotation at each AGM. Justin Gover will be retiring by rotation at the next AGM and, being eligible, he will seek re-election. Illustrations of the Application of the Remuneration Policy – Performance and Remuneration Scenarios The following table and graphical illustrations provide an illustration of the potential remuneration for the year ended 30 September 2018 for each of the Executive Directors, computed in accordance with the Remuneration Policy outlined above for each of three performance scenarios, as follows: 28 GW Pharmaceuticals plc | Annual report and accounts 2017The following table and graphs provide an illustration of the potential remuneration. In interpreting these scenarios it is very important to note that it is likely that a significant proportion of future long-term equity incentive grants to the Executive Directors are likely to consist partly of share options which will only have value to the Executive Directors if they are successful in generating share price growth during the vesting period. The remuneration committee believes that this approach will align the interests of Executive Directors with those of our shareholders. The face value of equity incentive awards shown in the graphical illustrations below is not therefore indicative of the amount that the Directors will earn from these awards in future, as it is principally the future growth in value of these awards that will generate a financial return for each Director: Minimum – fixed elements of remuneration Performance in line with expectations This scenario assumes that the current basic salary for each Director continues to be earned in 2018. The value of benefits receivable for the year ended 30 September 2018 is assumed to be equal to the value of benefits received in the year ended 30 September 2017 as set out in the single total figure of remuneration table on page 14. The pension contribution receivable by each Director for the year ended 30 September 2017 is assumed to be in line with the current level of contributions. No short-term incentive payment is assumed for any Director. No vesting of long-term equity-based incentives is assumed. This scenario is illustrative only and is not expected to be predictive of 2018 remuneration for either of the Executive Directors. Fixed elements of remuneration, as set out above, plus: Maximum remuneration receivable On-target level of short-term incentive payment is taken to be 66% of basic salary, being the current best estimate of the average bonus likely to be awarded by the remuneration committee in years when Group and individual Director performance is in line with expectations. This scenario assumes the grant of equity-based incentives with a Black-Scholes valuation at grant equivalent to 400% of basic salary to the CEO and 300% for the Chairman. It is then assumed that 50% of these awards will vest. We are required to illustrate the face value of these awards, ie where awards consist of market priced option awards, the face value is derived by multiplying the number of options granted by the exercise price. For the purposes of the illustrations below, we have assumed that the face value of options will equate to 159% of the Black-Scholes value. This has been derived by reference to the most recent equity incentive award to the Directors in January 2017. No account is taken of share price growth over the vesting period. This scenario is illustrative only and is not expected to be predictive of 2018 remuneration for either of the Executive Directors. Fixed elements of remuneration, as set out above, plus: The maximum level of short-term incentive payment is assumed to be 150% of basic salary. This scenario assumes the grant, to all Directors, of the maximum possible number of equity-based incentives per the above policy, being awards with a Black-Scholes valuation at grant equivalent to 600% of basic salary. We are required to illustrate the face value of these awards, ie where awards consist of market priced option awards, the face value is derived by multiplying the number of options granted by the exercise price. For the purposes of the illustrations below, we have assumed that the face value of options will equate to 159% of the Black-Scholes value. This has been derived by reference to the most recent equity incentive award to the Directors in January 2017. For illustrative purposes, it is then assumed that 100% of these awards will vest. No account is taken of share price growth over the vesting period. Operation of the equity retention policy, outlined above, will also mean that Executive Directors may only be able to realise a proportion of the illustrated incentive gains in 2018 as they are likely to be required to retain equity shares acquired under such schemes for an extended period. 29 GW Pharmaceuticals plc | Annual report and accounts 2017Directors’ Remuneration Report continued Chief Executive Officer (£000s) Chairman (£000s) 5,000 4,000 3,000 2,000 1,000 0 £4,956 78% £2,020 64% £454 100% 13% 22% 12% 9% Minimum Future – in line with expectations Maximum 6,000 5,000 4,000 3,000 2,000 1,000 0 £5,450 79% 12% 9% £1,839 59% 16% 25% £464 100% Minimum Future – in line with expectations Maximum Policy for Payments for Loss of Office The committee’s approach to payments in the event of termination is to take account of the individual circumstances including the reason for termination, individual performance, contractual obligations and the terms of the LTIPs in which the Director participates. On notice from the Company, the Company will normally continue to pay salary, pension and other benefits during the balance of the notice period while the individual remains an employee. Although the Director employment contracts do not provide for payment in lieu of notice, the remuneration committee may offer payment in lieu of notice if they consider that it is in the best interests of the Company, subject to such payment not exceeding the contractual notice entitlement. The committee may also approve other limited payments in connection with a departure, which may include legal fees connected to the departure, untaken holiday/accrued vacation, out-placement and repatriation. There is no automatic contractual entitlement to bonus on termination although this may be considered. Unvested LTIP awards normally lapse although the committee retains the power to determine, in accordance with the good leaver provisions of the LTIP scheme rules, what proportion of unvested awards will be retained and what proportion will lapse. In determining this, the committee will give consideration to the reason for leaving, the extent of achievement of performance conditions at the date of leaving and may decide to time pro-rate awards. 30 GW Pharmaceuticals plc | Annual report and accounts 2017Statement of Consideration of Employment Conditions Elsewhere in the Company During the annual review of remuneration, the committee considers the remuneration and terms and conditions for the broader employee population when determining the extent of basic salary increases for the Directors. Employees have not been consulted in respect of the design of the Company’s senior executive remuneration policy to date although the committee will keep this under review. Statement of Shareholder Views The remuneration committee considers shareholder feedback received in relation to the AGM each year at a meeting immediately following the AGM. This feedback, plus any additional feedback received from shareholders in respect of remuneration matters during the financial year, is then considered as part of the Company’s annual review of remuneration policy. In addition, the remuneration committee will seek to engage directly with major shareholders should any material changes be proposed to the Remuneration Policy. Approval This report was approved by the Board of Directors and signed on its behalf by: Adam George Company Secretary 4 December 2017 31 GW Pharmaceuticals plc | Annual report and accounts 2017Directors’ Responsibility Statement 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, as issued by the International Accounting Standards Board (“IASB”) 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 financial statements 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 UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. We confirm that to the best of our knowledge: > the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; > the strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and > the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. This responsibility statement was approved by the Board of Directors on 4 December 2017 and is signed on its behalf by: Adam George Company Secretary 4 December 2017 32 GW Pharmaceuticals plc | Annual report and accounts 2017Independent Auditor’s Report For the year ended 30 September 2017 Opinion In our opinion: > the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 30 September 2017 and of the Group’s loss for the year then ended; > the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union and IFRSs as issued by the International Accounting Standards Board (“IASB”); > 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. We have audited the financial statements of GW Pharmaceuticals plc (the “Parent Company”) and its subsidiaries (the “Group”) which comprise: > the Consolidated Income Statements; > the Consolidated Statements of Comprehensive Loss; > the Consolidated and Parent Company Balance Sheets; > the Consolidated and Parent Company Statements of Changes in Equity; > the Consolidated and Parent Company Cash Flow Statements; and > the related notes 1 to 27. The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK”)) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our Report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Summary of our audit approach Key audit matter The key audit matter that we identified in the current year was related to the research and Development (“R&D”) tax credit claimed by the Group from HMRC under the Small and Medium Enterprise (“SME”) scheme. Materiality Scoping The materiality that we used in the current year was £5,000,000 which was determined based on a blended measure including net cash flows from operations and total operating expenses benchmarks. Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group wide-controls and assessing the risks of material misstatement at the Group level. The Group was audited directly by the principal engagement team. 33 GW Pharmaceuticals plc | Annual report and accounts 2017Independent Auditor’s Report continued Conclusions Relating to Going Concern We are required by ISAs (UK) to report in respect of the following matters where: > the Directors’ use of the going concern basis of accounting in preparation of the financial We have nothing to report in respect of these matters. statements is not appropriate; or > the Directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s or the Parent Company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Key Audit Matters A key audit matter is a matter that, based on professional judgement, was of most significance in our audit of the financial statements of the current period and includes the most significant assessed risk of material misstatement (whether or not due to fraud) that we identified. Key audit matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. The matter set out below was addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on this matter. Research and Development Tax Credit Key audit matter description Research and development (R&D) activity related to HMRC’s Small and Medium Enterprise (“SME”) scheme activity incurred in the year ended 30 September 2017. The key audit matter is related to the application of the R&D tax credit methodology in accordance with the scheme’s qualifying criteria. Specifically, we focused on the appropriate inclusion of the research costs in the R&D tax credit claim, in respect of the valuation and allocation of R&D taxation recoverable and the corresponding accuracy of the R&D tax benefit. The R&D tax credit claimed for the year was £19.9 million (2016: £21.2 million). The Group has identified Research & Development and Orphan Tax Credits as a key source of estimation uncertainty in Note 2 Significant Accounting Policies and Note 10 Tax. How the scope of our audit responded to the key audit matter In responding to this key audit matter associated with the R&D tax credit the following procedures were undertaken to challenge management’s position and outcome: > Assessment of the methodology employed by management in calculating the R&D tax credit by involving our internal tax specialists, including R&D tax credit specialists; > A detailed examination of expenditure incurred was agreed directly to the R&D claim to evaluate whether the Group complied with the scheme’s qualifying criteria; > Key controls implemented by management to address the risk of material misstatements were identified. The design and implementation were assessed and operating effectiveness of the controls were tested. Based on the procedures performed, we conclude that the methodology applied to calculate the R&D tax credit is appropriate and consistent with that utilised in the prior year and the R&D tax credit claimed in the year was appropriate. Key observations 34 GW Pharmaceuticals plc | Annual report and accounts 2017Our Application of Materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group materiality £5,000,000 Basis for determining materiality We determined materiality based on a combination of benchmarks including net cash flows from operations and total operating expenses. Our materiality of £5,000,000 represents 3.4% of total operating expenses and 4.4% of net cash flows from operations. Rationale for the benchmark applied We believe that a combination of total operating expenditure and net cash outflow from operations is reflective of the relevant benchmarks for stakeholders in assessing the performance of the Group. The value of the Group is derived from successful research and development, with a significant proportion of the value derived from the prospective commercialisation of Epidiolex®. We have agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.25m, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. An Overview of the Scope of Our Audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level sufficient to give reasonable assurance that the financial statements are free from material misstatement. The scope of the audit included the following: > Identification of the two significant components in the Group being the US and the UK which are subject to a full audit and one insignificant component being Australia. The significant component in the US represents the Group’s US business, located in Carlsbad, California, which is expanding significantly to facilitate commercialisation of Epidiolex. The UK component is responsible for all R&D activities. > These two significant components cover 99% of the Group’s revenue, 99% of the Group’s loss before tax and 99% of the Group’s net assets. Loss before tax 1% 99% Full audit scope Review at Group level Net assets 1% Revenue 99% Full audit scope Review at Group level 100% Full audit scope > There were no separate component auditors engaged with the audits as they are completed by the principal engagement team. > Given the small number of components, we considered the risk around aggregation of misstatements to be low. Therefore also considering that no component auditors other than the principal audit team were involved, materiality for the components was set at £4,500,000. At the parent entity level, we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatements of the aggregated financial information of the remaining components not subject to audit. 35 GW Pharmaceuticals plc | Annual report and accounts 2017Independent Auditor’s Report continued Other Information The Directors are responsible for the other information. The other information comprises the information included in the Annual Report, including the Strategic Report and Directors’ Report, other than the financial statements and our Auditor’s Report thereon. We have nothing to report in respect of these matters. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact Responsibilities of Directors 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, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditor’s Report. Use of Our Report 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. 36 GW Pharmaceuticals plc | Annual report and accounts 2017Report on Other Legal and Regulatory Requirements Opinions on Other Matters Prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: > the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and > the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report or the Directors’ Report. Opinion on other matter prescribed by our engagement letter 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. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: > we have not received all the information and explanations we require for our audit; or > 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. We have nothing to report in respect of these matters. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’ remuneration have not been made. We have nothing to report in respect of this matter. David Hedditch (Senior statutory auditor) For and on behalf of Deloitte LLP Statutory Auditor London, United Kingdom 4 December 2017 37 GW Pharmaceuticals plc | Annual report and accounts 2017Consolidated Income Statements For the year ended 30 September Revenue Cost of sales Research and development expenditure Sales, general and administrative expenses Net foreign exchange (loss)/gain Operating loss Interest expense Interest and other income Loss before tax Tax benefit Loss for the year Loss per share – basic Loss per share – diluted Notes 2017 £000s 2016 £000s 2015 £000s 3 8,238 (3,541) 4 (111,229) (41,699) (5,045) (153,276) (745) 1,616 9 9 5 (152,405) 20,717 10 10,315 (2,719) (99,815) (19,939) 25,551 (86,607) (173) 608 (86,172) 22,515 28,540 (2,618) (76,785) (12,569) 6,202 (57,230) (75) 244 (57,061) 12,498 (131,688) (63,657) (44,563) 11 11 (43.4)p (23.5)p (43.4)p (23.5)p (18.1)p (18.1)p The accompanying notes are an integral part of these Consolidated Income Statements. All activities relate to continuing operations. Consolidated Statements of Comprehensive Loss For the year ended 30 September Loss for the year Items that may be reclassified subsequently to profit or loss Exchange differences on translation of foreign operations Other comprehensive (loss)/gain for the year Total comprehensive loss for the year 2017 £000s 2016 £000s 2015 £000s (131,688) (63,657) (44,563) (716) (716) 349 349 (71) (71) (132,404) (63,308) (44,634) The accompanying notes are an integral part of these Consolidated Statements of Comprehensive Loss. 38 GW Pharmaceuticals plc | Annual report and accounts 2017Consolidated Statements of Changes in Equity For the year ended 30 September Group At 1 October 2014 Issue of share capital Expenses of new equity issue Exercise of share options Share-based payment transactions Loss for the year Deferred tax attributable to unrealised share option gains Other comprehensive loss Balance at 30 September 2015 Issue of share capital (note 22) Expenses of new equity issue Underwriters’ contribution towards expenses of new equity issue Exercise of share options (note 22) Share-based payment transactions Loss for the year Deferred tax attributable to unrealised share option gains Other comprehensive gain Balance at 30 September 2016 Exercise of share options (note 22) Share-based payment transactions Loss for the year Deferred tax attributable to unrealised share option gains Other comprehensive loss Balance at 30 September 2017 Share Capital £000s 237 22 – 2 – – – – 261 39 – – 2 – – – – 302 2 – – – – 304 Share Premium Account £000s 220,551 127,812 (271) 1,183 – – – – 349,275 206,512 (472) 472 690 – – – – 556,477 93 – – – – Other Reserves £000s Accumulated Deficit £000s Total Equity £000s 19,260 – – – – – – (71) (81,464) 158,584 127,834 (271) 1,185 2,488 (44,563) 84 (71) – – – 2,488 (44,563) 84 – 19,189 (123,455) 245,270 206,551 (472) 472 692 8,152 (63,657) 1,133 349 – – – – 8,152 (63,657) 1,133 – – – – – – – – 349 19,538 (177,827) 398,490 95 11,860 (131,688) 134 (716) – – – 11,860 – (131,688) 134 – – (716) 556,570 18,822 (297,521) 278,175 39 GW Pharmaceuticals plc | Annual report and accounts 2017Company Statements of Changes in Equity For the year ended 30 September Company At 1 October 2014 Issue of share capital Expenses of new equity issue Exercise of share options Share-based payment transactions Profit for the year Balance at 30 September 2015 Issue of share capital (note 22) Expenses of new equity issue Underwriter’s contribution towards expense of new equity issue Exercise of share options (note 22) Share-based payment transactions Profit for the year Balance at 30 September 2016 Exercise of share options (note 22) Share-based payment transactions Profit for the year Balance at 30 September 2017 Share Capital £000s 237 22 – 2 – – 261 39 – – 2 – – 302 2 – – 304 Share Premium Account £000s 220,551 127,812 (271) 1,183 – – 349,275 206,512 (472) 472 690 – – 556,477 93 – – 556,570 Other Reserves £000s Accumulated Deficit £000s Total Equity £000s – – – – – – – – – – – – – – – – – – 49,519 – – – 2,478 8,046 60,043 – – – – 8,152 30,480 98,675 – 11,860 7,761 270,307 127,834 (271) 1,185 2,478 8,046 409,579 206,551 (472) 472 692 8,152 30,480 655,454 95 11,860 7,761 118,296 675,170 The accompanying notes are an integral part of these consolidated and Company Statements of Changes in Equity. 40 GW Pharmaceuticals plc | Annual report and accounts 2017Consolidated Balance Sheets As at 30 September Non-current assets Intangible assets – goodwill Other intangible assets Investments Property, plant and equipment Deferred tax asset Current assets Inventories Taxation recoverable Trade receivables and other current assets Cash and cash equivalents Total assets Current liabilities Trade and other payables Current tax liabilities Obligations under finance leases Deferred revenue Non-current liabilities Trade and other payables Obligations under finance leases Deferred revenue Total liabilities Net assets Equity Share capital Share premium account Other reserves Accumulated (deficit)/profit Total equity Group Company Notes 2017 £000s 2016 £000s 2017 £000s 2016 £000s 12 13 27 14 10 15 10 16 21 17 10 19 20 17 19 20 22 24 5,210 1,049 – 43,666 6,282 5,210 629 – 38,947 3,873 – – 437,414 – – – – 305,027 – – 56,207 48,659 437,414 305,027 4,244 20,072 11,217 241,175 4,248 21,322 4,556 374,392 – – 45,818 192,801 – – 23,331 327,676 276,708 404,518 238,619 351,007 332,915 453,177 676,033 656,034 (33,119) (838) (205) (2,307) (31,170) (883) (211) (2,686) (36,469) (34,950) (9,256) (4,755) (4,260) (9,423) (4,959) (5,355) (863) – – – (863) – – – (580) – – – (580) – – – (54,740) (54,687) (863) (580) 278,175 398,490 675,170 655,454 304 556,570 18,822 (297,521) 302 556,477 19,538 304 556,570 – (177,827) 118,296 302 556,477 – 98,675 278,175 398,490 675,170 655,454 The financial statements of GW Pharmaceuticals plc, registered number 04160917, on pages 38 to 73 were authorised by the Board and approved for issue on 4 December 2017. No income statement or statement of comprehensive income is presented for GW Pharmaceuticals plc as permitted by Section 408 of the Companies Act 2006. The Company’s profit for the year was £7,761,000 (2016: £30,480,000; 2015: £8,046,000). The accompanying notes are an integral part of these Consolidated and Company Balance Sheets. By order of the Board Adam George Company Secretary 4 December 2017 41 GW Pharmaceuticals plc | Annual report and accounts 2017Consolidated Cash Flow Statements For the year ended 30 September (Loss)/profit for the year Adjustments for: Interest expense Interest and other income Tax benefit Depreciation of property, plant and equipment Impairment of property, plant and equipment Reversal of impairment of property, plant and equipment Amortisation of intangible assets Net foreign exchange losses/(gains) Increase in provision for inventories Decrease in deferred signature fees Share-based payment charge Loss on disposal of property, plant and equipment (Increase)/ decrease in inventories (Increase)/decrease in trade receivables and other current assets Increase/(decrease) in trade and other payables and deferred revenue Cash (used in)/generated by operations Income taxes paid Research and development tax credits received Net cash (outflow)/inflow from operating activities Investing activities Interest received Increase in loan to subsidiary Purchase of property, plant and equipment Purchase of intangible assets Proceeds from sale of property, plant and equipment 2017 £000s Group 2016 £000s 2015 £000s 2017 £000s Company 2016 £000s 2015 £000s (131,688) (63,657) (44,563) 7,761 30,480 8,046 745 (1,616) (20,717) 5,276 635 (216) 245 5,045 100 (1,370) 11,860 582 173 (608) (22,515) 3,605 – – 62 (25,551) 72 (1,170) 8,152 1 (131,119) (96) (2,728) (101,436) 436 (753) 75 (244) (12,498) 2,250 606 – 52 (6,282) 33 (1,250) 2,478 1 (59,342) (12) (1,010) – (1,568) – – – – – 4,897 – – – – 11,090 – (22,487) – (320) – – – – – (24,439) – – – – 5,721 – 9,253 – (67) – – – – – (5,782) – – – – 2,197 – (5,591) 4,312 4,761 8,478 415 (249) 328 (129,631) (96,992) (51,886) (10,982) 14,725 (3,066) (2,293) 21,679 (883) 13,281 – 5,415 – – – – – – (110,245) (84,594) (46,471) (10,982) 14,725 (3,066) 1,433 – (16,059) (636) – 434 – (8,678) (512) – 236 1,568 – (120,526) – – – (17,915) (114) 2 320 (97,022) – – – 67 (58,235) – – – Net cash outflow from investing activities (15,262) (8,756) (17,791) (118,958) (96,702) (58,168) Financing activities Proceeds on exercise of share options Proceeds of new equity issue Expenses of new equity issue Underwriters’ contribution towards expenses of new equity issue Interest paid Repayments of fit out funding Repayments of obligations under finance leases 96 – (134) – (965) (841) (209) 540 206,550 (319) 472 (69) (240) (127) 1,185 127,834 (271) – (74) – (255) 96 – (134) – – – – Net cash (outflow)/inflow from financing activities Effect of foreign exchange rate changes (2,053) 206,807 (5,657) 26,063 128,419 6,224 (38) (4,897) Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year (133,217) 139,520 374,392 234,872 70,381 (134,875) 327,676 164,491 540 206,550 (319) 472 – – – 207,243 24,439 149,705 177,971 1,185 127,834 (271) – – – – 128,748 5,782 73,296 104,675 Cash and cash equivalents at end of the year 241,175 374,392 234,872 192,801 327,676 177,971 The accompanying notes are an integral part of these Consolidated and Company Cash Flow Statements. 42 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements For the year ended 30 September 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 plant. The Group is developing a portfolio of cannabinoid medicines, of which the lead product is Epidiolex®, an oral medicine for the treatment of refractory childhood epilepsies. The Company is a public limited company, which has had American Depository Receipts (“ADRs”) registered with the US Securities and Exchange Commission (“SEC”) and has been listed on NASDAQ since 1 May 2013. Until 5 December 2016, the Company was also listed on the Alternative Investment Market (“AIM”), which is a sub-market of the London Stock Exchange. The Company is incorporated and domiciled in the United Kingdom. The address of the Company’s registered office and principal place of business is Sovereign House, Vision Park, Histon, Cambridgeshire, CB24 9BZ. 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 (“IFRS”) as endorsed by the European Union and as issued by the International Accounting Standards Board (“IASB”). The Group financial statements also comply with Article 4 of the European Union IAS regulation. The financial statements have been prepared under the historical cost convention. Historical cost is generally based on the fair value of the consideration given in exchange for the assets and received for the liabilities. The principal accounting policies are set out below. Going Concern At 30 September 2017 the Group had cash and cash equivalents of £241.2 million (2016: £374.4 million). 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 this report when considering going concern. They have also considered the Group’s key risks and uncertainties affecting the likely development of the business. 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 at least a 12-month period from the date of this Report. Accordingly, they continue to adopt the going concern basis in preparing these financial statements. 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 acquisition method. In future business combinations, if a non-controlling interest in a subsidiary arises, such non-controlling interest will be identified separately from the Group’s equity therein. The 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. 43 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continued For the year ended 30 September 2. Significant Accounting Policies continued When the Group loses 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 accumulated deficit) 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. 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. Intangible Assets – Other Other intangible assets are stated at cost less provisions for amortisation and impairments. Licences, patents, know-how, software and marketing rights separately acquired or acquired as part of a business combination are amortised over their estimated useful lives using the straight-line basis from the time they are available for use. The estimated useful lives for determining the amortisation take into account patent lives and related product application, but do not exceed their lifetime. Asset lives are reviewed annually and adjusted where necessary. Contingent milestone payments are recognised at the point that the contingent event becomes certain. Any subsequent development costs incurred by the Group and associated with acquired licences, patents, know-how or marketing rights are written off to the income statement when incurred, unless the criteria for recognition of an internally generated intangible asset are met, usually when a regulatory filing has been made in a major market and approval is considered highly probable. 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 non-refundable up-front licence 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 licenced products, if and when such product sales occur, and revenue from the supply of products. For these agreements, total arrangement consideration is attributed to separately identifiable components on a reliable basis that reasonably reflects the selling 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. The percentage of completion method is used for a number of revenue streams of the Group. For each of the three years ended 30 September 2017, there were no discrete events or adjustments which caused the Group to revise its previous estimates of completion associated with those revenue arrangements accounted for under the percentage of completion method. 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 other than where products are damaged or defective. 44 GW Pharmaceuticals plc | Annual report and accounts 2017The Group maintains a rebate provision for expected reimbursements to our commercial partners in circumstances in which actual net revenue per vial differs from expected net revenue per vial as a consequence of, as an example, ongoing pricing negotiations with local health authorities. The amount of our rebate provision is based on, amongst other things, monthly unit sales and in-market sales data received from commercial partners and represents management’s best estimate of the rebate expected to be required to settle the present obligation at the end of the reporting period. Provisions for rebates are established in the same period that the related sales are recorded. Licensing Fees Licensing 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 licence term. Collaboration Fees Collaboration fees are deferred and recognised as services rendered based on the percentage of completion method. 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. Research and Development Expenditure on research and development activities is recognised as an expense in the period in which it is incurred prior to achieving regulatory approval. An internally generated intangible asset arising from the Group’s development activities is recognised only if the following conditions can be demonstrated: > the technical feasibility of completing the intangible asset so that it will be available for use or sale; > the intention to complete the intangible asset and use or sell it; > the ability to use or sell the intangible asset; > how the intangible asset will generate probable future economic benefits; > the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and > the ability to measure reliably the expenditure attributable to the intangible asset during its development. 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. Government Grants Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received. Government grants for research programmes are recognised as revenue over the periods necessary to match them with the related costs incurred, and in the Consolidated Income Statement are deducted from the related costs. Government grants related to property, plant and equipment are treated as deferred income and released to the Consolidated Income Statement over the expected useful lives of the assets concerned. Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognised in the income statement using the effective interest method. 45 GW Pharmaceuticals plc | Annual report and accounts 20172. Significant Accounting Policies continued 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: Leasehold buildings Plant, machinery and lab equipment Office and IT equipment Leasehold improvements 20 years or term of lease if shorter 3 to 20 years 3 to 5 years 4 to 20 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. No depreciation is provided on assets under the course of construction. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy. Depreciation on these assets commences when the assets are available for use. 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. Property, plant and equipment assets are classified as assets held-for-sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable in its current condition. They are stated at the lower of carrying amount and fair value less costs to sell. Depreciation is not recorded on assets classified as held-for-sale. 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 payment. 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 increase the carrying value to expected net realisable value, which may not exceed original cost. Adjustments to the provision for 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. Current and deferred taxes are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognised in other comprehensive income or directly in equity, respectively. Where current or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. 46 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 September The tax payable or recoverable is based on taxable profit for the year. Taxable profit differs from profit before tax 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 future 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 or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the Consolidated 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. (Loss)/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 anti-dilutive. 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 Consolidated 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 Consolidated 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). For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in 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. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rate for the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the date of transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity. 47 GW Pharmaceuticals plc | Annual report and accounts 20172. Significant Accounting Policies continued Share-Based Payments The Group operates a number of equity-settled share-based compensation plans under which the Company receives services from employees as consideration for equity instruments (options) of the Company. The fair value of the employee services received in exchange for the grant of the awards is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted (excluding the effect of any non-market-based performance and service 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 performance and service 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. 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. 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 Consolidated 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. 48 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 September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 recognised at fair value and then held at amortised cost which equates to nominal value. Long-term payables are discounted where the effect is material. All borrowings are initially recorded at the amount of proceeds received, net of transaction costs. Borrowings are subsequently carried at amortised cost, using the effective interest method. The difference between the proceeds, net of transaction costs, and the amount due on redemption is recognised as a charge to the income statement over the period of the relevant borrowing. 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. 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. Revenue Recognition The Group recognises revenue 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 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 licenced 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 selling prices that might be expected to be achieved in stand-alone transactions. Product revenue received is based on a contractually agreed percentage of our commercial partner’s in-market net sales revenue. The commercial partner’s in-market net sales revenue is the price per vial charged to end customers, less set defined deductible overheads incurred in distributing the product. In developing estimates, the Group uses monthly unit sales and in-market sales data received from commercial partners during the course of the year. For certain markets, where negotiations are ongoing with local reimbursement authorities, an estimated in-market sales price is used, which requires the application of judgement in assessing whether an estimated in-market sales price is reliably measurable. In the Group’s assessment, the Group considers, inter alia, identical products sold in similar markets and whether the agreed prices for those identical products support the estimated in-market sales price. In the event that the Group considers there to be significant uncertainty with regard to the in-market sales price to be charged by the commercial partner as a result of, as an example, ongoing pricing negotiations with local health authorities, such that it is not possible to reliably measure the amount of revenue that will flow to the Group, the Group would not recognise revenue until that uncertainty has been resolved. 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 regard 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. 49 GW Pharmaceuticals plc | Annual report and accounts 20172. Significant Accounting Policies continued Deferred Taxation At the balance sheet date, the Group has accumulated tax losses of £204.1 million (2016: £102.8 million) and other temporary differences of £17.8 million (2016: £33.9 million) available to offset against future profits. If the value of these losses and other temporary differences were recognised within the Group’s balance sheet at the balance sheet date, the Group would be carrying an additional deferred tax asset of £37.7 million (2016: £23.2 million). However, as explained in the tax accounting policy note, the Group’s 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. As such, a deferred tax asset of £6.3 million has been recognised at 30 September 2017 (2016: £3.9 million) in respect of temporary timings differences relating to the Group’s US subsidiary that are expected to be fully recoverable. Research and Development and Orphan Tax Credits The Group’s research and development tax credit claim is complex and requires management to interpret and apply UK and US research and development and orphan credit tax legislation to the Group’s specific circumstances. The recognition of the estimated UK research and development tax credit requires the use of certain assumptions in estimating the portion of current year research costs that are eligible for the claim under the Finance Act 2000. At 30 September 2017, the Group has estimated its research and development tax credit of £19.9 million (2016: £21.1 million) from HMRC. Impairment of Investments in Subsidiaries and Inter-Company Receivables The Company considers the recoverability of investments in subsidiaries and inter-company receivables on an ongoing basis, whenever indicators of impairment are present. If facts and circumstances indicate that investment in subsidiaries may be impaired, the estimated future cash flows associated with these subsidiaries would be compared to their carrying amounts to determine if a write-down to fair value is necessary. Adoption of New and Revised Standards In the current year the following revised standards have 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. IFRS 14 Regulatory Deferral Accounts (January 2014) Annual Improvements to IFRSs 2012–2014 Cycle (September 2014) Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations (May 2014) Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation (May 2014) Amendments to IAS 16 and IAS 41: Bearer Plants (June 2014) Amendments to IAS 27: Equity Method in Separate Financial Statements (August 2014) Amendments to IAS 1: Disclosure Initiative (December 2014) Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities – Applying the Consolidation Exception (December 2014) At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were issued by the IASB but not yet effective: IFRS 9 Financial Instruments (July 2014) IFRS 15 Revenue from Contracts with Customers (May 2014) IFRS 16 Leases (January 2016) IFRS 17 Insurance Contracts (May 2017) Amendments to IFRS 2: Classification and Measurement of Share-Based Payment Transactions (June 2016) Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (September 2016) Clarifications to IFRS 15: Revenue from Contracts with Customers (April 2016) Amendments to IAS 7: Disclosure Initiative (January 2016) Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealised Losses (January 2016) Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (September 2014) Amendments to IAS 40: Transfer of Investment Property (December 2016) Annual Improvements to IFRS Standards 2014-16 (December 2016) Amendments to IFRS 9: Prepayment Features with Negative Compensation (October 2017) Amendments to IAS 28: Long-Term Interests in Associates and Joint Ventures (October 2017) 50 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 SeptemberIFRS 15: Revenue from Contracts with Customers establishes comprehensive guidelines for determining when to recognise revenue and how much revenue to recognise. The core principle in that framework is that a company should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard is effective for reporting periods beginning on or after 1 January 2018. The Group continues to assess the impact of IFRS 15 on the results of the Group, and expects to finalise this assessment now that final endorsement by the EU has occurred. The impact is expected to be limited to historic revenue-generative partner agreements. IFRS 16: Leases will replace IAS 17 for accounting periods beginning on or after 1 January 2019. In so doing it will eliminate the distinction between classification of leases as finance or operating leases. As at the reporting date, the Group has non-cancellable operating lease commitments, however, the Group is in the process of determining the extent which these commitments will result in the recognition of an asset and a liability for future payments and how this will affect the Group’s profit and classification of cash flows as our assessment is still ongoing. The Directors do not expect that the adoption of the remaining Standards and Interpretations in future periods will have a material impact on the financial statements of the Group. 3. Segmental Information During the current financial year, the Group’s Board of Directors was reorganised and an Executive Leadership Team (“ELT”), consisting of statutory and non-statutory Directors, was formed. This reorganisation of the Group’s governance structures was carried out to align the Group’s management processes with the strategic objectives and requirements of commercialising Epidiolex. As part of this reorganisation the chief operating decision maker (“CODM”) for the Group is now identified as a sub-group of the ELT consisting of those members charged with executive management of the Group’s business activities. Information reported to this sub-group of the ELT, 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: > Commercial: The Commercial segment distributes and sells the Group’s commercial products. Currently Sativex® is promoted through strategic collaborations with major pharmaceutical companies for the currently approved indication of spasticity due to multiple sclerosis (“MS”). The Commercial segment will include revenues from the direct marketing of other future approved commercial products. The Group has licensing agreements for the commercialisation of Sativex with Almirall S.A. in Europe (excluding the UK) and Mexico, Otsuka Pharmaceutical Co. Ltd. (“Otsuka”) in the US, Bayer HealthCare AG in the UK and Canada, Neopharm Group in Israel, Emerge Health Pty. Ltd. in Australasia and Malaysia and Ipsen Biopharm Ltd. in Latin America (excluding Mexico and the Islands of the Caribbean). Commercial segment revenues include product sales, royalties, licence, collaboration and technical access fees, and development and approval milestone fees. > Sativex Research and Development: The Sativex Research and Development (“Sativex R&D”) segment seeks to maximise the potential of Sativex through the development of new indications. Sativex has shown promising efficacy in Phase 2 trials in other indications such as neuropathic pain, but these areas are not currently the subject of full development programmes. Sativex R&D segment revenues consist of research and development fees charged to Sativex licensees. > Pipeline Research and Development: The Pipeline Research and Development (“Pipeline R&D”) segment seeks to develop cannabinoid medications other than Sativex across a range of therapeutic areas using our proprietary cannabinoid technology platform. The Group’s product pipeline includes Epidiolex, in development as a treatment for Dravet syndrome, Lennox-Gastaut syndrome, Tuberous Sclerosis and Infantile Spasm, as well as other product candidates in Phase 1 and 2 clinical development for glioma, adult epilepsy and schizophrenia. Pipeline R&D 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 consistent with 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 sales, general and administrative expenses, interest expense, interest income and tax. No measures of segment assets and segment liabilities are reported to the CODM in order to assess performance and allocate resources. There is no inter-segment activity and all revenue is generated from external customers. 51 GW Pharmaceuticals plc | Annual report and accounts 20173. Segmental Information continued Segment Results For the year ended 30 September 2017 Revenue: Product sales Research and development fees Licence, collaboration and technical access fees Development and approval milestones Total revenue Cost of sales Research and development expenditure Segmental result Sales, general and administrative expenses Net foreign exchange loss Operating loss Interest expense Interest and other income Loss before tax Tax benefit Loss for the year Commercial £000s Sativex R&D £000s Pipeline R&D £000s Total Reportable Segments £000s Unallocated Costs1 £000s Consolidated £000s 6,232 – 1,373 110 7,715 (3,541) – 4,174 – 95 – – – 428 – – 6,232 523 1,373 110 – – – – 6,232 523 1,373 110 95 – (107) 428 – (107,078) 8,238 (3,541) (107,185) – – 8,238 (3,541) (4,044) (111,229) (12) (106,650) (102,488) (4,044) (106,532) (41,699) (5,045) (153,276) (745) 1,616 (152,405) 20,717 (131,688) 1 Unallocated costs represent the portion of share-based payment expenditures which is included in research and development expenditure, but which is not allocated to segments. The remaining share-based payment expenditure is included within sales, general and administrative expenses, which is similarly excluded from segmental result. Segment Results For the year ended 30 September 2016 Revenue: Product sales Research and development fees Licence, collaboration and technical access fees Development and approval milestones Total revenue Cost of sales Research and development expenditure Segmental result Sales, general and administrative expenses Net foreign exchange gain Operating loss Interest expense Interest and other income Loss before tax Tax benefit Loss for the year 5,208 – 1,172 98 6,478 (2,719) – 3,759 Commercial £000s Sativex R&D £000s Pipeline R&D £000s – 3,500 – – – 337 – – Total reportable segments £000s 5,208 3,837 1,172 98 Unallocated costs1 £000s Consolidated £000s – – – – 5,208 3,837 1,172 98 3,500 – (4,125) 337 – (91,571) 10,315 (2,719) (95,696) – – (4,119) 10,315 (2,719) (99,815) (625) (91,234) (88,100) (4,119) (92,219) (19,939) 25,551 (86,607) (173) 608 (86,172) 22,515 (63,657) 1 Unallocated costs represent the portion of share-based payment expenditures which is included in research and development expenditure, but which is not allocated to segments. The remaining share-based payment expenditure is included within sales, general and administrative expenses, which is similarly excluded from segmental result. 52 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 SeptemberSegment Results For the year ended 30 September 2015 Revenue: Product sales Research and development fees Licence, collaboration and technical access fees Development and approval milestones Total revenue Cost of sales Research and development expenditure Segmental result Sales, general and administrative expenses Net foreign exchange gain Operating loss Interest expense Interest and other income Loss before tax Tax benefit Loss for the year Commercial1 £000s Sativex R&D £000s Pipeline R&D £000s 4,255 – 1,287 188 – 22,275 – – – 535 – – Total Reportable Segments £000s 4,255 22,810 1,287 188 Unallocated Costs £000s Consolidated £000s – – – – 4,255 22,810 1,287 188 5,730 (2,618) – 22,275 – (26,398) 535 – (48,862) 28,540 (2,618) (75,260) – – (1,525) 28,540 (2,618) (76,785) 3,112 (4,123) (48,327) (49,338) (1,525) (50,863) (12,569) 6,202 (57,230) (75) 244 (57,061) 12,498 (44,563) 1 Unallocated costs represent the portion of share-based payment expenditures which is included in research and development expenditure, but which is not allocated to segments. The remaining share-based payment expenditure is included within sales, general and administrative expenses, which is similarly excluded from segmental result. Segment Results Revenues from the Group’s largest customer are included within the above segments as follows: Year ended 30 September 2017 Year ended 30 September 2016 Year ended 30 September 2015 Commercial £000s Sativex R&D £000s Pipeline R&D £000s 5,033 4,310 3,385 – – – – – – Revenues from the Group’s second largest customer are included within the above segments as follows: Year ended 30 September 2017 Year ended 30 September 2016 Year ended 30 September 2015 Commercial £000s Sativex R&D £000s Pipeline R&D £000s 1,559 1,419 1,474 – – – – – – Total £000s 5,033 4,310 3,385 Total £000s 1,559 1,419 1,474 Revenues from the Group’s third largest customer, the only other customer where revenues account for more than 10% of the Group’s revenues, are included within the above segments as follows: Commercial £000s Sativex R&D £000s Pipeline R&D £000s Total £000s Year ended 30 September 2017 Year ended 30 September 2016 Year ended 30 September 2015 280 280 280 95 3,500 22,275 428 337 535 803 4,117 23,090 53 GW Pharmaceuticals plc | Annual report and accounts 20173. Segmental Information continued Geographical Analysis of Revenue by Destination of Customer UK Europe (excluding UK) US Canada Asia/Other 4. Research and Development Expenditure GW-funded research and development Development partner-funded research and development 2017 £000s 1,502 5,342 375 582 437 8,238 2016 £000s 1,082 4,435 3,780 680 338 2015 £000s 1,158 3,592 22,555 700 535 10,315 28,540 2017 £000s 110,705 524 111,229 2016 £000s 95,978 3,837 99,815 2015 £000s 53,975 22,810 76,785 GW-funded research and development expenditure consists of costs associated with the Group’s research activities. These costs include costs of conducting pre-clinical studies or clinical trials, payroll costs associated with employing a team of research and development staff, share-based payment expenses, property costs associated with leasing laboratory and office space to accommodate research teams, costs of growing botanical raw material, costs of consumables used in the conduct of in-house research programmes, payments for research work conducted by sub-contractors by a network of academic collaborative research scientists, costs associated with safety studies and costs associated with the development of Epidiolex, Sativex or other pipeline product data. 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 sub-contracted 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, the Group uses both its internal resources and third-party contractors to provide contract research and development services to its commercial partners. 5. Loss Before Tax Loss before tax is stated after charging/(crediting): Operating lease rentals – land and buildings Operating lease rentals – equipment Depreciation of property, plant and equipment Impairment of property, plant and equipment Reversal of impairment of property, plant and equipment Amortisation of intangible assets Decrease in provision for inventories Foreign exchange loss/(gain) Staff costs (see note 7) 2017 £000s 3,602 25 5,276 635 (216) 245 100 5,045 55,328 2016 £000s 2,341 20 3,605 – – 62 72 (25,551) 40,463 2015 £000s 1,473 – 2,250 606 – 52 33 (6,202) 23,083 54 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 September6. Auditor’s Remuneration The auditor for the years ended 30 September 2017, 2016 and 2015 was Deloitte LLP Audit fees: – Audit of the Group’s annual accounts1 – Audit of the Company and subsidiaries pursuant to legislation Total audit fees Other services – Audit-related assurance2 – Other assurance services3 Total non-audit fees 2017 £000s 2016 £000s 2015 £000s 475 58 533 102 20 122 400 50 450 75 109 184 400 50 450 53 92 145 1 For the years ended 30 September 2017, 2016 and 2015, audit fees include amounts for the audit of the consolidated financial statements in accordance with the International Standards of Auditing, standards of the Public Company Accounting Oversight Board (United States) and include amounts for the audit of the Group’s internal controls over financial reporting. 2 Audit-related assurance fees relate to fees for the performance of interim reviews, and other procedures on interim results. 3 Other assurance services represents assurance reporting on historical financial information included in the Company’s shelf and follow-on US registration statements. An additional £59,000 was billed in respect of the 2016 audit during the year ended 30 September 2017. An additional £40,000 was billed in respect of the 2015 audit during the year ended 30 September 2016. The Audit Committee’s policy is to pre-approve all audit, audit-related and other services performed by the auditor. All such services were pre-approved during the years ended 30 September 2017, 2016 and 2015 under the Audit Committee’s policy. 7. Staff Costs The average number of Group employees (including Executive Officers) for the year ended 30 September was: Research and development Sales, general and administration 2017 Number 2016 Number 2015 Number 433 100 533 391 53 444 288 34 322 The average number of Company employees for the year ended 30 September was four (2016: four and 2015: one). Group aggregate remuneration comprised: Wages and salaries Social security costs Other pension costs Share-based payment 2017 £000s 2016 £000s 2015 £000s 37,517 4,301 1,650 11,860 55,328 25,823 5,132 1,356 8,152 17,092 2,748 765 2,478 40,463 23,083 Included in social security costs are local tax obligations on unrealised share option gains. The Company incurred £0.4 million of staff costs during the year (2016: £0.2 million and 2015: £0.2 million). 55 GW Pharmaceuticals plc | Annual report and accounts 20178. Directors’ Remuneration 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 2017 £000s 3,130 79 12,977 16,186 2016 £000s 2,523 215 6,453 9,191 2015 £000s 2,395 211 7,910 10,516 During 2017, six Directors were members of defined contribution pension schemes (2016: six and 2015: five). 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 12 to 31. 9. Other income and expense Interest expense – finance lease interest Interest expense – fit out funding interest Total interest expense Interest income – bank interest Other income Total interest and other income 2017 £000s (361) (384) (745) 1,616 – 1,616 2016 £000s (173) – (173) 435 173 608 2015 £000s (75) – (75) 244 – 244 Other income for the year ended 30 September 2016 related to an “above the line” credit associated with the UK large company R&D tax scheme. This represented an amount which was claimable from UK tax authorities in relation to qualifying expenditure incurred in the year ended 30 September 2016. 10. Tax a) Analysis of Tax Credit for the Year Current year research and development tax credit Current period tax (credit)/charge Adjustment in respect of prior year tax credit Deferred tax credit Movements on deferred tax assets Tax benefit 2017 £000s 2016 £000s 2015 £000s (19,900) 2,144 (468) (2,623) 130 (21,150) 1,175 (546) (2,037) 43 (12,641) 366 (165) (335) 277 (20,717) (22,515) (12,498) Tax credits relate to UK research and development tax credits claimed under the Corporation Tax 2009. The current period tax credit relates to US taxation on the taxable profit for the Group’s US subsidiary. The Group recognises in full the estimated benefit for qualifying current year UK research and development expenditures and resulting tax credits. Any difference in the credit ultimately received is recorded as an adjustment in respect of prior year. The Group recognises the likely recoverable estimated benefit for qualifying current year US research and development expenditures and resulting tax credits. Any difference in the credit ultimately received is recorded as an adjustment in respect of prior year. 56 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 SeptemberAt 30 September 2017 the Group had tax losses available for carry forward of approximately £204.1 million (2016: £102.8 million). Of such carried-forward losses, which are not subject to expiry, the Group has recognised a deferred tax asset of £1.6 million (2016: £1.8 million) up to the level of deferred tax liabilities arising in the same jurisdiction and additionally an asset supportable by taxable income projections of £nil (2016: £nil). The Group has also recognised a deferred tax asset of £6.3 million (2016: £3.9 million) in respect of taxable temporary timing differences relating to timing differences in another jurisdiction supportable by taxable income projections. In addition, the Group has not recognised deferred tax assets relating to other temporary differences of £17.8 million (2016: £33.9 million). 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 utilise all of the cumulative losses and therefore it is probable that the deferred tax assets will not be realised in full. If future income differs from current projections, this could significantly impact the tax charge or benefit in future periods. In addition to the amount charged to the income statement and other comprehensive income, the following amounts relating to tax have been recognised directly in equity: 2017 £000s 2016 £000s 2015 £000s Change in estimate of excess tax deductions related to share-based payments Total income tax recognised directly in equity 134 134 1,133 1,133 84 84 b) Factors Affecting the Tax Benefit for the Year The tax benefit for the year can be reconciled to the tax benefit on the Group’s loss for the year at the standard UK corporation tax rate as follows: 2017 £000s 2016 £000s 2015 £000s Loss before tax Tax credit on Group loss before tax at the standard UK corporation tax rate of 19.5% (2016: 20.0 %; 2015: 20.5%) Effects of: Expenses not deductible in determining taxable profit Impact of employee share acquisition relief Current year UK research and development tax credit Current year US tax credits R&D enhanced tax relief and surrender of losses Effect of unrecognised losses and temporary differences Overseas profits taxed at different rates Adjustment in respect of prior year tax credit Tax (152,405) (86,172) (57,061) (29,717) (17,234) (11,698) 756 (2,792) (19,900) (2,016) 11,634 21,329 456 (467) 588 (1,842) (21,150) (1,766) 12,679 6,634 122 (546) 233 (2,519) (12,641) – 7,756 6,536 – (165) (20,717) (22,515) (12,498) 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 2014 (Charged)/credited to profit or loss Credited to equity At 1 October 2015 (Charged)/credited to profit or loss Credited to equity At 1 October 2016 Credited/(charged) to profit or loss Credited to equity At 30 September 2017 Accelerated Tax Depreciation £000s Tax Losses £000s (605) (1,290) – (1,895) (23) – (1,918) 107 – (1,811) 882 1,002 – 1,884 (48) – 1,836 220 – 2,056 Share-Based Payment and Other Compensation £000s – 345 84 429 2,072 1,454 3,955 2,297 (215) 6,037 Total £000s 277 57 84 418 2,001 1,454 3,873 2,623 (215) 6,282 Deferred tax assets and liabilities have been offset where the Group has a legally enforceable right to do so, and intends to settle on a net basis. The taxing authority permits the Group to make or receive a single net payment for all UK subsidiaries. The Group’s US subsidiary operates in a different jurisdiction with no legally enforceable right to offset against UK tax charges or credits. 57 GW Pharmaceuticals plc | Annual report and accounts 201710. Tax continued On 15 September 2016, the reduction in the main rate of corporation tax from 19% to 17% was enacted, with effect from 1 April 2020. The enacted UK tax rate until 1 April 2015 was 21%, and 20% until 31 March 2017. On 16 November 2017, the US House of Representatives approved its version of comprehensive tax reform legislation. The Group is continuing to monitor the developments of these reform proposals and the alternative proposals approved by the Senate Finance Committee on 2 December 2017. If the two proposals are successfully reconciled and pass as proposed, it is considered that there may be an impact of a rate reduction on the deferred tax asset held but at the current time, it is not possible to fully quantify the potential impact. 11. Loss Per Share The calculations of loss per share are based on the following data: Loss for the year – basic and diluted Weighted average number of ordinary shares Less ESOP trust ordinary shares1 Weighted average number of ordinary shares for purposes of basic earnings per share Effect of potentially dilutive shares arising from share options2 Weighted average number of ordinary shares for purposes of diluted earnings per share Loss per share – basic Loss per share – diluted 2017 £000s 2016 £000s 2015 £000s (131,688) (63,657) (44,563) Number of shares 2017 Million 303.6 – 303.6 – 303.6 2016 Million 270.4 – 270.4 – 270.4 2015 Million 246.4 – 246.4 – 246.4 (43.4)p (23.5)p (43.4)p (23.5)p (18.1)p (18.1)p 1 As at 30 September 2017, 33,054 ordinary shares were held in the ESOP trust (2016: 33,054; 2015: 33,054). The effect is less than 0.1 million shares, and consequently these have not been presented above. 2 The Group incurred a loss in each of the financial years above. As a result, the inclusion of potentially dilutive share options in the diluted loss per share calculation would have an anti-dilutive effect on the loss per share for the period. The impact of 7.5 million share options have therefore been excluded from the diluted loss per share calculation for the year ended 30 September 2017 (30 September 2016: 7.1 million; 30 September 2015: 7.8 million). 12. Intangible Assets – Goodwill Group Cost – as at 1 October Net book value – as at 30 September 2017 £000s 5,210 5,210 2016 £000s 5,210 5,210 Goodwill arose upon the acquisition of GW Research Limited (formerly G-Pharm Limited) in 2001. For impairment testing purposes, all goodwill has been allocated to the Commercial segment as a separate cash-generating unit. Goodwill has an indefinite useful life and is tested annually for impairment or more frequently if there are indications of impairment. The Group has determined the recoverable amount of the Commercial segment based on a value-in-use calculation. This calculation uses pre-tax cash flow projections based on financial budgets approved by management covering a two-year period. Cash flows beyond the two-year period are based upon detailed internal and external third party analysis of the Group’s product opportunity, of which Epidiolex is a significant contributor, or are extrapolated using the estimated growth rates stated below. The projections include assumptions about the timing and likelihood of product launches and pricing policy. Management has determined the following assumptions to be the key assumptions in the calculation of value-in-use for the Commercial segment: Growth rate – sales volume in each period is the main driver for revenue and costs. The same growth rates have been used in financial budgets and are consistent with in-market run rates and internal commercial forecasts based on a 10-year period. 58 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 SeptemberLong-term growth rate – A 0% growth rate has been applied after 10 years (2016: 0% after 10 years). This approach has been adopted by management as it is representative of the long development and product lifecycle in the pharmaceutical sector. In future periods, depending on the performance of the Commercial segment, it may be necessary to revise the terminal growth rate. Discount rate – a 15.7% (2016: 12.6%) pre-tax rate has been used. This is considered appropriate for the purpose of impairment reviews as it reflects the current market assessment of the time value of money and the risks specific to the cash-generating unit. Any reasonably possible change in the key assumptions on which value-in-use is based would not cause the carrying amount to exceed the recoverable amount of the Commercial segment. 13. Other Intangible Assets Group Cost At 1 October 2015 Additions Transfers of completed assets At 1 October 2016 Additions Reclassifications Transfers of completed assets Disposals At 30 September 2017 Accumulated amortisation At 1 October 2015 Charge for the year At 1 October 2016 Charge for the year At 30 September 2017 Net book value At 30 September 2017 At 30 September 2016 Intangible Assets Under the Course of Construction £000s 66 387 (38) 415 259 41 (546) (41) 128 – – – – – 128 415 Software £000s Licences £000s Total £000s 220 35 38 293 359 – 546 – 59 24 – 83 47 – – – 345 446 – 791 665 41 – (41) 1,198 130 1,456 96 57 153 233 386 812 140 4 5 9 12 21 100 62 162 245 407 109 74 1,049 629 Included in additions are £nil of other intangible assets which are unpaid at the balance sheet date and are included in trade and other payables (2016: £nil). The Company does not own any other intangible assets. 59 GW Pharmaceuticals plc | Annual report and accounts 201714. Property, Plant and Equipment Group Cost At 1 October 2015 Additions Reclassifications Transfers of completed assets Disposals Exchange differences At 1 October 2016 Additions Reclassifications Transfers of completed assets Transfers to assets held for sale in year Disposals Exchange differences At 30 September 2017 Accumulated depreciation and impairment At 1 October 2015 Charge for the year Reclassifications Disposals Exchange differences At 1 October 2016 Charge for the year Transfers to assets held for sale in year Impairment of assets Reversal of impairment of assets Disposals Exchange differences At 30 September 2017 Net book value At 30 September 2017 At 30 September 2016 Assets Under the Course of Construction £000s Leasehold Buildings £000s 17,283 7,698 – (3,623) – – 21,358 11,090 (41) (26,566) – (390) – – 3,603 – – – – 3,603 – – – – – – Plant, Machinery and Lab Equipment £000s 7,915 1,754 1,463 1,809 (112) – 12,829 470 – 9,944 (1,249) (770) – Office and IT Equipment £000s Leasehold Improvements £000s Total £000s 3,347 273 (1,463) 29 (789) 20 1,417 72 – 131 – (33) (6) 8,164 473 – 1,785 (122) 1 10,301 418 – 16,491 – (225) (5) 36,709 13,801 – – (1,023) 21 49,508 12,050 (41) – (1,249) (1,418) (11) 5,451 3,603 21,224 1,581 26,980 58,839 606 – – – – 606 – – – (216) (390) – – – 63 – – – 63 180 – – – – – 243 3,765 1,654 216 (112) – 5,523 2,166 (340) 635 – (168) – 7,816 5,451 20,752 3,360 3,540 13,408 7,306 1,339 338 (216) (788) 1 674 331 – – – (32) (2) 971 610 743 2,266 1,550 – (122) 1 3,695 2,599 – – – (150) (1) 7,976 3,605 – (1,022) 2 10,561 5,276 (340) 635 (216) (740) (3) 6,143 15,173 20,837 43,666 6,606 38,947 The Company does not own any property, plant and equipment. The net book value of property, plant and equipment at 30 September 2017 includes £4.6 million in respect of assets held under finance leases (2016: £4.9 million). Included in additions is £2.0 million of property, plant and equipment which is unpaid and is included in trade and other payables (2016: £3.2 million). During the current financial year, the Group’s purpose-built manufacturing and processing facility was completed and occupied. Upon completion the associated capitalised costs previously held in Assets Under the Course of Construction were reclassified to the relevant asset class for each component asset. Depreciation commenced at this date and will continue over the relevant assets’ useful economic lives. The impairment loss on plant, machinery and lab equipment arose in connection with the reorganisation of the Group’s plant material growing strategy, whereby the recoverable value of the assets did not exceed their carrying value. The reversal of a previous impairment of assets under the course of construction relates to manufacturing assets for which their intended use has changed such that their value is now recoverable. During the year these assets were transferred out of assets under the course of construction and are now in use. 60 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 September15. Inventories Group Raw materials Work in progress Finished goods Total inventories, net of provision 2017 £000s 199 3,379 666 4,244 2016 £000s 252 3,226 770 4,248 Inventories with a carrying value of £2.1 million are considered to be recoverable after more than one year from the balance sheet date, but within the Group’s normal operating cycle (2016: £2.2 million). The provision for inventories relates to inventories expected to be utilised in the Group’s R&D activities. The movement in the provision for inventories is as follows: 2017 £000s Opening balance as at 1 October Write down of inventories Write off of inventories included in the provision Reversal of write down of inventories Closing balance as at 30 September 118 159 (177) (59) 41 2016 £000s 66 129 (20) (57) 118 The reversal of write-down is as a result of an increased level of production, reducing the level of work in progress expected to expire before use. Write off of inventories previously provided for does not impact cash flow. The Company did not own any inventory in the current or prior years. 16. Trade and Other Receivables Amounts falling due within one year Trade receivables Prepayments and accrued income Other receivables Amounts due from group undertakings Group Company 2017 £000s 2016 £000s 2017 £000s 2016 £000s 1,023 7,481 2,713 – 11,217 778 2,637 1,141 – 4,556 – 282 45,117 419 45,818 – 177 23,154 – 23,331 Trade receivables disclosed above are classified as loans and receivables and are therefore measured at amortised cost. Trade receivables at 30 September 2017 represent 45 days of sales (2016: 27 days). The average trade receivable days during the year ended 30 September 2017 was 47 days (2016: 19 days). The credit period extended to customers is 30 to 60 days. The trade receivables balance at 30 September 2017 consisted of balances due from five customers (2016: four customers) with the largest single customer representing 53% (2016: 70%) of the total amount due. The Group’s customers consist of a small number of large pharmaceutical companies, where the risk attributable to each customer is considered to be low. The Group seeks to mitigate credit risk by seeking payments in advance from pharmaceutical partners for significant expenditure to be incurred on their behalf. No interest is charged on trade receivables. No impairment losses were recognised during the year ended 30 September 2017 (2016: £nil). Prepayments and accrued income include £3.8 million (2016: £1.0 million) of deposits paid in advance on tangible and intangible fixed assets. The goods and services associated with these deposits are expected to be received by the Group within one year. The Directors consider that the carrying value of trade receivables approximates to their fair value due to the short maturity thereof. 61 GW Pharmaceuticals plc | Annual report and accounts 201717. Trade and Other Payables Amounts falling due within one year Other creditors and accruals Trade payables Clinical trial accruals Other taxation and social security Fit out funding (see note 18) Onerous lease provision Amounts owed to group undertakings Amounts falling due after one year Fit out funding (see note 18) Other creditors and accruals Onerous lease provision Group Company 2017 £000s 2016 £000s 2017 £000s 2016 £000s 19,335 5,807 5,520 2,032 389 36 – 33,119 7,957 1,288 11 9,256 15,899 3,433 9,503 1,490 845 – – 31,170 8,342 1,081 – 9,423 437 213 – 10 – – 203 863 – – – – 521 52 – 7 – – – 580 – – – – 42,375 40,593 863 580 Trade payables principally comprise amounts outstanding for trade purchases and ongoing costs. Trade payables at 30 September 2017 represent the equivalent of 19 days’ purchases (2016: 14 days). The average credit period taken for trade purchases during the year ended 30 September 2017 was 15 days (2016: 14 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 due to the short maturity thereof. Non-current other creditors and accruals relates entirely to the expected employer’s payroll taxes payable on employee share options which will vest more than one year after the financial year end. The onerous lease provision recognised in the year relates to an operating lease held on a property which was vacated in order to occupy larger premises. 18. Fit Out Funding On 19 November 2013 the Group entered into an agreement with its landlord to receive fit out funding of £7.8 million to fund the expansion and upgrades to manufacturing facilities. The funds were received in tranches, with the final amount received on 1 July 2014. The repayment of the borrowing takes the form of quarterly rental payments over a period of 15 years which commenced on 27 May 2016 when the Group entered into the associated lease of the building. As at 30 September 2017 associated interest of £2.2 million has been incurred (30 September 2016: £1.6 million). The total liability at 30 September 2017 is £8.3 million (30 September 2016: £9.2 million). The Group has estimated that £0.4 million of the total liability will be due within one year and the remaining £7.9 million is due after one year. The liability in respect of the funding was initially recognised at the amount of proceeds received, net of transaction costs, and has been subsequently carried at amortised cost using the effective interest method and a rate of 7.0% (30 September 2016: 7.0%). 62 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 SeptemberThe following table details the Group’s remaining contractual maturity for its borrowings and the related interest payments. The tables are based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group could be required to pay. The table includes cash flows for both interest, based on the rate applicable as at 30 September 2017, and principal amounts: Forward projection of cash flows as at 30 September 2017 Principal Interest Total Forward projection of cash flows as at 30 September 2016 Principal Interest Total 19. Obligations Under Finance Leases Group Amounts payable under finance leases: Within one year In the second to fifth years inclusive After five years Less: future finance charges Present value of lease obligations Amounts payable under finance leases: Amounts due for settlement within 12 months Amounts due for settlement after 12 months <1 year £000s 1–2 years £000s 2–3 years £000s 3–4 years £000s 4–5 years £000s 389 576 965 417 548 965 446 519 965 480 485 965 514 451 965 <1 year £000s 1–2 years £000s 2–3 years £000s 3–4 years £000s 4–5 years £000s 845 603 1,448 389 576 965 417 548 965 446 519 965 479 486 965 5+ years £000s 6,100 2,028 8,128 5+ years £000s 6,611 2,480 9,091 Total £000s 8,346 4,607 12,953 Total £000s 9,187 5,212 14,399 Minimum Lease Payments 2017 £000s 2016 £000s 556 2,220 5,959 8,735 571 2,223 6,511 9,305 (3,775) (4,135) 4,960 5,170 Present Value of Lease Payments 2017 £000s 2016 £000s 205 4,755 4,960 211 4,959 5,170 It is the Group’s policy to lease certain of its property, plant and equipment under finance leases. The weighted average lease term remaining is 16.1 years (2016: 17.1 years). For the year ended 30 September 2017, the average effective borrowing rate was 7.6% (2016: 7.5%). 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 Pounds Sterling. The carrying value of the Group’s lease obligations as at 30 September 2017 approximates to their fair value. The Group’s obligations under finance leases are generally secured by the lessors’ rights over the leased assets. 63 GW Pharmaceuticals plc | Annual report and accounts 201720. Deferred Revenue Group Amounts falling due within one year Deferred licence, collaboration and technical access fee income1 Advance research and development fees2 Amounts falling due after one year Deferred licence, collaboration and technical access fee income1 2017 £000s 2016 £000s 1,166 1,141 2,307 1,451 1,235 2,686 4,260 5,355 1 Deferred revenue primarily relates to up-front licence fees received in 2005 of £12.0 million from Almirall S.A. (deferred revenue balance as at 30 September 2017: £2.7 million; 30 September 2016: £3.5 million) and collaboration and technical access fees from other Sativex licensees. Amounts deferred under each agreement will be recognised in revenue as disclosed in note 2. 2 Advance payments received represent payments for research and development activities to be recognised as revenue in future periods as the services are rendered. 21. Financial Instruments The Group manages its capital to ensure that entities in the Group will be able to continue operating as a going concern while maximising shareholder returns. The Group’s overall strategy remains unchanged. 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 – loans and receivables Cash and cash equivalents Trade receivables – at amortised cost Other receivables Total financial assets Financial liabilities – amortised cost Other creditors and accruals Clinical trial accruals Trade payables Fit out funding Obligations under finance leases Total financial liabilities 2017 £000s 2016 £000s 241,175 1,023 1,699 374,392 778 385 243,897 375,555 16,546 5,520 5,807 8,346 4,960 41,179 12,401 9,503 3,433 9,187 5,170 39,694 All financial assets are current in nature. All financial liabilities, other than the non-current element of £4.8 million in respect of the obligations under finance leases (2016: £5.0 million), £1.3 million (2016: £1.1 million) of other creditors and accruals and £7.9 million (2016: £8.3 million) of fit out funding received from the Group’s landlord, are current in nature. In all instances, the Directors consider that the carrying value of financial assets and financial liabilities approximates to their fair value. It is, and has been throughout the years ended 30 September 2016 and 2017, the Group’s policy that no speculative trading in financial instruments shall be undertaken. 64 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 September 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 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 by 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. At the balance sheet date the maximum credit risk attributable to any individual counterparty was £85.5 million (2016: £244.0 million) which is held by HSBC. 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. 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 secures 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 90 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 £1.6 million (2016: £0.4 million; 2015: £0.2 million) during the year ended 30 September 2017 was earned from deposits with a weighted average interest rate of 0.89% (2016: 0.36%; 2015: 0.24%). Therefore, a 100 basis point increase in interest rates would have increased interest income, and reduced the loss for the year, by £1.8 million (2016: reduced loss by £1.2 million; 2015: reduced loss by £1.0 million). 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 apart from Greenwich Biosciences, Inc., is Pounds Sterling and the majority of transactions in the Group are denominated in that currency. The functional currency of Greenwich Biosciences, Inc. is US Dollars (US$). The Group receives revenues and incurs expenditures in foreign currencies and is exposed to the risks of foreign exchange rate movements, with the impact recognised in the consolidated 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. 65 GW Pharmaceuticals plc | Annual report and accounts 201721. Financial Instruments continued The table below shows analysis of the Pounds Sterling equivalent of year-end cash and cash equivalent balances by currency: Cash at bank and in hand: Pounds Sterling Euro US Dollar Canadian Dollar Total Short-term deposits (less than 30 days): Pounds Sterling US Dollar Total cash and cash equivalents 2017 £000s 2016 £000s 57,246 1,848 25,681 1,002 73,277 1,582 169,738 448 85,777 245,045 – 155,398 31,564 97,783 241,175 374,392 The table below shows those transactional exposures that give rise to net currency gains and losses recognised in the consolidated 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 relevant Group entity. As at 30 September these exposures were as follows: Net Foreign Currency Assets/(Liabilities) US Dollar Euro Canadian Dollar Other 2017 £000s 2016 £000s 171,375 420 1,002 (276) 263,094 1,665 649 (38) 172,521 265,370 Foreign Currency Sensitivity Analysis The most significant currencies in which the Group transacts, other than Pounds Sterling, are the US Dollar, the Euro and the Canadian Dollar. The Group also trades in other currencies in small amounts as necessary. The following table details the Group’s sensitivity to a 10% change in the year-end rate, which the Group feels is the maximum likely change in rate based upon recent currency movements, in the key foreign currency exchange rates against Pounds Sterling: Year ended 30 September 2017 Loss before tax Equity Year ended 30 September 2016 Loss before tax Equity Year ended 30 September 2015 Loss before tax Equity Euro £000s 42 42 Euro £000s 167 167 Euro £000s 77 77 US Dollar £000s 17,138 17,138 Canadian Dollar £000s 100 100 US Dollar £000s Can Dollar £000s 26,309 26,309 65 65 US Dollar £000s Can Dollar £000s 17,780 17,780 95 95 Other £000s (28) (28) Other £000s (4) (4) Other £000s (6) (6) In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year-end exposure does not reflect the exposure during the year. 66 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 September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 monitors Group cash flows and regularly reviews 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 32 days (2016: 32 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, other than the £4.8 million in respect of the obligations under finance leases (2016: £5.0 million) and £7.9 million (2016: £8.3 million) of fit out funding received from the Group’s landlord. The obligations under finance leases will be repaid over a weighted average 16.1 year term (2016: 17.1 year term) and the fit out funding received is being repaid over a 15-year finance term of which repayments commenced during the year. 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. 22. Share Capital As at 30 September 2017 the share capital of the Company’s allotted, called-up and fully paid amounts were as follows: Allotted, called-up and fully paid Changes to the number of ordinary shares in issue have been as follows: As at 1 October 2015 Issue of new shares (net of issuance costs) Exercise of share options As at 1 October 2016 Exercise of share options As at 30 September 2017 2017 £000s 304 2016 £000s 302 Number of Shares 261,180,173 38,640,000 2,272,966 302,093,139 2,346,601 Total Nominal Value £000s Total Share Premium £000s Total Consideration £000s 261 39 2 302 2 349,275 206,512 690 556,477 93 349,536 206,551 692 556,779 95 304,439,740 304 556,570 556,874 In July 2016, the Group completed an equity financing, issuing 38,640,000 ordinary shares in the form of American Depositary Shares (“ADSs”) listed on the NASDAQ Global market, raising net proceeds after expenses of US$273.1 million (£206.6 million). This took the form of 3,220,000 ADSs at a price to the public of US$90.00 per ADS. Each ADS represents 12 ordinary shares of 0.1p each in the capital of the Company. The Company has one class of ordinary shares which carry no right to fixed income. 67 GW Pharmaceuticals plc | Annual report and accounts 201723. Share-Based Payments Equity-settled Share Option Schemes The Company operates various equity-settled share option schemes for employees of the Group. All options granted under these schemes are exercisable at the share price on the date of the grant, with the exception of certain 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. All such options granted are equity-settled share options which entitle the holder to acquire an equity share in the Group. The vesting period for all options granted range between one and four years from the date of grant and options lapse after six months to seven years from the vesting date. Options generally also 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 various 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. In the year ended 30 September 2017, two employees designated as “Good Leavers” were permitted to retain options over 26,109 shares upon ceasing employment. Also during the year ended 30 September 2017, 9,556 non-Director LTIP share options were subject to a modification of terms per the provisions of IFRS 2 Share Based Payment. This led to the recognition of an incremental fair value charge of less than £0.1 million, calculated using the Black-Scholes share option pricing model, which arises due to increases in the underlying share price since the initial options were granted. In the year ended 30 September 2016, two employees designated as “Good Leavers” were permitted to retain options over 4,807 shares upon ceasing employment. Also during the year ended 30 September 2016, 90,000 non-director LTIP share options were replaced and accounted for as a modification of terms per the provisions of IFRS 2 Share based Payment. This led to the recognition of an incremental fair value charge of £0.4 million, calculated using the Black-Scholes share option pricing model, which arises due to increases in the underlying share price since the initial options were granted. LTIP Share Options and Performance Conditions LTIP awards granted to employees (excluding Executive Officers) are subject to service and non-market-based performance conditions which must be achieved before the options vest and become exercisable. Typically these are linked to operational, regulatory or strategic milestones and are designed to incentivise individual employees and advance the Group’s progress towards its strategic objectives. LTIP awards granted to Executive Officers are subject to service and 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. Typically these performance conditions relate to operational milestones or regulatory filing and approval. In the event that the performance conditions (non-market and market) are not achieved within the required vesting period, the options lapse. LTIP awards granted to Non-Executive Directors are subject to service-based performance conditions only, and vest automatically on completion of the required service period as determined at the point of grant. The number of outstanding options under each scheme can be summarised as follows: Employee share option schemes Employee LTIP awards Options outstanding 30 Sept 2017 Number of Share Options 30 Sept 2016 Number of Share Options 107,542 11,925,948 10,525,630 – 11,925,948 10,633,172 68 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 SeptemberThe movement in share options in each scheme during the year can be summarised as follows: Employee Options Employee LTIP Total Options Number of Share Options Weighted Average Exercise Price £ Number of Share Options Weighted Average Exercise Price £ Number of Share Options Weighted Average Exercise Price £ Outstanding at 1 October 2015 Granted during the year Exercised during the year Lapsed during the year Outstanding at 1 October 2016 Granted during the year Exercised during the year Lapsed during the year 770,936 – (663,394) – 107,542 – (107,538) (4) 1.02 – 1.04 – 7,660,564 4,767,106 (1,609,572) (292,468) 0.868 10,525,630 3,927,368 (2,239,063) (287,987) – 0.868 0.540 0.29 0.60 8,431,500 4,767,106 0.001 (2,272,966) (292,468) 0.001 0.482 10,633,172 3,927,368 1.525 (2,346,601) 0.001 (287,991) 0.001 Outstanding at 30 September 2017 – – 11,925,948 0.927 11,925,948 Share options outstanding at 30 September 2017 can be summarised as follows: 0.35 0.60 0.305 0.001 0.61 1.525 0.041 0.001 0.927 £0.00–£0.50 £2.50+ Outstanding at 30 September 2017 Exercisable at 30 September 2017 Employee Options Employee LTIP Total Options Number of Share Options Weighted Average Remaining Contractual Life/ Years Number of Share Options Weighted Average Remaining Contractual Life/ Years Number of Share Options Weighted Average Remaining Contractual Life/ Years – – – – – – 9,752,126 2,173,822 – 11,925,948 – 1,986,029 5.34 8.70 9,752,126 2,173,822 5.95 11,925,948 4.87 1,986,029 5.34 8.70 5.95 4.87 Share options outstanding at 30 September 2016 can be summarised as follows: Employee Options Employee LTIP Total Options Number of Share Options Weighted Average Remaining Contractual Life/ Years Number of Share Options Weighted Average Remaining Contractual Life/ Years Number of Share Options Weighted Average Remaining Contractual Life/ Years £0.00–£0.50 £0.51–£1.00 £1.00+ Outstanding at 30 September 2016 Exercisable at 30 September 2016 4,000 103,542 – 107,542 107,542 1.97 0.59 – 9,182,071 – 1,343,559 6.26 – 7.24 9,186,071 103,542 1,343,559 0.64 10,525,630 6.38 10,633,172 0.64 3,057,821 6.12 3,165,363 Charges for share-based payments have been allocated to the research and development expenditure and Sales, general and administrative expenses in the consolidated income statements as follows: 2017 £000s 2016 £000s Research and development expenditure Sales, general and administrative expenses 4,044 7,816 11,860 4,119 4,033 8,152 6.25 0.59 7.24 6.32 5.93 2015 £000s 1,525 953 2,478 In the year ended 30 September 2017, options were granted on 19 December 2016, 6 January 2017, 11 January 2017, 21 February 2017, 15 March 2017, 17 April 2017, 18 May 2017, 28 June 2017, 6 July 2017, 10 August 2017, and 6 September 2017. The aggregate of the estimated fair values of the options granted on those dates is £26.3 million and the weighted average fair value of the awards made during 2016 was £6.69 per option. In the year ended 30 September 2016, options were granted on 29 December 2015, 15 January 2016, 15 February 2016, 18 March 2016, 14 April 2016, 12 May 2016, 9 June 2016 and 26 August 2016. The aggregate of the estimated fair values of the options granted on those dates is £12.7 million and the weighted average fair value of the awards made during 2016 was £2.66 per option. 69 GW Pharmaceuticals plc | Annual report and accounts 201723. Share-Based Payments continued Fair values were calculated using the Black-Scholes share option pricing model for grants with non-market-based performance conditions. The following weighted average assumptions were used in calculating these fair values: 2017 2016 2015 Weighted average share price Weighted average exercise price Expected volatility Expected life Risk-free rate Expected dividend yield 744p 152p 67% 298p 60p 58% 579p 109p 59% 3.26 years 3.3 years 3.6 years 1.32% Nil 1.25% Nil 1.09% Nil Expected volatility was determined by calculating the historical volatility of the Group’s ADS share price over previous 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. 24. Other Reserves Other reserves of £18.8 million (30 September 2016: £19.5 million) relate to a £19.3 million merger reserve (30 September 2016: £19.3 million) and a £0.5 million debit relating to exchange difference on translation of foreign operations (30 September 2016: credit £0.2 million). The merger reserve was created as a result of the acquisition by the Company of the entire issued share capital of GW Pharma Limited in 2001. This acquisition was effected by a share-for-share exchange which was merger accounted under UK Generally Accepted Accounting Practice (“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. In preparing consolidated financial statements, the amount by which the fair value of the shares issued exceeded their nominal value was recorded in a merger reserve on consolidation, rather than in a share premium account. The merger reserve was retained upon transition to IFRSs, 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 (2016: nil). As at 30 September the ESOP held the following shares: Unconditionally vested in employees Shares available for future distribution to employees Total 2017 Number 69,119 33,054 2016 Number 90,043 33,054 102,173 123,097 The valuation methodology used to compute the share-based payment charge related to the ESOP is 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 23 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 a three-year vesting period from the date of grant. The share-based payment charge for shares granted under the ESOP plan amounted to £nil in the year ended 30 September 2017 (2016: £nil). As at 30 September 2017 the number and market value of shares held by the trust which have not yet unconditionally vested in employees is 33,054 (2016: 33,054) and £0.2 million (2016: £0.3 million) respectively. 70 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 September 25. Financial Commitments The Group had capital commitments for property, plant and equipment contracted but not provided for at 30 September 2017 of £7.6 million (2016: £5.1 million). At the balance sheet date the Group and Company had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Group Company Within one year Between two and five years After five years 2017 £000s 3,628 8,745 1,937 2016 £000s 2,723 8,117 2,198 14,310 13,038 2017 £000s 2016 £000s – – – – – – – – The minimum lease payments payable under operating leases recognised as an expense in the year were £3.6 million (2016: £2.4 million). Operating lease payments represent rentals payable by the Group for certain of its leased properties. Manufacturing and laboratory facilities are subject to 5 to 20-year leases, some of which have a lease break three years prior to the conclusion of the lease at the Group’s option. Office properties are subject to 1 to 10-year leases. During the year ended 30 September 2016, the Group signed a commercial growing agreement with an external supplier to produce plant material for use in the Epidiolex development programmes and commercial release. This agreement commenced on 1 January 2017 and includes multiple fee elements designed to incentivise cost-efficient, reliable production volumes of raw materials for use in research, development and commercial activities. As part of the accounting treatment for this agreement a component operating lease was identified under the requirements of IFRIC 4 Determining Whether an Arrangement Contains a Lease. Rental payments commenced on 1 January 2017 and continue over a five-year non-cancellable period. Future minimum lease payments associated with this operating lease are included in the table shown above. Other gross payments associated with this agreement, excluding operating lease rentals and capital commitments outlined above, fall due as follows: Group Company Within one year Between two and five years After five years 2017 £000s 2016 £000s 2017 £000s 2016 £000s 8,973 29,942 – 38,915 6,755 36,667 2,248 45,670 – – – – – – – – 71 GW Pharmaceuticals plc | Annual report and accounts 201726. 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. 2017 £000s 2016 £000s 2015 £000s Short-term employee benefits Post-employment benefits Share-based payments 4,144 84 7,237 11,465 2,523 215 4,556 7,294 2,395 211 1,164 3,770 Other Related Party Transactions Group During the year ended 30 September 2017, the remuneration committee agreed to indemnify Justin Gover for the incremental US taxation that would be suffered on the gain arising from one grant of LTIP options as a result of having relocated to the US at the Company’s request during the vesting period for this award. As at 30 September 2017 the residual liability is estimated as US$0.8 million (2016: US$1.2 million, 2015: US$nil), and is expected to be payable within the next 12 months. The Group paid £nil (2016: £138; 2015: £263) under a consultancy agreement for medical writing services to Kathryn Wright, wife of the Group’s former Chief Medical Officer Stephen Wright, who retired during the year ended 30 September 2017. As at 30 September 2017 there was no amount due to Kathryn Wright (2016 and 2015: £nil). The Group paid £nil (2016: £47 and 2015: £nil) to Adaptimmune Ltd in relation to travel expenses incurred by James Noble, a non-executive Director of the Group, who also acts as Chief Executive Officer for Adaptimmune Ltd. As at 30 September 2017 there was no amount due to Adaptimmune Ltd (2016 and 2015: £nil). All fees outlined above were paid on an arms-length basis and were carried out in accordance with the Group’s policy regarding related party transactions. Company During 2017, 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 2017 was £334.6 million (2016: £213.9 million). As a long-term loan, this has been disclosed within the Company balance sheet as an investment – see note 27. At 30 September 2017, the amount due from GW Pharma Limited to the Company was £45.1 million (2016: £23.1 million). At 30 September 2017, the amount due from the Company to Greenwich Biosciences, Inc. was £0.2 million (2016: £nil). 72 GW Pharmaceuticals plc | Annual report and accounts 2017Notes to the Consolidated Financial Statements continuedFor the year ended 30 September 27. Investments Group Investments Company At 1 October 2015 Add capital contribution in respect of share-based payment charge Additional funds advanced during year At 1 October 2016 Add capital contribution in respect of share-based payment charge Additional funds advanced during year At 30 September 2017 Loans to Group undertakings £000s 117,017 – 97,022 214,039 – 120,527 Investments £000s 82,836 8,152 – 90,988 11,860 – Total £000s 199,853 8,152 97,022 305,027 11,860 120,527 102,848 334,566 437,414 The Company has investments in the following subsidiary undertakings: Name of Undertaking Registered Office Address Country of Incorporation Activity % Holding Direct ownership: GW Pharma Limited GW Research Limited Greenwich Biosciences Inc. Cambridge, UK Cambridge, UK Carlsbad, US England and Wales England and Wales United States of America Pharmaceutical development Research and development Research and development services GW Pharmaceuticals Australia Melbourne, Australia Australia Pharmaceutical development PTY Limited Indirect ownership: GWP Trustee Company Limited Cannabinoid Research Institute Cambridge, UK England and Wales Employee share ownership services Limited Cambridge, UK Guernsey Pharmaceuticals Limited Cambridge, UK Cambridge, UK G-Pharm Limited England and Wales Guernsey England and Wales Dormant Dormant Dormant 100 100 100 100 100 100 100 100 All the subsidiary undertakings are included in the consolidated accounts. 73 GW Pharmaceuticals plc | Annual report and accounts 2017Advisers Registered Office GW Pharmaceuticals plc Sovereign House Vision Park Histon Cambridgeshire CB24 9BZ United Kingdom T: +44 (0)1223 266800 F: +44 (0)1223 235667 E: info@gwpharm.com Registered Number 04160917 England and Wales Solicitors to the Company Mayer Brown LLP 201 Bishopsgate London EC2M 3AF Auditor Deloitte LLP 2 New Street Square London EC4A 3BZ 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 Cautionary statement: This Annual Report release contains forward-looking statements that reflect GW’s current expectations regarding future events, including statements regarding financial performance, the timing of clinical trials, the relevance of GW products commercially available and in development, the clinical benefits of Sativex® and Epidiolex® and the safety profile and commercial potential of Sativex and Epidiolex. Forward-looking statements involve risks and uncertainties. Actual events could differ materially from those projected in this news release 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, Epidiolex and other products by consumer and medical professionals. A further list and description of risks and uncertainties associated with an investment in GW can be found in GW’s filings with the US Securities and Exchange Commission. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. GW undertakes no obligation to update or revise the information contained in this press release, whether as a result of new information, future events or circumstances or otherwise. GW Pharmaceuticals plc Sovereign House Vision Park Histon Cambridgeshire CB24 9BZ United Kingdom T: +44 (0)1223 266800 F: +44 (0)1223 235667 www.gwpharm.com 74 GW Pharmaceuticals plc | Annual report and accounts 201775 GW Pharmaceuticals plc | Annual report and accounts 2017Notes 76 GW Pharmaceuticals plc | Annual report and accounts 2017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 7 GW Pharmaceuticals plc Sovereign House Vision Park Histon Cambridgeshire CB24 9BZ United Kingdom T: +44 (0)1223 266800 F: +44 (0)1223 235667 www.gwpharm.com 

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