Diabetes
Epilepsy
Multiple Sclerosis Multiple Schizophrenia Cancer pain
Annual Report and Accounts 2013 Accounts Report and Annual The global leader medicines cannabinoid in prescription prescription in
GW Pharmaceuticals plc Annual Report and Accounts 2013 Highlights 2013
Contents Initial public offering on the NASDAQ Global Market completed in May 2013 raising total net proceeds before expenses of ifc Highlights 2013 $30.7m (£19.8m) 1 Chairman’s Statement 3 Chief Executive Officer’s Review Two US-targeted Sativex® Phase III pivotal programmes 8 Chief Financial Officer’s Review advanced in 2013 11 Board of Directors • Cancer Pain: two pivotal Sativex Phase III trials in recruitment 13 Strategic Report –– First Phase III top-line results expected in the second half of 2014 19 Chairman’s Corporate Governance Report –– Data intended to lead to a New Drug Application (“NDA”) filing with 23 Directors’ Report the US Food and Drug Administration (“FDA”) 24 Directors’ Remuneration Report • Multiple Sclerosis (“MS”): Phase III Investigational New Drug (“IND”) 38 Statement of Directors’ Responsibilities application opened with the FDA for Sativex in the treatment of MS spasticity 39 Independent Auditor’s Report –– Special Protocol Assessment (“SPA”) to be requested prior to 41 Consolidated Income Statements anticipated start of Phase III trial in 2014 42 Consolidated Statements of Changes in Equity • All Sativex Phase III clinical trials targeted at FDA approval are fully 43 Consolidated Balance Sheets funded by US partner, Otsuka 44 Consolidated Cash Flow Statements • Sativex US patent position further strengthened through two additional 45 Notes to the Consolidated Financial US Notices of Allowance Statements ibc Advisers Sativex now approved in 22 countries (ex-US) as a treatment for MS spasticity • In-market sales by partners increased by 25% • Commercial launch in Italy in July 2013 • Germany pricing agreement reached in September 2013 • Recommendation for approval in France in October 2013 • Ongoing commercial launches in planning over next 12 months • New Sativex data presented at ECTRIMS in October 2013 Expansion of epilepsy research programme through commencement of a new orphan paediatric epilepsy programme for Epidiolex® (purified extract of Cannabidiol, or CBD) • FDA orphan drug designation granted by FDA for Epidiolex in Dravet syndrome • Seven physician-led INDs granted by FDA to treat 125 paediatric epilepsy patients in the US with Epidiolex • Epidiolex paediatric epilepsy clinical trials in planning for 2014 • Additional epilepsy pipeline candidate, GWP42006 (Cannabidivarin or CBDV), commenced Phase I trial in September 2013 Significant clinical activity for GW’s other cannabinoid pipeline product candidates, including: • Positive preliminary data reported from a Phase IIa exploratory clinical trial of the novel cannabinoid medicine GWP42004 in type 2 diabetes with a Phase II dose ranging trial expected to commence in early 2014 • Phase II trial of GWP42003 for the treatment of ulcerative colitis ongoing with data expected in the first half of 2014 • Phase II trial of GWP42003 for the treatment of schizophrenia expected to commence in the first half of 2014 www.gwpharm.com • Phase Ib/IIa trial of THC:CBD for the treatment of glioma commenced in November 2013 1 GW Pharmaceuticals plc Annual Report and Accounts 2013
Chairman’s Statement
“I am pleased to report a highly successful year marked by the completion of an initial public offering of shares on the Nasdaq stock market.”
I am pleased to report a highly successful I believe that our business is characterised This past year has seen progress which year marked by the completion of an initial by a compelling set of strengths, as follows: reflects the broad scope of these strengths. public offering of shares on the Nasdaq • We have successfully commercialised We have achieved solid recruitment into stock market, the advance of Phase III our lead product, Sativex, and our Phase III trials programme for Sativex ® programmes for Sativex in the US, and believe this provides important in cancer pain, which comprises three the emergence of a new exciting orphan validation of our proprietary global trials and is expected to involve over development programme in childhood cannabinoid product platform. 1,000 patients. We have opened an IND epilepsy. As we enter 2014, I believe that from the FDA to allow us to proceed into the Company is poised to meet a number • We are pursuing a significant late Phase III for the MS spasticity indication of significant clinical, regulatory and stage opportunity for Sativex in cancer for the US market. We have seen steady commercial milestones for our investors. pain, with Phase III trials under volume growth of Sativex in-market sales way to support a future filing in the and further regulatory approvals of this In our 15 years of operations, I am proud US and other parts of the world. important medicine. In addition, a key that GW has established a world-leading • We are progressing an additional objective of the $30m Nasdaq offering was position in the development of plant- late stage opportunity for Sativex to accelerate investment in our product derived cannabinoid therapeutics and in the US for Multiple Sclerosis pipeline and we are now making clinical believe that Sativex and our other product (“MS”) and have opened a Phase III progress across the key pipeline candidates have the potential to address Investigational New Drug (“IND”) to candidates. From a strategic perspective, significant unmet medical needs across a the US Food and Drug Administration the Nasdaq offering has also allowed the diverse range of therapeutic areas. The (“FDA”) in this indication. Company to reduce our historic reliance new orphan epilepsy programme which • We are accelerating our orphan upon out-licensing and partner-funding of has emerged to the foreground during paediatric epilepsy programme and our research. In some cases, the balance of 2013 represents an important example of have received orphan designation risk versus reward and the cost of future GW’s corporate values in seeking to help from the FDA for Epidiolex in the development will dictate that out-licensing patients with serious unmet needs, our treatment of Dravet syndrome. We of certain product candidates will remain close relationship with the medical are also advancing other potential appropriate but we now expect to develop community, the benefits of our lead orphan cannabinoid opportunities. and retain commercial rights to selected position in cannabinoid science, and the valuable pipeline assets, including the multitude of opportunities for value • Our pipeline also includes clinical orphan paediatric epilepsy programme. creation within our platform. stage candidates targeting therapeutic areas such as type 2 diabetes, ulcerative colitis, schizophrenia and cancer. • We have collaborations with major pharmaceutical companies for Sativex. • We benefit from a strong competitive position in a highly specialised and regulated field. 2 GW Pharmaceuticals plc Annual Report and Accounts 2013
Chairman’s Statement continued
In 2014, I believe that we are poised to meet a number of significant milestones for GW investors.
Above: The GW management and support team at the NASDAQ bell ring ceremony to celebrate the Company’s IPO on the NASDAQ Global Market on 1 May 2013.
I am mindful of the considerable interest indication in the US. We expect further Finally, I should like to thank our in Epidiolex, our liquid formulation of regulatory approvals and commercial dedicated staff and management team purified cannabidiol (“CBD”), among US launches for Sativex outside the US. We for their commitment to our Company paediatric epilepsy specialists and patient also expect material pipeline progress with and for their hard work and considerable organisations. In parallel with our plans to clinical activity in the orphan epilepsy achievements during the course of this advance a sponsored clinical development programme and plan to expand our year. We look forward to continued programme in 2014, we have made portfolio of orphan cannabinoid progress in 2014. arrangements to provide Epidiolex in the opportunities. In addition, we look near term to patients under expanded forward to Phase II data for our ulcerative access INDs from the FDA. In 2013, colitis product candidate, and clinical seven INDs were granted by the FDA trials advancing for product candidates in to independent US clinicians to allow glioma, type 2 diabetes and schizophrenia. treatment of approximately 125 paediatric Dr Geoffrey W Guy epilepsy patients with Epidiolex and we are During the 2013 financial year, the Board Chairman aware of further interest from additional of Directors appointed Christopher Tovey 6 December 2013 US physicians to host similar INDs. Our to the newly created position of Chief ability to respond to these INDs results Operating Officer and Cabot Brown as a from the extensive pre-clinical and clinical non-executive Director. Mr Tovey brings safety information that GW has generated a wealth of commercial experience from on CBD over several years. more than 25 years in the pharmaceutical industry, including most recently as Vice In 2014, I believe that we are poised to President Global Marketing Operations at meet a number of significant milestones for UCB Pharmaceuticals. Mr Brown brings GW investors. The Sativex Phase III cancer more than 30 years of experience in the pain programme will continue to advance financial industry specialising in the towards completion and we also expect healthcare sector and sits on the to initiate the Phase III trial designed to Nominations, Audit and Remuneration obtain approval of the MS spasticity Committees. 3 GW Pharmaceuticals plc Annual Report and Accounts 2013
Chief Executive Officer’s Review
The Nasdaq listing was This was a transformative year for GW candidate. GW’s pipeline also includes marked by the successful completion of distinct clinical-stage product candidates an important strategic an initial public offering of shares on the targeting type 2 diabetes, ulcerative colitis, Nasdaq to US investors, a major corporate glioma and schizophrenia. and transformational milestone for GW; the advancement of two Phase III programmes for Sativex® in the US Nasdaq Listing event for GW. in cancer pain and MS; and the emergence In 2013, GW successfully completed a of a new exciting orphan development US initial public offering on the NASDAQ programme in paediatric epilepsy. Global Market (“Nasdaq”) issuing 3,500,000 American Depository Shares GW Overview (“ADSs”) at a price to the public of $8.90 GW is a biopharmaceutical company per ADS. Each ADS represents 12 ordinary focused on discovering, developing and shares of 0.1p each in the capital of commercialising novel therapeutics from its the Company. After the offering, the proprietary cannabinoid product platform underwriters exercised part of their in a broad range of disease areas. In 15 years over-allotment option, purchasing a of operations, GW has established a further 178,000 ADSs from the Company. world-leading position in the development Total net proceeds before expenses were of plant-derived cannabinoid therapeutics $30.7m. The ADSs trade on Nasdaq under through its proven drug discovery and the symbol “GWPH”. The Company’s development processes, a robust intellectual ordinary shares continue to trade on the property portfolio and its regulatory and London Stock Exchange’s Alternative manufacturing expertise. Investment Market (“AIM”) market for listed securities under the ticker “GWP”. GW commercialised the world’s first The Nasdaq listing was an important plant-derived cannabinoid prescription strategic and transformational event for drug, Sativex, which is approved for the GW as it has significantly increased treatment of spasticity due to MS in 22 GW’s profile amongst the US investment countries outside the US. GW is also community, as evidenced by numerous evaluating Sativex in a Phase III new institutional US healthcare investors programme for the treatment of cancer participating in the Initial Public Offering pain intended to support the submission of (“IPO”) and new sell-side research analysts a New Drug Application (“NDA”) for providing coverage of GW. The funds Sativex in cancer pain with the US Food raised further strengthened GW’s financial and Drug Administration (“FDA”) and in position and, in particular, will enable other markets around the world. the Company to advance the clinical Additionally, GW believes that MS development of several of its cannabinoid spasticity represents an attractive pipeline products as well as expand its indication for Sativex in the US and has manufacturing facilities in preparation opened a Phase III Investigational New for the future US launch of Sativex. Drug (“IND”) application with the FDA to conduct a Phase III clinical trial to evaluate Sativex for the treatment of MS spasticity that is also intended to lead to a future NDA.
Beyond Sativex, GW has a deep pipeline of additional cannabinoid product candidates, including a new notable orphan programme in childhood epilepsy for Epidiolex® (“CBD”) as well as a follow-on epilepsy CBDV product 4 GW Pharmaceuticals plc Annual Report and Accounts 2013
Chief Executive Officer’s Review continued
GW believes that Sativex® The Nasdaq listing has led to a substantial Sativex in MS improvement in the liquidity of GW’s According to the World Health has the potential to shares. The daily volume of shares traded Organisation, MS affects 1.3 million has increased from approximately 80,000 people worldwide, of which up to 80% address a significant per day to an average volume of almost suffer from spasticity, a symptom of MS 1million ordinary shares per day. characterised by muscle stiffness and unmet need in this uncontrollable spasms. There is no cure for treatment of cancer pain. Sativex in Cancer Pain such spasticity, and it is widely recognised Pain is uncontrolled with opioid that currently available oral treatments treatments in approximately 20% of afford only partial relief and have patients with advanced cancer, or 420,000 unpleasant side effects. Sativex offers the people in the US There are currently no prospect of treating patients who have approved non-opioid treatments for failed existing oral therapies and who patients who do not respond to, or might otherwise require invasive and experience negative side effects with, costly alternative treatment options. opioid medications. GW believes that Sativex has the potential to address a Sativex is currently approved as a significant unmet need in this large market treatment for MS spasticity in 22 countries, by treating patients with a product that including 17 countries in Europe. The employs a differentiated non-opioid medicine is currently available on mechanism of action, and offers the prescription in the UK, Spain, Germany, prospect of pain relief without increasing Canada, Denmark, Norway, Israel, opioid-related adverse side effects. Austria, Poland, Sweden, Italy and Finland. This medicine is also approved in GW is currently evaluating Sativex in a a further eight European countries, as well Phase III programme to treat persistent as Australia, New Zealand and Kuwait. pain in people with advanced cancer who experience inadequate pain relief from GW believes that MS spasticity represents optimised chronic opioid therapy, the an attractive indication for Sativex in the current standard of care. This programme US and has recently opened a Phase III represents the lead target indication for IND with the FDA to conduct a pivotal Sativex in the US and is being conducted Phase III clinical trial to evaluate Sativex under an IND consisting of three clinical for the treatment of MS spasticity. GW trials, the first two of which are expected expects to submit a request to the FDA for to enrol 760 patients in total and are Special Protocol Assessment (“SPA”) for intended to support the submission of an the proposed US Phase III trial, following NDA with the FDA and in other markets which the trial is expected to commence in around the world. The two pivotal Phase 2014. As with the US Phase III cancer pain III trial protocols mirror GW’s Phase IIb development programme, the costs of the trial of Sativex with respect to patient Phase III MS programme are to be fully population and treatment duration, and funded by Otsuka. employ a primary efficacy endpoint that yielded statistically significant results in In 2013, GW continued to achieve favour of Sativex in both Phase II trials. expansion of Sativex availability in Europe GW anticipates that top-line results from through the commercial launch in Italy by at least one of the Phase III trials will be GW’s partner Almirall. The medicine is available towards the end of 2014 with the reimbursed by the Italian authorities as a second study reporting results shortly Class H (hospital dispensed) medicine. thereafter. The costs of the Phase III cancer The reimbursed price of the medicine pain programme are fully funded by granted by the authorities in Italy is Otsuka Pharmaceutical Co. Ltd, who hold consistent with the reimbursed Sativex exclusive rights to commercialise Sativex price in Spain. In addition to this launch, in the US Sativex has been recommended for approval in France as a result of the 5 GW Pharmaceuticals plc Annual Report and Accounts 2013
GW’s activities in the successful closing of the European Mutual A study conducted in Germany to evaluate Recognition Procedure. GW expects the effects of Sativex on driving ability field of epilepsy have additional commercial launches over the showed no adverse effects on driving coming year. ability (no significant changes versus significantly accelerated in baseline in a battery of computerised tests). In Germany, following an arbitration panel In this study, MS spasticity and spasms 2013 with the emergence decision in March 2013 by the German also improved and the treatment was well of a new epilepsy orphan National Association of Statutory Health tolerated. As part of our post-approval risk Insurance Funds (“GKV-SV”) to impose a management plan, patient registries in the development programme. price reduction on Sativex sales, a revised UK, Germany and Spain have recruited agreement was reached between our approximately 700 patients to date without partners, Almirall, and the GKV-SV in signals of new tolerability/safety concerns. September 2013 for an increase to the In total, approximately 19,000 patient/ previously reduced price. This revised years of safety data have now been price is acceptable to both Almirall and generated without new relevant GW and ensures the long-term availability pharmacovigilance issues emerging. of Sativex in Germany, a market in which an estimated 4,000 patients are already Strengthened Sativex Patent taking the medicine. Position During 2013, GW advanced Sativex In the UK, Sativex was rescheduled in marketing exclusivity through two March 2013 into Schedule 4, Part 1 of the additional Notices of Allowance (“NOA”) Misuse of Drugs Act, reflecting the UK from the United States Patent and government view that Sativex has a low Trademark Office (“USPTO”). These potential for abuse and low risk of NOAs are for US Application Serial diversion. This new less restrictive Number 13/606,742, a patent application scheduling means that Sativex can be directed to the spray device of its Sativex prescribed in the UK with no restriction on product formulation, and US Application supply, recording, storage or destruction. Serial Number 13/607,897, a patent which protects delivery of its Sativex product New Data Presented at Ectrims formulation. A NOA is issued after the Positive clinical data on Sativex was USPTO makes a determination that a presented at the 29th Congress of the patent can be granted from an application. European Committee for Treatment GW’s intellectual property portfolio and Research in Multiple Sclerosis includes multiple patent families with (“ECTRIMS”) in Copenhagen, Denmark, issued and/or pending claims directed including at a Sativex satellite symposium to plants, plant extracts, extraction attended by approximately 1,200 people. technology, pharmaceutical formulations, Data from a 12 month, placebo-controlled drug delivery and the therapeutic uses study of Sativex in patients with MS of cannabinoids, as well as plant variety confirmed the reassuring safety profile and rights, know-how and trade secrets. GW’s tolerability of Sativex and provided further granted patents and pending applications evidence of long-term efficacy. (if they were to issue) in the US relating to Sativex would expire on various dates between 2021 and 2026, excluding possible patent term extensions. 6 GW Pharmaceuticals plc Annual Report and Accounts 2013
Chief Executive Officer’s Review continued
GW is developing other Sativex Collaboration Partners retains the exclusive right to manufacture GW has entered into five separate and supply Sativex to such partners on product candidates collaboration agreements for Sativex commercial supply terms for the duration with major pharmaceutical companies. of the commercial life of the product. based on the Company’s Each agreement provides the respective Details of the commercial partners and partner with exclusive rights in a defined their respective geographic rights are proprietary cannabinoid geographic territory to commercialise as follows: platform. Sativex in all indications, while GW
Otsuka Pharmaceutical Co. Ltd United States Novartis Pharma AG Australia, New Zealand, Asia (excluding Japan, China, Hong Kong), Middle East (excluding Israel) and Africa Almirall S.A. European Union (excluding the UK) and European Union accession countries, Switzerland, Norway, Turkey and Mexico. Bayer HealthCare AG UK and Canada Neopharm Group Israel
Cannabinoid Platform Pipeline anti-epileptiform and anticonvulsant In addition to Sativex, GW is developing activity using a variety of in vitro and other product candidates based on the in vivo models. These cannabinoids Company’s proprietary cannabinoid have also shown the ability to treat platform. seizures in acute models of epilepsy with significantly fewer side effects CBD for Intractable Paediatric than existing anti-epileptic drugs. Epilepsy Emerging as a New Orphan • In 2013, a total of seven expanded Development Programme access INDs have been granted by GW has carried out a significant amount the FDA to US clinicians to allow of pre-clinical research into cannabinoids treatment of approximately 125 in the treatment of epilepsy over the last paediatric epilepsy patients with GW’s five years. GW’s activities in the field of Epidiolex. A small number of patients epilepsy have significantly accelerated in are already being treated and the 2013 with the emergence of a new epilepsy majority are expected to commence orphan development programme featuring treatment in the coming months a liquid formulation of highly purified after receipt of the necessary DEA CBD extract for which the trademark site licences. GW is aware of further
Epidiolex has been registered. This interest from additional US physicians programme has gained increasing to host similar INDs. GW’s ability to momentum as a result of significant respond to these INDs results from interest among US paediatric epilepsy the extensive pre-clinical and clinical specialists and patient organisations in the safety information that GW has potential role of CBD in treating generated on CBD over several years. intractable childhood epilepsy, with initial focus on two orphan conditions, Dravet • It is the Company’s expectation that and Lennox-Gastaut syndromes. The these INDs will generate important current status of this orphan programme is clinical evidence in the near term as follows: to support the potential use of Epidiolex across a number of discrete • GW’s pre-clinical research into paediatric epilepsy syndromes. cannabinoids in the treatment of epilepsy has yielded data on two • GW has obtained orphan drug highly promising cannabinoid product designation from the FDA for candidates, CBD and CBDV, both Epidiolex in the treatment of Dravet of which have reported significant syndrome. We anticipate holding a pre-IND meeting with the FDA in 7 GW Pharmaceuticals plc Annual Report and Accounts 2013
the near future, following which we feature of a new anti-diabetic medicine, Summary expect to conduct the first placebo- increases insulin sensitivity, and This was a transformative year for GW controlled trial of Epidiolex in reduces fasting plasma glucose levels. marked by the successful completion of Dravet syndrome during 2014. • GWP42003, which features CBD an initial public offering of shares on the • GW is preparing to submit further as the primary cannabinoid, for the Nasdaq to US investors, a major corporate orphan designation applications to treatment of ulcerative colitis (“UC”), milestone for GW; the advancement of two the FDA in the field of epilepsy. for which a Phase II trial is ongoing, Phase III programmes for Sativex in the US in cancer pain and MS; and the emergence • GW has nine patents or patent with data expected in the first half of 2014. This follows pre-clinical of a new exciting orphan development applications in relation to CBD and programme in childhood epilepsy. CBDV, and activity is ongoing to research that has shown GWP42003 to have anti-inflammatory properties Looking forward, we believe that the further enhance the Company’s Company is poised to meet a number of proprietary position in this field. in a number of accepted animal models of inflammation, notably of significant clinical, regulatory and commercial milestones for GW investors. Separately, GW’s candidate GWP42006, the gut and the joints. In particular, GW’s research has demonstrated These include Phase III data from our which features CBDV as the primary US-focused pivotal Sativex trials, further cannabinoid, has now entered its first potential in the treatment of UC in standard in vivo models. Sativex commercial launches and sales Phase I human clinical trial. CBDV has growth, progress of the new orphan also shown significant promise in • GWP42003, which features CBD as the epilepsy programme in the US, and further pre-clinical studies as a potential treatment primary cannabinoid, for the treatment advancement of several other cannabinoid for epilepsy. GW believes that both CBD of schizophrenia, for which a Phase II pipeline candidates. and CBDV represent important product trial is expected to commence in the first candidates within the Company’s epilepsy half of 2014. GWP42003 has shown franchise. notable anti-psychotic effects in accepted pre-clinical models of schizophrenia Combined, these two epilepsy product and importantly has also demonstrated candidates represent a new development the ability to reduce the characteristic programme that may yield a variety of movement disorders induced by Justin Gover individual orphan indications and which currently available antipsychotic Chief Executive Officer may provide the Company with significant agents. The mechanism of GWP42003 6 December 2013 new market opportunities. This does not appear to rely on the D2 development programme is funded receptor augmentation of standard completely by GW and GW retains all antipsychotics and therefore has the rights to commercialise any and all potential to offer a novel treatment products that evolve from this programme. option in this therapeutic area. • Combinations of THC and CBD for the Other Pipeline Programmes treatment of glioma, for which a Phase GW’s other lead pipeline programmes are Ib/IIa trial in patients with Recurrent as follows: Glioblastoma Multiforme (“GBM”) • GWP42004, which features THCV commenced in November 2013. GBM is as the primary cannabinoid, for the considered a rare, or orphan, disease by treatment of type 2 diabetes, for the FDA and the European Medicines which a Phase II dose ranging trial is Agency. This study follows several expected to commence in early 2014. years of preclinical research which In late 2012, GW reported positive has demonstrated that cannabinoids preliminary data reported from a inhibit the viability of glioma cells both Phase IIa exploratory clinical trial of in vitro and in vivo via apoptosis or GWP42004, administered as an oral programmed cell death, may also affect capsule, in patients with type 2 diabetes angiogenesis, and have demonstrated which showed consistent evidence of tumour growth-inhibiting action and anti-diabetic effects. These findings an improvement in the therapeutic were consistent with pre-clinical data efficacy of temozolomide, a showing that GWP42004 protects standard treatment for glioma. the insulin-producing cells of the pancreatic islets, a highly desirable 8 GW Pharmaceuticals plc Annual Report and Accounts 2013
Chief Financial Officer’s Review
Sativex® in-market sales Revenue Development and approval milestone fees Total revenue for the year ended 30 decreased by £9.5m, or 97%, to £0.3m for volumes have made good September 2013 decreased by 18% to the year ended 30 September 2013 £27.3m compared to £33.1m for the year compared to £9.8m for the year ended progress during the year. ended 30 September 2012. 30 September 2012. Development and approval milestone fees consist of The volume of Sativex Sativex® in-market sales volumes have milestone payments due to us from 10ml vials sold in-market made good progress during the year. Sativex partners under the terms of our The volume of Sativex 10ml vials sold agreements. Development and approval by our partners increased in-market by our partners increased year milestone payments of £0.3m during the on year by 25%. This principally reflects year ended 30 September 2013 resulted year on year by 25%. the growth achieved by Almirall in from a single milestone payment received Germany and Spain during 2013. We can from Almirall upon agreement of Italian expect continued growth as Almirall pricing and reimbursement approval for conduct commercial launches in new Sativex. countries during 2014. Research and Development Sativex product sales revenue declined by Expenditure £0.3m, or 14%, to £2.2m for the year Total R&D expenditure increased by ended 30 September 2013 when compared £5.1m, or 19%, to £32.7m for the year to the year ended 30 September 2012. This ended 30 September 2013, from £27.6m reflects a 51% increase in the volume of for year ended 30 September 2012. Sativex shipped to partners, offset by the £1.1m adverse impact of increasing the The £5.1m increase resulted from a £4.1m provision for rebates expected to be due to increase in partner-funded R&D, linked to Almirall following the adverse German the Otsuka-funded Phase III cancer pain pricing decision in March 2013. It also clinical programme, and a £1.0m increase reflects the continuing effect of an to GW-funded R&D linked to progressing amendment to the Almirall supply our product pipeline. agreement signed last year under which we received a new £9.8m milestone and Segmental Results agreed a reduced supply price to Almirall In note 3 to the financial statements, which will remain in effect until after a segmental analysis of our business is Sativex cancer pain approval is achieved. provided showing the income statement split into the three business segments of Research and development (“R&D”) fees the Group: Sativex Commercial, Sativex increased by £4.1m, or 21%, to £23.6m for R&D and Pipeline R&D. the year ended 30 September 2013 compared to the year ended 30 September The Sativex Commercial business 2012. This reflected increased charges to generated a segment result of £3.0m (2012: our partners, principally Otsuka, for fees £14.1m) from product sales, milestones we have incurred in conducting our joint and licence fee revenues received from research plans, for which our partners commercial partners. reimburse us under the terms of our licence and collaboration agreements. Investment in Sativex R&D was £23.7m Further discussion regarding our joint (2012: £18.4m), of which £19.3m (2012: research plan activities is included within £14.1m) was Otsuka-funded Phase III the R&D section below. cancer pain expenditure. The remaining £4.4m (2012: £4.3m) was funded by GW. Licence, collaboration and technical access fees of £1.3m recorded in the year ended Investment in Pipeline R&D was £9.2m 30 September 2013 were consistent with (2012: £9.9m), of which Otsuka-funded the £1.3m recorded in the year ended 30 £4.3m (2012: £5.4m). The remaining September 2012. £4.9m (2012: £4.5m) was funded by GW. 9 GW Pharmaceuticals plc Annual Report and Accounts 2013
The Group’s net Expenditure R&D tax credits recognised vary Management and administrative expenses depending on our available tax losses, funds comprise cash increased by £0.1m, or 4%, to £3.8m for the eligibility of our R&D expenditure the year ended 30 September 2013 and the level of certainty relating to the balances together with compared to £3.7m for the year ended 30 recoverability of the claim. September 2012. This reflected the amounts held on short- combined effects of increases in GW welcomes the phased implementation term deposit totalling management and administrative expenses of the Government’s patent box scheme. of £0.3m, driven by incremental costs Under this scheme we expect most of £38.1m (2012: £29.3m). associated with being a US publicly listed GW’s future product revenues, milestone company offset by a reversal of £0.2m of income and licence fees to be eligible for share-based payment charges previously the 10% rate of taxation. The combination recognised as a result of management not of this low rate of taxation and the having met a non-market vesting condition enhanced expenditure reliefs available linked to 25% of the long-term incentive under the R&D tax credit scheme should plan grant that was due to vest in July result in a long-term low rate of future 2013. corporation tax.
Interest expense of £0.1m for the year Profitability ended 30 September 2013 represents a Loss before tax for the year ended £0.1m increase compared to the year 30 September 2013 was £10.4m (2012: ended 30 September 2012. This expense £1.2m profit). This is in line with guidance. relates to a finance lease arrangement we entered into in June 2013 to fund the This loss was decreased by the tax credit, fit-out of new R&D laboratory space. resulting in a post-tax loss for the year of £4.5m (2012: £2.5m profit). Interest income of £0.2m for the year ended 30 September 2013 was consistent Cash Flow with the £0.2m for the year ended The Group recorded a net cash inflow for 30 September 2012. the year of £8.7m (2012: £1.0m inflow).
Tax Net cash flow from operating activities Our tax credit increased by £4.6m, or decreased by £9.3m to a £7.5m outflow for 365%, to £5.8m for the year ended 30 the year ended 30 September 2013 September 2013 compared to £1.2m for compared to a £1.8m inflow for the year the year ended 30 September 2012. This ended 30 September 2012. This decrease credit consists of: was primarily driven by a £9.5m reduction • Recognition of a £2.0m R&D tax credit in development and approval milestone claimed and received in early 2013 receipts, a £0.3m reduction in Sativex from the UK tax authority in respect product sales, a £1.0 million increase in of the year ended 30 September 2012. GW-funded R&D, a £0.9m increase in cash used for working capital partially • Accrual for an expected R&D tax offset by a £2.4 million increase in R&D tax credit claim of £2.9m in respect of receipts. the year ended 30 September 2013. We expect to submit this claim in The net cash outflow from investing the next 2–3 months and this claim activities increased by £1.0m to £2.1m for is subject to agreement by Her the year ended 30 September 2013 from Majesty’s Revenue and Customs. £1.1m for the year ended 30 September • Recognition of a net deferred tax asset 2012, principally reflecting an increase in of £0.9m arising from the expected capital expenditure of £0.9m during the utilisation of brought forward corporation year ended 30 September 2013 as we tax trading losses which we intend to invested in expanding and upgrading our utilise to offset against future trading manufacturing and research laboratory profits by GW Pharma Limited, our facilities. principal commercial trading subsidiary. 10 GW Pharmaceuticals plc Annual Report and Accounts 2013
Chief Financial Officer’s Review continued
Net cash inflow from financing activities At 30 September 2013 the Group had The principal use of proceeds from the increased by £18.3m for the year ended 30 received £1.9m (2012: £1.1m) of advance Nasdaq listing was primarily to allow the September 2013 as a result of the receipt of payments for research activities to be Company to invest further in the clinical £18.1m from our Nasdaq IPO in May carried out on behalf of Otsuka in the next development of our product pipeline and 2013. six months. This has been disclosed as an to fund commercial production facilities advance payment received, within deferred in preparation for Sativex US launch. Financial Position revenue due within one year. As a result of our strengthened financial The Group’s cash position comprises cash position, GW-funded R&D expenditure balances together with amounts held on Deferred licence, collaboration and can be expected to increase by 40–50% as short-term deposit totalling £38.1m (2012: technical access fee income amounts to we progress our current Phase I and Phase £29.3m). £10.2m (2012: £11.5m) and represents the II trials programme and initiate a new balance of non-refundable Sativex licence clinical development plan for Epidiolex. In Inventories as at 30 September 2013 of agreement and technical access fees. £1.3m addition, the cash outflow associated with £4.7m (2012: £3.5m) consists of finished (2012: £1.4m) is shown as due within one capital expenditure is expected to increase goods, consumable items and work in year and £8.9m (2012: £10.1m) is shown from £2m this year to approximately £6m progress and is stated net of a provision for as due after more than one year. These will in 2014 as we expand our extraction and inventories of £1.6m (2012: £2.1m). be recognised as revenue in future periods. manufacturing facilities in preparation for During the year ended 30 September 2013, US commercialisation. the provision for inventories has reduced Average headcount of the Group for the by £0.5m, resulting in a credit to the year was 188 (2012: 177). The increase income statement. The provision release in in staff numbers reflects the expansion the year ended 30 September 2013 reflects of operations necessary to support the increased sales of Sativex and a decrease in commercial growth of Sativex and the the volume of inventory expected to expire increasing levels of R&D activity for Adam George prior to use. The remaining increase in both Sativex and our growing pipeline Chief Financial Officer inventories was due to continued growing of promising product candidates. 6 December 2013 of plant materials at a higher rate than it is being used for commercial production. 2014 Guidance: This provision is calculated in accordance We expect Sativex sales revenues to return with the inventory accounting policy set to growth in 2014 as in-market sales by our out in note 2. partners continue to grow as they progress multiple launches in new territories. Under Trade receivables and other current assets at the Otsuka licence agreement, we are 30 September 2013 were £1.7m (2012: entitled to receive a $5 million milestone £1.6m), comprising £0.6m (2012: £0.8m) payment upon first patient entry into the of trade receivables (from sales of Sativex) planned Phase III MS spasticity trial. and £1.1m (2012: £0.8m) of other receivables, accrued income and Total R&D expenditure will continue to prepayments. increase as the first two Phase III cancer pain trials progress towards completion, the third cancer pain trial gathers momentum and as we initiate the planned Multiple Sclerosis (“MS”) Phase III trials. All of these activities will be funded by our partner, Otsuka. 11 GW Pharmaceuticals plc Annual Report and Accounts 2013
Board of Directors
Dr Geoffrey W Guy BSc, MB BS, Adam George, BSc, ACA Chris Tovey, BSc MRCS Eng, LRCP, LMSSA, Chief Financial Officer Aged 43. Chief Operating Officer Aged 48. Dip Pharm Med Mr George joined GW in 2007 and was Mr Tovey has served as our Chief Chairman Aged 59. Group Financial Controller until 1 June Operating Officer since October 2012. Dr Guy is our founder and has served as 2012, at which time he joined the Board as He has gained a wealth of commercial Chairman since 1998. Dr Guy has over Chief Financial Officer. Mr George also experience from more than 25 years in the 30 years of experience in medical research acts as Company Secretary, a role he has pharmaceutical industry and was most and global drug development, most played since he first joined the Company. recently Vice President Global Marketing recently as Chairman and Chief Executive Prior to joining GW, Mr George occupied Operations at UCB Pharmaceuticals, of Ethical Holdings plc, a Nasdaq-quoted several senior finance roles within both responsible for worldwide marketing drug delivery company (now Amarin listed and privately owned high growth activities on a portfolio of UCB products Corporation plc, or Amarin), which he businesses. From 2004 to 2007, Mr George generating over €2b in annual sales. Prior founded in 1985 and led to its Nasdaq was Finance Director of Believe It Group to joining UCB, Mr Tovey was Vice listing in 1993. He also founded Limited (now 4Com plc), a President Managing Director UK & Phytopharm plc in 1989, of which he was telecommunications service provider, Ireland at Nabi Biopharmaceuticals, a Chairman until 1997. Dr Guy has been the having been Group Financial Controller US-based biopharmaceutical company. physician in charge of over 200 clinical from 2001 to 2004. Before joining Nabi, Mr Tovey spent studies including first dose in man, 18 years at GlaxoSmithKline, in senior pharmacokinetics, pharmacodynamics, Dr Stephen Wright MA, MD, FRCPE, commercial roles in both the European dose-ranging, controlled clinical trials FFPM and UK organisations. and large scale multi-centred studies and Research & Development Director clinical surveys. He is also an author on Aged 61. James Noble MA, FCA numerous scientific publications and has Dr Wright joined GW’s senior Non-executive Deputy Chairman contributed to six books. Dr Guy was management team in January 2004 as Aged 54. appointed as Visiting Professor in the Research & Development Director and Mr Noble has served as our non-executive School of Science and Medicine at the was promoted to the Board in March 2005. Director since January 2007. Mr Noble University of Buckingham in July 2011. Dr Wright has more than 20 years of has extensive experience in the biotech He also received the “Deloitte Director of experience in medicines development. industry and currently serves as Chief the Year Award in Pharmaceuticals and He joined GW from Ipsen, where he was Executive Officer of Immunocore Healthcare” in 2011. Dr Guy holds a BSc. Senior Vice President of Clinical Research Limited and Adaptimmune Limited, two in pharmacology from the University of & Development and a member of the UK companies involved in T cell receptor London, an MBBS at St. Bartholomew’s Board of Directors. In this role he led technology. Mr Noble was previously Hospital, an MRCS Eng. and LRCP teams responsible for regulatory success in Chief Executive Officer of Avidex Limited, London, an LMSSA Society of both the US and European Union. Prior to a private biotech company. Mr Noble Apothecaries and a Diploma of this, he was Venture Head of Neuroscience qualified as a chartered accountant with Pharmaceutical Medicine from the Royal at Abbott Laboratories, based in the US, PriceWaterhouse in 1980 and then spent Colleges of Physicians. and was also formerly Associate Medical seven years at investment bank Kleinwort Director at Glaxo in the UK. Benson Limited, where he became a Justin Gover BSc, MBA Director in 1990. He then joined British Chief Executive Officer Aged 42. Biotech plc as Chief Financial Officer and Mr Gover has been Chief Executive Officer secured the company’s IPO on NASDAQ of GW since January 1999. In this time, and London in 1992. From 1997 to 2001, he has been responsible for managing the he held numerous non-executive Director Group’s operations, equity financing and positions, including at PowderJect business development activities. Mr Gover Pharmaceuticals plc, Oxford has 16 years’ experience in the biotech GlycoSciences plc (OGS), MediGene AG, industry and was previously Head of and Advanced Medical Solutions plc. Corporate Affairs at Ethical Holdings plc, Mr Noble graduated from the University the NASDAQ-quoted drug delivery of Oxford in 1980. company. In this role, he was responsible for the company’s strategic corporate activities, including mergers and acquisitions, strategic investments, equity financing and investor relations. He holds a MBA from the INSEAD business school. 12 GW Pharmaceuticals plc Annual Report and Accounts 2013
Board of Directors continued
Thomas Lynch BSc (Econ), FCA Cabot Brown AB, MBA Non-executive Director Aged 57. Non-executive Director Aged 52. Mr Lynch most recently served as Mr Brown joined the GW Board in Chairman and Chief Executive Officer of February 2013. Mr Brown is the Founder Amarin Corporation plc, a Nasdaq listed and Chief Executive Officer of Carabiner company specialising in cardiovascular LLC, an advisory and private equity firm disease, until December 2009. From 1993 based in San Francisco and London that to 2004, Mr Lynch worked in a variety specialises in healthcare and education. of capacities in Elan Corporation plc, Previously, Mr Brown served as a including Chief Financial Officer and Managing Director at GCA Savvian Group Executive Vice-President, as well as Corp., an international financial advisory Vice-Chairman. In 1994, Mr Lynch firm, from 2011 to 2012 where he directed founded a company which became Warner the firm’s efforts in the healthcare industry. Chilcott plc, of which he was a Director Before joining GCA Savvian, Mr Brown until 1999, and from then until 2002 worked for 10 years at Seven Hills Group, served as a Director of Galen plc, which an investment banking group he co- acquired Warner Chilcott in 1999. founded where he also directed the firm’s Mr Lynch currently serves as a Director healthcare activities. He also was of the IDA Ireland (an Irish government Managing Director of Brown, McMillan & investment agency); senior independent Co., an investment firm he co-founded Director of ICON plc (clinical research); that sponsored buy-outs and venture Profectus BioSciences Inc., (immunological capital investments. From 1987 until 1995, diseases); and is Chairman of Chronetech Mr Brown worked at Volpe, Welty & AB (infectious diseases). Company, a boutique investment bank where he co-founded and ran the healthcare practice and served as a member of its Executive Committee. Mr Brown holds an MBA from Harvard Business School with high distinction as a George F. Baker Scholar and an AB cum laude in Government from Harvard College. 13 GW Pharmaceuticals plc Annual Report and Accounts 2013
Strategic Report
The Directors present their Strategic Report for the Group for the financial year ended 30 September 2013.
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 15 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 I, Phase II and Phase III 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 and seek pharmaceutical marketing authorisations.
We collaborate with other pharmaceutical companies. Where appropriate, we out-licence 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 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.
In future, we expect to retain the marketing rights to certain future products. These will most likely be 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.
We believe that our track record and expertise give us a significant competitive advantage. We have been conducting cannabinoid research for 15 years and are not aware of any direct competitor companies. We have a range of intellectual property as well as strong relationships with leading cannabinoid scientists. In addition, we are the first company in the world to have successfully obtained regulatory approval for a plant-derived cannabinoid medicine. In total, 22 countries have approved Sativex® and we continue to build relationships with medicines and controlled substance regulatory authorities around the world. 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 whilst sharing the financial risk with our partners. By maintaining close 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.
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 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.
The nature of our business is to take product development risk in order to create valuable medicines targeted to address areas of significant unmet medical need. We invest our efforts and financial resources into the process of identifying suitable pharmaceutical product candidates which we then take through an extensive development process. This is an inherently risky process. Not all of our product candidates will progress successfully to become marketable products. However, our in-house development expertise and unique knowledge of the cannabinoids with which we work should allow us to develop valuable products in an efficient manner that will significantly reduce, but which cannot eliminate this risk in future. 14 GW Pharmaceuticals plc Annual Report and Accounts 2013
Strategic Report continued
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 2013.
Total Group Revenue £000’s Sativex In-market Vial Sales Volumes
35,000 120,000
30,000 100,000
25,000 80,000
20,000
60,000 Revenue 15,000
Total in-market 10ml vials shipped in-market Total 40,000 10,000
20,000 5,000
2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Year Ended 30 September Financial Year Ended 30 September § Development and approval milestone fees § License, collaboration and technical access fees § Product sales § Research and development fees
Our revenues consist of R&D fees, product sales revenues, licence collaboration and technical access fees and development and approval milestone fees. In each of the financial years from 2009–2012 we received substantial development and approval milestones from our Sativex licensees. In 2013, we received only £0.3m of development and approval milestone income, £9.5m less than the prior year. The £5.8m reduction in total revenues from 2012–2013 was therefore wholly attributable to the reduction in development and approval milestones earned.
We consider our R&D fees, licence, collaboration and technical access fees and our product sales revenues to be recurring revenues. As illustrated above, over the last five years there has been a consistent growth trend in these revenues. The milestone revenues recognised in each of the financial years above tend to be individual items linked to specific development milestones achieved in a particular financial year. These are non-recurring items which tend to have a significant impact upon the profitability and cash flow of our business in each financial year in which they are received and earned.
The Sativex In-market Vial Sales Volumes graph above 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 2009, vial sales consisted entirely of vials sold by Bayer in Canada. In June 2010 Bayer started marketing Sativex in the UK. In 2011, Almirall launched Sativex in Spain, Germany and Denmark. In 2012 commercial sales to private patients started in Sweden and in 2013 commercial sales by Almirall commenced in Norway, Austria, Italy, Poland and by Neopharm in Israel. We expect new launches to continue to drive this growth in 2014.
In-market sales grew by 25% from 2012 to 2013. The growth trend above reflects a compound annual growth rate of 24% per annum over the last five years. 15 GW Pharmaceuticals plc Annual Report and Accounts 2013
Total Group R&D Spend £000’s Total Group Cash £000’s
35,000 40,000
30,000 35,000
30,000 25,000
25,000 20,000
20,000 Total Cash (£000’s) Total R+D Spend (£000’s) 15,000 15,000
10,000 10,000
5,000 5,000
2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Financial Year Ended 30 September Financial Year Ended 30 September § GW-funded R&D § Development partner-funded R&D
As illustrated in the Total Group R&D Spend graph above, our R&D expenditures have shown a consistent growth trend over the last five financial years from £19.4m in 2009 to £32.7m in 2013. The growth reflects progress with the Sativex development programme and the expansion of the scope of our research to involve a broad range of pipeline product candidates. In the last five years, a significant proportion of the growth of the partner-funded R&D expenditures has been driven by our expanding US Phase III cancer pain clinical trials programme, which has evolved from a single Phase IIa trial in 2009 to three pivotal Phase III cancer pain trials plus a series of supporting Phase I clinical trials and regulatory activities in 2013. All of this clinical activity is funded by our development partner Otsuka.
Over the last five years 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, resulting in a £1.1m decrease in partner-funded pre-clinical spend from 2012 to 2013. GW now has a worldwide licence to all data and product candidates generated under this collaboration.
From 2009 to 2012 GW-funded R&D remained static between £6.7m and £7.3m per annum, increasing to £8.0m in 2012 and £9.1m in 2013. This increasing GW-funded R&D spend reflects decisions we have taken to progress the cannabinoid product candidates developed under the Otsuka pre-clinical collaboration into Phase I/II clinical trials in order to seek proof of concept data in multiple disease areas including epilepsy, glioma, diabetes and schizophrenia.
The Total Group Cash graph above illustrates the trend in our financial year-end closing cash position for each of the last five years.
From 2010 to 2012 we recorded a positive net operating cash inflow in each financial year, largely as a result of the substantial milestone receipts in each financial year. In the financial year ended 30 September 2013 the lack of milestone receipts, as noted above, resulted in an operating cash outflow for the year of £7.5m, but having raised £18.1m of net new funds from issue of equity as part of our Nasdaq initial public offering on 1 May 2013 we reported a net cash inflow for the financial year of £8.7m, resulting in closing cash at 30 September 2013 of £38.1m.
A further review of the Group’s Strategy and Business Model, along with risk mitigation, is given in the Chairman’s Corporate Governance Report outlined on page 19.
A review of the results for the year and of future developments in the business is given in the Chief Executive Officer’s Review and in the Chief Financial Officer’s Review, which form part of this Annual Report.
The subsidiary undertakings principally affecting the results and net assets of the Group are listed in note 27 to the financial statements. 16 GW Pharmaceuticals plc Annual Report and Accounts 2013
Strategic Report continued
Principal Risks and Uncertainties In common with other pharmaceutical development companies GW faces a number of risks and uncertainties. Internal controls are in place to help identify, manage and mitigate these risks. Further details of these controls are outlined on page 19 in the Chairman’s Corporate Governance Report. The main risks have been identified as follows:
Clinical Clinical trials may encounter delays or may fail to achieve their endpoints.
Regulatory Regulatory bodies around the world have different requirements for the approval of therapeutic products. This may result in the restriction of indication, denial of approval or demands for additional data. Some regulators may refuse to consider approving cannabinoid products.
Legislative GW’s cannabinoid products are frequently classified as controlled drugs and as such are subject to both national and international legislation, which can change at any time. Rescheduling is often required before a cannabinoid medicine may be marketed. Such rescheduling may be refused or delayed.
Manufacturing GW may encounter problems in its manufacturing process which may delay product development programmes, interrupt commercial supplies or restrict the commercial quantities of product that can be made. We will need to develop new manufacturing processes for our new pipeline products. We may struggle to scale up our small scale processes to commercial scale.
Manufacturing facilities are subject to regulatory inspection and grant of manufacturing licences. These may be withdrawn at any time by inspectors if they consider that our facilities are not operating to the required high pharmaceutical standards.
Marketing and Commercialisation Following regulatory approval, GW’s products may not achieve commercial success or may be subject to competition.
Although we are leaders in the field of cannabinoid science, competitor companies and competitive cannabinoid products will emerge and will compete with our products in future. Our products will similarly compete with existing approved non-cannabinoid medicines which may be cheaper or may have greater efficacy, administration or prescribing advantages that may give them a competitive advantage. Reimbursement agencies may not agree to cover the full cost of an approved product or may impose pricing that is too low to be commercially viable. GW is reliant upon its commercial licensing partners to actively market Sativex within their respective territories.
Formulation and Bioavailability, Effect on Commercial Viability Our new cannabinoid formulations may not achieve the bioavailability necessary to demonstrate efficacy in clinical trials or the cost to manufacture the high doses needed to demonstrate efficacy may prove to be too high to be commercially viable.
Safety During development or during post-marketing surveillance, quality, safety, efficacy or tolerability issues may emerge which may result in the withdrawal or restriction of the product licence or early termination of clinical development programmes.
Intellectual Property The Group may not be able to secure and maintain the intellectual property protection for its products or may be prevented from commercialising some of its product candidate by the existence of competitor owned intellectual property.
Funding The Group may require access to additional funding in the future. If it fails to obtain such funding the Group may need to delay or scale back some of its R&D programmes or the commercialisation of some of its products.
Risk in Relation to the Use of Financial Instruments The Group is exposed to a number of financial risks, including credit risk, liquidity risk, market price risk and exchange rate risk. It is the Group’s policy that no speculative trading in financial instruments shall be undertaken.
Credit Risk The Group’s principal financial assets are cash and short-term money market investments. Risk is minimised through an investment policy restricting the investment of surplus cash to interest bearing deposits principally held with the major UK banking groups and with UK subsidiaries of banking groups with high credit ratings.
Trade receivables are concentrated to a small number of large customers, where the risk of default is low. 17 GW Pharmaceuticals plc Annual Report and Accounts 2013
Liquidity Risk This risk is minimised by placing surplus funds in a range of low risk cash deposits and short-term liquid investments for periods up to 365 days and at call. This portfolio of deposits is managed to ensure that a rolling programme of maturity dates is managed in accordance with Group expenditure plans in order to ensure available liquid cash funds when required.
Market Price Risk Market price risk primarily comprises interest rate exposure risk, which is managed by maintaining a rolling programme of varying deposit maturity dates, up to a maximum of 365 days, on a breakable deposit basis. The majority of funds are deposited for terms of less than 90 days. This allows the Group to react to rate changes within a reasonable timeframe and to mitigate pricing risk accordingly.
Exchange Rate Risk The Group’s principal functional currency is Pounds Sterling (“GBP”). However, during the year the Group had exposure to Euros (“€”), US Dollars (“US$”) and Canadian Dollars (“CAD”). The Group’s policy is to maintain natural hedges, where possible, by matching revenue and receipts with expenditure.
Going Concern The financial position of the Group, its cash flows and liquidity position are fully described in the Chief Financial Officer’s Review on pages 8 to 10. The Group’s business activities and the key factors affecting the likely development of the business in 2013 are described in the Chief Executive Officer’s Review on pages 3 to 7. In addition, the key policies for managing financial risks are set out above.
Having reviewed cash flow forecasts for the 12 month period following the date of signing the financial statements, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing these financial statements despite the current uncertain economic climate.
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. Their contribution is a key element to the future success of the Group and accordingly, from time to time, most employees are given the opportunity to participate in the Company’s share capital by joining one or more of the share option schemes operated by the Company. Details of the share options issued under these plans are set out in note 21 to the financial statements. Equal opportunity is given to all employees regardless of their age, sex, colour, race, disability, religion or ethnic origin.
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 adverse impacts are identified and resolved. The Group maintains and operates within a Code of Conduct and Business Ethics with which all staff are required to comply.
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.
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 our 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. As at 30 September 2013, 79 of our staff have worked for the Group for more than five years. Many of these have been with us for more than 10 years. We seek to encourage staff retention by offering participation in staff share option, 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. 18 GW Pharmaceuticals plc Annual Report and Accounts 2013
Strategic Report continued
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 forwards. 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 2013 was as follows:
Male Female Total 30 Sept 2013 30 Sept 2013 30 Sept 2013 Number of persons who were Directors of the Company 8 – 8 Number of persons who were senior managers of the Company 10 3 13 Number of persons who were employees of the Company 76 97 173 Total employees at 30 September 2013 94 100 194
Environmental Matters We have reported on all of the emission sources required under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. These sources fall within our consolidated financial statements. We do not have responsibility for any emission sources that are not included in our consolidated statements.
We have used the 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 2014.
We have used the most recent evidence or estimates provided by our energy supply partners to generate our disclosure of emissions for the period ended 30 September 2013. These include the purchase of electricity, heat, steam or cooling.
The annual quantity of emissions for the Group was 1,874 tonnes of carbon dioxide, 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 10.0 tonnes per head average for the year ended 30 September 2013.
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 our plant growing facility.
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.
On behalf of the Board
Adam George Chief Financial Officer 6 December 2013 19 GW Pharmaceuticals plc Annual Report and Accounts 2013
Chairman’s Corporate Governance Report
As a company that has securities which are traded on the Alternative Investment Market (“AIM”), we are not required to comply with the principles of the UK Corporate Governance Code (the “Code”). Although listed on the Nasdaq Global Market, our status as a Foreign Private Issuer means that we are subject to UK corporate governance rules. The Board has sought to robustly apply the principles of the UK Corporate Governance Code as far as practicable given the size of the Company and the nature of its operations.
At our Annual General Meeting in March 2014, Thomas Lynch, a non-executive Director, and I will be retiring by rotation and will seek re-election.
In this report I will explain how we have managed our corporate governance during 2013 and how we intend to maintain practices consistent with the requirements of the Code in future. I will also identify those provisions of the Code with which we are not fully compliant.
Our Strategy, Business Model and Approach to Risk The nature of our business is to take product development risk in order to create valuable medicines targeted to address areas of significant unmet medical need. We invest our efforts and financial resources into the process of identifying suitable pharmaceutical product candidates which we then take through an extensive development process. This is an inherently risky process. Not all of our product candidates will progress successfully to become marketable products. However, our in-house development expertise and unique knowledge of the cannabinoids with which we work should allow us to develop valuable products in an efficient manner that will significantly reduce, but which cannot eliminate this risk in future.
We manage the extent of retained risk by: • when appropriate, licensing our products to pharmaceutical partners with the expertise, resources and contacts to market our approved products, reducing the need for investment in sales infrastructure, allowing us to focus upon our own areas of expertise; • managing the development process of our products, in conjunction with our partners, to ensure optimal management of each stage of development, utilising our in-house resource wherever possible to ensure compliance with good clinical practice, maintenance of our knowledge base and close control; • seeking funding from partners for early stage research by entering into collaboration agreements, sharing the financial risks associated with our pipeline development; • negotiating licensing terms with partners that require our partners to fund most of the latter stages of product development, Phase III trials, indication expansion and product life cycle management; and • controlling the manufacturing of our products, in-house, to ensure that quality is maintained, processes optimised and manufacturing expertise is maintained within GW.
All of the above result in a business model that allows us to create value by developing a broad pipeline of potential future products whilst sharing the financial risk with our partners. By maintaining close internal control over most aspects of research and development (“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.
Having carried out a review of the level of risks that we are taking in pursuit of the Group’s strategy, the Board is satisfied that the level of retained risk is appropriate and commensurate with the financial rewards that should result from achievement of our strategy.
The Board of Directors The Company is controlled by the Board of Directors which currently comprises five Executive and three independent non-executive Directors. The Board of Directors has overall responsibility for the Group. Its aim is to represent the interests of the Group’s shareholders and to provide leadership and control in order to ensure the growth and long-term success of the business.
Provision A2.1 of the Code recommends separation of the roles of Chairman and Chief Executive. During 2013 we have taken steps to comply with this best practice. In April 2013 Justin Gover was appointed as Chief Executive Officer. I have retained my role as Chairman of the Board.
Provision B1.2 of the Code states that, except for smaller companies, at least half the Board, excluding the Chairman, should comprise independent non-executive Directors. As a smaller company, with three independent non-executive Directors, the Group is fully compliant with this provision of the Code.
Mr James Noble acts as the Company Deputy Chairman and senior independent non-executive Director.
All Directors are able to take independent advice in furtherance of their duties if necessary.
The Board is responsible to shareholders for the proper management of the Group. Board meetings are held at least six times a year to set the overall direction and strategy of the Group and to review financial and operating performance. Financial policy and budgets, including capital expenditure, are approved and monitored by the Board. All key strategic decisions are subject to Board approval. The Company Secretary is responsible for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. 20 GW Pharmaceuticals plc Annual Report and Accounts 2013
Chairman’s Corporate Governance Report continued
Directors are subject to election by shareholders at the first opportunity after their appointment. In addition, one third of the Directors are subject to retirement by rotation at each Annual General Meeting. The Board have considered the recommendation within Provision B7.1 of the Code, aimed at FTSE350 companies and above, that all Directors should be reappointed annually. However the Board has concluded that it is not appropriate for a company of GW’s size to adopt annual reappointment. For the foreseeable future we will continue with the existing practice of retirement by rotation every three years.
During the year, there were eight full meetings of the Board of Directors. All members of the Board of Directors attended each of the eight meetings, with the exception of Tom Lynch, James Noble and Stephen Wright, who each attended seven Board meetings.
Committees of the Board The detailed terms of reference of each of the Board committees can be found on the Group website at www.gwpharm.com.
Remuneration Committee The Remuneration Committee comprises all the non-executive Directors under the chairmanship of Mr Thomas Lynch. It reviews, inter alia, the performance of the Executive Directors and sets the scale and structure of their remuneration and the basis of their service agreements with due regard to the interests of the shareholders. The Remuneration Committee also determines the allocation of awards under the Long-Term Incentive Plan (“LTIP”) to Executive Directors. No Director has a service agreement with a notice period exceeding one year.
During the year, there were three full meetings of the Remuneration Committee. All members of the Committee attended these meetings.
It is a policy of the Remuneration Committee that no individual participates in discussions or decisions concerning his own remuneration.
The Directors’ Remuneration Report is set out on pages 24 to 37.
Audit Committee The Audit Committee comprises all the non-executive Directors under the chairmanship of James Noble. It meets at least three times per year and overviews the monitoring of the Group’s internal controls, accounting policies and financial reporting and provides a forum through which the external auditor reports. It meets at least once a year with the external auditors without executive Board members present.
The Audit Committee is also responsible for overseeing the activities of the external auditor including their appointment, reappointment, or removal as well as monitoring of their objectivity and independence. The Committee also considers the fees paid to the external auditor and whether the fee levels for non-audit services, individually and in aggregate, relative to the audit fee are appropriate so as not to undermine their independence.
The Audit Committee operates a formal policy in connection with the provision of non-audit services, whereby any engagement of services for a single activity with a fee of over £20,000 must be separately approved by the Audit Committee. A list of services which are not permitted to be provided by the external auditor is maintained, covering services that have the potential to impair or appear to impair the independence of their audit role. Other services are reviewed by the Audit Committee on a case-by-case basis.
James Noble is a qualified chartered accountant with recent financial experience. The Board is satisfied that his expertise ensures compliance with Code 3.1 of the Code, whereby at least one member of the Committee must have recent and relevant financial experience.
During the year, there were three full meetings of the Audit Committee which were all fully attended.
Nominations Committee The Nominations Committee comprises Mr James Noble and Mr Cabot Brown, under my chairmanship. It meets at least twice a year and reviews the structure, size and composition of the Board, supervising the selection and appointment process in relation to Directors, making recommendations to the Board with regard to any changes, using an external search consultancy if considered appropriate. For new appointments, which are made on merit, against objective criteria and with due regard to the benefits of diversity on the Board, including gender, the Nominations Committee will make a recommendation to the Board. Members of the Board then have the opportunity to meet the candidate prior to approving the appointment. Once appointed, the Nominations Committee oversees the induction of new Directors as well as ensuring that the Board as a whole receive the appropriate training during the course of the year in order to ensure that they have the knowledge and skills necessary to operate effectively.
Following the retirement of Richard Forrest at the Annual General Meeting on 18 January 2013, Cabot Brown was appointed as a non-executive Director on 19 February 2013. 21 GW Pharmaceuticals plc Annual Report and Accounts 2013
The Nominations Committee also retains responsibility for the Board appraisal process whereby the performance of all Directors is appraised annually both on an individual basis, for the Board as a whole taking into account such factors as attendance record, contribution during Board meetings and the amount of time that has been dedicated to Board matters during the course of the year. In addition, the Nominations Committee oversees the appraisal of each of the Board sub-committees. I oversee the appraisal process, while my performance as Chairman is reviewed by James Noble, in his capacity as senior independent Director, taking into account feedback from other members of the Board.
Provision B6.2 of the Code recommends that the Board should consider utilising an independent third party to facilitate the Board appraisal process, noting that this may not be appropriate for companies smaller than FTSE350. Having considered this recommendation, the Board has decided that the current appraisal process is operating satisfactorily and that, in recognition of GW’s size, it is not considered necessary to utilise the services of an independent facilitator at this time. The Nominations Committee will reconsider this in future and may appoint an independent facilitator if it determines that this is appropriate.
During 2013 there have been four Nominations Committee meetings. These meetings were fully attended.
Executive Management Committees Operational decision making is delegated to a number of Executive Management Committees which are committees consisting of certain Directors and members of senior management. These Executive Management Committees meet as required and on average every six weeks.
Communication with Shareholders The Board attaches great importance to effective communication with shareholders and encourages dialogue with both its institutional and private investors and we aim to respond promptly to all questions received verbally or in writing. Regular communication is maintained with all shareholders through Company announcements, the Annual Report and Accounts, Preliminary Results, the Interim Report and Quarterly Results. In addition the Company operates a website which can be found at www.gwpharm.com. The website contains further details of the Group, its products and its activities, details of regulatory announcements and Company announcements, Annual, Interim and Quarterly Reports, and details of the Company’s share price, share trading activity and graphs.
The Executive Directors regularly attend meetings with analysts and institutional shareholders throughout the year. With private shareholders this is not always practical. The Board has therefore sought to use the Company’s Annual General Meeting as the opportunity for both the Executive and the non-executive Directors to meet shareholders, after which the Board gives a presentation on the activities of the Group and there is also an opportunity to ask questions of all Directors on a formal and informal basis. At other times during the year, the non-executive members of the Board and I are available to meet with our institutional shareholders upon request. We welcome the opportunity to develop a mutual understanding of objectives with our shareholders.
All shareholders have at least 21 days’ notice of the Annual General Meeting.
Maintenance of a Sound System of Internal Control The Directors have overall responsibility for ensuring that the Group maintains a system of internal control to provide them with reasonable assurance that the assets of the Group are safeguarded and that the shareholders’ investments are protected. The system includes internal controls covering financial, operational and compliance areas, and risk management. There are limitations in any system of internal control, which can provide reasonable but not absolute assurance with respect to the preparation of financial information, the safeguarding of assets and the possibility of material misstatement or loss.
During 2013 the Board has considered and reviewed the system of internal controls in place. An assessment of the major risk areas for the business and methods used to monitor and control them was also undertaken with a particular focus upon the changing profile of the risks facing the business as the commercialisation of Sativex® progresses and as our clinical efforts encompass research involving a much broader range of new cannabinoid product candidates in a wide range of disease areas.
In addition to financial risk, the review covered operational, commercial, environmental, regulatory and R&D risks. The risk review is an ongoing process with regular review by the Board at least annually with appropriate input from the Audit Committee. The prime purpose of this review is to ensure that, having considered the controls that are in place to mitigate risks, the Board is satisfied with the residual level of risk being taken in pursuit of the Group strategy.
The key procedures designed to provide an effective system of internal control that have operated throughout the year and up to the date of the sign-off of this report are described below. 22 GW Pharmaceuticals plc Annual Report and Accounts 2013
Chairman’s Corporate Governance Report continued
Financial and Business Reporting Having taken all the matters considered by the Board and brought to the attention of the Board during the year into account, we are satisfied that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable.
The Board believe that the disclosures set out on within the Strategic Report on pages 13 to 18 provide the information necessary for shareholders to assess the Group’s performance, business model and strategy.
Control Environment There is an organisational structure with clearly defined lines of responsibility and delegation of accountability and authority.
Risk Management The Group employs Directors and senior executives with the appropriate knowledge and experience for a pharmaceutical group such as GW Pharmaceuticals plc. A formal risk management review is performed annually as part of the process of determining the adequacy of the Group’s system of internal controls and risk mitigation procedures.
Financial Information The Group prepares detailed budgets and working capital projections, which are approved annually by the Board and are updated regularly throughout the year. Detailed management accounts and working capital cash flows are prepared on a monthly basis and compared to budgets and projections to identify and manage any significant variances.
Management of Liquid Resources The Board is risk averse when investing the Group’s surplus cash funds. The Group’s treasury management policy sets out strict procedures and limits on how surplus funds are invested.
The Board has considered it inappropriate to establish an internal audit function, given the size of the Group. However, we will review this decision as the operations of the Group develop.
Dr Geoffrey W Guy Chairman 6 December 2013 23 GW Pharmaceuticals plc Annual Report and Accounts 2013
Directors’ Report
The Directors present their report and the audited financial statements for the Company and for the Group for the financial year ended 30 September 2013. Results and Dividends The Consolidated Income Statement for the year is set out on page 41. The Group’s loss for the financial year after taxation was £4.5m (2012: profit of £2.5m). The Directors do not recommend the payment of a dividend (2012: £nil). Group Research and Development Activities The research and development undertaken by the Group amounted to £32.7m (2012: £27.6m), all of which was expensed during the year. This included £23.6m (2012: £19.5m) of research and development expenditure which was carried out under contract for and was fully funded by our development partners. Substantial Shareholdings On 5 December 2013 the Company had been notified, in accordance with the Companies Act 2006, of the following interests in the ordinary share capital of the Company: Number of Shares Held % Prudential plc group of companies 26,241,389 14.8 Dr Geoffrey W Guy 17,187,654 9.7 VHCP Management LLC (Venrock) 10,053,600 5.7 Dr Brian Whittle 7,839,938 4.4 Farallon Capital Management LLC 7,008,000 3.9 Preston L Parish Trust 6,035,107 3.4 T. Rowe Price International Ltd. 5,348,688 3.0
Share Capital Information relating to changes to the issued share capital during the year is given in note 20 to the financial statements. The Group is funded entirely by ordinary share capital and has no bank debt as at 30 September 2013 (2012: £nil). The finance lease liability totalled £2.0m as at 30 September 2013 (2012: £nil). Directors and Their Interests Details of the beneficial interests of Directors in the ordinary shares of the Company are disclosed within the Director’s Remuneration Report on page 27. Details of the Directors’ share options and service contracts are shown in the Directors’ Remuneration Report. Biographical details of the Directors are given on pages 11 and 12. In accordance with the Articles of Association of the Company, Thomas Lynch and Geoffrey Guy will retire by rotation at the forthcoming Annual General Meeting and, being eligible, both offer themselves for re-election. Annual General Meeting The Annual General Meeting will be held at 11am on 11 March 2014 at Chandos House, 2 Queen Anne Street, London W1G 9LQ. 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. Deloitte LLP have expressed their willingness to continue in office as auditor and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. By order of the Board
Adam George Chief Financial Officer 6 December 2013 24 GW Pharmaceuticals plc Annual Report and Accounts 2013
Directors’ Remuneration Report
The information provided in this part of the Directors’ Remuneration Report is not subject to audit.
Remuneration Committee Chairman’s Annual Statement
Dear Shareholder For many years, in accordance with best practice, the GW Remuneration Committee, consisting of independent non-executive Directors under my Chairmanship, has been managing the remuneration of the Executive Directors within the framework of an agreed set of parameters and option scheme rules, summary details of which have been disclosed annually to shareholders within the Directors’ Remuneration Report.
Following the UK Government’s recent changes to executive remuneration disclosure and shareholder voting requirements, I welcome the opportunity to set out the remuneration policy that we propose to apply to executive remuneration from the 2014 Annual General Meeting. This future policy is consistent with the limits and approach that we have applied to executive remuneration for the last three years. No significant changes have been necessary in preparing this policy for shareholder approval.
The remuneration policy has been designed to ensure that Executive Directors receive appropriate incentive and reward given their performance, responsibility and experience. In determining this, the Remuneration Committee aims to ensure that the policy aligns the interests of Executive Directors with those of the shareholders.
The Group remuneration policy for Executive Directors is to: • have regard to the individuals’ experience and the nature and complexity of their work in order to pay a competitive salary that attracts and retains management of the highest quality, while avoiding remunerating those Directors more than is necessary; • link individual remuneration packages to the Group’s long-term performance through the award of share options, bonus schemes and via participation in the Group’s Long-Term Incentive Plan (“LTIP”); • 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 this policy is working well and that it establishes a firm framework within which future remuneration will be determined whilst still allowing the Remuneration Committee sufficient flexibility to adapt remuneration packages in line with the development of the business over the next three years. This should allow the Company to attract, retain and motivate Executive Directors with the skills, talent and motivation to deliver upon our strategy and to create value for our shareholders.
During 2013 the key changes to Executive Director remuneration have been as follows: • in line with inflationary increases given to GW staff, the Executive Directors received an inflationary basic salary increase of 3%, effective from 1 January 2013; • following completion of the Nasdaq listing on 1 May 2013, the Remuneration Committee decided, having consulted with independent external advisers, to increase further the basic salary of Adam George, Chief Financial Officer, to £185,000 with effect from 1 June 2013, to reflect his additional responsibilities; • in January 2013, the Remuneration Committee awarded a bonus of 35% of basic salary to the Executive Directors to reflect their performance for the year ended 31 December 2012. Bonuses for the 2013 calendar year will be considered and awarded in the financial year ended 30 September 2014; • in July 2013, the three year vesting period for the 2010 LTIP option award ended. 50% of the associated performance conditions for this award were achieved resulting in 50% of the LTIPs vesting and 50% lapsing. • in September 2013, the Remuneration Committee granted an LTIP award representing options with a market value at date of grant of 100% of basic salary and with a performance condition linked to growth in the value of the Company’s Nasdaq listed ADRs over the three year vesting period.
Thomas Lynch 6 December 2013 25 GW Pharmaceuticals plc Annual Report and Accounts 2013
Annual Report on Remuneration The information provided in this part of the Directors’ Remuneration Report is subject to audit.
Single Total Figure of Temuneration for Each Director The Directors received the following remuneration for the years ended 30 September 2013 as follows:
Long-term Salary Taxable Annual incentive Pension 2013 and fees benefits5 bonus plans6 contributions Total Name of Director £ £ £ £ £ £ Executive Dr Geoffrey W Guy 354,383 5,542 112,761 62,359 56,204 591,249 Justin Gover 286,770 3,905 92,725 51,279 47,405 482,084 Adam George 162,163 3,646 43,750 16,800 22,109 248,468 Dr Stephen Wright 241,232 8,845 77,234 42,712 39,486 409,509 Chris Tovey1 214,988 3,656 17,063 – 34,893 270,600
Non-executive James Noble 52,934 – – – – 52,934 Richard Forrest2 22,712 – – – – 22,712 Cabot Brown3 28,863 – – – – 28,863 Thomas Lynch4 – – – – – – Aggregate emoluments 1,364,045 25,594 343,533 173,150 200,097 1,933,269
1 Chris Tovey was appointed to the Board on 1 October 2012. 2 Richard Forrest retired by rotation on 18 January 2013. 3 Cabot Brown was appointed to the Board on 19 February 2013. 4 Since his appointment as a non-executive Director in July 2010, Thomas Lynch has waived his right to receive remuneration for this role. 5 Taxable benefits comprise healthcare insurance premiums. 6 LTIP gains represent the unrealised gains on LTIPs that vested during the year ended 30 September 2013, calculated according to the share price at the date of vesting. These gains have not been realised as the Directors have not exercised or sold these LTIPs.
The annual bonus shown in the table above represent awards in January 2013, representing 35% of basic salary to the Executive Directors reflecting their performance for the year ended 31 December 2012. Performance was assessed by the Remuneration Committee by considering the extent of achievement of a set of detailed objectives established at the start of the 2012 calendar year.
On 19 July 2013 the vesting period for the 2010 LTIP award ended. These awards were subdivided into four equal tranches, dependent upon four separate performance conditions. Two of the performance conditions were met therefore 50% of the options vested. These options have been included in the table above valued at the share price on the vesting date of 48p per ordinary share.
The Directors received the following remuneration for the years ended 30 September 2012 as follows:
Long-term Salary Taxable Annual incentive Pension 2013 and fees benefits4 bonus plans5 contributions Total Name of Director £ £ £ £ £ £ Executive Dr Geoffrey W Guy 348,675 3,619 154,891 146,623 50,395 704,203 Justin Gover 278,262 2,662 127,369 131,961 45,917 586,171 Adam George1 53,152 1,077 – 1,647 – 55,876 David Kirk2 182,279 2,291 103,000 118,161 21,780 427,511 Dr Stephen Wright 234,145 3,902 106,090 120,749 40,182 505,068
Non-executive James Noble 52,213 – – – – 52,213 Richard Forrest 38,213 – – – – 38,213 Thomas Lynch3 – – – – – – Aggregate emoluments 1,186,939 13,551 491,350 519,141 158,274 2,369,255
1 Adam George was appointed to the Board on 1 June 2012. 2 David Kirk retired from the Board on 1 June 2012. 3 Since his appointment as a non-executive Director in July 2010, Thomas Lynch has waived his right to receive remuneration for this role. 4 Taxable benefits comprise healthcare insurance premiums. 5 Long-term incentive plan gains represent the unrealised gains on LTIPs or via the All Employee Share Option Scheme (“AESOP”) that vested during the year ended 30 September 2012, calculated according to the share price at the date of vesting. These gains have not been realised as the Directors have not exercised or sold these LTIPs or AESOPs. 26 GW Pharmaceuticals plc Annual Report and Accounts 2013
Directors’ Remuneration Report continued
The annual bonus shown in the table on page 25 represent awards in January 2012, representing 50% of basic salary to the Executive Directors reflecting their performance for the year ended 31 December 2011. Performance was assessed by the Remuneration Committee by considering the extent of achievement of a set of detailed objectives established at the start of the 2011 calendar year.
On 27 March 2012 the vesting period for the 2009 LTIP award ended. This award was contingent upon a Sativex launch performance condition, which was achieved. These options have been included in the table above valued at the share price on the vesting date of 86.25p per ordinary share.
LTIPs Awarded During the Financial Year Executive Directors are awarded LTIPs at the discretion of the Remuneration Committee. The number of LTIPs to be awarded is typically calculated with reference to the closing mid-market ordinary share price of the Company’s ordinary shares on the day prior to grant and vest after a period of three years. During periods of volatility, the price used to determine the number of options to be granted is determined by reference to the average closing mid-market ordinary share price of the previous five trading days.
Under the terms of the LTIP Executive Directors are awarded options to subscribe for the Company’s ordinary shares at an exercise price equal to the nominal value. These options are subject to performance conditions which must be achieved before the options vest and become exercisable. In the event that the performance conditions are not achieved within the required three year vesting period these options will lapse. Once vested, an award may be exercised at any time prior to the tenth anniversary of the date of grant.
The table below sets out the LTIPs awarded in the year to 30 September 2013 to Directors: % of award vesting for Value at date Exercise Performance Date of minimum Summary of performance Name of Director Granted of grant price period end expiry performance measures and targets Dr Geoffrey W Guy 440,397 £331,839 0.1p 24/09/16 24/09/23 25% See 2013 award below Justin Gover 362,144 £272,876 0.1p 24/09/16 24/09/23 25% See 2013 award below Adam George 245,521 £185,000 0.1p 24/09/16 24/09/23 25% See 2013 award below Dr Stephen Wright 301,642 £227,287 0.1p 24/06/16 24/09/23 25% See 2013 award below Chris Tovey 200,000 £124,500 0.1p 30/11/15 30/11/22 25% See 2012 award below Chris Tovey 266,557 £200,851 0.1p 24/09/16 24/09/23 25% See 2013 award below
2012 Award The 2012 award is subdivided into four equal tranches, each of which will vest on 6 June 2015 upon achievement of the following performance conditions: • one quarter of the award will vest upon achievement of first positive cancer pain clinical trial results; • one quarter of the award will vest upon filing of a New Drug Application (“NDA”) for Sativex with the US Food and Drug Administration (“FDA”); • one quarter of the award will vest upon signature of a new non-Sativex product license agreement; and • one quarter of the award will vest subject to the Company share price performance over the three year vesting period. This will be ranked against the share price performance of a comparator group made up of the constituents of the FTSE Smallcap index. Awards will only vest if the Company is ranked at Median or above. 25% of this element of the award will vest if the Company achieves a Median ranking and 100% will vest if the Company achieves an Upper Quartile ranking, with a straight line approach used to calculate the percentage vesting between these two extremes.
2013 Award The 2013 award is subject to a performance condition whereby all of the awards will vest on the third anniversary of the date of the grant if the ADS price has increased by 75% of more during this three year period. 25% of the awards will vest if 25% growth is achieved, with a straight line basis of calculation being used to calculate the number of options vesting between these two extremes. No options will vest if the share price growth is below 25% over the three year vesting period.
The starting price for the growth calculation will be based on the US Dollar equivalent of the average closing mid-market price of twelve AIM listed ordinary shares, as calculated over the last 30 trading days prior to the Nasdaq IPO on 1 May 2013. This price of $10.37, equivalent to 56.6p per UK ordinary share, will be compared to the US Dollar denominated average mid-market closing price of the ADS, calculated by reference to the last 30 trading days of the three year vesting period. 27 GW Pharmaceuticals plc Annual Report and Accounts 2013
Statement of Directors’ Shareholding and Share Interests The table below shows, for each Director, the total number of shares owned, the total number of share options with and without performance conditions, those vested but unexercised and those exercised during the year. There are no requirements for Directors to hold shares in the Company. Options: Unvested Unvested with without Vested Exercised Shares performance performance not yet during Name of Director owned1 conditions conditions exercised2 the year Executive Dr Geoffrey W Guy 17,187,654 908,805 – 1,524,332 – Justin Gover 3,983,668 762,909 – 1,274,886 – Adam George 21,696 470,857 – 197,065 – Dr Stephen Wright 5,000 650,108 – 1,269,172 – Chris Tovey 10,000 466,557 – – –
Non-executive James Noble 72,500 – – – – Thomas Lynch 236,344 – – – – Cabot Brown – – – – –
1 This comprises the Directors’ holding of ordinary shares as at 30 September 2013. Further details are given in the table below. 2 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.
The table below shows the total number of Directors’ interests in shares: Ordinary Ordinary shares shares of 0.1p of 0.1p 30 Sept 30 Sept Name of Director 2013 2012 Executive Dr Geoffrey W Guy1 17,187,654 17,187,654 Justin Gover2 3,983,368 3,983,368 Adam George3 21,696 21,696 Dr Stephen Wright4 5,000 5,000 Chris Tovey 10,000 –
Non-executive James Noble 72,500 72,500 Thomas Lynch 236,344 236,344 Cabot Brown5 – –
1 Dr Geoffrey Guy’s holding includes 25,000 ordinary shares held by his immediate family and 1,174,958 shares held by his personal pension plan. 2 Justin Gover’s holding includes 33,147 ordinary shares held by his wife. 3 Adam George’s holding is held by his personal pension scheme. 4 Dr Stephen Wright’s holding of 5,000 ordinary shares is held by his wife. 5 Cabot Brown was appointed as a Director on 19 February 2013.
In addition the following ordinary shares have been conditionally gifted under the rules of the GW Pharmaceuticals All Employee Share Scheme as follows: At 1 Oct 2012 and 30 Sept Name of Director 2013 Vested Executive Mr Justin Gover 14,384 02/10/03 2,450 23/01/05 Dr Stephen Wright 1,507 22/01/07 1,500 21/01/08 Mr Adam George 2,065 01/06/12 28 GW Pharmaceuticals plc Annual Report and Accounts 2013
Directors’ Remuneration Report continued
The interests of the Directors in share options of the Company as at 30 September 2013 were:
At 1 Oct At 30 Sept Nominal Exercise Date of Date of Name of Director 2012 Granted Exercised Lapsed 2013 value price exercise expiry Dr Geoffrey W Guy 216,080 – – – 216,080 0.1p 199.00p 22/01/07 22/01/14 302,344 – – – 302,344 0.1p 128.00p 02/03/08 02/03/15 171,315 – – – 171,315 0.1p 125.50p 10/02/09 10/02/16 364,675 – – – 364,675 0.1p 95.50p 26/03/10 26/03/17 170,000 – – – 170,000 0.1p 0.1p 19/03/11 19/03/18 170,000 – – – 170,000 0.1p 0.1p 27/03/12 27/03/19 259,836 – – (129,918) 129,918 0.1p 0.1p 19/07/13 19/07/20 259,493 – – – 259,493 0.1p 0.1p 08/06/14 08/06/21 208,915 – – – 208,915 0.1p 0.1p 06/06/15 06/06/22 – 440,397 – – 440,397 0.1p 0.1p 24/09/16 24/09/23 Total 2,122,658 440,397 – (129,918) 2,433,137
Justin Gover 175,000 – – (175,000) – 0.1p 171.00p 16/01/06 16/01/13 170,854 – – – 170,854 0.1p 199.00p 22/01/07 22/01/14 239,063 – – – 239,063 0.1p 128.00p 02/03/08 02/03/15 135,458 – – – 135,458 0.1p 125.50p 10/02/09 10/02/16 299,844 – – – 299,844 0.1p 95.50p 26/03/10 26/03/17 153,000 – – – 153,000 0.1p 0.1p 19/03/11 19/03/18 153,000 – – – 153,000 0.1p 0.1p 27/03/12 27/03/19 213,666 – – (106,833) 106,833 0.1p 0.1p 19/07/13 19/07/20 213,384 – – – 213,384 0.1p 0.1p 08/06/14 08/06/21 187,381 – – – 187,381 0.1p 0.1p 06/06/15 06/06/22 – 362,144 – – 362,144 0.1p 0.1p 24/09/16 24/09/23 Total 1,940,650 362,144 – (281,833) 2,020,961
Adam George 150,000 – – – 150,000 0.1p 54.00p 05/11/10 05/11/17 10,000 – – – 10,000 0.1p 0.1p 26/11/11 26/11/18 70,000 – – (35,000) 35,000 0.1p 0.1p 19/07/13 19/07/20 90,593 – – – 90,593 0.1p 0.1p 08/06/14 08/06/21 134,743 – – – 134,743 0.1p 0.1p 06/06/15 06/06/22 – 245,521 – – 245,521 0.1p 0.1p 24/09/16 24/09/23 Total 455,336 245,521 – (35,000) 665,857
Dr Stephen Wright 100,000 – – – 100,000 0.1p 199.00p 22/01/07 22/01/14 400,000 – – – 400,000 0.1p 99.00p 02/09/07 02/09/14 200,000 – – – 200,000 0.1p 119.50p 21/01/08 21/01/15 107,570 – – – 107,570 0.1p 125.50p 10/02/09 10/02/16 229,610 – – – 229,610 0.1p 95.50p 26/03/10 26/03/17 140,000 – – – 140,000 0.1p 0.1p 27/03/12 27/03/19 177,970 – – (88,985) 88,985 0.1p 0.1p 19/07/13 19/07/20 177,735 – – – 177,735 0.1p 0.1p 08/06/14 08/06/21 170,731 – – – 170,731 0.1p 0.1p 06/06/15 06/06/22 – 301,642 – – 301,642 0.1p 0.1p 24/06/16 24/09/23 Total 1,703,616 301,642 – (88,985) 1,916,273
Chris Tovey – 200,000 – – 200,000 0.1p 0.1p 30/11/15 30/11/22 – 266,557 – – 266,557 0.1p 0.1p 24/09/16 24/09/23 Total – 466,557 – – 466,557
The 2011 LTIP award is due to vest on 8 June 2014. This is subject to a performance condition whereby the number of options vesting on the third anniversary of the date of grant will be determined according to the performance of the Company share price relative to a comparator group consisting of the constituents of the FTSE Smallcap index. Awards will only vest if the Company is ranked at median or above. 25% of the award will vest if the Company achieves median ranking, with 100% vesting if an upper quartile ranking is achieved. A straight line approach will be used to calculate the percentage vesting between these two extremes.
Details of the performance conditions attached to the 2012 and 2013 LTIP awards are described in the “Share options awarded during the financial year” section above.
The Remuneration Committee considered that, at the date of grant of these LTIP awards, the performance measures used represented the key value drivers for the business and that achievement of these performance measures should deliver significant value to the Group and to shareholders, such that the interests of the Executive Directors, the Group and our shareholders are appropriately aligned. 29 GW Pharmaceuticals plc Annual Report and Accounts 2013
During the year no options (2012: 140,000) were exercised. The average exercise price for the year ended 30 September 2012 was 0.1p and the average market price at date of exercise was 87p, resulting in a notional gain at exercise of £121,660.
The market price of the Company’s shares as at 30 September 2013 was 87p (2012: 75p) and the range during the year was 39.5p to 87p (2012: 68p to 100p).
Illustration of Total Shareholder Return The information provided in this part of the Directors’ Remuneration Report is not subject to audit.
The following graph shows the Company’s performance, measured by total shareholder return, for both the UK ordinary shares listed on AIM and the ADSs listed on Nasdaq, compared with the performance of the FTSE Smallcap index, excluding investment trusts. The Smallcap index has been selected for this comparison because it is the index used by the Company for the performance condition for the 2011 LTIP award and is considered to be the most suitable comparator index.
Total shareholder return – UK AIM-listed ordinary shares vs. FTSE Smallcap Index (excluding investment trusts) Source: Thomson Reuters
400
350
300
250
200 Value (£) Value
150
100
50
30 September 2008 30 September 2009 30 September 2010 30 September 2011 30 September 2012 30 September 2013
§ GW Pharmaceuticals plc ordinary shares § FTSE Smallcap (excl. investment trusts) Index This graph shows the daily movements, to 30 September 2013, of £100 invested in GW Pharmaceuticals plc 's AIM-listed ordinary shares on 30 September 2008 compared with the value of £100 invested in the FTSE Smallcap (excluding investments trusts) Index.
Total shareholder return – Nasdaq-listed ADSs vs. FTSE Smallcap Index (excluding investment trusts) As measured from the date of the Nasdaq IPO on 1 May 2013 Source: Thomson Reuters
200
175
150
125
100 Value (£) Value
75
50
25
30 April 2013 31 May 2013 30 June 2013 31 July 2013 31 August 2013 30 September 2013
§ GW Pharmaceuticals plc ordinary shares § FTSE Smallcap (excl. investment trusts) Index § GW Pharmaceuticals plc ADS This graph shows the daily movements, to 30 September 2013, of £100 invested in GW Pharmaceuticals plc's AIM-listed ordinary shares on 1 May 2013 compared with the value of £100 invested in the FTSE Smallcap (excluding investments trusts) Index and £100 invested in GW Pharmaceutical plc's Nasdaq-listed ADSs. 30 GW Pharmaceuticals plc Annual Report and Accounts 2013
Directors’ Remuneration Report continued
Chief Executive Officer Total Remuneration History The table below sets out total remuneration details for the Chief Executive Officer. Long term incentive Annual vesting rates CEO single bonus pay- against figure of total out against maximum Year remuneration1 maximum opportunity 2013 482,084 35% 50% 2012 586,171 50% 100% 2011 541,294 30% 100% 2010 535,325 70% 100% 2009 354,871 23% 100%
1 This total includes unrealised gains on share options vesting in each of the financial years shown above. These gains remain unrealised as options have not yet been exercised.
The table below shows the percentage change in remuneration of the Chief Executive Officer and the Company’s employees as a whole between 2012 and 2013. Percentage increase in remuneration in 2013 compared with remuneration in 2012 All CEO employees Basic salary 3% 3% Taxable benefits1 47% 51% Annual bonus –27% 13%
1 This increase relates to an underlying increase in health insurance premiums with no change in insurance cover levels.
Relative Importance of Spend on Pay The Committee has determined that revenue excluding milestones and research and development expenditure are the most relevant comparators 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 revenue excluding milestones and research and development expenditure and illustrates the year on year change.
§ 2013 § 2012
35,000 +26% +19% +6%
30,000
25,000
20,000 £’000s
15,000
10,000
5,000
Revenue Research and Staff costs excluding development milestones expenditure 31 GW Pharmaceuticals plc Annual Report and Accounts 2013
Proposed Application of the Remuneration Policy for the Year Ended 30 September 2014 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 paid on the basis set out in the Remuneration Policy Report below. ii) Annual Bonus We anticipate that the Remuneration Committee will meet at the end of 2013, or shortly thereafter, to assess Executive Director performance for the calendar year ended 31 December 2013. Based upon this assessment and in accordance with the Remuneration Policy Report below, the Remuneration Committee will award a cash bonus to each Executive Director. The level of bonus award will depend upon the extent of achievement of a set of strategic objectives that were set by the Remuneration Committee in January 2013. These included a broad set of 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 include progress with Phase III trial recruitment, pipeline development activities, operational and business development objectives, financial position and equity valuation. iii) Long-Term Incentive Plan It is expected that LTIP awards granted on 8 June 2011 will vest on 8 June 2014. The extent of vesting of this award is contingent upon the performance of the Company’s AIM-listed ordinary share price relative to a comparator group consisting of the constituents of the FTSE Smallcap index. Awards will only vest if the Company is ranked at median or above. 25% of the award will vest if the Company achieves median ranking, with 100% vesting if an upper quartile ranking is achieved. A straight-line approach will be used to calculate the percentage vesting between these two extremes.
We anticipate that in the second half of the 2014 financial year the Remuneration Committee will grant the next annual LTIP award under the terms of the 2008 LTIP to Executive Directors. This grant will be in accordance with the Policy report set out on pages 32 to 37, and can be expected to include performance conditions selected by the Remuneration Committee to align future equity-based remuneration of the Executive Directors with the interests of shareholders by linking vesting to the key value drivers for the business.
Remuneration Committee Approach to Remuneration Matters The Board has applied the Principles of Good Governance relating to Directors’ remuneration as described below.
The Remuneration Committee comprises James Noble and Cabot Brown under the chairmanship of Thomas Lynch. Cabot Brown was appointed to the Committee on 19 February 2013 following the retirement of Richard Forrest on 18 January 2013. The constitution and operation of the Committee is in compliance with the provisions of the UK Corporate Governance Code. When setting its remuneration policy for Executive Directors the Committee gives full consideration to the provisions and principles of the UK Corporate Governance Code.
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 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 two Annual General Meetings. No votes were withheld.
In future, in the event that we experience significant levels of shareholder votes against 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. 32 GW Pharmaceuticals plc Annual Report and Accounts 2013
Directors’ Remuneration Report continued
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 receive appropriate incentive and reward given their performance, responsibility and experience. In determining this, the Remuneration Committee aims to ensure that the policy aligns the interests of Executive Directors with those of the shareholders.
It is the Board’s intention to present a Remuneration Policy to the Annual General Meeting on 11 March 2014 for a binding vote. This policy will then be effective from the date of the Annual General Meeting for a maximum of three years or until a revised policy is approved by shareholders.
There will be an advisory vote on the Directors’ Remuneration Report presented to the Annual General Meeting 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 proposed future remuneration policy for Directors and seeks to explain how each element of the Directors’ remuneration packages will operate.
The Terms of Reference of the Remuneration Committee can be found on the AIM Rule 26 pages of the GW website at www.gwpharm.com.
Summary Remuneration Policy – Executive Directors Element of Remuneration Purpose and link to strategy Operation Maximum Performance targets Salary Rewards skills and experience Executive Directors’ salaries Not applicable. Not applicable. and provides the basis for a will be reviewed annually competitive remuneration and, at appropriate intervals, package. benchmarked against comparable roles in other pharmaceutical development companies with similar market capitalisations and/or scale of operational complexity.
Salaries will be determined by reference to market practice and market data, on which the Committee receives independent advice, and reflects individuals experience and roles.
The Committee may also decide to approve future increases following changes to job responsibilities or to reflect experience within the role.
Pension Enables Executive Directors Company contribution to a No maximum operated, Not applicable. to build long-term retirement personal pension scheme or but currently up to 17.5% savings. salary supplement. Levels of basic salary for all will be reviewed annually and Executive Directors. the Committee may decide to increase future contribution levels should the review indicate such a change is appropriate. 33 GW Pharmaceuticals plc Annual Report and Accounts 2013
Element of Remuneration Purpose and link to strategy Operation Maximum Performance targets Benefits Protects against risks and Benefits currently include Not applicable. Not applicable. provides other benefits in line death-in-service life insurance, with market practice. 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, as outlined below, to add or substitute benefits to ensure they remain market competitive.
The Committee is actively considering alternatives to the current insurance arrangements (including dental, critical illness and other insurances) and may implement changes to the package of insurance-related benefits. In the event that the Company requires an Executive Director to relocate, the Company would offer appropriate relocation assistance.
Annual Rewards achievement of the Payable in cash after award by Awards are normally Future performance bonus Bonus near-term business objectives Remuneration Committee. limited to a maximum of objectives are likely to include set at the start of each calendar 50% of basic salary. shared and/or individual year and reflects individual objectives, which may be and team performance of In exceptional periods, financial or non-financial. the Executive Directors in considered to be achieving those objectives, and those years in which These objectives are likely to progress towards achieving achievements lead to a include various milestones GW’s strategic plan. transformational effect linked to: on the future prospects or • successful execution of key The choice of future bonus valuation of the business, elements of the pipeline objectives applicable to the the annual maximum may development programmes to annual bonus scheme will increase up to 100% of include identification and reflect the Committee’s basic salary. execution of orphan drug assessment of the key developments; milestones/metrics required Judgement as to whether • progress with and results to be achieved within the achievements in a calendar from our Sativex Phase III calendar year in order to make year are considered cancer pain and MS clinical progress towards achieving to be exceptional is at trials programme in the US; GW’s strategic plan. the discretion of the • key regulatory steps (IND Remuneration Committee. grants, NDA filings, regulatory approvals); • successful commercialisation of Sativex by our partners; progress with business development activities; the Group’s financial position; and • equity liquidity and valuation.
A number of these objectives are considered to be commercially sensitive and are therefore not disclosed here in detail. 34 GW Pharmaceuticals plc Annual Report and Accounts 2013
Directors’ Remuneration Report continued
Element of Remuneration Purpose and link to strategy Operation Maximum Performance targets Long-Term Rewards execution of GW’s Conditional awards of nominal An award shall not be Performance conditions Incentive strategic plan and growth in cost options which normally granted in any calendar selected by the Remuneration Plans shareholder value over a multi- vest after three years subject year if, at the time of its Committee will generally (“LTIPs”) year period. to continued employment and proposed grant, it would consist of a mixture of: achievement of performance cause the number of shares • milestone based events, to be The Committee operates the conditions. allocated in the last 10 achieved over a three year LTIPs in accordance with plan calendar years to exceed vesting period and linked to rules and the Committee, The Remuneration Committee 10% of the ordinary share successful execution of GW’s consistent with market has the discretion, as set capital of the Company. strategic plan, likely to practice, retains discretion out in scheme rules, to include items such as positive over a number of areas determine the extent to which Under the 2008 LTIP, trial results, or regulatory relating to the operation and performance conditions have the maximum award is approvals; and administration of these plans. been successfully achieved 100% of basic salary per • TSR based measures, direct or to amend performance annum, and the aggregate or relative share price Performance conditions are conditions. total options to be issued performance. used to encourage achievement over the lifetime of the of strategy over the medium to As performance conditions are scheme to all scheme The weighting of these long-term and align Executive generally linked to substantive participants must not two forms of performance Directors’ interests with those milestone events, which do not exceed 15,000,000 share condition will be selected by of shareholders. involve significant judgement/ options. the Remuneration Committee estimation, claw back at the date of grant based upon The Remuneration Committee provisions are not considered their assessment of the key expects to introduce new LTIP to be necessary. value drivers for the business at schemes in future. The terms that time. of any such schemes will be approved by shareholders prior Major shareholders may to implementation. be consulted as part of the process of setting performance conditions.
Details of the performance conditions of LTIP grants made over the past three years are fully disclosed within the Annual Report on Remuneration.
Summary Remuneration Policy – Non-executive Directors Element of Remuneration Purpose and link to strategy Operation Maximum Performance Targets Non- Reflects time commitments and The remuneration of the non-executive Not applicable. Not applicable. executive responsibilities of each role. Directors will be determined by the Board as fees a whole by reference to market practice and Reflects fees paid by similarly market data, on which the Committee receives sized companies. independent advice, and reflects individual experience and roles.
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.
The Board may also decide to approve future increases following changes to job responsibilities or to reflect experience within the role.
The non-executive Directors do not receive any pension from the Company, nor do they currently participate in any of the bonus or share option schemes. In future, non-executive Directors may be invited to participate in the Group’s long-term incentive plans on terms similar to those used for Executive Directors. 35 GW Pharmaceuticals plc Annual Report and Accounts 2013
All Employee Comparison The following differences exist between the Company’s policy for the remuneration of Executive Directors 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 although health insurance and income protection insurance are generally only offered to the most senior executives. • All employees are entitled to a contribution from the Company towards a personal pension scheme which is generally at a lower level than the Executive Directors. • 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 opportunity typically applies to other employees.
Approach to Recruitment Remuneration The remuneration package for a new executive Director, to include basic salary, benefits, pension, annual bonus 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 the 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 match the value of the potential remuneration 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.
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 during their first two years of service. Thereafter, once satisfactorily established within their roles, and subject to Remuneration Committee consent, this and can be expected to increase to 12 months’ notice.
Details of Directors’ service contracts are as follows: Notice Director Date of contract period Executive Dr Geoffrey W Guy November 2000 12 months Justin Gover November 2000 12 months Dr Stephen Wright March 2005 12 months Adam George1 June 2012 6 months Chris Tovey1 October 2012 6 months
Non-executive James Noble January 2007 3 months Thomas Lynch July 2010 3 months Cabot Brown November 2013 3 months
1 Subject to the agreement of the Remuneration Committee, notice period will increase to 12 months upon completion of two years’ service as a Director.
The non-executive Directors have service agreements which are reviewed by the Board annually. They are included in the one third of Directors subject to retirement by rotation, in accordance with the Company’s Articles of Association, at each Annual General Meeting. Dr Geoffrey Guy and Mr Thomas Lynch will be retiring by rotation at the next Annual General Meeting and, being eligible, will seek re-election. 36 GW Pharmaceuticals plc Annual Report and Accounts 2013
Directors’ Remuneration Report continued
Illustrations of the Application of the Remuneration Policy to Executive Director Remuneration The following table provides an illustration of the potential remuneration for the year ended 30 September 2014 for each of the Executive Directors, computed in accordance with the Remuneration Policy outlined above and by applying the following assumptions:
Minimum The current basic salary for each Director is assumed to be basic salary for the year ended 30 September 2013.
The value of benefits receivable for the year ended 30 September 2014 is assumed to be equal to the value of benefits received in the year ended 30 September 2013.
The pension contribution receivable by each Director for the year ended 30 September 2014 is assumed to be in line with the value of pension contributions for the year ended 30 September 2013.
No bonus is assumed for any Director.
LTIP performance conditions are assumed not to be achieved so that no LTIPs vest.
In line with The on-target level of bonus is taken to be 38% of basic salary, being the average bonus awarded by the Remuneration expectations Committee for the past three years.
50% of performance conditions are assumed to be met, resulting in vesting of 50% of the LTIP award. Awards are valued as at the date of grant.
Maximum The maximum level of bonus is taken to be 100% of basic salary.
100% of performance conditions are assumed to be met, resulting in vesting of 100% of the LTIP award. Awards are valued as at the date of grant.
Chief Executive Officer Chief Financial Officer
1,000 600
900 29% 20% 500 800
700 400 35%
600 32% 15% £000’s 22% £000’s 500 300 20% 18% 400 100% 65% 45% 100% 60% 39% 200 300
200 100 100
Minimum In line with Maximum Minimum In line with Maximum expectations expectations § Fixed remuneration § Fixed remuneration § Annual variable remuneration § Annual variable remuneration §Chairman Long-term variable remuneration § Long-term variable remuneration
1,200
30% 1,000
800
31% 23% £000’s 600
18%
400 100% 59% 39%
200
Minimum In line with Maximum expectations § Fixed remuneration § Annual variable remuneration § Long-term variable remuneration 37 GW Pharmaceuticals plc Annual Report and Accounts 2013
Research and Development Director Chief Operating Officer
800 500
29% 450 44% 700
400 600 350 23% 500 32% 22% 300 £000’s £000’s 400 250 100% 77% 56% 18% 200 300 100% 60% 39% 150 200 100
100 50
Minimum In line with Maximum Minimum In line with Maximum expectations expectations § Fixed remuneration § Fixed remuneration § Annual variable remuneration § Annual variable remuneration § Long-term variable remuneration § Long-term variable remuneration 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 long-term incentive plans in which the Executive Director participates. On notice from the Company, the Company will normally continue to pay salary and continue insurance and pension benefits over the remaining notice period while the individual remains an employee. Although the Executive 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.
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 option 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.
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 Executive 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 Annual General Meeting each year at a meeting immediately following the Annual General Meeting. 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. Details of votes cast for and against the resolution to approve each year’s Remuneration Report and any relevant matters discussed with shareholders during the year will be set out in future Annual Reports on Remuneration.
Approval This report was approved by the Board of Directors on 6 December 2013 and signed on its behalf by:
Adam George Company Secretary 6 December 2013 38 GW Pharmaceuticals plc Annual Report and Accounts 2013
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union and have also chosen to prepare the Parent Company financial statements under IFRSs as adopted by the European Union. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors: • properly select and apply accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and • make an assessment of the Company’s ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 39 GW Pharmaceuticals plc Annual Report and Accounts 2013
Independent Auditor’s Report For the year ended 30 September 2013
Independent Auditor’s Report to the Members of GW Pharmaceuticals plc We have audited the financial statements of GW Pharmaceuticals plc for the year ended 30 September 2013 which comprise the Consolidated Income Statements, the Consolidated and parent company Balance Sheets, the Consolidated and Parent Company Cash Flow Statements, the Consolidated and Parent Company Statements of Changes in Equity and the related notes 1 to 29. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective Responsibilities of Directors and Auditor As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the Audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Opinion on Financial Statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 30 September 2013 and of the Group’s loss for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on Other Matters Prescribed by the Companies Act 2006 In our opinion: • the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Matters on Which we are Required to Report by Exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Parent Company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. 40 GW Pharmaceuticals plc Annual Report and Accounts 2013
Independent Auditor’s Report continued For the year ended 30 September 2013
Other Matters In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the provisions of the Companies Act 2006 that would have applied were the Company a quoted company.
Although not required to do so, the Directors have voluntarily chosen to make a corporate governance statement detailing the extent of their compliance with the UK Corporate Governance Code. We reviewed: • the Directors’ Statement contained within the Directors’ Report in relation to going concern; and • the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review.
Anna Marks (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Reading, United Kingdom 6 December 2013 41 GW Pharmaceuticals plc Annual Report and Accounts 2013
Consolidated Income Statements For the year ended 30 September
2013 2012 2011 Notes £000’s £000’s £000’s Revenue 3 27,295 33,120 29,627 Cost of sales (1,276) (839) (1,347) Research and development expenditure 4 (32,697) (27,578) (22,714) Management and administrative expenses (3,792) (3,660) (3,298) Operating (loss)/profit (10,470) 1,043 2,268 Interest expense 9 (64) (1) (3) Interest income 9 178 200 263 (Loss)/profit before tax 5 (10,356) 1,242 2,528 Tax 10 5,807 1,248 221 (Loss)/profit for the year (4,549) 2,490 2,749
(Loss)/earnings per share – basic 11 (3.0)p 1.9p 2.1p (Loss)/earnings per share – diluted 11 (3.0)p 1.8p 2.0p
The accompanying notes are an integral part of these consolidated income statements.
All activities relate to continuing operations.
The Group has no recognised gains or losses other than the gains and losses shown above and therefore no separate consolidated statements of comprehensive income have been presented. 42 GW Pharmaceuticals plc Annual Report and Accounts 2013
Consolidated Statements of Changes in Equity For the year ended 30 September
Share Share Premium Other Accumulated Capital Account Reserves Deficit Total Group £000’s £000’s £000’s £000’s £000’s At 1 October 2010 131 64,433 20,184 (72,075) 12,673 Exercise of share options 2 1,433 – – 1,435 Share-based payment transactions – – – 795 795 Profit for the year – – – 2,749 2,749 Balance at 30 September 2011 133 65,866 20,184 (68,531) 17,652 Exercise of share options – 81 – – 81 Share-based payment transactions – – – 1,009 1,009 Profit for the year – – – 2,490 2,490 Balance at 30 September 2012 133 65,947 20,184 (65,032) 21,232 Issue of share capital 45 19,725 – – 19,770 Expenses associated with new equity issue – (1,670) – – (1,670) Exercise of share options – 3 – – 3 Share-based payment transactions – – – 616 616 Loss for the year – – – (4,549) (4,549) Balance at 30 September 2013 178 84,005 20,184 (68,965) 35,402
Share Share Premium Other Accumulated Capital Account Reserves Deficit Total Company £000’s £000’s £000’s £000’s £000’s At 1 October 2010 131 64,433 922 3,365 68,851 Exercise of share options 2 1,433 – – 1,435 Share-based payment transactions – – – 795 795 Loss for the year – – – (300) (300) Balance at 30 September 2011 133 65,866 922 3,860 70,781 Exercise of share options – 81 – – 81 Share-based payment transactions – – – 1,009 1,009 Dividend received from subsidiary – – – 30,000 30,000 Profit for the year – – – 79 79 Balance at 30 September 2012 133 65,947 922 34,948 101,950 Issue of share capital 45 19,725 – – 19,770 Expense of new equity issue – (1,670) – – (1,670) Exercise of share options – 3 – – 3 Dividend received from subsidiary – – – 7,000 7,000 Share-based payment transactions – – – 616 616 Profit for the year – – – 528 528 Balance at 30 September 2013 178 84,005 922 43,092 128,197
The accompanying notes are an integral part of these consolidated statements of changes in equity. 43 GW Pharmaceuticals plc Annual Report and Accounts 2013
Consolidated Balance Sheets As at 30 September
Group Company 2013 2012 2013 2012 Notes £000’s £000’s £000’s £000’s Non-current assets Intangible assets – goodwill 12 5,210 5,210 – – Investments 27 – – 109,557 95,105 Property, plant and equipment 13 5,476 2,432 – – 10,686 7,642 109,557 95,105 Current assets Inventories 14 4,661 3,537 – – Deferred tax asset 895 – – – Taxation recoverable 10 2,900 820 – – Trade receivables and other current assets 15 1,733 1,588 4,014 27 Cash and cash equivalents 19 38,069 29,335 14,889 8,848 48,258 35,280 18,903 8,875 Total assets 58,944 42,922 128,460 103,980 Current liabilities Trade and other payables 16 (9,440) (9,114) (263) (2,030) Obligations under finance leases 17 (100) – – – Deferred revenue 18 (3,181) (2,449) – – (12,721) (11,563) (263) (2,030) Non-current liabilities Obligations under finance leases 17 (1,905) – – – Deferred revenue 18 (8,916) (10,127) – – Total liabilities (23,542) (21,690) (263) (2,030) Net assets 35,402 21,232 128,197 101,950 Equity Share capital 20 178 133 178 133 Share premium account 84,005 65,947 84,005 65,947 Other reserves 23 20,184 20,184 922 922 Accumulated deficit (68,965) (65,032) 43,092 34,948 Total equity 35,402 21,232 128,197 101,950
The financial statements of GW Pharmaceuticals plc, registered number 04160917, on pages 41 to 72 were approved by the Board on 6 December 2013.
The accompanying notes are an integral part of these consolidated balance sheets. 44 GW Pharmaceuticals plc Annual Report and Accounts 2013
Consolidated Cash Flow Statements For the year ended 30 September
Group Company 2013 2012 2011 2013 2012 2011 £000’s £000’s £000’s £000’s £000’s £000’s (Loss)/profit for the year (4,549) 2,490 2,749 528 79 (300) Adjustments for: Interest expense 64 1 3 – – – Interest income (178) (200) (263) (35) – – Tax (5,807) (1,248) (221) – – – Depreciation of property, plant and equipment 989 754 589 – – – Net foreign exchange (gains)/losses (25) (202) 7 – – – (Decrease)/increase in allowance for doubtful debts (26) 26 – – – – Decrease in provision for inventories (530) (1,300) (425) – – – Share-based payment charge 616 1,009 795 – – – (9,446) 1,330 3,234 493 79 (300) Increase in inventories (594) (813) (219) – – – (Increase)/decrease in trade receivables and other current assets (108) 609 (1,043) (1,500) 4 (11) (Decrease)/increase in trade and other payables and deferred revenue (152) 247 168 (1,766) 5,419 (124) Cash (used in)/generated by operations (10,300) 1,373 2,140 (2,773) 5,502 (435) Research and development tax credits received 2,832 428 221 – – – Net cash (outflow)/inflow from operating activities (7,468) 1,801 2,361 (2,773) 5,502 (435)
Investing activities Interest received 167 258 244 38 – – Increase in loan to subsidiary – – – (9,327) (16,601) – Dividend received from subsidiary – – – – 18,866 – Purchase of property, plant and equipment (2,243) (1,318) (891) – – – Net cash outflow from investing activities (2,076) (1,060) (647) (9,289) 2,265 –
Financing activities Proceeds on exercise of share options 3 81 1,435 3 81 1,435 Proceeds of new equity issue 19,770 – – 19,770 – – Expenses of new equity issue (1,670) – – (1,670) – – Interest paid (64) (1) (3) – – – Proceeds from finance leases 225 – – – – – Capital element of finance leases (11) (7) (39) – – – Net cash inflow from financing activities 18,253 73 1,393 18,103 81 1,435 Net increase in cash and cash equivalents 8,709 814 3,107 6,041 7,848 1,000 Cash and cash equivalents at the beginning of the year 29,335 28,319 25,219 8,848 1,000 – Effect of foreign exchange rate changes 25 202 (7) – – – Cash and cash equivalents at end of the year 38,069 29,335 28,319 14,889 8,848 1,000
For the year ended 30 September 2013, the total dividend received by the Company from its subsidiary GW Pharma Limited was £7.0m. The dividend was settled by non-cash movements through the intercompany balances.
For the year ended 30 September 2012, the total dividend received by the Company from its subsidiary GW Pharma Limited was £30.0m. Total cash paid was £18.9m and the remaining £11.1m was settled by non-cash movements through the intercompany balances.
The accompanying notes are an integral part of these consolidated cash flow statements. 45 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements
1. General Information GW Pharmaceuticals plc (the “Company”) and its subsidiaries (the “Group”) are primarily involved in the development of cannabinoid prescription medicines using botanical extracts derived from the Cannabis Sativa plant. The Group are developing a portfolio of cannabinoid medicines, of which the lead product is Sativex®, an oromucosal spray for the treatment of Multiple Sclerosis (“MS”) symptoms, cancer pain and neuropathic pain.
The Company is a public limited company, which has been listed on the Alternative Investment Market (“AIM”), which is a sub-market of the London Stock Exchange, since 28 June 2001. The Company is incorporated and domiciled in the United Kingdom. The address of the Company’s registered office and principal place of business is Porton Down Science Park, Salisbury, Wiltshire.
In addition, the Company has American Depository Receipts (“ADRs”) registered with the US Securities and Exchange Commission (“SEC”) and is listed on NASDAQ.
2. Significant Accounting Policies The principal Group accounting policies are summarised below.
Basis of Accounting The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”). The financial statements have also been prepared in accordance with IFRSs as endorsed by the European Union and 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, except for the revaluation of financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The principal accounting policies are set out below.
Going Concern The Directors have considered the financial position of the Group, its cash position and forecast cash flows for the 12 month period from the date of signing these financial statements when considering going concern. They have also considered the Group’s business activities, the key policies for managing financial risks and the key factors affecting the likely development of the business in 2014. In the light of this review, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing these financial statements.
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. 46 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
2. Significant Accounting Policiescontinued 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.
No income statement is presented for GW Pharmaceuticals plc as permitted by Section 408 of the Companies Act 2006. The Company’s profit for the financial year was £528,000 (2012 profit: £79,000; 2011 loss: £300,000).
Intangible Assets – Goodwill Goodwill arising in a business combination is recognised as an asset at the date that control is acquired. Goodwill is measured as the excess of the sum of consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest (if any) in the entity over the net of the acquisition date amounts of the identifiable assets and liabilities assumed.
Goodwill is not amortised but is tested for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Revenue Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business net of value added tax and other sales-related taxes. The Group recognises revenue when the amount can be reliably measured; when it is probable that future economic benefits will flow to the Group; and when specific criteria have been met for each of the Group’s activities, as described below.
The Group’s revenue arises from product sales, licensing fees, collaboration fees, technical access fees, development and approval milestone fees, research and development fees and royalties. Agreements with commercial partners generally include 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 licensed 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 2013, 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.
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. 47 GW Pharmaceuticals plc Annual Report and Accounts 2013
2. Significant Accounting Policiescontinued Licencing Fees License fees received in connection with product out-licensing agreements, even where such fees are non-refundable, are deferred and recognised over the period of the licence term.
Collaboration Fees Collaboration fees are deferred and recognised as services are 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.
Royalties Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant agreement, provided that it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably.
Research and Development Expenditure on research and development activities is recognised as an expense in the period in which it is incurred.
An internally generated intangible asset arising from the Group’s development activities is recognised only if the following conditions are met: • an asset is created that can be identified; • it is probable that the asset created will generate future economic benefits; and • the development cost of the asset can be measured reliably.
The Group has determined that regulatory approval is the earliest point at which the probable threshold can be achieved. All research and development expenditure incurred prior to achieving regulatory approval is therefore expensed as incurred.
Property, Plant and Equipment Property, plant and equipment are stated at cost, net of accumulated depreciation and any recognised impairment loss. Depreciation is provided so as to write off the cost of assets, less their estimated residual values, over their useful lives using the straight-line method, as follows: Motor vehicles 4 years Plant, machinery and lab equipment 3–10 years Office and IT equipment 4 years Leasehold improvements 5–15 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.
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. 48 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
2. Significant Accounting Policiescontinued Investments in Subsidiary Companies Investments are shown at cost less any provision for impairment. Investments in subsidiary companies which are accounted for under merger accounting principles are shown at the nominal value of shares issued in accordance with the provisions of Section 131 of the Companies Act 2006.
The carrying value of investments in subsidiary companies in the Company balance sheet is increased annually by the value of the capital contribution deemed to have been made by the Company in its subsidiary by the grant of equity-settled share-based payments to the employees of the subsidiary company. The value attributable to these equity-settled share-based payments is calculated in accordance with IFRS 2 Share-based payments.
Inventories Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average cost method. Cost includes materials, direct labour, depreciation of manufacturing assets and an attributable proportion of manufacturing overheads based on normal levels of activity. Net realisable value is the estimated selling price, less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.
If net realisable value is lower than the carrying amount, a write down provision is recognised for the amount by which the carrying amount exceeds its net realisable value.
Inventories manufactured prior to regulatory approval are capitalised as an asset but provided for until there is a high probability of regulatory approval of the product. At the point when a high probability of regulatory approval is obtained, the provision is adjusted appropriately to adjust the carrying value to expected net realisable value, which may not exceed original cost.
Adjustments to the provision against inventories manufactured prior to regulatory approval are recorded as a component of research and development expenditure. Adjustments to the provision against commercial product related inventories manufactured following achievement of regulatory approval are recorded as a component of cost of goods.
Taxation The tax expense represents the sum of the tax currently payable or recoverable and deferred tax.
The tax payable or recoverable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised only to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. 49 GW Pharmaceuticals plc Annual Report and Accounts 2013
2. Significant Accounting Policiescontinued (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 antidilutive.
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), which for all companies forming part of the Group, is Pounds Sterling. The presentation currency of the consolidated financial statements is also Pounds Sterling.
In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated at the rates of exchange prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the income statement as a component of operating loss.
Share-based Payment Equity-settled share-based payments to employees and others providing similar services are measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant.
The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. At each balance sheet date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves.
Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date of grant.
Warrants Warrants issued by the Group are recognised and classified as equity when upon exercise, the Company would issue a fixed amount of its own equity instruments (ordinary shares) in exchange for a fixed amount of cash or another financial asset.
Consideration received, net of incremental costs directly attributable to the issue of such new warrants, is shown in equity. Changes in fair value of such warrants are not recognised in the consolidated financial statements.
When the warrants are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. 50 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
2. Significant Accounting Policiescontinued 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 income statement. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.
Cash and Cash Equivalents Cash and cash equivalents comprise cash in hand and on-call deposits held with banks and other short-term highly liquid investments with a maturity of three months or less.
Financial Liabilities Financial liabilities are classified as either financial liabilities “at Fair Value Though Profit and Loss” or “other financial liabilities”. For each reporting period covered herein, the Group’s financial liabilities were restricted to “other financial liabilities”. 51 GW Pharmaceuticals plc Annual Report and Accounts 2013
2. Significant Accounting Policiescontinued Other Financial Liabilities Trade payables are initially measured at fair value, net of transaction costs, and are subsequently measured at amortised cost, using the effective interest rate method.
The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
Critical Judgements in Applying the Group’s Accounting Policies In the application of the Group’s accounting policies, which are described above, the Board of Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revisions and future periods if the revision affects both current and future periods.
The following are the critical judgements, apart from those involving estimations (which are dealt with separately below), that the Directors have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.
Recognition of Clinical Trials Expenditure The Group recognises expenditure incurred in carrying out clinical trials during the course of conduct of each clinical trial in line with the state of completion of each trial. This involves the calculation of clinical trial accruals at each period end to account for expenditure which has been incurred. This requires estimation of the expected full cost to complete the trial and also estimation of the current stage of trial completion.
Clinical trials usually take place over extended time periods and typically involve a set-up phase, a recruitment phase and a completion phase which ends upon the receipt of a final report containing full statistical analysis of trial results. Accruals are prepared separately for each in-process clinical trial and take into consideration the stage of completion of each trial including the number of patients that have entered the trial, the number of patients that have completed treatment and whether the final report has been received. In all cases, the full cost of each trial is expensed by the time the final report has been received.
Revenue Recognition The Group recognises revenue from product sales, licensing fees, collaboration fees, technical access fees, development and approval milestone fees, 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 licensed products, if and when such product sales occur. For these agreements, the Group is required to apply judgement in the allocation of total agreement consideration to the separately identifiable components on a reliable basis that reasonably reflects the 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 regards 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 regards to the total costs incurred and total estimated costs expected to be incurred over the length of the agreement. 52 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
2. Significant Accounting Policiescontinued 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.
Rebate Provision 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 the rebate provision is based on, amongst other things, monthly unit sales and in-markets sales data received from commercial partners and represents management’s best estimate of the rebate expected to be required to settle this present obligation at the end of the reporting period.
Pricing decisions made by local health authorities, including revisions and clarifications that have retroactive application can result in changes to management’s estimates of the rebates reported in prior periods.
Aggregate rebate provision accruals as at 30 September 2013 and 2012 were £1.2 and £0.2 million, respectively.
Provision for Inventories The Group maintains inventories which, based upon current sales levels and the current regulatory status of the product in each indication, is in-excess of the amount that is expected to be utilised in the manufacture of finished product for future commercial sales.
Provision is therefore made to reduce the carrying value of the excess inventories to their expected net realisable value.
The provision for inventories and adjustments thereto, are estimated based on evaluation of the status of the regulatory approval, projected sales volumes and growth rates. The timing and extent of future provision adjustments will be contingent upon timing and extent of future regulatory approvals and post-approval in-market sales demand, which remain uncertain at this time.
Deferred Taxation At the balance sheet date, the Group has accumulated tax losses of £33.6m (2012: £40.9m) available to offset against future profits. If the value of these losses were recognised within the Group’s balance sheet at the balance sheet date, the Group would be carrying a deferred tax asset of £6.1m (2012: £9.7m). 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.
Impairment of Investments in Subsidiaries and Intercompany Receivables The Company considers the recoverability of investments in subsidiaries and intercompany 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 and arrangements.
IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities IFRS 13 Fair Value Measurement IAS 19 (revised June 2011) Employee Benefits IAS 27 (revised May 2011) Separate Financial Statements IAS 28 (revised May 2011) Investments in Associates and Joint Ventures Amendments to IAS 1 (June 2011) Presentation of Items of Other Comprehensive Income 53 GW Pharmaceuticals plc Annual Report and Accounts 2013
2. Significant Accounting Policiescontinued 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:
Amendments to IFRS 10, IFRS 12 and IAS 27 (Oct 2012) Investment Entities Amendments to IAS 32 (Dec 2011) Offsetting Financial Assets and Financial Liabilities Amendments to IAS 36 (May 2013) Recoverable Amount Disclosures for Non-Financial Assets Amendments to IAS 39 (Jun 2013) Novation of Derivatives and Continuation of Hedge Accounting Amendments to IFRS 1 (Mar 2012) Government Loans Amendments to IFRS 7 (Dec 2011) Disclosures – Offsetting Financial Assets and Financial Liabilities Annual Improvements to IFRSs: 2009–2011 Cycle (May 2012) Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (June 2012) IFRS 9 Financial Instruments IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine IFRIC 21 Levies
The Directors do not expect that the adoption of these Standards and Interpretations in future periods will have a material impact on the financial statements of the Group.
3. Segmental Information Information reported to the Company’s Board of Directors, the chief operating decision maker for the Group, for the purposes of resource allocation and assessment of segment performance is focused on the stage of product development. The Group’s reportable segments are as follows: • Sativex Commercial: The Sativex Commercial segment promotes Sativex through strategic collaborations with major pharmaceutical companies for the currently approved indication of spasticity due to MS. The Group has licensing agreements for the commercialisation of Sativex with Almirall S.A. in Europe (excluding the United Kingdom) and Mexico, Otsuka Pharmaceutical Co. Ltd. (“Otsuka”) in the US, Novartis Pharma AG in Australia, New Zealand, Asia (excluding Japan, China and Hong Kong), the Middle East and Africa, Bayer HealthCare AG in the United Kingdom and Canada and Neopharm Group in Israel. Sativex Commercial segment revenues include product sales, licence, collaboration, and technical access fees, and development and approval milestone fees. • Sativex Research and Development: The Sativex Research and Development segment seeks to maximise the potential of Sativex through the development of new indications. The current focus for this segment is the Phase III clinical development programme of Sativex for use in the treatment of cancer pain. The Group also believe that MS spasticity represents an attractive indication for the US and we intend to pursue an additional clinical development programme for this significant market opportunity. In addition, Sativex has shown promising efficacy in Phase II trials in other indications such as neuropathic pain, but these areas are not currently the subject of full development programmes. Sativex Research and Development segment revenues consist of research and development fees charged to Sativex licensees. • Pipeline Research and Development: The Pipeline Research and Development segment seeks to develop cannabinoid medications other than Sativex across a range of therapeutic areas using our proprietary cannabinoid technology platform. The Group’s product pipeline includes an orphan childhood epilepsy programme as well as other product candidates in Phase I and II clinical development for glioma, ulcerative colitis, type 2 diabetes and schizophrenia. Pipeline Research and Development segment revenues consist of research and development fees charged to Otsuka under the terms of our pipeline research collaboration agreement.
The accounting policies of the reportable segments are 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 management and administrative expenses, interest expense, interest income and tax.
No measures of segment assets and segment liabilities are reported to the Company’s Board of Directors in order to assess performance and allocate resources. Intersegment activity has been eliminated. There are no intersegment sales and all revenue is generated from external customers. 54 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
3. Segmental Information continued Segment Results For the Year Ended 30 September 2013 Total Sativex Sativex Pipeline Reportable Unallocated Commercial R&D R&D Segments Costs1 Consolidated £000’s £000’s £000’s £000’s £000’s £000’s Revenue: Product sales 2,157 – – 2,157 – 2,157 Research and development fees – 19,333 4,261 23,594 – 23,594 Licence, collaboration and technical access fees 1,294 – – 1,294 – 1,294 Development and approval milestone fees 250 – – 250 – 250 Total revenue 3,701 19,333 4,261 27,295 – 27,295 Cost of sales (1,276) – – (1,276) – (1,276) Research and development credit/(expenditure) 597 (23,737) (9,240) (32,380) (317) (32,697) Segmental result 3,022 (4,404) (4,979) (6,361) (317) (6,678) Management and administrative expenses (3,792) Operating loss (10,470) Interest expense (64) Interest income 178 Loss before tax (10,356) Tax 5,807 Loss for the year (4,549)
The following is an analysis of depreciation and the movement in the provision for inventories by segment for the year ended 30 September 2013: Total Sativex Sativex Pipeline Reportable Unallocated Commercial R&D R&D Segments Costs1 Consolidated £000’s £000’s £000’s £000’s £000’s £000’s Depreciation – (560) (429) (989) – (989) Decrease/(increase) in provision for inventories 597 (67) – 530 – 530
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 management and administrative expenses, which is similarly excluded from segmental result. 55 GW Pharmaceuticals plc Annual Report and Accounts 2013
3. Segmental Information continued Segment Results For the Year Ended 30 September 2012 Total Sativex Sativex Pipeline Reportable Unallocated Commercial R&D R&D Segments Costs1 Consolidated £000’s £000’s £000’s £000’s £000’s £000’s Revenue: Product sales 2,514 – – 2,514 – 2,514 Research and development fees – 14,080 5,420 19,500 – 19,500 Licence, collaboration and technical access fees 1,294 – – 1,294 – 1,294 Development and approval milestone fees 9,812 – – 9,812 – 9,812 Total revenue 13,620 14,080 5,420 33,120 – 33,120 Cost of sales (839) – – (839) – (839) Research and development credit/(expenditure) 1,300 (18,415) (9,904) (27,019) (559) (27,578) Segmental result 14,081 (4,335) (4,484) 5,262 (559) 4,703 Management and administrative expenses (3,660) Operating profit 1,043 Interest expense (1) Interest income 200 Profit before tax 1,242 Tax 1,248 Profit for the year 2,490
The following is an analysis of depreciation and the movement in the provision for inventories by segment for the year ended 30 September 2012: Total Sativex Sativex Pipeline Reportable Unallocated Commercial R&D R&D Segments Costs1 Consolidated £000’s £000’s £000’s £000’s £000’s £000’s Depreciation – (394) (360) (754) – (754) Decrease in provision for inventories 1,300 – – 1,300 – 1,300
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 management and administrative expenses, which is similarly excluded from segmental result. 56 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
3. Segmental Information continued Segment Results For the Year Ended 30 September 2011 Total Sativex Sativex Pipeline Reportable Unallocated Commercial R&D R&D Segments Costs1 Consolidated £000’s £000’s £000’s £000’s £000’s £000’s Revenue: Product sales 4,409 – – 4,409 – 4,409 Research and development fees – 10,822 5,216 16,038 – 16,038 Licence, collaboration and technical access fees 3,843 – – 3,843 – 3,843 Development and approval milestone fees 5,337 – – 5,337 – 5,337 Total revenue 13,589 10,822 5,216 29,627 – 29,627 Cost of sales (1,347) – – (1,347) – (1,347) Research and development credit/(expenditure) 266 (14,757) (7,834) (22,325) (389) (22,714) Segmental result 12,508 (3,935) (2,618) 5,955 (389) 5,566 Management and administrative expenses (3,298) Operating profit 2,268 Interest expense (3) Interest income 263 Profit before tax 2,528 Tax 221 Profit for the year 2,749
The following is an analysis of depreciation and the movement in the provision for inventories by segment for the year ended 30 September 2011: Total Sativex Sativex Pipeline Reportable Unallocated Commercial R&D R&D Segments Costs1 Consolidated £000’s £000’s £000’s £000’s £000’s £000’s Depreciation – (248) (341) (589) – (589) Decrease in provision for inventories 266 159 – 425 – 425
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 management and administrative expenses, which is similarly excluded from segmental result.
Segment Results Revenues from the Group’s largest customer, the only customer where revenues amount for more than 10% of the Group’s revenues, are included within the above segments as follows: Sativex Sativex Pipeline Commercial R&D R&D Total £000’s £000’s £000’s £000’s Year ended 30 September 2013 – 19,333 4,261 23,594 Year ended 30 September 2012 – 13,994 5,420 19,414 Year ended 30 September 2011 3,687 10,729 5,216 19,632
Geographical Analysis of Revenue by Destination of Customer: 2013 2012 2011 £000’s £000’s £000’s UK 577 248 1,469 Europe (excluding UK) 2,290 12,712 10,317 United States 19,508 14,274 11,830 Canada 587 436 795 Asia 4,333 5,450 5,216 27,295 33,120 29,627
All revenue, profits and losses before tax originated in the UK. All assets and liabilities are held in the UK. 57 GW Pharmaceuticals plc Annual Report and Accounts 2013
4. Research and Development Expenditure 2013 2012 2011 £000’s £000’s £000’s GW-funded research and development 9,103 8,078 6,676 Development partner-funded research and development 23,594 19,500 16,038 32,697 27,578 22,714
GW-funded research and development consists of payroll costs for research staff and associated overhead, cost of growing botanical raw material, research work and sponsorship of collaborative scientists, and external third party costs incurred in conducting clinical trials.
Development partner-funded research and development expenditures include the costs of employing staff to work on joint research and development plans, plus the costs of subcontracted pre-clinical studies and sponsorships of academic scientists who collaborate with the Group. These expenditures are charged to the Group’s commercial partners, principally Otsuka. The Group is the primary obligor for these activities and under the terms of the Sativex development agreements and the Otsuka research collaboration agreement, the Group uses both its internal resources and third party contractors to provide contract research and development services to its commercial partners.
5. (Loss)/profit Before Tax (Loss)/profit before tax is stated after charging/(crediting): 2013 2012 2011 £000’s £000’s £000’s Operating lease rentals – land and buildings 1,186 1,036 782 Depreciation of property, plant and equipment – owned 947 744 541 Depreciation of property, plant and equipment – leased 42 10 48 Provision for inventories (530) (1,300) (425) Allowance for doubtful debts – trade receivables (26) 26 – Foreign exchange loss/(gain) 237 301 (96) Staff costs (see note 7) 10,686 10,098 8,532
6. Auditor’s Remuneration 2013 2012 2011 £000’s £000’s £000’s The auditor for the years ended 30 September 2013, 2012 and 2011 were Deloitte LLP Audit fees: – Audit of the Company’s annual accounts1 70 51 8 – Audit of the Company’s subsidiaries pursuant to legislation 40 42 37 Total audit fees 110 93 45 Other services – Audit-related assurance2 40 5 5 – Other assurance services4 306 – – – All other services4 – 13 – Total non-audit fees 346 18 5
1 For the years ended 30 September 2013 and 2012, the audit fees include amounts for the audit of the Group in accordance with the PCAOB standards. 2 Audit related assurance fees relate to fees for the performance of interim reviews. 3 Other assurance services represents assurance reporting on historical financial information included in the Company’s initial US registration statement. 4 All other services represent other assurance services provided to the Group. 58 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
7. Staff Costs The average number of Group employees (including Executive Directors) for the year ended 30 September was:
2013 2012 2011 Number Number Number Research and development 170 162 136 Management and administration 18 15 16 188 177 152
The Company had no employees during the year (2012 and 2011: nil). 2013 2012 2011 £000’s £000’s £000’s Their aggregate remuneration comprised: Wages and salaries 8,442 7,700 6,443 Social security costs 1,103 926 865 Other pension costs 525 463 429 Share-based payment 616 1,009 795 10,686 10,098 8,532
The Company incurred no staff costs during the year (2012 and 2011: £nil).
8. Directors’ Remuneration Directors’ remuneration and other benefits for the year ended 30 September were as follows: 2013 2012 2011 £000’s £000’s £000’s Emoluments 1,733 1,692 1,426 Money purchase contributions to Directors’ pension arrangements 200 158 171 Gain on exercise of share options – 122 225 1,933 1,972 1,822
During 2013, five Directors were members of defined contribution pension schemes (2012 and 2011: four).
Further details concerning the Directors’ remuneration, shareholdings and share options which form part of these financial statements are set out in the Directors’ Remuneration Report on pages 24 to 37.
9. Interest 2013 2012 2011 £000’s £000’s £000’s Interest expense – Finance lease interest (64) (1) (3) Interest income – Bank interest 178 200 263
10. Tax a) Analysis of Tax Credit for the Year 2013 2012 2011 £000’s £000’s £000’s Current year research and development tax credit (2,900) (820) – Adjustment in respect of prior year tax credit (2,012) (428) (221) Recognition of previously unrecognised deferred tax asset (2,872) – – Current year utilisation of deferred tax assets 1,977 – – Tax credit (5,807) (1,248) (221)
Tax credits relate to UK research and development tax credits claimed under the Finance Act 2000.
The Group has historically recognised uncertain benefits of enhanced research and development deductions and the resulting tax credits when acceptances of the claim has been reached with Her Majesty’s Revenue and Customs (UK) (“HMRC”), resulting in prior year adjustments to the tax credit as shown above. There is now a sustained history of agreeing such claims with HMRC, resulting in the recognition in the year ended 30 September 2013 of the full estimated benefit for qualifying current year research and development expenditures. Any difference in the credit ultimately received is recorded as an adjustment in respect of prior year. 59 GW Pharmaceuticals plc Annual Report and Accounts 2013
10. Tax continued During the current year, the Group reached an agreement with HMRC regarding the tax returns submitted for the year ended 30 September 2012. Pursuant to this agreement, HMRC agreed that the Group’s principal research subsidiary company, GW Research Ltd., was able to surrender trading losses that arise from its research and development activity for a tax credit cash rebate. This agreement with HMRC resulted in an additional tax benefit being recorded in the current year due to: (i) the recognition of an additional £2.0m of research and development tax credits in respect of the year ended 30 September 2012 by GW Research Ltd. and (ii) the recognition of a £2.9m deferred tax asset in respect of cumulative trading losses which are utilisable against current and future trading profits by GW Pharma Limited.
At 30 September 2013 the Group had tax losses available for carry forward of approximately £33.6m (2012: £40.9m, 2011: £46.0m). The Group has recognised a deferred tax asset in respect of £4.1m (2012: £nil) of such losses. The Group has not recognised deferred tax assets relating to the remaining carried forward losses, of approximately £29.5m (2012: £40.9m, 2011: £11.4m). In addition, the Group has not recognised deferred tax assets relating to other temporary differences of £1.7m (2012: £1.3m, 2011: £0.4m). These deferred tax assets have not been recognised as the Group’s management considers that there is insufficient future taxable income, taxable temporary differences and feasible tax-planning strategies to 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. b) Factors Affecting the Tax Credit for the Year The tax credit for the year can be reconciled to the tax (credit)/charge on the Group (loss)/profit at the standard UK corporation tax rate as follows: 2013 2012 2011 £000’s £000’s £000’s (Loss)/profit before tax (10,356) 1,242 2,528 Tax charge on Group (loss)/profit at standard UK corporation tax rate of 23.5% (2012: 25%; 2011: 27%) (2,434) 311 682 Effects of: Expenses not deductible in determining taxable profit 44 – 3 Income not taxable in determining taxable profit (8) (4) (45) Current year research and development tax credit (2,900) (820) – R&D enhanced tax relief and surrender of losses 2,225 88 (1,275) Effect of unrecognised losses and temporary differences 2,150 (395) 635 Recognition of previously unrecognised deferred tax asset (2,872) – – Adjustment in respect of prior year tax credit (2,012) (428) (221) Tax (5,807) (1,248) (221)
The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting periods: Accelerated Other Tax Temporary Tax Depreciation Differences Losses Total £000’s £000’s £000’s £000’s At 1 October 2010 (149) 71 78 – (Charged)/credited to profit or loss (53) 131 (78) – At 1 October 2011 (202) 202 – – (Charged)/credited to profit or loss (75) 75 – – At 1 October 2012 (277) 277 – – (Charged)/credited to profit or loss (463) (277) 1,635 895 At 30 September 2013 (740) – 1,635 895
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. All entities in the Group operate in the same taxation jurisdiction and the taxing authority permits the Group to make or receive a single net payment.
On 2 July 2013, the UK Government substantively enacted a reduction in the main rate of corporation tax from 23% to 21% with effect from 1 April 2014. The rate will reduce further to 20% from 1 April 2015. 60 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
11. (Loss)/earnings Per Share The calculations of (loss)/earnings per share are based on the following data: 2013 2012 2011 £000’s £000’s £000’s (Loss)/profit for the year – basic and diluted (4,549) 2,490 2,749
Number of Shares 2013 2012 2011 m m m Weighted average number of ordinary shares 151.5 133.2 131.9 Less ESOP trust ordinary shares1 – (0.2) (0.2) Weighted average number of ordinary shares for purposes of basic earnings per share 151.5 133.0 131.7 Effect of potentially dilutive shares arising from share options2 – 4.5 3.9 Effect of potentially dilutive shares arising from warrants – – 0.2 Weighted average number of ordinary shares for purposes of diluted earnings per share 151.5 137.5 135.8 (Loss)/earnings per share – basic (3.0)p 1.9p 2.1p (Loss)/earnings per share – diluted (3.0)p 1.8p 2.0p
1 As at 30 September 2013, 34,706 ordinary shares were held in the ESOP trust. The financial effect is less than 0.1m, and consequently these have not been presented above. 2 We incurred a loss in the year ended 30 September 2013. As a result, the inclusion of potentially dilutive share options in the diluted loss per share calculation would have an antidilutive effect on the loss per share for the period. Therefore, the impact of 6.7 million share options have been excluded from the diluted loss per share calculation for the year ended 30 September 2013.
12. Intangible Assets – Goodwill 2013 2012 Group £000’s £000’s Cost – As at 1 October 5,210 5,210 Accumulated impairment losses – – Net book value – As at 30 September 5,210 5,210
As at 30 September 2013 the Company had no intangible assets (2012: nil).
Goodwill arose upon the acquisition of GW Research Ltd. (formerly G-Pharm Ltd) by GW Pharma Limited in 2001. For impairment testing purposes, all goodwill has been allocated to the Sativex Commercial segment as a separate cash-generating unit. The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired.
The recoverable amount of this cash-generating unit is determined based on a value in use calculation which uses cash flow projections based on financial budgets covering a five year period and a discount rate of 12% per annum (2012: 12% per annum). These projections take into account projected future product sales revenues. The Group models expected sales based upon the current in-market run rate. Expectations of future growth and timing of new launches are modelled based upon guidance from our marketing partners.
Any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the carrying amount to exceed the recoverable amount of the cash-generating unit. An impairment loss is recognised only if the carrying value of the cash-generating unit exceeds the recoverable amount. 61 GW Pharmaceuticals plc Annual Report and Accounts 2013
13. Property, Plant and Equipment Plant, Assets Under Machinery Office Motor the Course of and Lab and IT Leasehold Vehicles Construction Equipment Equipment Improvements Total Group £000’s £000’s £000’s £000’s £000’s £000’s Cost At 1 October 2011 11 – 3,545 1,122 1,110 5,788 Additions – – 500 235 583 1,318 Disposals (11) – (403) (490) (504) (1,408) At 1 October 2012 – – 3,642 867 1,189 5,698 Additions – 1,164 630 225 2,014 4,033 At 30 September 2013 – 1,164 4,272 1,092 3,203 9,731 Accumulated depreciation At 1 October 2011 11 – 2,396 669 844 3,920 Charge for the year – – 392 195 167 754 Disposals (11) – (403) (490) (504) (1,408) At 1 October 2012 – – 2,385 374 507 3,266 Charge for the year – – 477 237 275 989 At 30 September 2013 – – 2,862 611 782 4,255 Net book value At 30 September 2013 – 1,164 1,410 481 2,421 5,476 At 30 September 2012 – – 1,257 493 682 2,432
The Company does not own any property, plant and equipment.
The net book value of property, plant and equipment at 30 September 2013 includes £1.9m in respect of assets held under finance leases (2012: £nil).
14. Inventories 2013 2012 £000’s £000’s Raw materials 180 312 Work in progress 4,101 2,951 Finished goods 380 274 4,661 3,537
Inventory with a carrying value of £3.5m is considered to be recoverable after more than one year from the balance sheet date, but within the Group’s normal operating cycle (2012: £2.3m).
The provision for inventories relates to inventories expected to expire before being utilised by the Group. The movement in the provision for inventories is as follows: 2013 2012 £000’s £000’s Opening balance – as at 1 October 2,131 3,431 Decrease in provision for inventories (530) (1,300) As at 30 September 1,601 2,131
The Company does not own any inventory in current or prior years. 62 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
15. Financial Assets Trade and Other Receivables Group Company 2013 2012 2013 2012 £000’s £000’s £000’s £000’s Amounts falling due within one year Trade receivables 621 784 – – Provision for impairment – trade receivables – (26) – – 621 758 – – Prepayments and accrued income 763 595 37 22 Other receivables 349 235 3,977 5 1,733 1,588 4,014 27
Trade receivables disclosed above are classified as loans and receivables and are therefore measured at amortised cost.
Trade receivables at 30 September 2013 represent eight days of sales (2012: eight days). The average trade receivable days during the year ended 30 September 2013 was 34 days (2012: 31 days). The credit period extended to customers is 30 to 60 days.
The provision for impairment – trade receivables is £nil at 30 September 2013. £26,000 was considered to be impaired at 30 September 2012. This was subsequently reversed during the year ended 30 September 2013 following recovery in full of the related receivable. All trade receivables, aside from this individual receivable in the year ended 30 September 2012, were current at the balance sheet date as at 30 September 2013 and 2012. Group Company 2013 2012 2013 2012 £000’s £000’s £000’s £000’s Movement in the allowance for doubtful debts Balance at the beginning of the period 26 – – – Impairment losses recognised – 26 – – Amounts recovered during the year (26) – – – Balance at the end of the period – 26 – –
The trade receivables balance at 30 September 2013 consisted of balances due from seven customers (2012: six customers) with the largest single customer representing 35% (2012: 38%) of the total amount due. Given that the Group’s customers consist of a small number of large pharmaceutical companies, counterparty credit risk is considered to be low. The Group seeks to mitigate credit risk by seeking payments in advance from pharmaceutical partners for expenditure to be incurred on their behalf.
No interest is charged on trade receivables.
The Directors consider that the carrying value of trade receivables approximates to their fair value.
16. Financial Liabilities Trade and Other Payables Group Company 2013 2012 2013 2012 £000’s £000’s £000’s £000’s Amounts falling due within one year Other creditors and accruals 5,302 4,437 123 1,999 Trade payables 3,393 4,090 140 31 Other taxation and social security 745 587 – – 9,440 9,114 263 2,030 63 GW Pharmaceuticals plc Annual Report and Accounts 2013
16. Financial Liabilities continued Trade payables principally comprise amounts outstanding for trade purchases and ongoing costs.
Trade payables at 30 September 2013 represent the equivalent of 36 days purchases (2012: 51 days).
The average credit period taken for trade purchases during the year ended 30 September 2013 was 39 days (2012: 31 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.
17. Obligations Under Finance Leases Minimum Lease Payments 2013 2012 £000’s £000’s Amounts payable under finance leases: Within one year 177 – In the second to fifth years inclusive 861 – After five years 1,559 – 2,597 – Less: future finance charges 592 – Present value of lease obligations 2,005 –
Present Value of Lease Payments 2013 2012 £000’s £000’s Amounts payable under finance leases: Amounts due for settlement within 12 months 100 – Amounts due for settlement after 12 months 1,905 – 2,005 –
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 13.9 years (2012: nil). For the year ended 30 September 2013, the average effective borrowing rate was 4% (2012: nil). 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 2013 approximates to their fair value.
The Group’s obligations under finance leases are generally secured by the lessors’ rights over the leased assets.
18. Deferred Revenue Group Company 2013 2012 2013 2012 £000’s £000’s £000’s £000’s Amounts falling due within one year Deferred licence, collaboration, and technical access fee income1 1,294 1,378 – – Advance research and development fees2 1,887 1,071 – – 3,181 2,449 – – Amounts falling due after one year Deferred licence, collaboration and technical access fee income1 8,916 10,127 – –
1 These deferred revenues result mainly from up-front licence fees received in 2005 of £12.0 million from Almirall S.A. (deferred revenue balance as at 30 September 2013 – £5.9 million and 30 September 2012 – £6.6 million) and collaboration and technical access fees from other Sativex licensees. Amounts deferred under each agreement will be recognised in revenue as discussed in note 2. 2 Advance payments received represents payments for research and development activities to be carried out in the next year on behalf of Otsuka. These amounts will be recognised as revenue in future periods as the services are rendered. 64 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
19. Financial Instruments The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising return to shareholders. The Group’s overall strategy remains unchanged from 2012.
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 2013 2012 £000’s £000’s Financial assets Cash and cash equivalents 38,069 29,335 Taxation recoverable 2,900 820 Trade receivables – at amortised cost 621 758 Prepayments and accrued income 763 595 Other receivables 349 235 Total financial assets 42,702 31,743 Financial liabilities Other creditors and accruals 5,302 4,437 Trade payables – at amortised cost 3,393 4,090 Other taxation and social security 745 587 Obligations under finance leases 2,005 – Total financial liabilities 11,445 9,114
All financial assets and financial liabilities, other than the non-current element of £1.9m in respect of the obligations under finance leases (2012: £nil), are current in nature. In all instances, the fair value of financial assets and financial liabilities approximates the carrying value due to the short-term nature of these instruments.
It is, and has been throughout the period under review, the Group’s policy that no speculative trading in financial instruments shall be undertaken.
Credit Risk: Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has a policy of only dealing with creditworthy counterparties, principally involving the major UK clearing banks and their wholly owned subsidiaries, when placing cash on deposit. In addition the Group operates a treasury policy that dictates the maximum cash balance that may be placed on deposit with any single institution or group. This policy is reviewed and approved from time to time by the Audit Committee and the Board of Directors.
Trade receivables represent amounts due from customers for the sale of commercial product and research funding from development partners, consisting primarily of a small number of major pharmaceutical companies where the credit risk is considered to be low. The Group seeks to minimise credit risk by offering only 30 days credit to commercial customers and by requesting payment in advance from its development partners for the majority of its research activities.
At the balance sheet date the maximum credit risk attributable to any individual counterparty was £11.2m (2012: £13.0m).
Trade receivables at 30 September 2013 to the value of £nil (2012: £26,000) were past their due date and were provided against in full.
The carrying amount of the financial assets recorded in the financial statements represents the Group’s maximum exposure to credit risk as no collateral or other credit enhancements are held.
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. 65 GW Pharmaceuticals plc Annual Report and Accounts 2013
19. Financial Instruments continued i) Interest Rate Risk The Group is exposed to interest rate risk as it places surplus cash funds on deposit to earn interest income. The Group seeks to ensure that it consistently earns commercially competitive interest rates by using the services of an independent broker to identify and secure the best commercially available interest rates from those banks that meet the Group’s stringent counterparty credit rating criteria. In doing so the Group manages the term of cash deposits, up to a maximum of 365 days, in order to maximise interest earnings while also ensuring that it maintains sufficient readily available cash in order to meet short-term liquidity needs.
Interest income of £0.2m (2012: £0.2m; 2011: £0.3m) during the year ended 30 September 2013 was earned from deposits with a weighted average interest rate of 0.97% (2012: 1.00%; 2011: 0.86%). Therefore, a 100 basis point increase in interest rates would have increased interest income, and reduced the loss for the year, by £0.2m (2012: increased profit by £0.2m; 2011: increased profit by £0.3m).
The Group does not have any balance sheet exposure to assets or liabilities which would increase or decrease in fair value with changes to interest rates. ii) Currency Risk The functional currency of the Company, and each of its subsidiaries, is Pounds Sterling and the majority of transactions in the Group are denominated in that currency. However, the Group receives revenues and incurs expenditures in foreign currencies and is exposed to the risks of foreign exchange rate movements, with the impacted recognised which are recorded 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.
The table below shows an analysis of the Sterling equivalent of the year end cash and cash equivalents balances by currency:
2013 2012 £000’s £000’s Cash at bank and in hand: Sterling 4,312 7,779 Euro 776 683 US Dollar 5,201 4,600 Canadian Dollar 227 228 Total 10,516 13,290 Short-term deposits: Sterling 27,553 16,045 Total cash and cash equivalents 38,069 29,335
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): 2013 2012 £000’s £000’s US Dollar 2,424 355 Euro 710 396 Canadian Dollar 432 464 Other (51) (24) 3,515 1,191 66 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
19. Financial Instruments continued Foreign Currency Sensitivity Analysis: The most significant currencies in which the Group transacts, other than Sterling, are the US Dollar and the Euro. The Group also trades in the Canadian Dollar; the Czech Crown and the Polish Zloty. The following table details the Group’s sensitivity to a 10% change in the key foreign currency exchange rates against Sterling: Euro US Dollar Can Dollar Other Year Ended 30 September 2013 £000’s £000’s £000’s £000’s Profit before tax 71 242 43 (5) Equity 71 242 43 (5)
Euro US Dollar Can Dollar Other Year Ended 30 September 2012 £000’s £000’s £000’s £000’s Profit before tax 40 36 46 (2) Equity 40 36 46 (2)
Euro US Dollar Can Dollar Other Year Ended 30 September 2011 £000’s £000’s £000’s £000’s Profit before tax 90 99 22 (4) Equity 90 99 22 (4)
Liquidity Risk: Responsibility for liquidity risk management rests with the Board of Directors, which has built a liquidity risk management framework to enable the monitoring and management of short, medium and long-term cash requirements of the business.
The Board of Directors actively monitor Group cash flows and regularly review projections of future cash requirements to ensure that appropriate levels of liquidity are maintained. The Group manages its short-term liquidity primarily by planning the maturity dates of cash deposits in order to time the availability of funds as liabilities fall due for payment. The Group does not maintain any borrowing facilities.
Cash deposits, classified as cash and cash equivalents on the balance sheet, comprise deposits placed on money markets for periods of up to three months and on call. The weighted average time for which the rate was fixed was 38 days (2012: 50 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 long-term obligations under finance leases of £1.9m (2012: £nil) which will be repaid over a weighted average 13.9 year term. There have been no material changes to the Group’s exposure to liquidity risks or the manner in which it manages and measures liquidity risk.
20. Share Capital As at 30 September 2013 the share capital of the Company allotted, called-up and fully paid amounts were as follows:
2013 2012 £000’s £000’s Allotted, called-up and fully paid 178 133
Changes to the number of ordinary shares in issue have been as follows: Total Nominal Total Share Total Number of Value Premium Consideration Shares £000’s £000’s £000’s As at 1 October 2011 133,055,154 133 65,866 65,999 Exercise of share options 315,200 – 81 81 As at 30 September 2012 133,370,354 133 65,947 66,080 Issue of new shares 44,136,000 45 18,055 18,100 Exercise of share options 14,933 – 3 3 As at 30 September 2013 177,521,287 178 84,005 84,183
During the year ended 30 September 2013 the Group completed an Initial Public Offering on the NASDAQ Global Market, issuing 44,136,000 shares for net consideration of £18.1 million. This took the form of 3,678,000 American Depositary Shares (“ADSs”) at a price to the public of $8.90 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 2013
21. Share-based payments Equity-settled Share Option Schemes The Company operates various equity-settled share option schemes for employees of the Group. In addition, options have been issued to a small number of expert consultants in return for services provided to the Group.
All options granted under these schemes are exercisable at the share price on the date of the grant, with the exception of options issued under the GW Pharmaceuticals Long Term Incentive Plan (“LTIP”) which are issued with an exercise price equivalent to the par value of the shares under option.
The vesting period for all options granted is three years from the date of grant and options lapse after 10 years.
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 share option scheme rules, employees may be allowed to retain some or all of the share options upon ceasing employment by the Group. Vested options usually need to be exercised within six months of leaving.
Under the terms of the LTIP employees are awarded options to subscribe for the Company’s ordinary shares at an exercise price equivalent to the par value of the shares under option. These options are subject to performance conditions which must be achieved before the options vest and become exercisable. In the event that the performance conditions are not achieved within the required three year vesting period these options lapse. Once vested, an LTIP award may be exercised at any time prior to the 10th anniversary of the date of grant.
LTIP awards granted to Executive Directors are subject to performance conditions which are determined by the Remuneration Committee. These are usually a mixture of market-based and non-market-based performance conditions which are intended to link executive compensation to the key value drivers for the business whilst aligning the interests of the Executive Directors with those of shareholders and employees.
2010 Awards The vesting period of the 2010 awards completed on 19 July 2013. These awards were subdivided into four equal tranches, dependent upon four separate performance conditions. Two of the performance conditions were met. One unmet performance condition was a marked-based performance condition, and therefore no reversal of the charge is permitted. The remaining unmet performance condition was a non-market-based performance condition. The reversal of this charge was £0.3m.
2011 Awards In the year ended 30 September 2011, all awards granted were LTIP awards.
The 2011 LTIP awards are subject to a performance condition whereby the number of options vesting on the third anniversary of the date of grant will be determined according to the performance of the Company share price relative to a comparator group consisting of the constituents of the FTSE smallcap index. LTIP awards will vest if the Company is ranked at median or above in relation to the Group. 25% of the award vests if the Company achieves median ranking, with 100% vesting if an upper quartile ranking is achieved. A straight-line approach is used to calculate the percentage vesting between these two extremes.
2012 Awards In the year ended 30 September 2012, all awards granted were LTIP awards.
The 2012 LTIP awards are subdivided into four equal tranches, each of which vests on 6 June 2015 upon achievement of the following performance conditions: • one quarter of the award vests upon achievement of first positive cancer pain clinical trial results; • one quarter of the award vests upon filing of a New Drug Application (“NDA”) for Sativex with the US Food and Drug Administration (“FDA”); • one quarter of the award vests upon signature of a new non-Sativex product licence agreement; and • one quarter of the award vests subject to the Company share price performance over the three year vesting period. This will be ranked against the share price performance of a comparator group made up of the constituents of the FTSE smallcap index. Awards will only vest if the Company is ranked at median or above. 25% of this element of the award will vest if the Company achieves a median ranking and 100% will vest if the Company achieves an upper quartile ranking, with a straight-line approach used to calculate the percentage vesting between these two extremes. 68 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
21. Share-based payments continued 2013 awards In the year ended 30 September 2013, all awards granted were LTIP awards.
The 2013 LTIP awards are subject to performance conditions whereby 100% of the awards vest on the third anniversary of the date of the grant if the ADS price has increased by 75% or more during the three year vesting period ended 24 September 2016. 25% of the awards vests if 25% growth is achieved, with a straight-line basis of calculation being used to calculate the number of options vesting between these two extremes. No options vest if the share price growth is below 25% over the three year vesting period.
The starting price for the growth calculation for the 2013 award is based on the US Dollar equivalent of the average closing mid- market price of 12 AIM listed ordinary shares, as calculated over the last 30 trading days prior to the Nasdaq IPO on 1 May 2013. This price of $10.37, equivalent to 56.6p per UK ordinary share, will be compared to the US Dollar denominated average mid-market closing price of the ADS, calculated by reference to the last 30 trading days of the three year vesting period.
The number of outstanding options under each scheme can be summarised as follows: 30 Sept 30 Sept 2013 2012 Number Number of Share of Share Options Options Employee share option schemes 5,535,581 6,462,379 Employee LTIP awards 6,778,743 4,591,765 Consultant share options 425,856 612,456 Options outstanding at 30 September 12,740,180 11,666,600
The movement in share options in each scheme during the year can be summarised as follows:
Employee Options Employee LTIP Consultant Options Total Options Weighted Weighted Weighted Weighted Number of Average Number of Average Number of Average Number of Average Share Exercise Share Exercise Share Exercise Share Exercise Options Price £ Options Price £ Options Price £ Options Price £ Outstanding at 1 October 2011 6,867,829 1.23 3,458,345 0.001 714,956 1.32 11,041,130 0.85 Granted during the year – – 1,326,770 0.001 – – 1,326,770 0.001 Exercised during the year (95,200) 0.76 (190,000) 0.001 (30,000) 0.29 (315,200) 0.26 Expired during the year (310,250) 1.14 (3,350) 0.001 (72,500) 1.22 (386,100) 1.15 Outstanding at 1 October 2012 6,462,379 1.24 4,591,765 0.001 612,456 0.76 11,666,600 0.76 Granted during the year – – 2,679,374 0.001 – – 2,679,374 0.001 Exercised during the year (5,800) 0.54 (9,133) 0.001 – – (14,933) 0.21 Expired during the year (920,998) 1.71 (483,263) 0.001 (186,600) 1.61 (1,590,861) 1.34 Outstanding at 30 September 2013 5,535,581 1.16 6,778,743 0.001 425,856 1.28 12,740,180 0.57
Share options outstanding at 30 September 2013 can be summarised as follows:
Employee Options Employee LTIP Consultant Options Total Options Weighted Weighted Weighted Weighted Average Average Average Average Number of Remaining Number of Remaining Number of Remaining Number of Remaining Share Contractual Share Contractual Share Contractual Share Contractual Range of exercise prices Options Life/Years Options Life/Years Options Life/Years Options Life/Years £0.01–£0.50 10,000 5.0 6,778,743 8.5 30,000 6.2 6,818,743 8.5 £0.51–£1.00 3,016,817 2.5 – – 35,000 0.9 3,051,817 2.5 £1.01–£1.50 1,656,372 1.7 – – 288,496 1.5 1,944,868 1.7 £1.51–£2.00 852,392 0.3 – – 72,360 0.3 924,752 0.3 Outstanding at 30 September 2013 5,535,581 1.9 6,778,743 8.5 425,856 1.6 12,740,180 5.4 Exercisable at 30 September 2013 5,535,581 1.9 2,342,099 5.8 425,856 1.6 8,303,536 3.0 69 GW Pharmaceuticals plc Annual Report and Accounts 2013
21. Share-based payments continued Share options outstanding at 30 September 2012 can be summarised as follows:
Employee Options Employee LTIP Consultant Options Total Options Weighted Weighted Weighted Weighted Average Average Average Average Number of Remaining Number of Remaining Number of Remaining Number of Remaining Share Contractual Share Contractual Share Contractual Share Contractual Range of exercise prices Options Life/Years Options Life/Years Options Life/Years Options Life/Years £0.01–£0.50 10,000 6.0 4,591,765 7.9 30,000 7.2 4,631,765 7.9 £0.51–£1.00 3,025,117 3.5 – – 85,000 0.8 3,110,117 3.4 £1.01–£1.50 1,656,372 2.8 – – 375,096 2.6 2,031,468 2.8 £1.51–£2.00 918,498 0.3 – – 72,360 0.8 990,858 0.3 £2.01–£2.50 852,392 1.3 – – 50,000 0.8 902,392 1.3 Outstanding at 30 September 2012 6,462,379 2.6 4,591,765 7.9 612,456 1.9 11,666,600 4.7 Exercisable at 30 September 2012 6,462,379 2.6 1,443,132 6.1 612,456 1.9 8,517,967 3.1
Charges for share-based payments have been allocated to the research and development expenditure and management and administrative expenses in the consolidated income statements as follows: 2013 2012 £000’s £000’s Research and development expenditure 317 559 Management and administrative expenses 299 450 616 1,009
In the year ended 30 September 2013, options were granted on 30 November 2012, 20 February 2013, 28 March 2013 and 24 September 2013. The aggregate of the estimated fair values of the options granted on those dates is £1.5m and the weighted average fair value of the awards made during 2013 was £0.57 per option.
In the year ended 30 September 2012, options were granted on 15 December 2011, 23 March 2012, 31 May 2012, 6 June 2012 and 1 July 2012. The aggregate of the estimated fair values of the options granted on those dates is £1.1m and the weighted average fair value of the awards made during 2012 was £0.82 per option.
Fair values were calculated using the Black-Scholes share option pricing model for grants with non-market-based performance conditions. The Monte Carlo share option pricing model has been used for grants with market-based performance conditions. The following weighted average assumptions were used in calculating these fair values: 2013 2012 Weighted average share price 55p 83p Weighted average exercise price 0.1p 0.1p Expected volatility 44% 52% Expected life 5.0 years 5.0 years Risk-free rate 0.5% 0.5% Expected dividend yield Nil Nil
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, performance conditions and behavioural considerations.
22. Warrants Warrants to subscribe for ordinary shares in the Company are as shown below: At 1 Oct Warrants Warrants Warrants At 30 2012 Granted Exercised Lapsed Sept 2013 Date of Exercise Date of Number Number Number Number Number Issue Price Expiry Warrant holder Great Point Partners 1,888,480 – – – 1,888,480 13/08/09 105.0p 13/08/14 Great Point Partners 1,888,480 – – – 1,888,480 13/08/09 175.0p 13/08/14 Total 3,776,960 – – – 3,776,960
The above warrants were issued to Great Point Partners on 13 August 2009 at a time when the mid-market price for ordinary shares of the Company was 78.0p. The warrant issue was concurrent with the issue of 7,553,920 new ordinary shares to Great Point Partners at 78.0p per share.
The warrants can be exercised at any time prior to their expiry on 13 August 2014. 70 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
23. Other Reserves Other reserves of £20.2m relate to a £19.3m merger reserve and a £0.9m warrants reserve. The warrants reserve is discussed in note 22. The merger reserve was created as a result of the acquisition by the Company of the entire issued share capital of GW Pharma Limited in 2001. This acquisition was effected by a share for share exchange which was merger accounted under UK Generally Accepted Accounting Practice, or UK GAAP, in accordance with the merger relief provisions of Section 131 of the Companies Act 1985 (as amended) relating to the accounting for business combinations involving the issue of shares at a premium. 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 (2012: nil).
As at 30 September the ESOP held the following shares: 2013 2012 Number Number Unconditionally vested in employees 374,408 228,607 Conditionally gifted to employees – 173,951 Shares available for future distribution to employees 34,706 34,706 Total 409,114 437,264
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 21 relating to the LTIP awards. The exercise price for shares granted under the ESOP is nil, and the vesting conditions include employment by the Group over the three year vesting period from the date of grant. The share-based payment charge for shares granted under the ESOP plan amounted to £nil in the year ended 30 September 2013 (2012: £33,441).
As at 30 September 2013 the number and market value of shares held by the trust which have not yet unconditionally vested in employees is 34,706 (2012: 208,657) and £nil (2012: £0.2m) respectively.
24. Financial Commitments The Group had capital commitments for property, plant and equipment contracted but not provided for at 30 September 2013 of £0.1m (2012: £0.1m).
At the balance sheet date the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Group Company 2013 2012 2013 2012 £000’s £000’s £000’s £000’s Within one year 1,136 987 – – Between two and five years 2,028 2,375 – – After five years 807 – – – 3,971 3,362 – –
The minimum lease payments payable under operating leases recognised as an expense in the year were £1.2m (2012: £1.0m).
Operating lease payments represent rentals payable by the Group for certain of its leased properties. Manufacturing and laboratory facilities are subject to 10 to 15 year leases with a lease break three years prior to the conclusion of the lease at the Group’s option. Office properties are usually leased for one year or less with the exception of the London property, which is on a five year lease and the Histon property which is on a 10 year lease with a five year break. 71 GW Pharmaceuticals plc Annual Report and Accounts 2013
25. Contingent Liabilities The Group may, from time to time, be involved in legal proceedings that are incidental to the Group operations. The Group is not currently involved in any legal or arbitration proceedings which may have, or have had in the 12 months preceding the date of this report, a material effect on the consolidated financial position, results of operations or liquidity of the Group.
26. 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. 2013 2012 2011 £000’s £000’s £000’s Short-term employee benefits 1,733 1,664 1,426 Post-employment benefits 200 158 171 Share-based payments 539 831 625 2,472 2,653 2,222
Other Related Party Transactions: Group During the year the Group purchased services in the ordinary course of business from Brian Whittle Associates Limited, a company controlled by Brian Whittle, a former Director and substantial shareholder of the Company, at a cost of £4,000 (2012: £3,000; 2011: £19,000). As at 30 September 2013 there was no amount due to Brian Whittle Associates Limited (2012: £nil; 2011: £nil).
Upon the retirement of David Kirk from the Board of Directors of the Company, on 1 June 2012, the Remuneration Committee agreed that, in accordance with the “Good Leaver” provisions of the share option scheme rules, David Kirk would be allowed to retain all of his outstanding share options after leaving the employment of the Group.
On 1 June 2012 these included: • 1.2m share options, with a weighted average exercise price of £1.48 and a weighted average time to expiry of 1.9 years; • 0.3m of vested LTIP awards with a 0.1p exercise price and a weighted average time to expiry of 6.0 years; and • 0.3m of unvested LTIP award, with a 0.1p exercise price and weighted average time to expiry of 8.25 years.
Subsequently, 0.5m of the share options and 0.1m of the unvested LTIP award have lapsed. The remaining unvested options remain subject to the performance conditions and shall only become exercisable if the Group achieves the performance conditions before the vesting date. All vested options shall remain available to exercise at any time prior to their expiry upon the 10th anniversary of their date of grant.
Company During 2013, 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 2013 was £30.4m (2012: £16.6m; 2011: £nil). As a long-term loan, this has been disclosed within the Company balance sheet as an investment – see note 27.
As discussed in note 29, on 19 September 2013, the Company received a dividend payment of £7.0m from GW Pharma Limited. £3.0m was settled through intercompany balances with £4.0m outstanding as at 30 September 2013. A dividend payment of £30.0m was received in the year ended 30 September 2012. No dividends were received in the year ended 30 September 2011.
At 30 September 2013, the amount due from the GW Pharma Limited to the Company was £4.0m (2012: £2.0m due from GW Pharma Ltd; 2011: £0.6m due from GW Pharma Limited). 72 GW Pharmaceuticals plc Annual Report and Accounts 2013
Notes to the Consolidated Financial Statements continued
27. Investments Principal Group Investments The Company has investments in the following significant subsidiary undertakings: Loans to Group Investments Undertakings Total Company £000’s £000’s £000’s At 1 October 2011 77,495 – 77,495 Add capital contribution in respect of share-based payment charge 1,009 – 1,009 Additional funds advanced during year – 16,601 16,601 At 1 October 2012 78,504 16,601 95,105 Add capital contribution in respect of share-based payment charge 616 – 616 Additional funds advanced during year – 13,836 13,836 At 30 September 2013 79,120 30,437 109,557
The Group has investments in the following significant subsidiary undertakings:
Name of undertaking Country of Registration Activity % Holding GW Pharma Limited England and Wales Research and Development 100 GW Research Limited England and Wales Research and Development 100 Cannabinoid Research Institute Limited England and Wales Research and Development 100 Guernsey Pharmaceuticals Limited Guernsey Research and Development 100 GWP Trustee Company Limited England and Wales Employee Share Ownership 100 G-Pharm Trustee Company Limited England and Wales Dormant 100 G-Pharm Limited England and Wales Dormant 100
All the subsidiary undertakings are included in the consolidated accounts.
28. Subsequent Events Subsequent to the year-end, on 13 November 2013, the Group entered into an arrangement for the construction of new 10,000 sq. ft. manufacturing lease premises. As part of the agreement of the lease, the landlord will provide up to £7.8m of fit-out funding as a finance lease, to be repaid via rentals of £1.0m over the first 15 years of the 20 year lease term. Construction is expected to start in December 2013 and be completed in 2015.
29. Dividends 2013 2012 2011 Company £000’s £000’s £000’s Dividends received from subsidiary companies 7,000 30,000 – Dividends received per share 3.9p 22.5p –
No dividends were paid by the Company (2012 and 2011: nil). Advisers
Registered Office Principal Bankers GW Pharmaceuticals plc HSBC Bank plc Porton Down Science Park 70 Pall Mall Salisbury London SW1Y 5EZ Wiltshire SP4 0JQ United Kingdom Public Relations Advisers T: +44 (0)1980 557000 FTI Consulting F: +44 (0)1980 557111 Holborn Gate E: [email protected] Southampton Buildings London WC2A 1PB Registered Number 04160917 England and Wales Registrars Capita Registrars Nominated Adviser and Broker Northern House Peel Hunt LLP Woodsome Park 120 London Wall Fenay Bridge London EC2Y 5ET Huddersfield West Yorkshire HD8 0LA Joint Financial Adviser N M Rothschild & Sons Limited New Court St. Swithin’s Lane London EC4P 4DU
Solicitors to the Company Mayer Brown LLP 201 Bishopsgate London EC2M 3AF
Auditors Deloitte LLP Abbots House Abbey Street Reading Berkshire RG1 3BD
Cautionary statement: This annual report contains forward-looking statements that reflect GW’s current expectations regarding future events, including development and regulatory clearance of GW’s products. Forward-looking statements involve risks and uncertainties. Actual results and events could differ materially from those projected herein and depend on a number of factors, including (inter alia), the success of GW’s research strategies, the applicability of the discoveries made therein, the successful and timely completion of uncertainties related to the regulatory process, and the acceptance of Sativex® and other products by consumer and medical professionals. The forward-looking statements reflect knowledge and information available at the date of preparation of this annual report and the Company undertakes no obligation to update these forward-looking statements. Nothing in this annual report should be construed as a profit forecast. GW Pharmaceuticals plc Annual and Report Accounts 2013
GW Pharmaceuticals plc Porton Down Science Park Salisbury Wiltshire SP4 0JQ UK
T: +44 (0)1980 557000 F: +44 (0)1980 557111 www.gwpharm.com