GW Pharmaceuticals: Multiple Value Inflection Points In 2013

GW Pharmaceuticals’ (GW) stock is trading at a 52-week low despite having achieved key commercial and R&D milestones in 2012, meeting financial expectations, while maintaining a solid financial base. On our valuation, the current share price discounts potential new indications for Sativex (cancer pain), the entire R&D pipeline and possible licensing deals (Otsuka). As such, we see a buying opportunity ahead of potential value-inflection points, both commercial and clinical, in 2013.

Sativex Commercial: Steady Progress In 2012
Encouraging in-market sales growth (£10.0m in FY12, +89%) reflects continued uptake in existing markets and new country launches. In 2013, we expect the completion of German pricing negotiations (Q113), an Italian launch (Q113) and additional EU roll-out (mid-2013 onwards) to create a strong platform for future growth. Beyond Europe, Sativex sales growth could be supported by launches in Australia (Q413/Q114) and Middle-Eastern territories (Q413 onwards).

R&D: Expect A Busy 2013
GW has announced encouraging Phase II results for GW42004 (novel oral cannabinoid) in Type II diabetes. Initial signs of efficacy and acceptable safety pave the way for a larger Phase IIb dose-ranging study in H213. In 2013, we also expect three programmes to enter clinical trials (for schizophrenia, epilepsy and glioma), further Phase II data (ulcerative colitis) and, potentially, headline Sativex Phase III results (cancer pain) in Q413. Finally, completion of the Otsuka cancer/CNS collaboration in mid-2013 could be an important inflection point for licensing the lead candidates.

Financials: Fine-Tuning Sativex Forecasts
We have updated our FY13 numbers and published new FY14 forecasts following GW’s guidance and revised timelines for further EU launches of Sativex. The main changes to our model are lower Sativex sales for FY13-15 reflecting the protracted European pricing negotiations and higher R&D spend. Despite a more gradual EU roll-out, our view of Sativex peak sales potential (£64m/year) remains unchanged.

Valuation: DCF-Based Valuation Of £195m
We value GW at £195m, or £1.46 per share, based on a DCF analysis. Sativex in MS spasticity contributes 53p per share, with cash adding another 13p. Thus, the current share price of 58p appears to discount any new Sativex indications, pipeline success, or potential licensing deals, which in our view represents a clear buying opportunity.

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