Our Product Pipeline Summary

Our commercialized product and key ongoing development programs are shown in the table below.

Our Strategic Partnerships

To support the development and commercialization of Sativex, we have entered into license and development agreements with the following major pharmaceutical companies: Otsuka in the United States; Almirall S.A., or Almirall, in Europe (excluding the United Kingdom) and Mexico; Novartis Pharma AG, or Novartis, in Australia and New Zealand, Asia (excluding Japan, China and Hong Kong), the Middle East (excluding Israel) and Africa; Bayer HealthCare AG, or Bayer, in the United Kingdom and Canada; Ipsen Biopharm Ltd, or Ipsen, in Latin America (excluding Mexico and the Islands of the Caribbean); and Neopharm Group, or Neopharm, in Israel. These agreements provide our collaborators with the sole right to commercialize Sativex in exclusive territories for all indications. From our incorporation through September 30, 2014 these agreements have yielded cash of £67.6 million in upfront fees and milestone payments. In addition, we are entitled to receive up to an additional £203.0 million in potential payments upon the achievement of regulatory and commercial milestones. Upon commercialization, we are also entitled to receive revenue from the supply of products as well as royalties on product sales. In addition, under the terms of our agreement with Otsuka, all pre-clinical and clinical costs associated with the development of Sativex in the United States are fully funded by Otsuka.

Our Strengths

We believe that we offer the following key distinguishing characteristics:

Our Proprietary Cannabinoid Product Platform

The cannabis plant is the unique source of more than 70 structurally related, plant-derived cannabinoids. Although one cannabinoid, THC, is known to cause psychoactive effects associated with the use of illicit herbal cannabis, none of the other cannabinoids are known to share this property. In recent decades, there have been major scientific advances that have led to the discovery of new plant-derived cannabinoids and a cannabinoid receptor system in the human body, or endocannabinoid system. We are at the forefront of this new area of science, and we believe that our proprietary cannabinoid product platform uniquely positions us to discover and develop cannabinoids as new therapeutics. We are currently evaluating the potential for cannabinoids in the treatment of central nervous system, or CNS, disorders, including epilepsy, multiple sclerosis and schizophrenia, cancer and cancer pain, type-2 diabetes, ulcerative colitis and neurodegenerative disease.

Our proprietary cannabinoid product platform consists of our:

We believe that our focus on the development of therapeutics from plant-derived cannabinoids offers the following important advantages:

We believe that the successful development and regulatory approval of Sativex for MS spasticity provide important validation of our proprietary cannabinoid product platform.

The prospect for cannabinoid therapeutics to be approved through the FDA approval pathway has been the subject of statements from the White House, Congress and the Drug Enforcement Administration, or DEA. The White House Office of National Drug Control Policy states on its “Facts and Answers to the Frequently Asked Questions about Marijuana” on the White House website that the FDA has recognized and approved the medicinal use of isolated components of the marijuana plant and related synthetic compounds, and it specifically references Sativex as a product that is currently in late-stage clinical trials with the FDA. In its June 2012 report titled “Reducing the U.S. Demand for Illegal Drugs,” the U.S. Senate Caucus on International Narcotics Control expresses the view that the development of marijuana-based therapeutics through an approved FDA process is the best route to explore and references Sativex as a promising product currently in the final phase of the FDA’s trials for approved use in the United States. In that report, the Senate Caucus urged the FDA to complete a careful review of Sativex in a timely manner. In its May 2014 report titled “The Dangers and Consequences of Marijuana Abuse,” the DEA expresses support for ongoing research into potential medicinal uses of marijuana’s active ingredients, and specifically references Sativex and Epidiolex.

Our Business Strategy

Our goal is to capitalize on our leading position in the field of cannabinoid therapeutics by pursuing the following strategies:

Our Proprietary Cannabinoid Product Platform

We believe we have established a world-leading position in cannabinoid therapeutics through our proven proprietary cannabinoid product platform. Our platform consists of a continually evolving library of internally generated novel cannabis plant types that produce selected cannabinoids, discovery of novel cannabinoid pharmacology through our network of world leading scientists, an intellectual property portfolio, in-house formulation, processing and manufacturing capabilities, and development and regulatory expertise. We further believe that we are in a unique position to develop and manufacture plant-derived cannabinoid formulations worldwide at sufficient quality, uniformity, scale and sophistication for the purposes of pharmaceutical development and to meet international regulatory requirements.

Cannabinoid Science Overview

Although one cannabinoid, THC, is known to cause psychoactive effects associated with the use of illicit herbal cannabis, none of the other cannabinoids are known to share these properties. In recent decades, there have been major scientific advances that have led to the discovery of new plant-derived cannabinoids and the endocannabinoid system. We are at the forefront of this new area of science and our research into a large number of these cannabinoids suggests that each has distinct pharmacological effects and potential therapeutic applications.

Our research to date has focused on the following plant-based cannabinoids:

Initial academic research in the field of cannabinoid science focused almost exclusively on THC. It has been widely published in scientific literature that THC has pain suppression, anti-spasmodic, anti-tremor, anti-inflammatory, appetite stimulant and anti-nausea properties. Our research and development, however, has focused primarily on exploring cannabinoids other than THC and identifying potential therapeutic applications of these other cannabinoids. We have focused particularly on CBD, which has shown in pre-clinical testing conducted by us and supported by publications in scientific literature to have anti-inflammatory, anti-convulsant, anti-psychotic, anti-oxidant, neuroprotective and immunomodulatory effects. In addition, we believe CBD is not intoxicating as evidenced by its distinct pharmacology from THC as well as evidence from clinical trials. In particular, the intoxicating effects of THC result from its activity as a partial agonist at the CB1 receptor; CBD does not have this same pharmacologic activity. There is a significant body of scientific literature on the properties of CBD, which consistently describes CBD as a cannabinoid without psychotropic effects. Furthermore, according to publications in scientific literature, in particular pre-clinical research published by Zuardi, et al. in the Journal of Psychopharmacology 1982 and clinical research published by Karniol, et al. in the European Journal of Pharmacology 1974, research suggests that the presence of CBD may mitigate some of the side-effects of THC. We have also identified important pharmacological effects of other cannabinoids, such as the anti-convulsant effects of CBDV, anti-diabetic effects of THCV, anti-nausea effects of CBDA and anti-cancer effects of CBG.

There are at least two types of cannabinoid receptors, CB1 and CB2, in the human endocannabinoid system. CB1 receptors are considered to be among the most widely expressed G protein-coupled receptors in the brain and are particularly abundant in areas of the brain concerned with movement and postural control, pain and sensory perception, memory, cognition, emotion, and autonomic and endocrine function. CB1 receptors are also found in peripheral tissues including peripheral nerves and non-neuronal tissues such as muscle, liver tissues and fat. CB2 receptors are expressed primarily in tissues in the immune system and are believed to mediate the immunological effects of cannabinoids. In addition, research suggests the endocannabinoid system interacts with other important neurotransmitter and neuromodulatory systems in the human body, including TRP channels, adenosine uptake and serotonin receptors. We believe that the far-reaching and diverse pharmacology of the numerous cannabinoids provides significant potential for development of cannabinoid therapeutics across many indications and disease areas.

Our Product Development Approach

Our approach to early product development of novel cannabinoids consists of the following stages:

Cannabinoid Chemotype Development. Our research activities commence with the generation of novel and proprietary cannabinoid plant types that produce selected cannabinoids. Our plant geneticists breed unique and protected “chemotypes,” or plants characterized by their chemical content, such that we can precisely control the cannabinoid composition of a plant. We employ traditional methods of plant breeding, with no use of genetic modification. We select chemotypes on the basis of their cannabinoid profile, appropriate levels of concentration and botanical characteristics that enable commercial viability. We seek protection for chemotypes in the form of plant variety rights, which protect the plants and the material obtained therefrom in Europe.

Extract Preparation. After we generate the unique and protected chemotypes, we develop and characterize preparations from an extract of the chemotype. In addition to preparing whole plant extracts, we also modify the extract preparations by adding or removing certain components or purifying preparations to produce a purified cannabinoid. Each of these steps may give rise to patentable opportunities.

Pharmacologic Evaluation. We then conduct in vitro and in vivo pharmacologic evaluation studies in validated disease models, testing the potential activity, safety and routes of drug metabolism of each cannabinoid preparation as well as combinations of preparations. These studies seek to identify the pharmacology of cannabinoid preparations and allow us to determine the potential therapeutic area in which they might have promise. We then conduct additional pharmacology, toxicology and pre-clinical development on promising preparations.

We conduct most of our pharmacologic evaluations in collaboration with cannabinoid scientists at academic institutions around the world. We enter into research collaboration agreements and other arrangements that enable us to benefit from the expertise of external scientists while retaining intellectual property rights that emerge from the study of our research materials.

Product Composition and Formulation Development. In parallel with the later stages of pharmacological evaluation, we identify optimum extraction and processing methods for the most promising preparations and then develop clinical formulations from the plant extract and analytical methodologies to further study the formulations. We are able to develop formulations of potential product candidates that focus on one or more cannabinoids as key active constituents as well as formulations that focus on a single cannabinoid. Each of these steps may give rise to patentable opportunities.

Our formulation approach is exemplified by Sativex, the first approved cannabinoid therapeutic based on whole plant extracts from the cannabis plant. The main active ingredients of Sativex, THC and CBD, are extracted from two protected chemotypes. In addition to THC and CBD, Sativex contains additional cannabinoid and non-cannabinoid plant components. In order to achieve a fully standardized formulation of these complex extracts, we employ a range of advanced analytical technologies to demonstrate batch-to-batch uniformity. We standardize the formulation across the extracts as a whole, not simply by reference to their key active components.

Clinical development. Selected cannabinoid product candidates progress into clinical development. We have an in-house clinical operations team that has the proven capability to execute Phase 1, 2 and 3 trials rapidly and cost-effectively. Since our inception, we have undertaken an extensive program of clinical trials in over 3,000 patients, including over 20 Phase 2 and Phase 3 trials.

Cannabinoid Product Production Process

There are three principal steps in the manufacturing process for Sativex and our cannabinoid product candidates—production of botanical raw material, or BRM, botanical drug substance, or BDS, and botanical drug product, or BDP, in each instance as defined by FDA Guidance for Industry—Botanical Drug Products. We hold inventories of BRM and BDS, both of which have extended shelf lives that enable us to manufacture BDP on demand. We have in-house facilities that can perform all steps in the production process.

BRM Production. Once a cannabinoid plant type is selected to form the basis of a pharmaceutical product candidate, we reproduce the chemotype solely through propagation of plant cuttings, or clones, in order to ensure that all subsequent plant material is genetically uniform. For Sativex, our plants are grown under highly controlled conditions in indoor glasshouses, in which all key features of the growing climate and growing process are standardized. The cultivation process lasts 11 weeks from plant cutting to harvest. Plant material is grown throughout the year and batches are harvested each week. Following harvest, plant material is dried and milled under standardized conditions. All of the plant-based raw materials for Sativex and our other pipeline product candidates are sourced from either our own in-house growing operations or from our growing sub-contractors.

BDS Production. BRM from each chemotype is processed and controlled separately to yield a well-characterized and standardized extract as our BDS for a particular product or product candidate. Conversion from BRM to BDS involves several processing steps as well as employment of extraction technologies. A proprietary liquid carbon dioxide extraction method is employed for Sativex production.

BDP Production. BDP is the finished product manufactured from one or more BDS’s at our in-house manufacturing facility. We manufacture Sativex and our other product candidates through a controlled series of processes resulting in a reproducible finished product manufactured to GMP standards. We are able to manufacture spray products (such as Sativex), liquids (such as Epidiolex) and capsules.

Advantages of Our Approach

We believe that our focus on the development of therapeutics from plant-derived cannabinoids offers the following important advantages:

Scientific Collaborators

Our research network extends to 29 academic institutions in eight countries. We work closely with the most eminent cannabinoid pharmacologists in the world, including Professor Roger Pertwee, Aberdeen University and Professor Vincenzo di Marzo, the Institute of Biomolecular Chemistry of the National Research Council (ICB-CNR). In target disease areas, we identify lead scientists and institutions with relevant expertise and enter into collaborations to advance our research efforts. In cancer, we collaborate with the research team at Complutense University, Madrid and with Professor Karol Sikora, Dean of Buckingham University and former Global Clinical Expert in Oncology at AstraZeneca. We conduct metabolic and inflammation research in collaboration with Professor Mike Cawthorne, University of Buckingham, Professor Jimmy Bell, Imperial College, London, and Professor Angelo Izzo, University of Naples. We conduct epilepsy research with Dr. Ben Whalley, University of Reading. All research with our collaborators is conducted under collaboration agreements, and any expert advice provided outside of research activity is governed by consulting agreements. The expertise of these collaborators relates principally to the pharmacology of cannabinoids and the early pre-clinical phases of product development.

All results and the accumulated knowledge gained from this work is written up and reported to us on a quarterly basis and is usually shared among the network of collaborators such that no specific individuals have retained knowledge that is critical to any of our development programs. In addition, having completed the early phases of product development for our main product candidates, future developments will largely be focused on human clinical trials which are entirely managed by our in-house clinical management teams. As a result, we do not consider any single collaboration in isolation to be material to our business.

Sativex

Our most advanced product, Sativex, is an oromucosal spray of a formulated extract of the cannabis sativa plant that contains the principal cannabinoids THC and CBD as well as specific minor cannabinoids and other non-cannabinoid components. Because cannabinoids are virtually insoluble in water, we use organic solvents, ethanol and propylene glycol, to formulate the extract. The product has been granted the U.S. Adopted Name, or USAN, of nabiximols.

We developed Sativex to be administered as an oral spray, whereby the active ingredients are absorbed in the lining of the mouth, either under the tongue or inside the cheek. This route of administration is intended to achieve a reliable rate of absorption and high level of bioavailability of THC and CBD. The spray cannot be inhaled due to the particle size. The spray provides patients with the flexibility to self-manage their dosage in order to achieve and maintain an optimal therapeutic response. In the United States, the FDA will require the spray to be incorporated within additional packaging which features a dose counter in order to reduce the potential for diversion. We are developing a dose counter with funding from Otsuka in parallel with our Phase 3 cancer pain program.

Sativex Pharmacokinetics

Although Sativex contains THC, both the composition of its formulation and its route of administration means that the resulting THC blood levels achieved are quite distinct from those associated with smoked cannabis. We have compared the pharmacokinetics of Sativex to data reported in a separate study published by Marilyn Huestis, et al., in the September 1992 issue of Journal of Analytical Toxicology involving smoked cannabis. This comparison illustrates differences in the speed of absorption and maximum concentration, or Cmax, of THC in the blood. Rapid concentration of high levels of THC in the blood, as achieved by smoked cannabis, is known to be associated with intoxication.

Comparison of the Plasma Concentration Time Curves for Smoked Cannabis
and Sativex Oromucosal Spray

Sativex for Cancer Pain

We are evaluating Sativex in a Phase 3 program to treat persistent pain in people with advanced cancer who experience inadequate pain relief from optimized chronic opioid therapy. This program represents the lead target indication for Sativex in the United States and is also intended to form the basis for future regulatory applications in the rest of the world. This Phase 3 program follows positive data from two Phase 2 trials of Sativex in this indication involving over 530 patients. We believe that Sativex has the potential to address a significant unmet need in this large market by treating patients with a product that employs a differentiated non-opioid mechanism of action, and offering the prospect of pain relief without increasing opioid-related adverse side effects.

Cancer Pain Opportunity. Chronic, unremitting persistent pain in deep tissues that results from cancer adversely affects a significant patient population.

The primary treatment for cancer pain is analgesic narcotics, also known as opioids. Morphine and oxycodone are the most prescribed opioids, and morphine is the standard regimen for treating cancer pain in palliative care and hospice care programs and facilities. Opioids are often added to non-opioid analgesics and other adjuvant medications to control cancer pain. These agents act on the CNS by binding to various opiate receptors. The use of opioids is frequently met with undesirable side effects such as constipation, sedation, respiratory depression and analgesic tolerance as well as the risk of addiction. Studies in animal models of pain suggest that there may be pharmacodynamic synergy between cannabinoids and opioids.

According to Data Monitor Stakeholder Insight: Cancer Pain, Dec 2009, there were 4.75 million cancer patients in the United States in 2009. Approximately 70% of those patients, or 3.3 million individuals, experience pain. According to market research conducted on behalf of Otsuka as part of our collaboration, approximately 72%, or 2.4 million of these patients, have advanced cancer, of which 89%, or approximately 2.1 million patients, are treated with opioid medications. According to Fallon, et al. in the March/April 2006 edition of Clinical Medicine, pain is uncontrolled with opioid treatments in approximately 20% of patients with advanced cancer, or 420,000 people in the United States.

There are currently no approved non-opioid treatments for patients who do not respond to, or experience negative side effects with, opioid medications.

Pharmacology. We believe there is a strong pharmacologic rationale for the use of Sativex in cancer pain. Cannabinoid receptors have been found in all of the principal pain transmission pathways, including the dorsal horn of the spinal cord, the descending tracts from the peri-aqueductal grey and rostral-ventral medulla and within the cortical structures, the medial thalamus, amygdala and limbic cortex. In animal models, not only does local administration of endogenous cannabinoids produce pain relief, but THC and CBD also produce pain relief in animal models of both nociceptive and neuropathic pain.

In this context, the CB1 receptor, of which THC is a partial agonist, has been identified as being most implicated in cannabinoid-induced pain relief. CBD is a potent inhibitor of adenosine uptake, and it is also known to be an agonist at the TRPV-1 (vanilloid) receptor. Both of these activities may produce pain relief. Furthermore, CBD has anti-inflammatory activity in standard animal models of inflammation and is a potent inhibitor of neutrophil chemotaxis. Finally, CBD also has an anxiolytic effect, is anti-psychotic and is believed to mitigate some of the undesirable side effects of THC.

Cancer Pain Clinical Program

Phase 2 Clinical Data. We have completed two Phase 2 multinational, randomized, placebo-controlled trials for Sativex in patients with advanced cancer who experienced inadequate pain relief from the use of optimized chronic opioid therapy. In each of the two trials, patients received Sativex or placebo as add-on treatment to strong opioid therapy while remaining on stable doses of their background optimized opioid therapy.

In both Phase 2 trials, pain was assessed daily by the patient using a 0 to 10 Numeric Rating Scale, or NRS. The change in pain severity was measured by comparing pain scores at the end of the trial with baseline scores at the beginning of the trial. There are two primary approaches to analyzing these changes in pain, either by assessing the mean numeric change in NRS or by responder analyses which assess percentage improvements.

Historically, application of responder analyses required choosing a specific cut-off point on the NRS, or alternatively a percentage threshold, deemed to be clinically meaningful. More recently, an alternative approach to responder analyses, known as the Cumulative Proportion of Responders Analysis, or CPR Analysis, has been proposed as an improvement to previous approaches. This analysis was first published by John Farrar, et al. in the November 2001 issue of Pain and was proposed to overcome concerns with previous approaches which had required a pre-determined choice of the level of response which would be considered clinically meaningful. The CPR Analysis is one of the key efficacy parameters discussed in the FDA-approved package insert of the analgesic medications pregabalin and duloxetine and analyzes the full range of responses achieved across the entire patient population within a trial. We believe the CPR Analysis offers several advantages over using a single cut-off response rate, including:

The specific method used is to analyze the cumulative proportion of patients who reach each level of response rate, calculated and displayed up to the response rate cut-off point. The CPR Analysis graph displays patient data in order of the calculated level of response for both active treatment and placebo. For each level of response, it shows the proportion of the total number of patients that equaled or exceeded that level of response.

Results of our Phase 2 trials have been analyzed using three methodologies—mean change in NRS scores, analysis of patients with a response of 30% or more, and the CPR Analysis. Following our end of Phase 2 discussions with FDA, we chose to employ the CPR Analysis as the primary efficacy analysis in the first two of our Phase 3 trials.

Phase 2a Data

Results from a Phase 2a trial in 177 patients were published by Jeremy Johnson, et al. in the February 2010 issue of Journal of Pain and Symptom Management, the official journal of the American Academy of Hospice and Palliative Medicine, the National Hospice and Palliative Care Organization and the U.S. Cancer Pain Relief Committee. This three-arm trial compared the efficacy and safety of Sativex to a THC-only extract spray formulation and placebo as add-on treatments to strong opioid therapy administered over a two-week period. A co-primary efficacy endpoint of the trial was the change in mean pain score (on the 0 to 10 NRS) from baseline to end of treatment. The results showed a statistically significant improvement of 0.67 points in the Sativex group compared with the placebo group (p=0.014). Changes in pain scores using responder analyses not specified in the trial protocol showed the following:

Sativex in Cancer Pain—Phase 2a CPR Analysis

During the trial, patients were permitted to administer between 0-48 sprays per day. The median dose in the Sativex treatment group was 8.15 sprays per day.

While Sativex showed a statistically significant improvement over placebo in the trial, it is noteworthy that the THC-only extract spray showed a smaller improvement of 0.32 points over placebo, which was not statistically significant, providing evidence that the combination of THC and CBD, the main ingredients in Sativex, is an improved cannabinoid formulation for this patient population as compared to THC alone.

Phase 2b Data

Results from a Phase 2b dose ranging trial were published by Russell Portenoy, et al. in the May 2012 issue of The Journal of Pain, the official journal of the American Pain Society. This randomized, double-blind, placebo-controlled, parallel-group trial recruited a total of 360 patients in 14 countries in North America, Europe, Latin America and South Africa, and evaluated three dose range groups of Sativex—a low-dose (one to four sprays per day), mid-dose (six to ten sprays per day), and high-dose (11 to 16 sprays per day)—and placebo, over a five-week treatment period. The primary objectives of this trial were to determine the effective dose range and to demonstrate a non-effective dose of Sativex in patients with advanced cancer who experience inadequate pain relief during optimized chronic opioid therapy.

The trial provided data to support entry into a Phase 3 program, showing statistically significant differences in favor of Sativex over placebo in two key analyses of pain scores. The trial also provided information sufficient to select a dose range of Sativex in the patient population and confirmed key features of the trial design of our Phase 3 trials.

The primary efficacy measure of the trial was a patient assessment of pain using a 0 to 10 NRS. This endpoint was analyzed using a primary and two secondary statistical methodologies, including 30% responder analysis (where a response was defined as a 30% or greater reduction in the NRS score during the last three days of treatment versus the three-day baseline period at the beginning of the trial), CPR Analysis and change from baseline analysis in NRS average pain. The 30% responder analysis was specified as the primary analysis in the protocol. Results of these analyses for the low and mid-dose groups are provided below:

Sativex in Cancer Pain—Phase 2b
CPR Analysis for Low-Dose Group

Sativex in Cancer Pain—Phase 2b
CPR Analysis for Mid-Dose Group

Sativex in Cancer Pain—Phase 2b
CPR Analysis for Combined Low and Mid-Dose Groups

The Sativex high-dose level did not show superior efficacy to placebo. While tolerability does not completely account for this lack of efficacy, it is noteworthy that discontinuation due to adverse events was 28% in the high- dose group and was substantially higher than the rates of discontinuation in the placebo group (18% discontinuation), the low-dose group (14% discontinuation) and in the mid-dose group (17% discontinuation). In addition, 34% of patients in the high-dose group took their medication below their target dose at the end of the treatment period.

The trial included several secondary endpoints, including sleep disruption, which is identified in the Phase 3 trials as the key secondary endpoint. In the Phase 2b trial, the Sativex low-dose group showed a statistically significant difference compared to placebo in reducing sleep disruption (treatment difference 0.88 points, p=0.003). While the mid-dose group showed no improvement over placebo, the low-and mid-dose Sativex groups, when combined, did show a statistically significant reduction in sleep disruption compared to placebo (treatment difference 0.61 points, p=0.016).

Phase 2 Safety Profile

The safety profile of Sativex in the two Phase 2 trials was consistent. In the Phase 2a trial, the most common treatment-related adverse events (occurring at a rate greater than or equal to 10% for the Sativex population) reported for the Sativex treatment group were somnolence (13% vs. 10% for placebo), dizziness (12% vs. 5% for placebo) and nausea (10% vs. 7% for placebo). In the Phase 2b trial, the most common treatment-related adverse events (occurring at a rate greater than 10% for the combined Sativex population) reported for the Sativex treatment groups were dizziness (17% vs. 10% for placebo), nausea (11% vs. 8% for placebo) and somnolence (12% vs. 4% for placebo). An analysis of treatment-related severe adverse events showed that such events occurred at a similarly low rate in the mid-dose and low- dose Sativex groups as in the placebo group (3% and 3% vs. 1%). More patients in the high-dose Sativex group experienced treatment-related severe adverse events, with 17% of subjects doing so. The most severe treatment related events observed in the Sativex arm (occurring in more than two patients for the combined Sativex population) were disturbance in attention, dizziness, sedation, anorexia, vomiting, nausea and vertigo.

Phase 2 Key Findings

The Phase 2 trials provided us data sufficient to support entry into Phase 3 trials of Sativex in cancer pain, to determine the optimum dose range to be used in Phase 3 trials, and determine the choice of primary efficacy analysis to be used in the first two Phase 3 trials.

Dose Range

We believe that the Phase 2b trial achieved one of its key objectives in determining the effective dose range for Sativex and demonstrating a non-effective dose range. Efficacy was observed in both the low (one to four sprays per day) and mid-dose (six to ten sprays per day) groups and these groups were also associated with a lower or similar rate of adverse events to placebo, and a low rate of withdrawal from the trial due to adverse events. In contrast, the data suggests that a high-dose range of Sativex reaches a maximum tolerated dose without improved efficacy over placebo. These results are consistent with those seen in the Phase 2a trial where the median daily dose taken by the Sativex treatment group was 8.15 sprays per day.

We have therefore concluded that an appropriate approach to dosing in the Phase 3 trials is to employ a single dose range of three to ten sprays per day.

Following our End of Phase 2 discussions with the FDA, we decided to employ the CPR Analysis as the primary efficacy analysis in the first two of our Phase 3 trials. In the third Phase 3 trial, which employs a different “enriched’ trial design, the primary efficacy analysis is the mean change from baseline in NRS scores. These analyses have provided statistically significant results in favor of Sativex in both Phase 2 trials.

Phase 3 Program. As a result of the positive data seen in our Phase 2 program, we and Otsuka held discussions with the FDA regarding the proposed Phase 3 program for the continued development of Sativex for cancer pain. We are now conducting three multi-national, randomized, placebo- controlled, multi-center Phase 3 trials, two of which will employ an identical trial design and endpoints and are expected to support the NDA submission. These two Phase 3 trials include the following key features:

The ongoing Phase 3 program is being performed with and funded by Otsuka.

Patients are being recruited into these two trials at hospital sites in the United States, Europe and Mexico. Professor Marie Fallon, Professor of Palliative Care, University of Edinburgh, is the principal investigator of the first trial, and Dr. Russell K. Portenoy, Chairman of the Department of Pain Medicine and Palliative Care, Beth Israel Medical Center in New York City, is the principal investigator of the second trial. We anticipate that top-line results from at least one of these Phase 3 trials will be available towards the end of 2014, with top-line results from the second Phase 3 trial following shortly thereafter. This program is intended to support the submission of an NDA with the FDA and in other markets around the world.

We are also in the process of conducting a third Phase 3 trial, which we expect to enroll approximately 540 patients, that is designed to provide additional information on the effects of Sativex in treating opioid resistant cancer pain. The results of this third trial are not intended to be included in the initial regulatory filings if the results of the first two pivotal Phase 3 trials provide a sufficient basis to demonstrate the safety and efficacy of Sativex in the target indication. The third Phase 3 trial differs in design from the first two trials, employing a two-part “enriched trial design” akin to that which was successfully employed in the MS spasticity trials program. The trial involves exposing all enrolled patients to Sativex in a two-week single-blind phase, or Phase A, following which responders will be randomized either to stay on Sativex or switch to placebo in a double- blind phase for a five-week treatment period, or Phase B. The primary efficacy analysis will be the mean change from baseline in Phase B as measured using a 0 to 10 NRS. The trial is designed to enroll 216 patients in Phase B. The protocol provides for a pre-planned interim analysis when half the number of planned patients complete the study.

Long-term Safety and Efficacy. Results from a long-term, open-label, follow-up trial in 43 cancer pain patients who had previously participated in the Phase 2a trial were published by Jeremy Johnson, et al. in the November 2012 issue of Journal of Pain and Symptom Management. These results showed that the long-term use of Sativex was generally well tolerated, with no evidence of a loss of effect for the relief of pain with long-term use. Furthermore, patients who kept using Sativex did not seek to increase their dose of Sativex or other pain-relieving medication over time.

Abuse Liability. A study published in the June 2011 issue of Human Psychopharmacology by Kerri Schoedel, et al. compared the abuse liability of Sativex at three dose levels (four sprays taken consecutively, eight sprays taken consecutively and 16 sprays taken consecutively) with placebo and two doses of dronabinol (synthetic THC) capsules (20mg and 40mg) in a randomized, double-blind, crossover study in 23 healthy subjects with a history of non- dependent but regular recreational cannabis use. The subjective effects of 20 and 40mg dronabinol were consistently and significantly greater than placebo, demonstrating that it has measurable abuse potential. The effects of Sativex were consistently lower than dronabinol. Four sprays of Sativex taken consecutively (containing 10.8mg of THC) was not significantly different from placebo with regard to changes in primary variables, suggesting low abuse potential at this dosage. Eight sprays of Sativex taken consecutively had a mixed profile of effects suggesting modest abuse potential, while 16 sprays of Sativex taken consecutively was significantly different from placebo in most outcome measures suggesting significant abuse potential. In contrast to this abuse liability study in which Sativex doses were administered together, patients in the Phase 3 trials administer between three and ten sprays over a 24-hour period.

If Sativex receives FDA approval, it will be a controlled substance, as is the case with opioids, and the U.S. Drug Enforcement Administration, or DEA, will place it in a schedule under the Controlled Substances Act of 1970, or CSA, in order for it to be able to be prescribed to patients in the United States. The schedule into which a product is placed reflects the DEA’s determination of its potential for abuse or dependence. We expect Sativex to be listed by the DEA as a Schedule II or III controlled substance. As part of the NDA, we will submit information on abuse liability which will be reviewed by the Controlled Substances Staff at the FDA in consultation with the National Institute on Drug Abuse. Ultimately, the Assistant Secretary for Health will transmit the findings and scheduling recommendation to the DEA.

In February 2013, the Advisory Council on the Misuse of Drugs, which is the advisory body to the U.K. government with respect to controlled substances, confirmed its recommendation to the U.K. government that it deems Sativex to have low abuse potential and low risk of diversion, and that Sativex thereafter should be scheduled as a Schedule IV substance. Legislation placing Sativex into Schedule IV came into effect in April 2013.

Potential Expansion of Cancer Pain Market. Following successful completion of the development of Sativex in the treatment of pain in patients with advanced cancer, we may consider, together with Otsuka, expanding the target market of Sativex by conducting Phase 3 trials in the treatment of pain in patients with earlier stage cancer. A future submission of a supplemental NDA in this expanded indication would represent a significant additional market opportunity for Sativex in the United States and the rest of the world. Under the terms of our Otsuka collaboration, such additional development costs would be fully funded by Otsuka.

Sativex for MS Spasticity

The approved label for Sativex is as a “treatment for symptom improvement in patients with moderate to severe MS spasticity who have not responded adequately to other anti-spasticity medication and who demonstrate clinically significant improvement in spasticity related symptoms during an initial trial of therapy.”

We recently initiated the commercialization of Sativex for MS spasticity in 15 countries outside the United States. We have also received regulatory approval in an additional 12 countries, and we anticipate commercial launches in the several of these countries in the next 12 months. Two additional countries have recommended approval for Sativex and regulatory filings are ongoing in 9 other countries, principally in the Middle East where we expect approvals over the next 12 months.

We believe that MS spasticity represents a significant market opportunity for the United States and we intend to commence a required Phase 3 clinical trial of Sativex for MS spasticity in 2015 intended to lead to submission of an NDA to the FDA for this indication. Although Sativex has been approved for the treatment of MS spasticity in 27 countries outside the United States, we believe that from a commercial and regulatory perspective, Sativex for cancer pain represents the optimal entry point into the United States market. This is because we believe the size of the commercial opportunity for the cancer pain indication in the United States is larger than the MS spasticity opportunity. Moreover, because patients with MS spasticity would typically use Sativex for an extended treatment duration, we expect that additional pre-clinical carcinogenicity data will be required as part of the submission of an NDA in this indication. While the carcinogenicity studies are now underway, the timing of the availability of such data is expected to follow the expected timing of the submission of an NDA in the cancer pain indication potentially allowing us to obtain U.S. approvals for this indication before we would be able to obtain U.S. approvals in MS spasticity. The initial development of Sativex focused on the European MS spasticity market, hence pre-clinical carcinogenicity data was originally generated prior to our first interactions with the FDA.

We held our first meeting with the FDA in December 2012 to discuss the MS spasticity indication. This pre-IND meeting led to the submission and acceptance of an IND in mid-2013 with an investigational plan that includes a Phase 3 trial protocol. The FDA provided initial feedback on design features necessary for the study to serve as a pivotal study in our development program. Consistent with the FDA’s recommendations, we have requested a Special Protocol Assessment, or SPA, for the proposed Phase 3 trial. Under the SPA process, a sponsor may reach an agreement with the FDA as to the required design and size of clinical trials intended to form the primary basis of an efficacy claim. Subject to agreement with the FDA on the protocol, we aim to commence this clinical trial in 2015.

MS Spasticity Opportunity. MS is the most common disabling neurological condition affecting young adults. According to the World Health Organization, MS affects more than 1.3 million people worldwide, of which over 400,000 are in the United States and over 600,000 are in Europe. MS affects twice as many women as men and typically develops between the ages of 20 and 40 years. The hallmark pathology of MS is patchy demyelination, leading to nerve damage, which in most cases causes symptoms that adversely affect quality of life. Spasticity is one of the most common, chronic and disabling of these symptoms, affecting up to 80% of MS patients over their lifetimes. Spasticity refers to an abnormal, involuntary tightness of muscles, which increases when the muscles are rapidly stretched, so that the associated joint appears to resist movement. Some of the features of spasticity include muscle stiffness, difficulty straightening joints, reduced mobility, limb weakness, shaking, intermittent spasms and pain. As a result of the increased muscle tone due to spasticity, “simple” everyday movements become difficult or impossible altogether. In addition, painful muscle spasms can lead to difficulty with sleeping, sitting in a chair or lying in bed. Occasionally, spasms may be triggered by fairly minor irritations such as tight clothing, a full bladder or bowel, urinary tract infection or skin irritation, such as from a pressure sore. Moderate to severe spasticity can lead to significant impairment.

There is no cure for spasticity, and it is widely recognized that currently available oral treatments afford only partial relief and have unpleasant side effects. Sativex offers the prospect of treating patients who have failed existing oral therapies and who might otherwise require invasive and costly alternative treatment options such as intrathecal baclofen or surgery.

Pharmacology. Sativex has been investigated for anti-spasticity effects in chronic relapsing experimental allergic encephalomyelitis, or CREAE, the accepted animal model of MS spasticity. In this model, Sativex rapidly reduces spasticity in a dose-dependent way, achieving the same overall reduction in spasticity as baclofen, the standard first line treatment for MS spasticity, without causing as much disability in the animals.

Each of the two principal cannabinoids within Sativex, THC and CBD, possess pharmacological properties that provide a rationale to support the efficacy of Sativex in MS spasticity. In animal models of MS, the CB1 receptor plays a key role in the modulation of spasticity and spasms. While CBD has little activity at cannabinoid receptors, it does have neuroprotective properties, which are most likely mediated by its ability to modulate intra-cellular calcium. The key pharmacology of CBD in MS likely relates to its role as an agonist at TRP channels, critical for maintaining calcium homeostasis and as an inhibitor of adenosine uptake, providing a non-cannabinoid receptor mechanism for its anti-inflammatory properties. In addition, CBD has an anxiolytic effect, is anti-psychotic and is believed to mitigate some of the undesirable side effects of THC.

MS Spasticity Clinical Program. In clinical trials, Sativex has been shown to provide effective relief of spasticity symptoms, including reduced spasms, improved sleep and improved function, in patients for whom existing anti-spasticity treatments have failed. During the course of the development program for Sativex in MS spasticity, we have conducted Phase 2 and Phase 3 double-blind, randomized, placebo-controlled trials involving 1,294 patients. These trials have all been published in peer-reviewed journals. In each trial, patients were permitted to remain on stable doses of their background oral anti-spasticity medication and spasticity was measured using a 0 to 10 NRS. This scale has been validated for use in spasticity clinical trials.

The largest and most recent of the Phase 3 trials, published by A. Novotna, et al. in the April 2011 issue of European Journal of Neurology, was a two-part trial and employed an enriched trial design. During the first four-week period, all patients received Sativex single-blind. This was followed by a 12-week, double-blind period in which patients who had achieved a pre-determined level of response at the end of the prior four-week period were randomized to Sativex or placebo in a conventional parallel group design. We designed this trial to demonstrate the size of clinical benefit achieved from Sativex in patients who had previously shown a capacity to respond to treatment.

The primary efficacy endpoint of the trial was the difference between Sativex and placebo in the mean change in spasticity as measured by the patient using a 0 to 10 NRS in the 12-week period from randomization to the end of treatment. There were a number of functional secondary measures that are important in contributing to an assessment of the clinical relevance of a change in the primary outcome measure. In particular, the objective view of the physician was considered important by regulatory authorities and was therefore included as a secondary endpoint.

After the four-week, single-blind period in 572 patients, Sativex reduced the mean score for spasticity on the NRS scale by 3.01 points from a baseline of 6.91 points, or 44%. In addition, 48% of patients’ NRS score improved by 20% or more during this initial period, the pre-defined level of response required to be included in the randomized phase.

As a result, 241 patients proceeded into the 12-week, randomized, placebo-controlled trial phase. The primary endpoint, the mean difference between treatment groups at the end of the randomized treatment period was statistically significant in favor of Sativex (p=0.0002). Furthermore, 74% of Sativex responders experienced a reduction of 30% or more in their spasticity score from their original pre-treatment baseline, which represents a meaningful clinical improvement in this patient population.

The secondary efficacy measures were in line with the primary outcome of the trial. In particular, the functional measures added to the existing evidence that patients achieve a benefit that is apparent to both their caregiver and their physician. The following secondary efficacy measures showed statistically significant improvements of Sativex over placebo: spasm score (p=0.0046), sleep disturbance (p<0.0001), Subject Global Impression of Change (p=0.023), Physician Global Impression of Change (p=0.005), Carer Global Impression of Function (p=0.005) and Barthel Activities of Daily Living (p=0.007). Of the other secondary efficacy measures, the timed ten-meter walk and Modified Ashworth Scale approached statistical significance (p=0.069 and p=0.094, respectively).

The safety profile of Sativex across placebo-controlled trials conducted in MS patients shows that the drug is generally well tolerated, with the most commonly occurring individual adverse events (occurring at a rate greater than 10%) being dizziness (25% vs. 8% for placebo), fatigue (13% vs. 8% for placebo) and nausea (10% vs. 6% for placebo). Adverse events were typically mild or moderate in severity and the pattern of common adverse events is similar in both short-term and long-term exposure to Sativex. The most common adverse events tend not to be recurrent, occurring in the first four weeks of treatment and much less commonly thereafter.

We have opened an IND with the FDA and plan to conduct a US-targeted pivotal Phase 3 clinical trial to evaluate Sativex for the treatment of MS spasticity. We have submitted to the FDA a request for Special Protocol Assessment, or SPA, of the Phase 3 study protocol, for which we have not yet reached agreement. We expect to respond to the FDA’s feedback on the protocol through an additional SPA submission with a view to commencing the trial in 2015. If the except to respond trial is conducted and is successful, we intend to submit the results, along with the foreign clinical data collected in our clinical development program for MS spasticity to date, in an NDA for MS spasticity. We expect the trial design will be consistent in some respects with the most recent Phase 3 trial conducted in Europe and published by A. Novotna, et al., in 2011. The U.S. Phase 3 trial is expected to employ an enriched study design, but is expected to employ two co-primary endpoints: spasticity as measured on the Modified Ashworth Scale, and the Physician Global Impression of Change to provide evidence that the observed treatment difference is clinically meaningful. We believe FDA will also require that we establish a dose-response using a multiple fixed dose design.

Long-Term Efficacy. We have demonstrated the long-term efficacy of Sativex in a placebo-controlled trial published by William Notcutt, et al. in the February 2011 issue of Multiple Sclerosis. This randomized withdrawal trial recruited 36 patients with MS that had been receiving Sativex on prescription for a mean duration of 3.6 years. Patients were randomized to continue with Sativex or switched to placebo in a double-blind, four-week treatment period. The primary efficacy endpoint of the trial was the time to treatment failure, with treatment failure being defined as cessation of the randomized treatment before the end of the trial, a worsening of spasticity (defined as an increase in the mean spasticity NRS over the last seven days of the treatment period of at least 20% and at least one unit from the treatment baseline), or a clinically relevant increase in or addition to anti-spasticity drugs or disease modifying medications after randomization.

Kaplan-Meier Plot: Time to Treatment Failure

The primary efficacy endpoint was statistically significant in favor of Sativex (p=0.013). Of the key secondary measures, both the Subject Global Impression of Change (p=0.017) and the Carer Global Impression of Functional Ability (p=0.0011) were also statistically significant.

In addition to this controlled trial, there is a significant body of evidence from long-term open-label extension trials to support the evidence of maintenance of efficacy in long-term use of Sativex, many of which have been published in peer-reviewed journals.

The withdrawal rate from open-label, long-term extension trials is low, and withdrawals due to a lack of efficacy are uncommon. For those patients who remained in open-label, long-term extension trials for a year, the symptom score for spasticity remained low, providing supportive evidence that continued use of Sativex is associated with long-term maintenance of efficacy.

The pattern of adverse events seen in long-term use of Sativex is very similar to that seen in the short-term placebo-controlled trials. Since Sativex first became commercially available, there has been an estimated additional 20,000 patient-years of exposure to Sativex outside of clinical trials and no new significant safety issues have been identified.

Post-Approval Evidence of Sativex Clinical Benefits. Since launch, two studies have been completed which support the commercialization efforts of our partners. An independent survey of Sativex prescription use in the United Kingdom has been the subject of a paper published by William Notcutt in the July 2012 issue of the peer-reviewed publication Primary Health Care Research and Development. In this survey of 124 Sativex patients with a mean duration of treatment of 30 months, the majority of respondents and their caregivers reported improvements across a range of daily functional activities, alongside a reduction in the use of concomitant anti-spasticity medication and other health care resources.

A formal prospective trial of prescription use in Germany was presented in October 2012 at the 28th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS) in Lyon, France. This trial involved 300 patients and showed that the clinical response rate on Sativex is with consistent with, and somewhat better than, that seen in the Phase 3 trials.

Post-Approval Evidence of Sativex Safety Profile. In August 2013, we announced the results from a 12-month multicenter, double-blind, randomized parallel group, placebo-controlled study in 121 patients with MS spasticity. The study was required as a post-approval commitment by the UK regulatory authority, the Medicines and Healthcare products Regulatory Agency, or MHRA, with the primary objective of evaluating whether Sativex may have long-term adverse effects on cognitive function or mood. The primary endpoint was the change in cognitive function as assessed by the total Paced Auditory Serial Addition Test, or PASAT, score from baseline to end of treatment. Mood was assessed by the Beck Depression Inventory-II. There was a slight improvement in the PASAT score from the beginning to the end of the study in both the Sativex and placebo groups, thus confirming that the effects of Sativex on long-term cognitive impairment were the same as the effects of placebo. Similarly, the change in mood over the 12-month period was more or less identical in the Sativex and the placebo group, confirming no untoward effect on mood. Of the efficacy secondary endpoints, each of the global impression of change scores as assessed by the patient, physician and carer was highly significantly in favor of Sativex (p<0.0001, p=0.001 and p=0.004 respectively). Detailed data from this study was presented at the 29th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS) in October 2013.

Sativex in Neuropathic Pain and Other Indications

Sativex is approved to treat MS neuropathic pain in Israel and Canada (under a Notice of Compliance with conditions, or NOC/c, policy) and also has an NOC/c approval in Canada for cancer pain. The NOC/c policy applies to drugs that show promising Phase 2 evidence of efficacy in a patient population with a high, unmet medical need for which there is currently no approved treatment. NOC/c approvals are granted subject to the completion of subsequent Phase 3 confirmatory trials. Although we are not actively pursuing the following indications, we have generated positive Phase 2 data and believe that there may be potential for the use of Sativex to be expanded into the following areas:

Our Strategic Alliances and Collaborations

We have entered into six separate collaboration agreements for Sativex with major pharmaceutical companies. Each agreement provides the respective partner with exclusive rights in a defined geographic territory to commercialize Sativex in all indications, while we retain the exclusive right to manufacture and supply Sativex to such partner on commercial supply terms for the duration of the commercial life of the product. These agreements typically carry a 15- year initial term, with automatic renewal periods. However, our agreement with Novartis continues on a country-by-country basis for the commercial life of the products. Our partners have the right, under certain circumstances, to terminate their agreements with us, and three of our partners, Almirall, Otsuka and Novartis, have the right to terminate their agreements with us without cause.

Each of our collaboration agreements for Sativex incorporates different supply and royalty terms. With the exception of the Novartis agreement, described below, each of our supply agreements requires us to supply fully labeled Sativex vials at a price that is expressed as a percentage of a partner’s in-market net sales revenue. In some cases, part of this revenue is structured as a combination of product supply price plus a royalty, although both types of revenue are accounted for similarly. Sativex supply revenue is invoiced when product inventory is delivered to or collected by the marketing partner. Royalties will be received in arrears based upon quarterly in- market net sales declarations from partners.

The price charged for Sativex in the market is controlled by our marketing partners. However, our contracts do not anticipate us being obligated to supply Sativex at a loss. In such event, if the in-market supply price would cause us to supply Sativex at a loss we would have the right to renegotiate supply terms to prevent this. For example, following the price reduction in Germany in March 2013, the resultant supply price would have led to us providing Sativex to our partner, Almirall, at a loss. We are now completing discussions on an amendment to the supply terms with Almirall which provide for us to generate a margin on supply of product for countries in which a price reduction would otherwise have led to us supplying product at a loss.

Please see Note 3 to our audited consolidated financial statements included as part of this Annual Report for a breakdown of our revenue by geographic location.

Sativex in the United States

In 2007, we entered into a Sativex U.S. license agreement with Otsuka, the Japanese pharmaceutical company and developer of Abilify ^® (aripiprazole), one of the world’s highest selling antipsychotic medications.

Under the terms of the Sativex U.S. license agreement, we granted Otsuka an exclusive license to develop and market Sativex in the United States. We are responsible for the manufacture and supply of Sativex to Otsuka. Both companies jointly oversee all U.S. clinical development and regulatory activities for the first cancer pain indication. We will be the holder of the IND until the filing of an NDA, which will be in Otsuka’s name. Otsuka will assume development and regulatory responsibility for the second and any subsequent indications. Otsuka will bear the costs of all U.S. development activities for Sativex in the treatment of cancer pain, additional indications and future formulations.

The financial terms of this agreement include total milestone payments and license fees to us of up to $272.0 million, of which approximately $18.0 million relates to license fees, $54.0 million are linked to regulatory milestones, such as initiation of Phase 3 trials, submission of an NDA to the FDA and other regulatory approvals, and $200.0 million are linked to various commercial milestones, as well as revenue from the supply of products and royalties on product sales. Our combined supply price and royalty to Otsuka equates to a percentage in the mid-twenties of Otsuka’s in-market net sales revenue. Otsuka paid us the license fee of $18.0 million upfront and has since paid an additional milestone payment of $4.0 million upon commencing the first Phase 3 clinical trial in cancer pain.

Sativex in Latin America, Asia, the Middle East and Africa

Novartis Pharma AG. In 2011, we entered into an exclusive agreement with Novartis to commercialize Sativex in Australia and New Zealand, Asia (excluding Japan, China and Hong Kong), the Middle East (excluding Israel) and Africa.

Under the terms of this agreement, Novartis has exclusive commercialization rights to Sativex in the above-mentioned territories and will act as the marketing authorization holder for Sativex. We will be responsible for the manufacture and supply of Sativex to Novartis.

The financial terms of the agreement included an upfront fee of $5.0 million from Novartis. In addition, we are eligible to receive additional payments of up to $28.8 million, of which $12.0 million is linked to achievement of regulatory approvals and $16.8 million is linked to commercial performance targets. We will also receive revenue from the supply of products and royalties on net sales of Sativex. Our supply terms to Novartis are structured differently from those of our other partners. We supply batches of unlabeled Sativex vials and Novartis completes the labeling and packaging process. Our supply price is structured as cost of goods plus a margin plus a further royalty that is expected to grow with volume. Over the long-term, we expect our revenue to average a percentage in the teens of Novartis’ Sativex in-market net sales revenue.

Australia represents the largest potential market in the territory licensed to Novartis. To date, the Australian reimbursement authorities have not agreed to grant public reimbursement for Sativex in the MS spasticity indication and therefore the product is not yet launched in that country. We expect the position in Australia to impact Novartis’ commercialization strategy for its licensed territory and this may lead to Novartis waiting for the cancer pain indication to be approved prior to commencing commercialization of the product.

Ipsen Biopharm Ltd. In 2014, we entered into an exclusive agreement with Ipsen. Under the terms of this agreement, Ipsen will promote and distribute Sativex in Latin America (excluding Mexico and the Islands of the Caribbean).

Neopharm Group. Under an agreement signed in 2010, Neopharm, an Israeli pharmaceutical company, holds exclusive commercial rights to Sativex in Israel. The financial terms of this agreement did not include a license fee and we are not entitled to any milestone payments. We will receive revenue from the supply of products to Neopharm, expected to equate to a percentage equal to forty to fifty of Neopharm’s in-market net sales revenue. To date, we have received less than $300,000 under this collaboration agreement.

Under the terms of this agreement, Neopharm acts as market authorization holder in the territory. We are responsible for commercial product supply to Neopharm for which we generate sales revenue.

Sativex in the European Union

Almirall S.A. In 2005, we entered into an exclusive agreement with Almirall, an international pharmaceutical company with headquarters in Spain and 2013 total revenue of €825.5 million, to commercialize Sativex in the European Union (excluding the United Kingdom) and E.U. accession countries, as well as Switzerland, Norway and Turkey. In 2012, this agreement was amended to add Mexico to the licensed territory. In countries where Almirall has no direct presence at the time of product launch, we will jointly agree on the appointment of distribution partners. In such countries, we may elect to distribute the product ourselves.

Under the agreement, we are the marketing authorization holder for Sativex in all countries in the territory except where local regulations require a locally registered entity to assume this responsibility. In addition, we are responsible for commercial product supply to Almirall. The financial terms of the agreement included an upfront fee of £12.0 million. In addition, milestone payments are payable to us upon the successful completion of certain development activities, as well as on regulatory approvals and the achievement of specified sales targets. Since its initial execution in 2005, the agreement has been the subject of various amendments, two of which included the provision of new milestone payments. Since 2005, in total, we have received £20.8 million of milestone payments from Almirall. We have the potential to receive a further £19.5 million in future milestone payments in the event that the relevant milestones are achieved. Of such £19.5 million in potential future milestone payments, £6.5 million are linked to regulatory and clinical milestones and £13.0 million are linked to commercial milestones. We also receive revenue from the supply of Sativex, currently equating to a percentage in the low to mid-twenties of Almirall’s in-market net sales revenue, a percentage which, following an amendment currently under discussion, is expected to be subject to a floor price equal to cost of goods plus a margin. This percentage is expected to increase to the mid-thirties if Sativex is approved for cancer pain in Europe.

Bayer HealthCare AG. In 2003, we entered into an agreement with Bayer whereby we granted Bayer an exclusive license to market Sativex in the United Kingdom. This agreement was amended later in 2003 to include Canada.

Under the agreement, we are the marketing authorization holder for Sativex in the United Kingdom and Canada. In addition, we are responsible for commercial product supply to Bayer.

The financial terms of the agreement included an upfront fee of £5.0 million. In addition, milestone payments are payable on the successful completion of certain development activities, as well as on regulatory approvals and the achievement of specified sales targets. Since its initial execution in 2003, the agreement has been the subject of various amendments, one of which included the provision of new milestone payments. In total, we have received £14.8 million in milestone payments from Bayer. We have the potential to receive a further £9.0 million in milestone payments in the event that the relevant milestones are achieved, all of which are related to future regulatory approvals. We also receive revenue from supply of Sativex, equating to a percentage in the mid-thirties to forty of Bayer’s in-market net sales revenue.

Research Collaboration with Otsuka

Under a six-year research collaboration agreement with Otsuka which ended in June 2013, we jointly conducted pre-clinical research on a range of our cannabinoids, both alone and in combination, as potential new drug candidates for the treatment of CNS disorders and oncology. At the end of the agreement, global rights to all product candidates were automatically exclusively licensed back to us from Otsuka.

This collaboration yielded promising data and new intellectual property with particular focus on epilepsy, schizophrenia and various oncology indications, including glioma. These efforts were focused on a few cannabinoid drug candidates, which include CBD, THCV, CBG, CBDV, alone and/or in combination. With global rights now licensed back to us, we are now progressing the development of a number of these product candidates. Otsuka is entitled to a small royalty on sales of product candidates protected by patents filed during the term of the collaboration.

Pipeline Research and Development

There are over 70 cannabinoid compounds, and our research explores their potential therapeutic applications across a broad range of disease areas, including in the treatment of epilepsy, type-2 diabetes, ulcerative colitis, schizophrenia, cancer and neurodegenerative disease.

Pipeline Programs

Our pipeline of orphan drug programs include the following:

Our additional lead pipeline programs comprise distinct product candidates with the following primary cannabinoid components:

In addition to these programs, we are conducting pre-clinical research into the potential application of our cannabinoids in several examples of neuroprotection, nausea and anorexia/cachexia.

Our early clinical development activities are conducted outside of the United States and we generally expect to submit INDs in the United States for our product candidates at a later stage in their development. For orphan product candidates, we generally expect to submit INDs in the United States at an earlier stage of clinical development.

Orphan Pediatric Epilepsy Program

Market Overview

Epilepsy is one of the most common neurological disorders in children. According to Russ in the February 2012 edition of Pediatrics, there is a point prevalence of 6.3 per 1,000 children currently diagnosed with epilepsy. Based on these findings, we estimate that 466,000 childhood patients in the United States and 765,000 patients in Europe are currently diagnosed with epilepsy.

Specialists estimate that up to 20% of these cases show pharmacoresistance to current treatment (i.e., seizures that persist despite accurate diagnosis and carefully monitored treatment with multiple antiepileptic drugs) and are deemed “medically intractable.” Furthermore it is recognized that some of those that do find relief often suffer side effects severe enough with their current medication that an alternative or adjunct is often sought.

In total, therefore, we believe the size of the intractable pediatric epilepsy population is 93,200 patients in the United States and 153,000 in Europe.

Epidiolex Development Strategy in Pediatric Epilepsy

Many cases of epilepsy are able to be classified and have clearly defined natural histories providing important information on the likelihood of seizure control and chance of remission. Some of the rarer electroclinical syndromes have very poor responses to treatment and negligible remission rates such as Ohtahara in neonates, Dravet in infants, Lennox-Gastaut in young children and progressive myoclonic epilepsies in adolescence.

Our strategy for the development of Epidiolex in pediatric epilepsy is to initially concentrate on two orphan indication syndromes—Dravet Syndrome and Lennox-Gastaut Syndrome. We expect to further expand the market opportunity by either targeting additional orphan seizure disorders and/or by seeking approval for a wider indication of pediatric epilepsy refractory to current treatments.

The active ingredient in Epidiolex, CBD, is one of the two principal cannabinoids in Sativex. Sativex has over 30,000 patient years of exposure in real world use, during which a favorable safety profile and positive benefit-risk balance has continued to be established. We believe that this data is supportive of the safety profile for Epidiolex.

We are currently manufacturing Epidiolex in-house using many of the same processes and facilities developed for Sativex. We expect to satisfy near-term requirements for Epidiolex from these current facilities but we are exploring further scale-up options for various parts of the production process both in-house and with external third parties.

Dravet Syndrome

Dravet syndrome is a severe infantile-onset, genetic, drug-resistant epilepsy syndrome with a distinctive but complex electroclinical presentation. Onset of Dravet syndrome occurs during the first year of life with clonic and tonic-clonic seizures in previously healthy and developmentally normal infants. Symptoms peak at about five months of age, and the latest onset beginning by 15 months of use. Other seizures develop between one and four years of age such as prolonged focal dyscognitive seizures and brief absence seizures, and duration of these seizures decreases during this period, but their frequency increases. Prognosis is poor and approximately 14% of children die during a seizure, because of infection, or suddenly due to uncertain causes, often because of the relentless neurological decline. Patients develop intellectual disability and life-long ongoing seizures. Intellectual impairment varies from severe in 50% of patients, to moderate and mild intellectual disability each accounting for 25% of cases. Patients may rarely return to normal intellect.

According to Forsgren L. et al. in the 2004 edition of Epilepsy in Children, the incidence of epilepsy in the first year of life is 1.5 per 1,000 people, or, by our estimate, 6,450 new epilepsies per year. According to Dravet et al. in the 2012 edition of Epileptic Syndromes in Infancy, Childhood and Adolescence, up to 5% of epilepsies diagnosed in the first year of life are Dravet syndrome, equating to 320 new cases per year in the United States with a mortality rate that studies have shown may be as high as 15% in the first 20 years of life, or, by our estimate, 5,440 patients with Dravet in the United States under the age of 20 years. Applying the same assumptions in Europe, we believe there are an estimated 6,710 Dravet patients in the European Union. It is likely that these figures are a low estimate as this syndrome is reportedly underdiagnosed.

A large percentage of cases of Dravet syndrome have a family history for epilepsy or convulsions. Heterozygous de novo mutations of the alpha 1 (α-1) subunit of the SCN1A gene, which encodes a voltage-gated sodium channel, are the major cause of Dravet syndrome and are found in approximately 75% of patients and more than 500 SCN1A mutations have been reported to be associated with this disorder.

There are currently no FDA-approved treatments specifically indicated for Dravet syndrome. The standard of care usually involves a combination of the following anticonvulsants: clobazam, clonazepam, leviteracetam, topirimate, valproic acid, ethosuximide or zonisamide. Stiripentol is approved in Europe for the treatment of Dravet syndrome in conjunction with clobazam and valproate. In the United States, stiripentol was granted an Orphan Drug Designation for the treatment of Dravet syndrome in 2008; however, the drug is not FDA approved.

Potent sodium channel blockers used to treat epilepsy actually increase seizure frequency in patients with Dravet Syndrome. The most common are phenytoin, carbamazepine, lamotrigine and rufinamide.

Management of this disease may also include a ketogenic diet, and physical and communication therapy. In addition to anti-convulsive drugs, many patients with Dravet syndrome are treated with anti-psychotic drugs, stimulants and drugs to treat insomnia.

Lennox-Gastaut Syndrome

Lennox-Gastaut syndrome, or LGS, is a rare disorder characterized by multiple types of seizures with slow spike wave complexes on EEG, such seizures usually beginning before four years of age. The seizure types vary among patients and include: tonic axial, atonic, atypical absence and myoclonic. Tonic axial seizures are the characteristic type of seizure seen in LGS and consist of flexion of the neck and body, extension of the arms and legs and contraction of the facial muscles. Other effects that may be associated include apnea, eye rolling and facial flushing. Although they only last for seconds, they can occur day or night and usually impair consciousness. Atypical absence seizures also occur in a majority of cases and although generally subtle, they are often accompanied by loss of muscle tone, myoclonic jerks and drooling.

According to Trevathan et al. in the December 1997 edition of Epilepsia, the estimated prevalence of Lennox-Gastaut syndrome is between 3 and 4% of childhood epilepsy, or, by our estimate, 14,000 to 18,500 patients in the United States and 23,000 to 31,000 patients in the European Union under the age of eighteen years.

Drug resistance is one of the main features of LGS. Generally, treatment often requires broad spectrum anti-epileptic drugs and/or polypharmacy. Treatment will also depend on the seizure type as some treatments that are effective for one type of seizure may worsen another. The treatments already approved by the FDA for LGS and used as adjunctive therapy with existing medications are: Onfi (clobazam); Banzel (rufinamide); Lamictal (lamotrigine); Topamax (topirimate); and Felbatol (felbamate). Although these medicines, when used with other particular anti-epileptic drugs, show a level of efficacy, many also have severe undesirable side effects. Furthermore, several of these medicines are based on the same mechanism of action of traditional anti-epileptic drugs. As patients with LGS generally need to take several treatments to gain any change to their seizure frequency, we believe there is a need for further pharmacological treatments, particularly those with a different mechanism of action, to give prescribers more options in treating this rare, pharmacoresistant syndrome.

Cannabinoid Rationale for Treating Epilepsy

Several features of the pharmacology of certain cannabinoids suggest that they may be candidates for investigation as anti-epileptic drugs. A series of validated laboratory experiments have shown that certain cannabinoids can modulate neurotransmission, can reduce neuro-inflammation and can affect oxidative stress.

These cannabinoids may simultaneously modulate a number of endogenous systems to attenuate and/or prevent epileptic neuronal hyperexcitability. These include ion channel control, inflammation, modulation of oxidative stress and inhibition of gene expression of epilepsy-associated genes.

Several different ion channels influence epileptogenesis (the process by which a normal brain develops epilepsy) including both ligand-gated and voltage-gated ion channels. It is the former to which a proportion of the actions of plant cannabinoids can be attributed, for example through agonism and antagonism of G-protein coupled receptors, including orphan receptors as well as modulation of transient receptor potential (TRP) channels (differentially activated, repressed and desensitized by different plant cannabinoids). Additionally it is now recognized that there is a role for inflammation in epilepsy. Some cannabinoids possess anti-inflammatory properties including inhibition of pro-inflammatory cytokine release and modulation of glial cell/neuronal interactions. Furthermore they modulate oxidative stress and production of toxic nitric oxide. Research shows that other than THC, plant cannabinoids have little or no affinity for the cannabinoid receptors, and therefore do not share the unwanted psychoactivity that goes along with stimulation of the CB1 receptor in particular.

Finally, certain cannabinoids may possess disease modifying potential through regulation of epilepsy-related genes, as well as up-regulation of endogenous anti-convulsant neuropeptides and/or compensatory systems.

We continue to conduct research into the mechanism of action of the anti-epileptic cannabinoids.

CBD pharmacology in epilepsy

The epilepsy-relevant pharmacology of CBD can be summarized as follows: inhibition of neutrophil and microglial migration, anti-inflammatory effects in conventional animal models; inhibition of adenosine uptake and indirect agonism of the neuroprotective and anti-inflammatory A2a receptor; other neuroprotective effects (TNF inhibition and anti-oxidant activity); antipsychotic activity; agonism at the orphan receptor GPR55; desensitizer of TRP channels; anticonvulsant activity in all laboratory models tested; ion channel modulation; reduction of acetylcholine turnover at neuro-muscular junctions; and perturbation of the negative effects of THC (opposes euphoric, cognitive and psychotropic effects) via one or more of the above mechanisms.

CBD has negligible binding at the CB1 receptor, and so shares neither the pharmacology of CB1 agonists such as THC nor that of CB1 antagonists such as Rimonabant. CBD’s mechanism for treating seizures is not fully understood but is believed to involve a combination of beneficial effects stacking upon one another (polypharmacology).

Preclinical models suggest a broad role for CBD in generalized and absence seizures, and clinical reports of benefit extend into other congenital seizure disorders.

Our CBD Research in Pediatric Epilepsy

We have conducted pre-clinical research of CBD in epilepsy for several years and have reported significant anti-epileptiform and anticonvulsant activity using a variety of in vitro and in vivo models. This research has shown the ability of CBD to treat seizures in acute models of epilepsy with significantly fewer side effects than existing anti-epileptic drugs.

Our cannabinoid research compounds were screened in electrically discharging hippocampal brain slices caused by the omission of Mg ²⁺ ions from, or addition of the K ⁺ channel blocker, 4-aminopyridine (4-AP) to the bathing solution. In these models, 100µM of CBD decreased epileptiform amplitude and duration as well as burst frequency; importantly, this compound exerted no effect upon the propagation of epileptiform activity.

Subsequently, the anti-convulsant actions of 1, 10 and 100 mg/kg CBD were examined in three different in vivo seizure rodent models. In the PTZ-induced acute, generalized seizures model, 100 mg/kg CBD significantly decreased mortality rate and the incidence of tonic-clonic seizures. In the acute pilocarpine model of temporal lobe seizures all doses of CBD significantly reduced the percentage of animals experiencing the most severe seizures. In this model of partial seizures, 10 and 100 mg/kg CBD significantly decreased the percentage of animals dying as a result of seizures and all doses of CBD also decreased the percentage of animals experiencing the most severe tonic-clonic seizures.

Our Clinical Research

During 2013, we have received increasing interest among U.S. pediatric epilepsy specialists and patient organizations in the potential role of CBD in treating intractable childhood epilepsy, in particular Dravet syndrome. This interest led to a medical conference organized by the New York University School of Medicine on October 4, 2013 titled: “Cannabidiols: Potential Use in Epilepsy and Other Neurological Disorders.” Epilepsy specialists at the meeting viewed CBD as attractive for the treatment of these disorders for a variety of reasons, including:

In addition, specialists at this conference concluded the following:

Our commercial development in pediatric epilepsy is focused on Epidiolex, a liquid formulation of pure plant-derived CBD. Epidiolex is now being evaluated in both placebo-controlled clinical trials and compassionate care “expanded access” studies. Both of these programs are authorized by the FDA. Our initial focus is on conducting formal development programs for Epidiolex in the treatment of both Dravet syndrome and LGS. The Company has received from the FDA Orphan Drug Designations for Epidiolex for both Dravet syndrome and LGS, as well as Fast Track Designation for Dravet syndrome. We have also received Orphan Drug Designation from the European Medicines Agency for Epidiolex for Dravet syndrome.

According to Dravet et al. in the 2012 edition of Epileptic Syndromes in Infancy, Childhood and Adolescence, up to 5% of epilepsies diagnosed in the first year of life are Dravet syndrome, equating to 5,440 patients in the United States and 6,710 patients in Europe under the age of 20. We believe, however, that this syndrome is under-diagnosed.

We held a pre-IND meeting with the FDA in February 2014 to discuss the investigational plan for Epidiolex in Dravet syndrome, following which we opened a commercial IND in May 2014. In October 2014, we commenced a Phase 2/3 trial designed as a two-part randomized double-blind, placebo-controlled parallel group dose escalation, safety, tolerability, pharmacokinetic and efficacy trial of single and multiple doses of Epidiolex to treat Dravet syndrome in children who are being treated with other anti-epileptic drugs. Part one comprises the pharmacokinetic and dose-finding elements of the trial in a total of 30 patients over a 3 week treatment period. Part two is a placebo-controlled safety and efficacy evaluation of Epidiolex over a 3 month treatment period in a total of 80 patients. We anticipate commencing an additional Phase 3 trial in Dravet syndrome in the first quarter of 2015 in parallel with part two of the first Phase 2/3 trial.

In addition to Dravet syndrome, we expect to commence a clinical program for Epidiolex for the treatment of LGS. GW expects to begin two Phase 3 trials in LGS in the first quarter of 2015.

In parallel with our commercial clinical trials program, the FDA has been receiving and approving INDs from independent investigators in the U.S. to allow treatment with Epidiolex in children with a range of epilepsy syndromes. To date, FDA has approved treatment under expanded access INDs for approximately 410 children at approximately 20 U.S. clinical sites. The patients in these INDs suffer not only from Dravet syndrome and LGS, but also from other pediatric epilepsy syndromes. In total, there are 20 expanded access INDs and 7 individual emergency treatment INDs open with the FDA. In the emergency cases, GW has responded to, and the FDA has approved, emergency treatment requests from physicians for children hospitalized as a result of severe and potentially life-threatening seizures. So far as GW is aware, 6 of the 7 children treated under emergency INDs remain on Epidiolex treatment.

In addition to Company and physician-led activities, two U.S. state governments (Georgia and New York) are collaborating with GW on separate state-based clinical trials in epilepsy.

Physician Reports of Clinical Effect Data

Data has been made available from physician reports of efficacy and safety from the “expanded access” program on 58 children and young adults with treatment-resistant epilepsy who have been treated with Epidiolex for a period of 12 weeks of which 40 patients have been treated for at least 16 weeks. The analysis of the clinical data relating to Epidiolex summarized below was performed on the clinical data made available to the Company for analysis on or before October 14, 2014.

Data were collected at hospital sites by the local medical teams and sent to GW for compiling into a database. It should be noted that expanded access studies (sometimes called “compassionate use”) are uncontrolled, carried out by individual investigators, not conducted in strict compliance with Good Clinical Practices and not intended to be analyzed together as study data. Therefore, the data reported from these programs may not be indicative of results from, or duplicated in, placebo-controlled company-sponsored clinical trials. . Further, due to the non-normal distribution of the data collected from the small sample size, we have chosen to use median data in its analysis. This is consistent with the approach we would expect to take in analyzing data arising from a placebo controlled trial where the data are not normally distributed. However, other statistical principles may be more appropriate to the analysis of the clinical data generated from our placebo controlled trials of Epidiolex for the treatment of Dravet syndrome and LGS.

The treatment-resistant patients suffer from a range of epilepsies in which current anti-epileptic drugs have been unsuccessful in adequately controlling seizures and include severe forms of epilepsy such as Dravet syndrome and LGS. Many of these patients have extreme and rare forms of epilepsy including several patients with major congenital structural brain abnormalities. The 58 patients were predominately children with an average age of 11 years. In all cases, Epidiolex was added to current anti-epileptic drugs (AEDs). On average, patients were taking 3 other AEDs. These data are from three hospital sites in the United States. Median baseline total seizure frequency was 67.5 per month (range 4-2872).

Treatment effect data on all 58 patients with 12 week data and 40 patients with 16 week data showed a median reduction in total seizure frequency of 40% after 12 weeks of treatment and 51% after 16 weeks of treatment. 43% of patients obtained a greater than 50% reduction in total seizure frequency after 12 weeks and 55% of patients obtained a greater than 50% reduction in total seizure frequency after 16 weeks. At both the 12 week and 16 week timepoints, 10% of patients were seizure-free.Data after 20 weeks treatment was also made available on 10 patients and the effect seen at this timepoint is consistent with that seen at the 16 week timepoint.

Dravet Syndrome Patients

Of the 58 patients, the largest single type of epilepsy was Dravet syndrome (n=12). With respect to the 12 patients with Dravet syndrome, the data presented below include only convulsive seizures reported for each patient, the types of seizures considered by FDA in assessing primary efficacy for Dravet syndrome trials. The 12 patients with Dravet syndrome had an average age of 8 years. Data were made available on 12 patients with 12 week data and 9 patients with 16 week data. Median baseline convulsive seizure frequency was 15 per month (range 6-112).

Treatment effect data have been presented to show median percent changes in seizure frequency during the first, second, third and fourth months of treatment compared with seizure frequency during a 4 week baseline observation period. Treatment effect data on all 12 patients with 12 week data and 9 patients with 16 week data showed a median reduction in total seizure frequency of 51% after 12 weeks of treatment and 56% after 16 weeks of treatment. 58% of patients obtained a greater than 50% reduction in total seizure frequency after 12 weeks and 56% of patients obtained a greater than 50% reduction in total seizure frequency after 16 weeks. At the 12 week timepoint 25% of patients were seizure-free. At the 16 week timepoint 22% of patients were seizure-free.

CBD Safety Profile

In addition to data on clinical effect, safety data have been made available on 151 patients (58 patients with 12 weeks treatment plus 93 additional patients for whom 12 week data is not yet available) and represents approximately 50 patient-years of treatment with Epidiolex. The most common adverse events (occurring in 10% or more of patients and resulting from all causes) were somnolence (19%) and fatigue (11%). There were two withdrawals from treatment due to an adverse events and there were four withdrawals from treatment due to lack of clinical effect. Serious adverse events were reported in 26 patients, including one death from SUDEP (sudden unexpected death in epilepsy) and one from respiratory failure due to aspiration. Of these serious adverse events, one case was deemed related to Epidiolex by one of the independent investigators. Neither of the two deaths were deemed related to Epidiolex In some instances, the addition of Epidiolex may be associated with changes in serum concentrations of concomitant AEDs. The adverse event data presented above reflects the information received by the Company in adverse event reports on or before October 14, 2014.

GWP42006 (CBDV) in Epilepsy

In addition to Epidiolex, our epilepsy product candidates also include GWP42006, which features CBDV as the primary cannabinoid. CBDV is similar in chemical structure to CBD and has also shown anti-epileptic properties across a range of in vitro and in vivo models of epilepsy. We have completed a Phase 1 trial of GWP42006 in 66 healthy subjects. In this trial, GWP42006 was well tolerated even at the highest tested dose. There were no serious or severe adverse events, nor any withdrawals due to adverse events. We expect to commence a Phase 2 trial of GWP42006 in patients with epilepsy in the first half of 2015. GWP42006 has the potential for development in the field of pediatric epilepsy as well as the broader epilepsy market.

We have rights to a portfolio of intellectual property related to CBD and CBDV in epilepsy. This portfolio, as at 1 November, includes fourteen patent families containing one or more pending and/or issued patents with claims related to the use of CBD and/or CBDV in the treatment of epilepsy as well as compositions, extraction techniques, CBD and CBDV extracts and highly purified CBD.

In a paper published in the September 2012 issue of The British Journal of Pharmacology by scientists with whom we collaborate at the University of Reading, United Kingdom, GWP42006 was reported to have the potential to prevent more seizures, with few of the side effects caused by many existing anti-epileptic drugs, such as uncontrollable shaking. In the study, GWP42006 strongly suppressed seizures in six different experimental models commonly used in epilepsy treatment. GWP42006 was also found to provide additional efficacy when combined with drugs currently used to control epilepsy. Genetic biomarkers for response have been identified.

Epilepsy is estimated to affect 50 million people worldwide including, according to the Centers for Disease Control and Prevention, 2.2 million people in the United States. Drug therapy remains ineffective for seizure control in up to 30% of patients with epilepsy because either the drugs do not control the seizures or the patients cannot tolerate the side effects. Currently available drugs can cause significant side effects to individuals’ movement and cognitive abilities that can adversely affect the quality of life for epileptic patients.

Glioma

Market Overview

Glioma describes any tumor that arises from the glial tissue of the brain. Glioblastoma, or GBM, is a particularly aggressive tumor that forms from abnormal growth of glial tissue. According to the New England Journal of Medicine, GBM accounts for approximately 46% of the 22,500 new cases of brain cancer diagnosed in the United States each year. Treatment options are limited and expected survival is a little over one year. GBM is considered a rare disease by the FDA and the European Medicines Agency, or EMA.

Our Research

In pre-clinical models, we have shown cannabinoids to be orally active in the treatment of gliomas and, in addition, have shown tumor response to be positively associated with tissue levels of cannabinoids. We have identified the putative mechanism of action for our cannabinoid product candidates, where autophagy and programmed cell death are stimulated via inhibition of the akt/mTORC1 axis. We have shown in in vivo studies that cannabinoids have a synergistic effect with temozolomide, the standard chemotherapeutic agent used in the treatment of glioma.

In light of this promising pre-clinical research, In 2014, we commenced an early proof of concept Phase 1b/2a clinical trial in 20 patients with recurrent GBM. The first phase of this trial was an open-label safety evaluation of GWP42002:GWP42003 in combination with temozolomide, the current standard of care. This study is a two part study with an open-label phase to assess safety and tolerability and a double blind, randomized, placebo-controlled phase with patients randomized to receive active or placebo. The first phase, comprising two cohorts of three patients each completing two cycles (months) of treatment is now complete. Safety data from these initial patient cohorts has been assessed by the independent safety monitoring board and their approval has been given to proceed into a Phase 2a placebo-controlled phase which has begun randomization. The primary outcome measure is 6 month progression free survival. The principal cannabinoids we have studied in pre-clinical models of glioma are GWP42002 and GWP42003 in various ratios, and this first trial will employ an equal ratio of GWP42002 and GWP42003 to establish a proof of principle. It is anticipated that subsequent development would focus on a product candidate with a different ratio of GWP42002 and GWP42003.

A recent study carried out in collaboration with us by specialists at St George’s, University of London, was the first to show a dramatic effect on brain tumors when combining cannabinoids with irradiation. This research, published in Molecular Cancer Therapeutics, showed that tumour growth in mouse brain was significantly slowed when a combination of THC and CBD was used with irradiation and tumor inhibition was higher than observed with irradiation alone.

We have also generated promising pre-clinical data to suggest that our cannabinoids could have benefits in other cancers, notably breast cancer, colon cancer and prostate cancer. In particular, in a model of Her2 positive breast cancer, we have shown cannabinoids to have the ability to inhibit not only local metastases, but also the occurrence of distant metastases. Our efforts are now focused on identifying the precise molecular mechanism of action of cannabinoids in breast cancer, and to define the optimum cannabinoid treatment regimen.

Neonatal Hypoxic-Ischemic Encephalopathy

Disease Background

Neonatal hypoxic-ischemic encephalopathy, or NHIE, is acute or sub-acute brain injury due to asphyxia caused during birth resulting from deprivation of oxygen during birth (hypoxia) as a result of a sentinel event such as ruptured placenta, parental shock and even increased heart rate. Hypoxic damage can occur to most of the infant’s organs, but brain damage is the most serious and least likely to heal, resulting in encephalopathy. This can later manifest itself as either mental retardation (including developmental delay and/or intellectual disability) or physical disabilities such as spasticity, blindness and deafness. Indeed, spastic diplegia and the other forms of cerebral palsy almost always feature asphyxiation during the birth process as a contributing factor.

The exact timing and underlying causes of these outcomes remains unknown but it is widely recognized that interventions need to be administered within six hours of hypoxic insult.

Market Overview

According to Kurinczuk et al. in the 2010 edition of Early Human Development, the incidence of NHIE is 1.5 to 2.8 per 1,000 births in the United States, or, by our estimate, 6,500 to 12,000 cases per year. Of these, 35% are expected to die in early life and 30% will end up with permanent disability. However, at time of diagnosis of NHIE, it is unclear what the prognosis may be, even for cases that are mild, and therefore the whole population is presumed to require treatment.

There are currently no FDA-approved medicines specifically indicated for NHIE. The only FDA-approved treatment is the Olympic Cool-Cap System and treatment guidelines in many European countries also support use of whole body hypothermia. Clinical studies have shown the Cool-Cap to reduce the occurrence of disability due to NHIE but not death, while whole body hypothermia had a more marginal effect on disability but is able to reduce mortality.

There are academic initiatives looking to develop treatments in this area. In addition, one intervention being investigated by the pharmaceutical industry is an IV infusion of 2-Iminobiotin. Neurophyxia attained orphan drug designation for this treatment in both Europe and the United States and is conducting a Phase 2 study in Eastern Europe.

Cannabinoid Rationale for Treating NHIE

The pathophysiology of NHIE includes processes such as apoptosis, oxidative stress, inflammation and excitotoxicity, and may involve not only the brain, but also other organs. Some plant cannabinoids are able to influence all of these processes, but unlike other therapeutic compounds under development, can combine these neuroprotective strategies within a single molecule. Firstly they can act on transcription factors and nuclear receptors that control neuronal homeostasis and survival. Secondly, not only do they have important free radical scavenging actions, but may also upregulate and activate endogenous antioxidant defenses. Thirdly, they influence the immune network and modulate phenomena associated with infection or inflammation, via inhibition of macrophage and neutrophil migration, natural killer cell proliferation, and by their ability to inhibit harmful cytokine production. . It has been widely reported that endocannabinoids are able to protect the glial cell, an effect that may be independent of CB receptors. Finally, the endocannabinoid system, or ECS, has been shown to be neuroprotective in animal models—the levels of endogenous cannabinoids become enhanced in the brains of newborn rats after acute injury, acting as a protective response, and it has been proposed that one additional mechanism by which plant cannabinoids work is by preventing the enzymatic degradation of endocannabinoids, thus enhancing endogenous defense mechanisms.

Recent research into the neuroprotection that has been shown by cannabinoids in animal models of neonatal hypoxia has also suggested a role for the 5HT1A receptor, since some of the beneficial effects can be blocked by 5HT1A receptor blockers.

CBD as the Primary Cannabinoid Product Candidate in NHIE

In addition to its other properties, the possible neuroprotective effects of CBD have been examined. These neuroprotective effects are thought to be based mainly on the potent anti-inflammatory and anti-oxidant properties of CBD, although other actions of CBD that might also account for CBD-induced neuroprotection including: inhibition of calcium transport across membranes; inhibition of anandamide uptake and enzymatic hydrolysis; inhibition of iNOS protein expression and NF-κB activation; and inhibition of adenosine uptake. In a similar fashion to endocannabinoids, adenosine is thought to be part of a natural neuroprotective system, because adenosine levels rise in response to hypoxic insult in the brain and increasing extracellular adenosine acts as a neuroprotectant. It has been demonstrated that CBD enhances adenosine signaling through the inhibition of adenosine re-uptake and therefore indirectly activates the A2A receptor.

Previously, it was demonstrated that CBD reduces brain damage after ischemic injury in adult animals. In a piglet model of NHIE, CBD improved brain activity as measured by an EEG and reduced the numbers of seizures by half, while histological analysis of brain tissues showed that neuron degeneration was reduced. Neurological exams showed improved neurobehavioral performance up to three days after insult. There were also significant beneficial extra cerebral effects and the dose of dopamine needed by the animals to maintain blood pressure was less than half of what was required in vehicle-treated animals.

Our NHIE Research

In a paper by Castillo, reporting results from our collaboration, CBD protected newborn mice forebrain slices from oxygen and glucose deprivation. Prevention of necrotic and apoptotic cell death and reductions in excitotoxicity, inflammation and nitrous oxide production was mediated by CB ₂ and adenosine receptors. Another study from our collaboration with Lafuente showed that administration of CBD to newborn piglets at doses much lower than those reported in the literature protects brain cells, preserves brain activity, prevents seizures and improves neurobehavioral performance. These neuroprotective effects were not only free from side effects but also associated with some cardiac, hemodynamic and ventilatory benefits unlike other promising compounds with neuroprotective activity. These data support the view of CBD as a possible therapy for asphyxiated newborns.

We are planning to consult with regulatory authorities on the development program for an intravenous CBD formulation in the treatment of NHIE.

Type-2 Diabetes

Market Overview

According to the American Diabetes Association, 25.8 million individuals in the United States, or 8.3% of the population, have diabetes, of which at least 90% have the type-2 form. According to the World Health Organization, between 2010 and 2030, diabetes rates in developing countries will increase by 70% and by 20% in developed countries.

Type-2 diabetes is associated with two pathological features—insulin resistance in peripheral tissues causing an increase in the insulin requirement and a failure of the insulin-producing cells in the pancreas to meet this increased demand. Insulin resistance is driven by obesity, as well as a genetic predisposition, age and lack of exercise. Insulin resistance causes elevated blood glucose levels, which is associated with various complications of diabetes, including increased risk of cardiovascular disease, kidney damage, nerve damage and eye disease.

There is no cure for diabetes, so treatments are aimed primarily at controlling blood glucose levels. There is recognition that advances in the treatment of type-2 diabetes should focus not merely on glucose control but in protecting the overworked pancreatic islet cells from failure. Thus, there is an unmet need for improved insulin sensitizer drugs and oral treatments that result in a restoration of normal insulin production and glucose-dependent release of insulin from pancreatic islets.

Our Research

We have completed a Phase 2a trial in the treatment of dyslipedemia in patients with type-2 diabetes. This five-arm trial was a 13 week randomized, double-blind, placebo-controlled, parallel group, pilot trial of GWP42004 (5mg), GWP42003 (100mg) and two separate ratios (5mg:5mg and 100mg:5mg) of GWP42003 and GWP42004. Each treatment was delivered in the form of oral capsules and administered twice daily. The trial enrolled a total of 62 type-2 diabetes patients, such that each treatment group had 11 to 14 patients.

Although GWP42004 showed no benefit in lipid control, the trial showed that GWP42004, an oral cannabinoid treatment, produced the following desirable anti-diabetic effects: reduced fasting plasma glucose levels (p=0.04), with an increase in fasting insulin (p=0.289), and improved pancreatic beta-cell function (p=0.0074). Other trends of interest included increased serum adiponectin (p=0.0024), reduced systolic blood pressure (p=0.099), reduced serum IL-6 levels (p=0.076), and reduced serum C-Reactive Protein (CRP) levels (p=0.107). GWP42004 also showed numerical improvement in increased insulin sensitivity (p=0.275), improvements in both glucose and insulin response to glucose load (OGTT) (p=0.889 and p=0.417, respectively), and raised GLP-1 (glucagon-like peptide-1) (p=0.254). In this small study, GWP42004 was numerically better than placebo in reduction of HbA1c, the standard primary endpoint for Phase 3 diabetes studies, but failed to demonstrate significance (p=0.278). Because baseline HbA1c levels were normal, a significant reduction would not be expected. We are designing future studies of GWP42004 to focus on patients with elevated baseline HbA1c levels. The trial did not show meaningful effects in the other treatment arms.

Several of these findings are consistent with pre-clinical data generated in collaboration with Professor Mike Cawthorne at the GW Metabolic Research Laboratory, University of Buckingham. In particular, pre-clinical data suggests that GWP42004 protects the insulin-producing cells of the pancreatic islets, a highly desirable feature of a new anti-diabetic medicine, increases insulin sensitivity and reduces fasting plasma glucose levels.

In March 2014, we commenced a larger placebo-controlled Phase 2 dose ranging trial of GWP42004 with an estimated completion date in 2016.

Ulcerative Colitis

Market Overview

Ulcerative colitis, or UC, is a chronic, relapsing inflammatory disease affecting the colon which can cause pain, urgent diarrhea, severe tiredness and loss of weight. In addition, patients with chronic intestinal inflammation have an increased risk of developing bowel cancers. According to the Crohn’s & Colitis Foundation of America, UC may affect as many as 700,000 Americans.

Medical treatment for UC has two main goals: achieving remission (the near absence of symptoms) and, once that is accomplished, maintaining remission (prevention of flare-ups). To accomplish these goals, treatment is aimed at controlling the ongoing inflammation in the intestine. The four major classes of medication used today to treat ulcerative colitis are aminosalicylates (5-ASA), steroids, immune modifiers and antibiotics. According to the Centers for Disease Control and Prevention, in one-quarter to one-third of patients with ulcerative colitis, medical therapy is not completely successful or complications arise. Under these circumstances, surgical removal of the colon may be considered.

Our Research

We have shown that GWP42003 has anti-inflammatory properties in a number of accepted animal models of inflammation, notably of the gut and the joints. In addition, we have shown the capacity of GWP42003 to inhibit the production in tissues of chemical mediators of inflammation, such as Tumor Necrosis Factor alpha, or TNFα. In particular, we have demonstrated efficacy in the treatment of UC in standard in vivo models.

We have completed a Phase 2a study to investigate the efficacy and safety of GWP42003 compared with placebo for the treatment of 60 adult patients with UC who had not been able to gain remission from the condition despite first line treatment with salicylates, and in some cases immunosuppressive therapy.   The trial was a 10-week randomized, double-blind, placebo controlled study of GWP42003 extract, which features CBD as the primary cannabinoid and which also contains THC and other cannabinoid and non-cannabinoid components.

The primary endpoint of this study was the percentage of participants achieving remission quantified by the MAYO score and included a range of secondary measures to determine whether GWP42003 has a positive benefit for subjects on symptom control. GWP42003 was given as a twice daily oral capsule in a dose titration regimen with an upper target dose of 250mg twice daily. Due to the pilot nature of the study, and the small patient population, the significance value was set at p=0.1. 

Of the 60 patients, 29 patients were randomised to the active treatment group, and 31 to the placebo group. During the early weeks of the study, more patients withdrew from the active treatment group than from the placebo treatment group so that the per protocol population (those that took the investigational medicine as intended) comprised only 17 patients on GWP42003 and 27 on placebo.  Most of these withdrawals were due to THC-related adverse events such as dizziness. For this reason, in this exploratory phase 2 setting, GW believes that the results for the protocol compliant population are most relevant to the assessment of efficacy.  The intent to treat population (ITT) includes those patients who were only exposed to GWP42003 for a short period, and therefore had little if any opportunity to benefit. We note that the ITT population is nonetheless the population in whom efficacy must be demonstrated in Phase 3 studies in order to support approval.

The primary endpoint of disease remission, as assessed by a MAYO score of 2 or less at the end of the study was not statistically significant in either protocol-compliant patients or the ITT population.

Among the secondary efficacy endpoints, for the protocol-compliant population, the Inflammatory Bowel Disease Questionnaire was significantly in favor of GWP42003, as was the Physician Assessment of Disease severity and the Patient Global Impression of Change.

For the ITT population, the Patient Global Impression of Change and the total partial MAYO score change from baseline (this includes stool frequency, bleeding and physician global impression) were statistically significantly in favor of GWP42003.

All patients on GWP42003 reported at least 1 adverse event, compared with 77% of patients on placebo.  Of the adverse events while on the drug, 90% were mild or moderate.  There were no serious adverse events (SAEs) on GWP42003, while there were 4 SAEs on placebo (two of which were exacerbations of the ulcerative colitis). However, as stated above, 13 patients withdrew from the study due to adverse events while on drug, compared with 7 on placebo. There were no deaths in the study.

We believe that these results provide promising evidence for a therapeutic effect in the treatment of ulcerative colitis in patients who had previously failed to respond to first line therapy. While the results support the further investigation of GWP42003 and have provided useful pointers as to how this further investigation should best be done, we have yet to propose next steps in this program.

Schizophrenia

Market Overview

Schizophrenia is a chronic disease that manifests through disturbances of perception, thought, cognition, emotion, motivation and motor activity. Over a lifetime, about 1% of the population will develop schizophrenia.

All antipsychotic treatments for schizophrenia rely primarily upon their antagonistic action at the dopamine D2 receptor for their antipsychotic effect. They produce a wide range of adverse events, and are often poorly tolerated by patients resulting in poor compliance with treatment.

Current antipsychotics also have little or no effect upon the “negative” symptoms (blunted mood and lack of pleasure, motivation and movement) of schizophrenia or the associated cognitive deficit. Furthermore, the “positive” symptoms (such as hallucinations, delusions and thought disorder) of at least one‒third of patients fail to respond adequately to current treatments.

Our Research

GWP42003 has shown notable anti-psychotic effects in accepted pre-clinical models of schizophrenia and importantly has also demonstrated the ability to reduce the characteristic movement disorders induced by currently available anti-psychotic agents. The mechanism of GWP42003 does not appear to rely on the D2 receptor augmentation of standard antipsychotics and therefore has the potential to offer a novel treatment option in this therapeutic area. In March 2014, we commenced a Phase 2a trial of GWP42003 in the treatment for schizophrenia with an expected completion date in the second half of 2015.

Additionally, our pre-clinical research findings suggest that a range of other psychiatric conditions may be promising targets for cannabinoid therapeutics.

Intellectual Property and Technology Licenses

Our success depends in significant part on our ability to protect the proprietary nature of Sativex, Epidiolex, our other product candidates, technology and know- how, to operate without infringing on the proprietary rights of others, and to defend challenges and oppositions from others and prevent others from infringing on our proprietary rights. We have sought, and plan to continue to seek, patent protection in the United States and other countries for our proprietary technologies. Our intellectual property portfolio at September 30, 2014, includes 49 patent families with issued and/or pending claims directed to plants, plant extracts, extraction technology, pharmaceutical formulations, drug delivery and the therapeutic uses of cannabinoids, as well as plant variety rights, know-how and trade secrets. From these families, as of September 30, 2014, we own 360 pending patent applications worldwide. Within the United States, we already have 26 issued patents with a further 29 pending patent applications under active prosecution. There are an additional 303 issued patents outside of the United States. Our policy is to seek patent protection for the technology, inventions and improvements that we consider important to the development of our business, but only in those cases where we believe that the costs of obtaining patent protection is justified by the commercial potential of the technology, and typically only in those jurisdictions that we believe present significant commercial opportunities.

We also rely on trademarks, trade secrets, know-how and continuing innovation to develop and maintain our competitive position.

Our strategy is to seek and obtain patents related to Sativex across all major pharmaceutical markets around the world. In the United States, our patents and/or pending applications (if they were to issue) relating to Sativex would expire on various dates between 2021 and 2026, excluding possible patent term extensions. We have at least seven different patent families containing one or more pending and/or issued patents directed to the Sativex formulation, the extracts from which Sativex is composed, the extraction technique used to produce the extracts and the therapeutic use of Sativex. In the key indication, treatment of cancer pain, we have obtained a patent in the United States, titled “Pharmaceutical Compositions for the Treatment of Pain,” which would expire in September 2026. This patent is specific to the United States, and we will not seek to file, or obtain corresponding rights under, this patent in other countries.

Under the 2007 research collaboration agreement with Otsuka, which expired in June 2013, all intellectual property (including both patents and non-manufacturing related know-how) that was conceived by either Otsuka or us during the course of the collaboration is jointly owned by Otsuka and us, and is referred to as “collaboration IP.” Since no product/product candidate(s) were licensed by Otsuka at the end of the collaboration, we have an exclusive sub-licensable royalty-bearing license to use collaboration IP both outside and within the fields of CNS and oncology.

Under the collaboration agreement, we are responsible for the filing, prosecution, maintenance and defense of any patents filed on the jointly owned collaboration IP, and Otsuka is responsible for all out-of-pocket expenses associated therewith. In the event Otsuka no longer wishes to reimburse us for our out-of-pocket costs associated with any of the jointly owned patents, Otsuka is required to assign its rights to the patents in question back to us. Otsuka has the first right to bring and control any action for infringement of any joint patent rights in the research field, and we have the right to join such action at our own expense. In the event Otsuka fails to bring such an action, we have the right to bring and control any such action at our own expense. Neither party shall have the right to settle any infringement litigation regarding the joint patent rights inside the research field without the prior written consent of the other party.

We have a portfolio of intellectual property relating to CBD and CBDV in epilepsy. This portfolio includes five distinct patent families which are either granted or filed, protecting the use of these product candidates and their manufacture and formulation. The latest expiry date of these families runs to June 2034. We have recently filed a further four new patent applications providing protection for use of the product candidates. The latest expiry date of these families runs to October 2034. Several of these patent families are collaboration IP derived from the now expired Otsuka research collaboration, and to which we have an exclusive sub-licensable royalty-bearing license. These patent families include claims to use of CBD and/or CBDV in the treatment of epilepsy as well as other families which provide protection for compositions, extraction techniques, CBD and CBDV extracts and highly purified CBD. We anticipate additional patent applications being filed as new data is generated. The trademark Epidiolex is registered in the United Kingdom and the United States.

The term of individual patents depends upon the countries in which they are obtained. In most countries in which we have filed, the patent term is 20 years from the earliest date of filing a non-provisional patent application. In the United States, a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office, or PTO, in granting a patent, or may be shortened if a patent is terminally disclaimed over another patent.

The term of a patent that covers an FDA-approved drug may also be eligible for extension, which permits term restoration as compensation for the term lost during the FDA regulatory review process. The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, permits an extension of up to five years beyond the expiration of the patent. The length of the patent term extension is related to the length of time the drug is under regulatory review. Extensions cannot extend the remaining term of a patent beyond 14 years from the date of product approval and only one patent applicable to an approved drug may be extended. Similar provisions to extend the term of a patent that covers an approved drug are available in Europe and other non-U.S. jurisdictions; indeed Supplementary Protection Certificates have been applied for such that the European formulation patent for Sativex will be extended to 2025 in Europe. In the future, if and when our pharmaceutical product candidates receive FDA approval, we may apply for extensions on patents covering those products.

To protect our rights to any of our issued patents and proprietary information, we may need to litigate against infringing third parties, avail ourselves of the courts or participate in hearings to determine the scope and validity of those patents or other proprietary rights.

We also rely on trade secret protection for our confidential and proprietary information, and it is our policy to require our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us.

Manufacturing

We are responsible for the manufacture and supply of our products for commercial and clinical trial purposes. We operate under GMP manufacturing licenses issued by the Medicines and Healthcare products Regulatory Agency, or MHRA, in the United Kingdom and our facilities have been audited by the MHRA on several occasions. We have personnel with extensive experience in production of botanical raw material, pharmaceutical production, quality control, quality assurance and supply chain.

For commercial Sativex production, the BRM is currently contracted to an external third party, although our staff is at the contract site to monitor activity and production quality on a weekly basis. All other steps in the commercial production process for Sativex are performed in-house. We routinely hold significant inventories of Sativex BRM and BDS, both of which have extended shelf lives that enable us to manufacture finished product on demand. We believe that these inventories are currently sufficient to enable us to continue to meet anticipated commercial demand for Sativex in the event of an interruption in our supply of BRM.

We are in the process of expanding and upgrading parts of our manufacturing facilities in order to meet future demand and FDA requirements. We are constructing a new BDS production facility at our current site where we expect to install new BDS processing equipment. Construction work for this new facility commenced in September 2013 and is expected to be completed in 2015. Longer term, depending on volume requirements, we anticipate the need to construct a new BDP facility.

For Epidiolex production, the BRM is currently contracted to the same external third party used for Sativex production. We are planning a significant expansion of growing facilities over the next few years in order to meet potential demand for Epidiolex, including working with several new third party contractors and adopting new methods in order to handle and process bulk quantities of BRM. All other steps in the production process for Epidiolex are currently performed in-house and we are working with a number of third party contractors in the scale-up of various steps in the process in order to be in a position to manufacture commercial quantities.

We have successfully exported cannabinoid commercial or research materials to 35 countries and have the necessary in-house expertise to manage the import/export process worldwide. We have substantial expertise in, and experience with, relevant international and national regulations in relation to the research, distribution and commercialization of cannabinoid therapeutics. We have formed relationships with relevant international and national agencies in order to enable licensing of research sites, establishing appropriate product distribution channels and securing licensed storage, obtaining import/export licenses, and facilitating amendments to relevant legislation if required prior to commercialization.

Competition

The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. While we believe that our scientific knowledge, technology and development experience provide us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions, governmental agencies and public and private research institutions. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future.

A synthetic THC (dronabinol) oral capsule has been approved and distributed in the United States for anorexia associated with weight loss in patients with AIDS. Dronabinol and nabilone (a synthetic molecule similar to THC) capsules have been approved and distributed in the United States for the treatment of nausea and vomiting associated with cancer chemotherapy in patients who have failed to respond adequately to conventional antiemetic treatments. We are also aware of exploratory research into the effects of THC formulations in other areas.

We are aware of discovery research within the pharmaceutical industry into synthetic agonists and antagonists of CB1 and CB2 receptors. We are also aware of companies that supply synthetic cannabinoids and cannabis extracts to researchers for pre-clinical and clinical investigation. We are also aware of various companies that cultivate cannabis plants with a view to supplying herbal cannabis or non-pharmaceutical cannabis-based formulations to patients. These activities are generally not compliant with national and international legislation and have not been approved by the FDA.

In both MS spasticity and cancer pain, Sativex aims to treat patients who do not respond adequately to standard care. In MS spasticity, such treatments include baclofen and tizanidine, and in cancer pain such treatments include morphine and other opioids. In cancer pain, the principal focus of ongoing clinical research by our potential competitors is in the development of alternative formulations of opioids.

With respect to CBD, a number of non-approved and non-standardized “artisanal” CBD preparations derived from crude herbal cannabis have been made available in limited quantities by producers of “medical marijuana” in the United States. In addition, certain pharmaceutical companies that currently manufacture synthetic THC are likely to have the capability to manufacture synthetic CBD and may already be doing so. Insys Therapeutics, Inc. has publicly stated its intention to develop CBD in Dravet syndrome, LGS, glioma and potentially other orphan indications. Zogenix, Inc. is developing low dose fenfluramine in Dravet syndrome.

We have never endorsed or supported the idea of distributing or legalizing crude herbal cannabis, or preparations derived from crude herbal cannabis, for medical use and do not believe prescription cannabinoids are the same, and therefore competitive, with crude herbal cannabis. We have consistently maintained that only a cannabinoid medication, one that is standardized in composition, formulation and dose, administered by means of an appropriate delivery system, and tested in properly controlled pre-clinical and clinical studies, can meet the standards of regulatory authorities around the world, including those of the FDA. We have also repeatedly stressed that these regulatory processes provide important protections for patients, and we believe that any cannabinoid medication must be subjected to, and satisfy, such rigorous scrutiny.

The prospect for cannabinoid therapeutics to be approved through the FDA approval pathway has been the subject of statements from the White House, Congress and the Drug Enforcement Administration, or DEA. The White House Office of National Drug Control Policy states on its “Facts and Answers to the Frequently Asked Questions about Marijuana” on the White House website that the FDA has recognized and approved the medicinal use of isolated components of the marijuana plant and related synthetic compounds, and it specifically references Sativex as a product that is currently in late-stage clinical trials with the FDA. In its June 2012 report titled “Reducing the U.S. Demand for Illegal Drugs,” the U.S. Senate Caucus on International Narcotics Control expresses the view that the development of marijuana-based therapeutics through an approved FDA process is the best route to explore and references Sativex as a promising product currently in the final phase of the FDA’s trials for approved use in the United States. In that report, the Senate Caucus urged the FDA to complete a careful review of Sativex in a timely manner. In its May 2014 report titled “The Dangers and Consequences of Marijuana Abuse,” the DEA expresses support for ongoing research into potential medicinal uses of marijuana’s active ingredients, and specifically references Sativex and Epidiolex.

Government Regulation and Product Approval

FDA Approval Process

In the United States, pharmaceutical products are subject to extensive regulation by the FDA. The Federal Food, Drug, and Cosmetic Act, or the FDC Act, and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending NDAs, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties and criminal prosecution.

Pharmaceutical product development in the United States typically involves pre-clinical laboratory and animal tests, the submission to the FDA of an IND, which must become effective before clinical testing may commence, and adequate, well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease.

Pre-clinical tests include laboratory evaluation of product chemistry, formulation and toxicity, as well as animal trials to assess the characteristics and potential safety and efficacy of the product. The conduct of the pre-clinical tests must comply with federal regulations and requirements, including good laboratory practices. The results of pre- clinical testing are submitted to the FDA as part of an IND along with other information, including information about product chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long term pre-clinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.

A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has neither commented on nor questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin.

Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted: (i) in compliance with federal regulations, (ii) in compliance with Good Clinical Practice, or GCP, an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators and monitors, and (iii) under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.

The FDA may order the temporary, or permanent, discontinuation of a clinical trial at any time or impose other sanctions if it believes that the clinical trial either is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The trial protocol and informed consent information for patients in clinical trials must also be submitted to an institutional review board, or IRB, for approval. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements or may impose other conditions.

Clinical trials to support NDAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In Phase 1, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics, pharmacological actions, side effects associated with increasing doses and, if possible, early evidence on effectiveness. Phase 2 usually involves trials in a limited patient population to determine the effectiveness of the drug for a particular indication, dosage tolerance and optimum dosage, and to identify common adverse effects and safety risks. If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to obtain the additional information about clinical efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to permit the FDA to evaluate the overall benefit-risk relationship of the drug and to provide adequate information for the labeling of the drug. In most cases, the FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate the efficacy of the drug. A single Phase 3 trial with other confirmatory evidence may be sufficient in rare instances where the trial is a large multicenter trial demonstrating internal consistency and a statistically very persuasive finding of a clinically meaningful effect on mortality, irreversible morbidity, or prevention of a disease with potentially serious outcome, and confirmation of the result in a second trial would be practically or ethically impossible.

After completion of the required clinical testing, an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required before marketing of the product may begin in the United States. The NDA must include the results of all pre-clinical, clinical, and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting an NDA is substantial. Under federal law, the submission of most NDAs is additionally subject to a substantial application user fee, currently exceeding $2,335,000, and the manufacturer and/or sponsor under an approved NDA are also subject to annual product and establishment user fees, currently exceeding $110,000 per product and $569,000 per establishment. These fees are typically increased annually.

The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of NDAs. Most such applications for standard review drug products are reviewed within 10 to 12 months, while most applications for priority review drugs are reviewed in six to eight months. Priority review can be applied to drugs that the FDA determines offer major advances in treatment, or provide a treatment where no adequate therapy exists. For biologics, priority review is further limited only for drugs intended to treat a serious or life-threatening disease relative to the currently approved products. The review process for both standard and priority review may be extended by FDA for three additional months to consider certain late-submitted information, or information intended to clarify information already provided in the submission.

The FDA may also refer applications for novel drug products, or drug products that present difficult questions of safety or efficacy, to an advisory committee, which is typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured. The FDA will not approve the product unless compliance with current good manufacturing practices, or cGMP, is satisfactory and the NDA contains data that provide substantial evidence that the drug is safe and effective in the indication studied.

After the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing, or information, in order for the FDA to reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included.

An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDA approval, the FDA may require a risk evaluation and mitigation strategy, or REMS, to help ensure that the benefits of the drug outweigh the potential risks. REMS can include medication guides, communication plans for health care professionals, and elements to assure safe use, or ETASU. ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The requirement for a REMS can materially affect the potential market and profitability of the drug. Moreover, product approval may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.

Disclosure of Clinical Trial Information

Sponsors of clinical trials of certain FDA-regulated products, including prescription drugs, are required to register and disclose certain clinical trial information on a public website maintained by the U.S. National Institutes of Health. Information related to the product, patient population, phase of investigation, study sites and investigator, and other aspects of the clinical trial is made public as part of the registration. Sponsors are also obligated to disclose the results of these trials after completion. Disclosure of the results of these trials can be delayed until the product or new indication being studied has been approved. Competitors may use this publicly available information to gain knowledge regarding the design and progress of our development programs.

Fast Track Designation and Accelerated Approval

FDA is required to facilitate the development, and expedite the review, of drugs that are intended for the treatment of a serious or life-threatening disease or condition for which there is no effective treatment and which demonstrate the potential to address unmet medical needs for the condition. Under the Fast Track Program, the sponsor of a new drug candidate may request that FDA designate the drug candidate for a specific indication as a Fast Track drug concurrent with, or after, the filing of the IND for the drug candidate. FDA must determine if the drug candidate qualifies for Fast Track designation within 60 days of receipt of the sponsor’s request.

Under the Fast Track Program and FDA’s accelerated approval regulations, FDA may approve a drug for a serious or life-threatening illness that provides meaningful therapeutic benefit to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments.

In clinical trials, a surrogate endpoint is a measurement of laboratory or clinical signs of a disease or condition that substitutes for a direct measurement of how a patient feels, functions or survives. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. A drug candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or post- approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, will allow FDA to withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject to prior review by FDA.

In addition to other benefits such as the ability to use surrogate endpoints and engage in more frequent interactions with FDA, FDA may initiate review of sections of a Fast Track drug’s NDA before the application is complete. This rolling review is available if the applicant provides, and FDA approves, a schedule for the submission of the remaining information and the applicant pays applicable user fees. However, FDA’s time period goal for reviewing an application does not begin until the last section of the NDA is submitted. Additionally, the Fast Track designation may be withdrawn by FDA if FDA believes that the designation is no longer supported by data emerging in the clinical trial process.

The Hatch-Waxman Act

Orange Book Listing

In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent whose claims cover the applicant’s product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic competitors in support of approval of an abbreviated new drug application, or ANDA. An ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listed drug. Other than the requirement for bioequivalence testing, ANDA applicants are not required to conduct, or submit results of, pre-clinical or clinical tests to prove the safety or effectiveness of their drug product. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original listed drug.

The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book. Specifically, the applicant must certify that: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product. The ANDA applicant may also elect to submit a section viii statement, certifying that its proposed ANDA label does not contain (or carves out) any language regarding the patented method-of- use, rather than certify to a listed method-of-use patent.

If the applicant does not challenge the listed patents, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired.

A certification that the new product will not infringe the already approved product’s listed patents, or that such patents are invalid, is called a Paragraph IV certification. If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit, or a decision in the infringement case that is favorable to the ANDA applicant.

The ANDA application also will not be approved until any applicable non- patent exclusivity listed in the Orange Book for the referenced product has expired.

Exclusivity

Upon NDA approval of a new chemical entity or NCE, which is a drug that contains no active moiety that has been approved by the FDA in any other NDA, that drug receives five years of marketing exclusivity during which time the FDA cannot receive any ANDA seeking approval of a generic version of that drug. Certain changes to a drug, such as the addition of a new indication to the package insert, are associated with a three-year period of exclusivity during which the FDA cannot approve an ANDA for a generic drug that includes the change.

An ANDA may be submitted one year before NCE exclusivity expires if a Paragraph IV certification is filed. If there is no listed patent in the Orange Book, there may not be a Paragraph IV certification and thus no ANDA may be filed before the expiration of the exclusivity period.

For a botanical drug, FDA may determine that the active moiety is one or more of the principle components or the complex mixture as a whole. This determination would affect the utility of any 5-year exclusivity as well as the ability of any potential generic competitor to demonstrate that it is the same drug as the original botanical drug.

Patent Term Extension

After NDA approval, owners of relevant drug patents may apply for up to a five-year patent extension. The allowable patent term extension is calculated as half of the drug’s testing phase—the time between IND submission and NDA submission—and all of the review phase—the time between NDA submission and approval up to a maximum of five years. The time can be shortened if FDA determines that the applicant did not pursue approval with due diligence. The total patent term after the extension may not exceed 14 years.

For patents that might expire during the application phase, the patent owner may request an interim patent extension. An interim patent extension increases the patent term by one year and may be renewed up to four times. For each interim patent extension granted, the post-approval patent extension is reduced by one year. The director of the PTO must determine that approval of the drug covered by the patent for which a patent extension is being sought is likely. Interim patent extensions are not available for a drug for which an NDA has not been submitted.

Advertising and Promotion

Once an NDA is approved, a product will be subject to certain post-approval requirements. For instance, FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry- sponsored scientific and educational activities and promotional activities involving the internet.

Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a new NDA or NDA supplement before the change can be implemented. An NDA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.

Adverse Event Reporting and GMP Compliance

Adverse event reporting and submission of periodic reports is required following FDA approval of an NDA. The FDA also may require post-marketing testing, known as Phase 4 testing, REMS and surveillance to monitor the effects of an approved product, or the FDA may place conditions on an approval that could restrict the distribution or use of the product. In addition, quality-control, drug manufacture, packaging, and labeling procedures must continue to conform to current good manufacturing practices, or cGMPs, after approval. Drug manufacturers and certain of their subcontractors are required to register their establishments with FDA and certain state agencies. Registration with the FDA subjects entities to periodic unannounced inspections by the FDA, during which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money and effort in the areas of production and quality control to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing or if previously unrecognized problems are subsequently discovered.

Pediatric Exclusivity and Pediatric Use

The Best Pharmaceuticals for Children Act, or BPCA, provides NDA holders a six-month extension of any exclusivity—patent or non-patent—for a drug if certain conditions are met. Conditions for exclusivity include a determination by the FDA that information relating to the use of a new drug in the pediatric population may produce health benefits in that population; a written request by the FDA for pediatric studies; and agreement by the applicant to perform the requested studies and the submission to the FDA, and the acceptance by the FDA, of the reports of the requested studies within the statutory timeframe. Applications under the BPCA are treated as priority applications.

In addition, under the Pediatric Research Equity Act, or PREA, NDAs or supplements to NDAs must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective, unless the sponsor has received a deferral or waiver from the FDA. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation has been granted. The required pediatric assessment must assess the safety and effectiveness of the product for the claimed indications in all relevant pediatric subpopulations and support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The sponsor or FDA may request a deferral of pediatric studies for some or all of the pediatric subpopulations. A deferral may be granted for several reasons, including a finding that the drug is ready for approval for use in adults before pediatric studies are complete or that additional safety or effectiveness data need to be collected before the pediatric studies begin. Under PREA, the FDA must send a non-compliance letter requesting a response with 45 days to any sponsor that fails to submit the required assessment, keep a deferral current or fails to submit a request for approval of a pediatric formulation.

Orphan Drugs

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition—generally a disease or condition that affects fewer than 200,000 individuals in the U.S. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of the drug and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. The first NDA applicant to receive FDA approval for a particular active ingredient to treat a particular disease with FDA orphan drug designation is entitled to a seven-year exclusive marketing period in the U.S. for that product, for that indication. During the seven-year exclusivity period, the FDA may not approve any other applications to market the same drug for the same disease, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition, or the same drug for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee.

Special Protocol Assessment

A company may reach an agreement with the FDA under the Special Protocol Assessment, or SPA, process as to the required design and size of clinical trials intended to form the primary basis of an efficacy claim. According to its performance goals, the FDA is supposed to evaluate the protocol within 45 days of the request to assess whether the proposed trial is adequate, and that evaluation may result in discussions and a request for additional information. An SPA request must be made before the proposed trial begins, and all open issues must be resolved before the trial begins. If a written agreement is reached, it will be documented and made part of the administrative record. Under the FDC Act and FDA guidance implementing the statutory requirement, an SPA is generally binding upon the FDA except in limited circumstances, such as if the FDA identifies a substantial scientific issue essential to determining safety or efficacy after the study begins, public health concerns emerge that were unrecognized at the time of the protocol assessment, the sponsor and FDA agree to the change in writing, or if the study sponsor fails to follow the protocol that was agreed upon with the FDA.

Controlled Substances

The federal Controlled Substances Act of 1970, or CSA, and its implementing regulations establish a “closed system” of regulations for controlled substances. The CSA imposes registration, security, recordkeeping and reporting, storage, manufacturing, distribution, importation and other requirements under the oversight of the U.S. Drug Enforcement Administration, or DEA. The DEA is the federal agency responsible for regulating controlled substances, and requires those individuals or entities that manufacture, import, export, distribute, research, or dispense controlled substances to comply with the regulatory requirements in order to prevent the diversion of controlled substances to illicit channels of commerce.

Facilities that manufacture, distribute, import or export any controlled substance must register annually with the DEA. The DEA registration is specific to the particular location, activity(ies) and controlled substance schedule(s). For example, separate registrations are required for importation and manufacturing activities, and each registration authorizes which schedules of controlled substances the registrant may handle. However, certain coincident activities are permitted without obtaining a separate DEA registration, such as distribution of controlled substances by the manufacturer that produces them.

The DEA categorizes controlled substances into one of five schedules—Schedule I, II, III, IV or V—with varying qualifications for listing in each schedule. Schedule I substances by definition have a high potential for abuse, have no currently accepted medical use in treatment in the United States and lack accepted safety for use under medical supervision. They may be used only in federally approved research programs and may not be marketed or sold for dispensing to patients in the United States. Pharmaceutical products having a currently accepted medical use that are otherwise approved for marketing may be listed as Schedule II, III, IV or V substances, with Schedule II substances presenting the highest potential for abuse and physical or psychological dependence, and Schedule V substances presenting the lowest relative potential for abuse and dependence. The regulatory requirements are more restrictive for Schedule II substances than Schedule III substances. For example, all Schedule II drug prescriptions must be signed by a physician, physically presented to a pharmacist in most situations and cannot be refilled.

The DEA inspects all manufacturing facilities to review security, recordkeeping, reporting and handling prior to issuing a controlled substance registration. The specific security requirements vary by the type of business activity and the schedule and quantity of controlled substances handled. The most stringent requirements apply to manufacturers of Schedule I and Schedule II substances. Required security measures commonly include background checks on employees and physical control of controlled substances through storage in approved vaults, safes and cages, and through use of alarm systems and surveillance cameras. An application for a manufacturing registration as a bulk manufacturer (not a dosage form manufacturer or a repacker/relabeler) for a Schedule I or II substance must be published in the Federal Register, and is open for 30 days to permit interested persons to submit comments, objections or requests for a hearing. A copy of the notice of the Federal Register publication is forwarded by DEA to all those registered, or applicants for registration, as bulk manufacturers of that substance. Once registered, manufacturing facilities must maintain records documenting the manufacture, receipt and distribution of all controlled substances. Manufacturers must submit periodic reports to the DEA of the distribution of Schedule I and II controlled substances, Schedule III narcotic substances, and other designated substances. Registrants must also report any controlled substance thefts or significant losses, and must obtain authorization to destroy or dispose of controlled substances. As with applications for registration as a bulk manufacturer, an application for an importer registration for a Schedule I or II substance must also be published in the Federal Register, which remains open for 30 days for comments. Imports of Schedule I and II controlled substances for commercial purposes are generally restricted to substances not already available from domestic supplier or where there is not adequate competition among domestic suppliers. In addition to an importer or exporter registration, importers and exporters must obtain a permit for every import or export of a Schedule I and II substance or Schedule III, IV and V narcotic, and submit import or export declarations for Schedule III, IV and V non-narcotics. In some cases, Schedule III non-narcotic substances may be subject to the import/export permit requirement, if necessary to ensure that the United States complies with its obligations under international drug control treaties.

For drugs manufactured in the United States, the DEA establishes annually an aggregate quota for the amount of substances within Schedules I and II that may be manufactured or produced in the United States based on the DEA’s estimate of the quantity needed to meet legitimate medical, scientific, research and industrial needs. This limited aggregate amount of cannabis that the DEA allows to be produced in the United States each year is allocated among individual companies, which, in turn, must annually apply to the DEA for individual manufacturing and procurement quotas. The quotas apply equally to the manufacturing of the active pharmaceutical ingredient and production of dosage forms. The DEA may adjust aggregate production quotas a few times per year, and individual manufacturing or procurement quotas from time to time during the year, although the DEA has substantial discretion in whether or not to make such adjustments for individual companies.

The states also maintain separate controlled substance laws and regulations, including licensing, recordkeeping, security, distribution, and dispensing requirements. State Authorities, including Boards of Pharmacy, regulate use of controlled substances in each state. Failure to maintain compliance with applicable requirements, particularly as manifested in the loss or diversion of controlled substances, can result in enforcement action that could have a material adverse effect on our business, operations and financial condition. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to revoke those registrations. In certain circumstances, violations could lead to criminal prosecution.

Europe/Rest of World Government Regulation

In addition to regulations in the United States, we are and will be subject, either directly or through our distribution partners, to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of our products, if approved.

Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in non-U.S. countries prior to the commencement of clinical trials or marketing of the product in those countries. Certain countries outside of the United States have a process that requires the submission of a clinical trial application much like an IND prior to the commencement of human clinical trials. In Europe, for example, a clinical trial application, or CTA, must be submitted to the competent national health authority and to independent ethics committees in each country in which a company intends to conduct clinical trials. Once the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed in that country.

The requirements and process governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country, even though there is already some degree of legal harmonization in the European Union member states resulting from the national implementation of underlying E.U. legislation. In all cases, the clinical trials are conducted in accordance with GCP and other applicable regulatory requirements.

To obtain regulatory approval of an investigational drug under E.U. regulatory systems, we must submit a marketing authorization application. This application is similar to the NDA in the United States, with the exception of, among other things, country-specific document requirements. Drugs can be authorized in the European Union by using (i) the centralized authorization procedure, (ii) the mutual recognition procedure, (iii) the decentralized procedure or (iv) national authorization procedures. The initial Sativex approvals were a consequence of an application under the De-Centralized Procedure, or DCP, to the E.U. member states of the United Kingdom and Spain.

The EMA implemented the centralized procedure for the approval of human drugs to facilitate marketing authorizations that are valid throughout the European Union. This procedure results in a single marketing authorization granted by the European Commission that is valid across the European Union, as well as in Iceland, Liechtenstein and Norway. The centralized procedure is compulsory for human drugs that are: (i) derived from biotechnology processes, such as genetic engineering, (ii) contain a new active substance indicated for the treatment of certain diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative diseases, autoimmune and other immune dysfunctions and viral diseases, (iii) officially designated “orphan drugs” (drugs used for rare human diseases) and (iv) advanced-therapy medicines, such as gene- therapy, somatic cell-therapy or tissue-engineered medicines. The centralized procedure may at the request of the applicant also be used for human drugs which do not fall within the above mentioned categories if the human drug (a) contains a new active substance which, on the date of entry into force of this Regulation, was not authorized in the Community; or (b) the applicant shows that the medicinal product constitutes a significant therapeutic, scientific or technical innovation or that the granting of authorization in the centralized procedure is in the interests of patients or animal health at the European Community level.

Under the centralized procedure in the European Union, the maximum timeframe for the evaluation of a marketing authorization application by the EMA is 210 days (excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions asked by the Committee for Medicinal Products for Human Use, or CHMP), with adoption of the actual marketing authorization by the European Commission thereafter. Accelerated evaluation might be granted by the CHMP in exceptional cases, when a medicinal product is expected to be of a major public health interest from the point of view of therapeutic innovation, defined by three cumulative criteria: the seriousness of the disease to be treated; the absence of an appropriate alternative therapeutic approach, and anticipation of exceptional high therapeutic benefit. In this circumstance, EMA ensures that the evaluation for the opinion of the CHMP is completed within 150 days and the opinion issued thereafter.

The mutual recognition procedure, or MRP, for the approval of human drugs is an alternative approach to facilitate individual national marketing authorizations within the European Union. Basically, the MRP may be applied for all human drugs for which the centralized procedure is not obligatory. The MRP is applicable to the majority of conventional medicinal products, and is based on the principle of recognition of an already existing national marketing authorization by one or more member states. Since the first approvals for Sativex were national approvals in the United Kingdom and Spain (following a DCP), the only route open to us for additional marketing authorizations in the European Union was the MRP.

The characteristic of the MRP is that the procedure builds on an already‒existing marketing authorization in a member state of the E.U. that is used as a reference in order to obtain marketing authorizations in other E.U. member states. In the MRP, a marketing authorization for a drug already exists in one or more member states of the E.U. and subsequently marketing authorization applications are made in other European Union member states by referring to the initial marketing authorization. The member state in which the marketing authorization was first granted will then act as the reference member state. The member states where the marketing authorization is subsequently applied for act as concerned member states.

The MRP is based on the principle of the mutual recognition by European Union member states of their respective national marketing authorizations. Based on a marketing authorization in the reference member state, the applicant may apply for marketing authorizations in other member states. In such case, the reference member state shall update its existing assessment report about the drug in 90 days. After the assessment is completed, copies of the report are sent to all member states, together with the approved summary of product characteristics, labeling and package leaflet. The concerned member states then have 90 days to recognize the decision of the reference member state and the summary of product characteristics, labeling and package leaflet. National marketing authorizations shall be granted within 30 days after acknowledgement of the agreement.

Should any Member State refuse to recognize the marketing authorization by the reference member state, on the grounds of potential serious risk to public health, the issue will be referred to a coordination group. Within a timeframe of 60 days, member states shall, within the coordination group, make all efforts to reach a consensus. If this fails, the procedure is submitted to an EMA scientific committee for arbitration. The opinion of this EMA Committee is then forwarded to the Commission, for the start of the decision making process. As in the centralized procedure, this process entails consulting various European Commission Directorates General and the Standing Committee on Human Medicinal Products or Veterinary Medicinal Products, as appropriate. Since the initial approvals of Sativex in the United Kingdom and Spain, there have been three “waves” of additional approvals under three separate MRPs. Each of these procedures have been completed without any referral, and therefore without any delay.

For other countries outside of the European Union, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, again, the clinical trials are conducted in accordance with GCP and the other applicable regulatory requirements.

If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension of clinical trials, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

In addition, most countries are parties to the Single Convention on Narcotic Drugs 1961, which governs international trade and domestic control of narcotic substances, including cannabis extracts. Countries may interpret and implement their treaty obligations in a way that creates a legal obstacle to our obtaining marketing approval for Sativex and our other products in those countries. These countries may not be willing or able to amend or otherwise modify their laws and regulations to permit Sativex or our other products to be marketed, or achieving such amendments to the laws and regulations may take a prolonged period of time. In that case, we would be unable to market our products in those countries in the near future or perhaps at all.

Reimbursement

Sales of pharmaceutical products in the United States will depend, in part, on the extent to which the costs of the products will be covered by third-party payers, such as government health programs, commercial insurance and managed health care organizations. These third-party payers are increasingly challenging the prices charged for medical products and services. Additionally, the containment of health care costs has become a priority of federal and state governments, and the prices of drugs have been a focus in this effort. The United States government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. If these third-party payers do not consider our products to be cost-effective compared to other available therapies, they may not cover our products after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, imposed new requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries and included a major expansion of the prescription drug benefit under Medicare Part D. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which will provide coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for products for which we receive marketing approval. However, any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payers often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payers.

On February 17, 2009, President Obama signed into law The American Recovery and Reinvestment Act of 2009. This law provides funding for the federal government to compare the effectiveness of different treatments for the same illness. A plan for the research will be developed by the Department of Health and Human Services, the Agency for Healthcare Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payers, it is not clear how such a result could be avoided and what if any effect the research will have on the sales of our product candidates, if any such product or the condition that it is intended to treat is the subject of a study. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of our product candidates. Decreases in third-party reimbursement for our product candidates or a decision by a third-party payer to not cover our product candidates could reduce physician usage of the product candidate and have a material adverse effect on our sales, results of operations and financial condition.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (collectively, the ACA) enacted in March 2010, is expected to have a significant impact on the health care industry. The ACA is expected to expand coverage for the uninsured while at the same time contain overall health care costs. With regard to pharmaceutical products, among other things, the ACA is expected to expand and increase industry rebates for drugs covered under Medicaid programs and make changes to the coverage requirements under the Medicare D program. We cannot predict the impact of the ACA on pharmaceutical companies as many of the ACA reforms require the promulgation of detailed regulations implementing the statutory provisions which has not yet occurred. In addition, although the United States Supreme Court has upheld the constitutionality of most of the ACA, some states have stated their intentions to not implement certain sections of the ACA and some members of Congress are still working to repeal the ACA. These challenges add to the uncertainty of the changes enacted as part of ACA. In addition, the current legal challenges to the ACA, as well as Congressional efforts to repeal the ACA, add to the uncertainty of the legislative changes enacted as part of the ACA.

In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the European Union do not follow price structures of the United States and generally tend to be significantly lower.

Other Health Care Laws and Compliance Requirements

In the United States, our activities are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration), or CMS, other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice and individual U.S. Attorney offices within the Department of Justice, and state and local governments. For example, sales, marketing and scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act, the privacy provisions of the Health Insurance Portability and Accountability Act, or HIPAA, and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, or VHCA, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. Under the VHCA, drug companies are required to offer certain drugs at a reduced price to a number of federal agencies including the U.S. Department of Veteran Affairs and U.S. Department of Defense, the Public Health Service and certain private Public Health Service‒designated entities in order to participate in other federal funding programs including Medicare and Medicaid. Recent legislative changes purport to require that discounted prices be offered for certain U.S. Department of Defense purchases for its TRICARE program via a rebate system. Participation under the VHCA requires submission of pricing data and calculation of discounts and rebates pursuant to complex statutory formulas, as well as the entry into government procurement contracts governed by the Federal Acquisition Regulations.

In order to distribute products commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors of pharmaceutical products in a state, including, in certain states, manufacturers and distributors who ship products into the state, even if such manufacturers or distributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. Several states have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities or register their sales representatives. Other legislation has been enacted in certain states prohibiting pharmacies and other health care entities from providing certain physician prescribing data to pharmaceutical companies for use in sales and marketing, and prohibiting certain other sales and marketing practices. All of our activities are potentially subject to federal and state consumer protection and unfair competition laws.

Expanded Access to Investigational Drugs

An investigational drug may be eligible for clinical use outside the context of a manufacturer’s clinical trial of the drug. “Expanded access,” sometimes also referred to as “treatment use,” refers to the use of an investigational drug where the primary purpose is to diagnose, monitor or treat a patient’s disease or condition rather than to collect information about the safety or effectiveness of a drug. Expanded access INDs are often sponsored by individual physicians to treat patients. FDA regulations provide for three categories of expanded access: expanded access for individual patients, including for emergency use; expanded access for intermediate-size patient populations; and expanded access for large patient populations under a treatment IND or treatment protocol. For all types of expanded access, FDA must determine prior to granting expanded access that: (1) the patient or patients to be treated have a serious or life‒threatening disease or condition and there is no comparable or satisfactory alternative therapy; (2) the potential patient benefit justifies the potential risks of use and that the potential risks are not unreasonable in the context of the disease or condition to be treated; and (3) granting the expanded access will not interfere with the initiation, conduct or completion of clinical studies in support of the drug’s approval. In addition, the sponsor of an expanded access IND must submit IND safety reports and, in the cases of protocols continuing for one year or longer, annual reports to the FDA. Expanded access programs are not intended to yield information relevant to evaluating a drug’s effectiveness.