GW Pharmaceuticals plc was founded in 1998 and is a public limited company incorporated under the laws of England and Wales. Since June 28, 2001, our ordinary shares have been admitted to trading on the Alternative Investment Market, or AIM, a market operated by London Stock Exchange plc, under the symbol GWP. On May 1, 2013, we completed our initial public offering of American Depositary Shares, or ADSs, on the NASDAQ Global Market. Our ADSs are traded under the symbol GWPH.

Our registered and principal executive offices are located at Sovereign House, Vision Park, Chivers Way, Histon, Cambridge, CB24 9BZ, United Kingdom, our general telephone number is (44) 1223 266-800 and our internet address is http://www.gwpharm.com. Our website and the information contained on or accessible through our website are not part of this document. Our agent for service of process in the United States is CT Corporation System, 111 Eighth Avenue, 13th Floor, New York, NY 10011.

Overview

We are a biopharmaceutical company focused on discovering, developing and commercializing novel therapeutics from our proprietary cannabinoid product platform in a broad range of disease areas. In our 17 years of operations, we have established a world leading position in the development of plant-derived cannabinoid therapeutics through our proven drug discovery and development processes, our intellectual property portfolio and our regulatory and manufacturing expertise. We commercialized the world’s first plant-derived cannabinoid prescription drug, Sativex, also known as nabiximols, which is approved for the treatment of spasticity due to multiple sclerosis, or MS, in 28 countries outside the United States. We have a deep pipeline of additional cannabinoid product candidates.

Our lead cannabinoid product candidate is Epidiolex, a liquid formulation of pure plant-derived cannabidiol, or CBD, for which we retain global commercial rights. We received Orphan Drug Designation from the U.S. Food and Drug Administration, or FDA, for Epidiolex for the treatment of both Dravet syndrome and Lennox-Gastaut syndrome, or LGS, each of which are severe infantile-onset, genetic, drug-resistant epilepsy syndromes. Additionally, GW has received Fast Track Designation from the FDA and Orphan Designation from the European Medicines Agency, or EMA, for Epidiolex for the treatment of Dravet syndrome. We have commenced four pivotal Phase 3 trials of Epidiolex, two in Dravet syndrome and two in LGS, each of which is due to report top-line results in 2016. We expect to submit a New Drug Application, or NDA, to the FDA for Epidiolex in the fourth quarter of 2016. We also expect to commence Phase 3 clinical development of Epidiolex in an additional rare pediatric epilepsy syndrome, Tuberous Sclerosis Complex, or TSC, in early 2016.

In parallel with our formal Epidiolex development program, the FDA has granted 20 intermediate expanded access Investigational New Drug Applications, or INDs, to independent investigators in the United States to treat a total of over 450 children and young adults suffering from intractable epilepsy with Epidiolex. In addition, the FDA has granted further INDs to treat 400 additional patients under expanded access programs supported by 6 U.S. states and for which GW is supplying Epidiolex. The FDA has also granted to physicians 11 individual emergency INDs. In December 2015, we obtained physician reported data on 261 patients receiving Epidiolex under these INDs, which have shown promising signals of clinical effect in reducing seizures.

GW has a deep pipeline of additional cannabinoid product candidates which includes compounds in Phase 1 and 2 development for both orphan (Neonatal Hypoxic Ischemic Encepholapthy and glioma) and non-orphan (type 2 diabetes and schizophrenia) indications. We expect to advance additional orphan drug development opportunities in the next 12 months.

Epidiolex® for Orphan Pediatric Epilepsy

Our lead cannabinoid product candidate is Epidiolex, a liquid formulation of pure plant-derived CBD, which is in development for the treatment of a number of rare pediatric epilepsy disorders. Several features of the pharmacology of certain cannabinoids suggest that they may be candidates for investigation as anti-epileptic drugs. We have conducted pre-clinical research of CBD in epilepsy for the last eight years, primarily in collaboration with the University of Reading in the United Kingdom. This research has shown that CBD has significant anti-epileptiform and anticonvulsant activity using a variety of in vitro and in vivo models and that it has the ability to treat seizures in acute animal models of epilepsy with significantly fewer side effects than existing anti-epileptic drugs.

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 within the field of pediatric epilepsy is to initially concentrate formal development efforts on three orphan indications: Dravet Syndrome, LGS and TSC. We have to date received Orphan Drug Designation from the U.S. FDA for Epidiolex for the treatment of both Dravet syndrome and LGS. Additionally, we have received Fast Track Designation from the FDA and Orphan Designation from the EMA for Epidiolex for the treatment of Dravet syndrome. We expect to further expand the market opportunity by targeting additional orphan seizure disorders.

The active ingredient in Epidiolex, CBD, is one of the two principal cannabinoids in Sativex. Sativex has over 45,000 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.

Epilepsy Market Overview

Epilepsy is one of the most common neurological disorders in children. According to Russ et al in the February 2012 edition of Pediatrics, there are 466,000 childhood epilepsy patients in the United States and 765,000 patients in Europe, of which 30%, or about 140,000 patients in the United States and about 230,000 in Europe, are deemed medically intractable or pharmacoresistant. According to Kwan and Brodie in the February 2000 edition of the New England Journal of Medicine, 36% of patients with epilepsy were pharmacoresistant. Of the patients in the study, 47% became seizure-free during treatment with their first antiepileptic drug, 13% became seizure-free during treatment with a second anti-epileptic drug as a monotherapy, and 4% became seizure-free with a third anti-epileptic drug or treatment with multiple anti-epileptic drugs. The remaining 36% of patients were classified by the authors as having pharmacoresistant epilepsy. 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. The costs of uncontrolled epilepsy are significant, with direct and indirect costs associated with epilepsy totaling more than $15 billion per year. 50,000 epilepsy related deaths occur each year, more than breast cancer deaths annually.

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. 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 or from Sudden Unexpected Death in Epilepsy, or SUDEP. 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 worldwide. 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, however, we believe that this syndrome is likely 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%-80% 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.

Dravet Syndrome Phase 3 Clinical Program

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 was completed in February 2015, and included pharmacokinetic and dose-finding data elements in a total of 34 patients over a 3 week treatment period. Following a review of the Part A data by an independent panel, Part two of the trial commenced in March 2015, and is a placebo-controlled safety and efficacy evaluation of Epidiolex (at a dose of 20mg/kg per day) over a 3-month treatment period. Originally expected to recruit 100 patients, this trial reached a total of 120 patients randomized.

In April 2015, we commenced an additional Phase 3 trial in Dravet syndrome which is recruiting an additional 150 patients. This placebo-controlled trial differs from the first Phase 3 trial in that it includes two Epidiolex dose arms, at 20mg/kg and at 10 mg/kg. Both of these studies will be the largest known controlled trials in Dravet syndrome.

We expect to report top-line results from the Phase 2/3 trial in the first quarter of 2016 and results from the second Phase 3 trial in mid-2016.

The primary measure of efficacy in both trials will be the comparison between Epidiolex and placebo in the percentage change from baseline in number of convulsive seizures during the treatment period.

Lennox-Gastaut Syndrome

Lennox-Gastaut syndrome (LGS) is a type of epilepsy with multiple types of seizures, particularly tonic (stiffening) and atonic (drop) seizures. 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 with the cause of the disorder unknown in 1 out of 4 children. LGS affects between 14,500 – 18,500 children under the age of 18 in the U.S. and over 30,000 children and adults in the U.S. 80% of children with LGS continue to experience seizures, psychiatric, and behavioral deficits in adulthood. Seizures due to LGS are hard to control and they generally require life-long treatment as LGS usually persists into the adult years. Historically patients with LGS have had few effective treatment options. Intellectual and behavioral problems associated with LGS are common and add to the complexity of this syndrome and the difficulties in managing life with LGS.

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.

LGS Phase 3 Clinical Program

In May 2015 we commenced the Phase 3 pivotal trials program for Epidiolex in LGS. The first Phase 3 trial is a placebo-controlled safety and efficacy evaluation of Epidiolex (at a dose of 20mg/kg per day) over a 3-month treatment period. Originally expected to recruit 100 patients, this trial reached a total of 171 patients randomized. The second placebo-controlled Phase 3 trial differs from the first Phase 3 LGS trial in that it includes two Epidiolex dose arms, at 20mg/kg and at 10 mg/kg. Originally expected to recruit 150 patients, it has completed enrollment above the original target sample size and is expected to reach a total of over 210 patients randomized. We expect to report top-line results from both trials in the second quarter of 2016. The primary measure of efficacy in both trials will be the comparison between Epidiolex and placebo in the percentage change from baseline in number of drop attacks during the treatment period. We have been notified of the death of one of the patients enrolled in the LGS Phase 3 trial program. This death has been investigated and has been deemed unrelated to Epidiolex by the principal investigator responsible for the patient.

It is important to note that the protocols for both the Epidiolex Dravet syndrome and LGS Phase 3 trial trials allow for a prospective pooling of data within each indication, which is endorsed by the FDA in its recent guidance (Integrated Summary of Effectiveness “ISE” – October 2015). The recommendations in this guidance reflect the FDA’s current thinking regarding information that the industry should include in an ISE to provide an integrated analysis that offers insights beyond those observable in individual clinical trials, where NDA filers are “encouraged to provide an ISE because it represents an opportunity to present a coherent analysis and presentation of the drug’s benefits.”

Tuberous Sclerosis Complex (TSC)

TSC is a genetic disorder that causes non-malignant tumors to form in many different organs, primarily in the brain, eyes, heart, kidney, skin and lungs. The brain and skin are the most affected organs. TSC results from a mutation in tumor suppression genes TSC1 or TSC2. According to the Tuberous Sclerosis Alliance, TSC is estimated to affect approximately 50,000 patients in the United States. The most common symptom of TSC is epilepsy, which occurs in 75 – 90% of patients, about 70% of whom experience seizure onset in their first year of life. Approximately 60% of these TSC patients (or approximately 25,000 of patients in the United States) have treatment-resistant seizures. The seizures of TSC are typically focal in onset. There are significant co-morbidities associated with TSC including cognitive impairment in 50%, autism spectrum disorders in up to 40% and neurobehavioral disorders in over 60% of individuals with TSC.

A number of patients with TSC have been treated with Epidiolex in the expanded access program. According to Geffrey AL et al. in a poster presentation at the American Epilepsy Society annual meeting in December 2014, of five TSC patients treated with Epidiolex, four patients experienced a reduction in seizures of 97% (n=2), 77% (n=1) and 40% (n=1) at week 16 compared to a 4-week baseline period. All three patients with cognitive impairment experienced cognitive gains and one of the two subjects with behavioral problems showed improvements. Since this poster presentation, additional TSC patients have commenced treatment with Epidiolex in the expanded access program. Based on these findings, we have decided to commence a clinical program of Epidiolex in TSC and we expect to commence Phase 3 clinical development in early 2016.

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, most 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.

Based on recent findings in The Journal of Pharmacology and Experimental Therapeutics , CBD is likely to be acting via more than one mechanism of action with the effect of reducing neuronal hyperexcitability. Importantly, the anti-seizure effects of CBD are not dependent on cannabinoid receptors, nor on sodium channels.

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.

There is a significant effort to identify the mechanisms of action that underpin the clinical effectiveness of Epidiolex (and other cannabinoids) in epilepsy, including investigation of the effects of cannabinoids on epilepsy associated gene expression. CBD has negligible binding at the CB1 receptor, and so shares neither the pharmacology of CB1 agonists such as THC nor that of CB1 inverse agonists 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 partial seizures, and clinical reports of benefit extend into other congenital seizure disorders.

Our CBD Pre-Clinical 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 Mg2+ 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.

During 2013, we 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:

Epidiolex Expanded Access INDs

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, the FDA has granted 20 intermediate expanded access INDs to independent physician investigators in the United States to treat a total of over 450 children and young adults suffering from intractable epilepsy with Epidiolex, as well as three individual patient expanded access INDs. The patients in these INDs suffer not only from Dravet syndrome and LGS, but also from other pediatric epilepsy syndromes. In addition, the FDA has granted additional INDs to independent investigators operating under expanded access programs supported by individual states and for which we are supplying Epidiolex. The FDA may authorize expanded access programs to facilitate access to investigational drugs for treatment use for patients with a serious or immediately life-threatening disease or condition who lack therapeutic alternatives. In addition to Company and physician-led activities, a number of U.S. state governments and the government of New South Wales, Australia, are collaborating with GW on separate state-based clinical trials in epilepsy.

Seven abstracts related to our programs were presented at the 69th Annual Meeting of the American Epilepsy Society including data from the physician-led Epidiolex expanded access program. On December 7, 2015, at the Annual Meeting of the American Epilepsy Society, physician reports of clinical effect and safety data was presented on 261 children and young adults with treatment-resistant epilepsy who have been treated with Epidiolex for a period of at least 12 weeks (Devinsky et al). This data is from 16 clinical sites in the United States and was generated under expanded access INDs authorized by the FDA. In addition, physician reports of safety data were presented on 313 patients (261 patients with 12 weeks treatment effect data plus an additional 52 patients still in their first 12 weeks of treatment or who withdrew from treatment). The expanded access program comprises clinical studies performed by individual physicians.

The patients included in the Epidiolex program had Dravet syndrome (17% of the total) and LGS (15% of the total), epilepsy types that can lead to intellectual disability and lifelong seizures, as well as 14 other types of severe epilepsy, such as TSC, Aicardi syndrome and Doose syndrome. Many of these other types of epilepsy are severe and rare, and several patients with these epilepsies have major congenital structural brain abnormalities.

The 261 patients were predominately children with an average age of 11.8 years. In all cases, Epidiolex was added to current anti-epileptic drug (AED) treatment regimes. On average, patients were taking approximately three other AEDs. At baseline, the median number of convulsive seizures per month was 31.

Clinical Effect Data – All Patients

Data was presented on all 261 patients who had at least 12 weeks treatment. Treatment was open label. Of these 261 patients, 135 patients had also reached 36 weeks treatment at the time of data analysis. Information collected on all seizures (convulsive and non-convulsive) is reported for each patient. Data is presented showing the median change in seizure frequency compared to a 4-week baseline period.

At the end of 12 Weeks, 47% of all patients experienced a ≥50% reduction in seizures and 9% of all patients were seizure-free.

At the end of 12 Weeks, the median overall reduction in convulsive seizure frequency was 48.8%.

Clinical Effect Data – Dravet syndrome patients only

Data was presented on 44 patients with Dravet syndrome who had at least 12 weeks treatment data. Of these 44 patients, 25 patients had also reached 36 weeks treatment at the time of data analysis. Information collected on all seizures (convulsive and non-convulsive) is reported for each patient. Data is presented showing the median change in seizure frequency compared to a 4-week baseline period.

At the end of 12 Weeks, 13% of Dravet syndrome patients were seizure-free.

Of the 44 patients with Dravet syndrome, 42 patients had convulsive seizures at baseline. At the end of 12 weeks, the median reduction in convulsive seizures in these patients was 52.3%.

Clinical Effect Data – Patients without Dravet syndrome

Data was made available on all 217 patients with diagnoses other than Dravet syndrome who had at least 12 weeks treatment. Of these 217 patients, 110 patients had also reached 36 weeks treatment at the time of data analysis. Information collected on all seizures (convulsive and non-convulsive) is reported for each patient. Data is presented showing the median change in seizure frequency compared to a 4-week baseline period.

Clinical Effect Data – LGS patients only

Data was presented on 40 patients with LGS who had at least 12 weeks treatment data. Of these patients, 14 had atonic seizures at baseline. In these patients, there was a 71.1% median reduction in the number of atonic seizures at the end of 12 weeks.

Safety Data

Safety data was made available on 313 patients (261 patients with 12 weeks treatment effect data plus 52 additional patients for whom 12 week treatment effect data is not yet available or who withdrew from treatment) and represents approximately 180 patient-years of exposure to Epidiolex. The most common adverse events (occurring in 10% or more patients and resulting from all causes) were somnolence (23%), diarrhea (23%), fatigue (17%), decreased appetite (17%), convulsions (17%) and vomiting (10%). Adverse events led to discontinuation in four percent of patients. Most adverse events were mild or moderate and transient. 14 patients (4%) reported an adverse event leading to discontinuation. There were 36 (12%) withdrawals from treatment due to lack of clinical effect. Serious adverse events were reported in 106 patients. Of these, SAEs in 16 (5%) patients were deemed possibly related to treatment, including altered liver enzymes (4 patients), status epilepticus/convulsion (4), diarrhea (4), decreased weight (3), thrombocytopenia (1). Serious adverse events reported under the expanded access program include 7 deaths. We are also aware of the death of 1 patient that received Epidiolex on a compassionate use basis in the United Kingdom. All 8 of these deaths have been investigated and were all deemed unrelated to Epidiolex by the independent investigators. Clobazam co-therapy was associated with a higher rate of treatment response (median reduction in convulsive seizures): 56.4% v. 35.0% at week 12; this may reflect elevations in the N-desmethyl clobazam metabolite. This apparent effect of clobazam co-therapy was not seen in Dravet syndrome or LGS groups - at week 12, 53% of Dravet/LGS patients on Clobazam were ³ 50% responders compared with 54% not taking Clobazam (odds ratio 0.97 (95% CI - 0.35-2.65)).

Clinical Effect Data - TSC patients

On December 7, 2015, at the Annual Meeting of the American Epilepsy Society, safety and efficacy data on 10 patients diagnosed with TSC from the expanded access program was presented by Massachusetts General Hospital for Children (Geffrey et al) on Epidiolex treatment of refractory epilepsy in these patients. In this presentation, there was a response rate of 50%, 50%, 40%, 60% and 66% at 2, 3, 6, 9, and 12 months of treatment with Epidiolex, respectively. Improvements were reported in alertness, verbal capacity/communication, vocalizations, cognitive availability, and initiation of emotional and physical connections, as well as heightened expression of emotion. Side effects were seen in 50% of patients (5) and most were resolved with anti-epileptic drug or CBD dose adjustment.

Clinical Effect Data - Epileptic Spasms

On December 7 , 2015, at the Annual Meeting of the American Epilepsy Society, safety and efficacy data on 9 patients suffering from epileptic spasms from the Epidiolex expanded access program were presented by Massachusetts General Hospital for Children (Abati et al). Epilepsy spasms often remain refractory to standard anti-epileptic drugs . According to this poster, Epidiolex exerted its effects in a short time course, with a response rate of 67% after two weeks and 78% after 1 month. Three of nine patients became spasm-free after two weeks of Epidiolex treatment. By parent report, patients also showed cognitive gains including improvements in alertness, verbal capacity/communication, and cognitive availability.

Note Regarding Expanded Access Studies

The expanded access studies we currently support are uncontrolled, carried out by individual physician investigators independent from us, and not always conducted in strict compliance with Good Clinical Practices, all of which can lead to an observed treatment effect that may differ from one seen in placebo-controlled trials. Data from these studies provide only anecdotal evidence of efficacy for regulatory review, although they may provide supportive safety information for regulatory review. The patients treated under these expanded access INDs contain no control or comparator group for reference and these patient data are not designed to be aggregated or reported as study results. Moreover, data from such small numbers of patients may be highly variable. Information obtained from these INDs, including the statistical principles that the independent investigators have chosen to apply to the data, may not reliably predict data collected via systematic evaluation of efficacy in our sponsored clinical trials, or evaluated via other statistical principles that may be applied in these trials. Such studies are carried out by individual investigators and not conducted in strict compliance with Good Clinical Practices. We can offer no assurances that the observations reported by the treating physicians under these expanded access INDs are due solely to Epidiolex and not as a result of other factors, such as a beneficial or synergistic drug-drug interaction, as postulated above. 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. 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. 

We believe the data we have received to date under these expanded access INDs support the continued investigation of Epidiolex as a potential treatment for epilepsy, including for Dravet syndrome, LGS and TSC.

Emergency INDs

The FDA has also granted to physicians 11 individual emergency INDs. An emergency IND is an IND for the use of an investigational new drug or biological product for clinical treatment of a patient in an emergency situation. In order to be granted an emergency IND the following five conditions must all be met: (1) the patient or patients to be treated have a serious or immediately life-threatening disease or condition, and there is no comparable or satisfactory alternative therapy to diagnose, monitor, or treat the disease or condition; (2) FDA must determine that the patient cannot obtain the drug under another IND or protocol; (3) the potential benefits to the patient justify the potential risks of the treatment and the risks from this investigational treatment are not unreasonable in the context of the disease or condition treated with this investigational product; (4) providing the investigational drug for the requested use will not interfere with the initiation, conduct, or completion of clinical investigations that could support marketing approval of the expanded access use or otherwise compromise the potential development of the expanded access use; and (5) the physician must determine that the probable risk to the person from the investigational drug is not greater than the probable risk from the disease or condition. In these cases, we have 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. In a poster at the American Epilepsy Society annual meeting in December 2014, Lopez C. et al. presented information on a four year old patient with super refractory status epilepticus due to febrile infection related epilepsy syndrome, or FIRES, treated with Epidiolex under an emergency IND concluding that CBD was very well tolerated and associated with a significant improvement in clinical and electrographic seizure burden. We believe all but two of the children treated under emergency INDs remain on Epidiolex treatment. Two children treated under emergency INDs died while receiving treatment with Epidiolex; both deaths were deemed unrelated to Epidiolex by the independent investigators.

Epidiolex Manufacturing

We are currently manufacturing Epidiolex through utilization of in-house and external third party facilities for various steps in the production process. We expect to satisfy near-term requirements for Epidiolex from these current facilities but we are also in the process of scaling-up various parts of the production process both in-house and with external third parties. We anticipate that we will need to continue to expand our manufacturing capacity over the next several years to satisfy expected commercial demand.

GW is actively scaling its growing and manufacturing of Epidiolex to meet anticipated commercial demand, if approved. From its extensive experience in growing CBD botanical raw material, GW is able to utilize a range of growing methods to generate significant quantities of CBD botanical raw material derived from its proprietary CBD plant chemtotypes. In 2015, production increased by a factor of approximately 20 times (4 Tonnes to 92 Tonnes) compared with the previous year and is expected to double in 2016. This equates to approximately 200 Tonnes in 2016 and when purified and formulated, results in approximately 1.6 million 100mg/ml bottles of Epidiolex. To put this into context, in 2015 GW shipped just over 20,000 bottles of Epidiolex to clinics in the U.S. for both controlled trials and expanded access use. With expectations of significant demand for Epidiolex upon approval, GW plans to continue expansion of its Epidiolex plant growing capacity well beyond this 2016 goal. The finished product, Epidiolex, is a liquid formulation of pure CBD and there are several processing steps beyond growing to ensure that the product is pure, meets the required FDA specification, and can be manufactured at scale to current Good Manufacturing Practice Regulations. Each step has already been scaled and a further increase in scale is anticipated during 2016. We believe we are on track to be ready for FDA pre-approval inspection in the second half of 2016.

Epidiolex Commercialization

We are planning to commercialize Epidiolex in the United States and elsewhere using our own sales and marketing organization. In June 2015, we appointed Julian Gangolli to the newly created position of President, North America and he has been appointed to the GW Board of Directors. Mr. Gangolli is leading our commercial organization in the United States. We have also recruited a number of U.S. medical affairs, clinical trials and commercial staff, many of whom have strong epilepsy knowledge and experience. We expect this organization to expand over the next 12 months. The creation of the medical affairs team has allowed us to open scientific and consultative communications with key stakeholders, such as the patient and physician communities in the United States, whilst the commercial staff have begun actively developing our commercial strategy for the United States, looking at issues like pricing and reimbursement strategy and the structuring of the marketing approach and sales force.

GWP42006 (CBDV) in Epilepsy

In addition to Epidiolex, our epilepsy product candidates also include GWP42006, which features CBDV as the primary cannabinoid. CBDV is distinct in chemical structure to CBD and has also shown anti-epileptic properties across a range of in vitro and in vivo models of epilepsy. 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.

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 reported, nor any withdrawals due to adverse events. We have commenced a Phase 2 trial of GWP42006 in 130 patients with epilepsy and expect results in the second half 2016. As part of our agreement with the government of New South Wales in Australia, we expect an additional trial of GWP42006 to commence in 2016 in children with treatment-resistant epilepsy. We believe that GWP42006 has the potential for development in the field of pediatric epilepsy as well as the broader epilepsy market.

New South Wales Initiative

In October 2015, we signed a Memorandum of Understanding (MOU) with the Government of New South Wales in Australia to progress a research program for Epidiolex and CBDV in children with severe, drug resistant childhood epilepsy. The MOU will facilitate (i) a world first, Phase 2 clinical trial in children for GWP42006, (ii) a compassionate access program for Epidiolex, (iii) provision for New South Wales to host additional Phase 3 clinical trials of Epidiolex and (iv) a Phase 4 clinical trial of Epidiolex (to follow completion of the Phase 3 studies).

CBD/CBDV Intellectual Property Portfolio

Our patent portfolio related to the use of CBD and/or CBDV includes fourteen patent families containing one or more pending and/or issued patents with claims in the treatment of epilepsy, compositions, extraction techniques, CBD and CBDV extracts and highly purified plant-derived CBD. These include Notices of Allowance from the U.S. Patent and Trademark Office for patent applications protecting the use of CBD in the treatment of partial seizures and for CBDV in the treatment of patients with epilepsy. The issued patents from these applications will provide an exclusivity period until June 2030 and March 2031 respectively. We have also had a patent granted in the UK which claims the use of CBD in combination with certain standard anti-epileptic drugs in the treatment of epilepsy. Equivalent patent applications are being prosecuted in the US and at the European Patent Office. We also had a patent granted in the UK in October 2015 which claims the use of CBD in combination with certain standard anti-epileptic drugs in the treatment of epilepsy. Equivalent patent applications are being prosecuted in the US and at the European Patent Office.

Other Orphan Product Candidates

Glioma

Beyond epilepsy-related orphan diseases, we are evaluating a combination product containing GWP42002:GWP42003 in the treatment of recurrent glioblastoma multiforme, or GBM, a particularly aggressive brain tumor which is considered a rare disease by the FDA and the European Medicines Agency. 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. We have received Orphan Drug Designation from the FDA for GWP 42002:GWP42003 combination for the treatment of GBM.

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 N ew 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.

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 tumor 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.

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 evaluating GWP42002:GWP42003 (THC/CBD) 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 followed by a double blind, randomized, placebo-controlled phase with patients randomized to receive active or placebo. The first phase, an open-label safety evaluation of GWP42002:GWP42003 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 was given to proceed into a Phase 2a placebo-controlled phase.

We have now completed recruitment of the 20 patient placebo-controlled 2a phase of the trial, and top-line data is expected around mid-2016. 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 employs Sativex, which contains 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.

Neonatal Hypoxic-Ischemic Encephalopathy (NHIE)

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. 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. This treatment is only available in specialized neonatal intensive care units and must be started within 6 hours of birth. Even if a patient is put into induced hypothermia there is still a significant rate of morbidity and mortality, with a meta-analysis of the available data revealing a 27% death rate. Among the patients who survive NHIE, 28% suffer from major neurodevelopment issues and 26% develop Cerebral Palsy. 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 B.V. attained orphan drug designation for this treatment in both Europe and the United States and is conducting a Phase 2 study.

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 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 antagonists.

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 A _2A receptor. Previously, it was demonstrated that CBD reduces brain damage after ischemic injury in adult animals. In a newborn 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 et al, published in Neurobiology of Disease in 2010, reporting results from our pre-clinical collaboration, CBD protected newborn mice forebrain slices from oxygen and glucose deprivation. We have further demonstrated that CBD was neuroprotective even when administered 18 hours after the hypoxic insult. A study from our pre-clinical collaboration with Lafuente, published in Paediatric Research in 2011, showed that administration of CBD to newborn piglets at doses much lower than those reported in the literature appears to protect brain cells, preserve brain activity, prevent seizures and improve neurobehavioral performance. These neuroprotective effects were not only free from side effects in the piglets but also associated with some cardiac, hemodynamic and ventilatory benefits unlike other promising compounds with neuroprotective activity. This data supports the view of CBD as a possible therapy for asphyxiated newborns. In a paper by Pazos et al. published in Neuropharmacology in 2012, post hypoxic-ischemic administration of CBD to newborn rats was shown to reduce the volume of brain damage, restore neurobehavioral function long term and reserve myelinization. In a second paper by Pazos et al, published in Neurpharmacology in 2013, reporting results from our pre-clinical collaboration, post hypoxic-ischemic administration of CBD was shown, in a piglet model, to reduce necrotic and apoptotic cell death, recover brain activity, restore neurobehavioral function in the short term and enhance hypothermia protection.

Our NHIE clinical program

We held a pre-IND meeting with the FDA to discuss the development program for an intravenous CBD formulation (GWP42003) in the treatment of NHIE. In April 2015, we received Orphan Drug Designation from the FDA for CBD for the treatment of NHIE in July 2015 we received Orphan Drug Designation from the EMA for CBD for the treatment of perinatal asphyxia. In addition, in July 2015 we received Fast Track Designation from the FDA. We expect to commence a Phase 1 trial in healthy volunteers in the first half of 2016.

Other Pipeline Product Candidates

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 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. GWP42004 is an orally administered product which features plant-derived tetrahydrocannabivarin (THCV) as its active ingredient. THCV is distinct from THC and does not share its intoxicating psychoactive effects. The primary objective of this study is to compare the change in glycemic control in participants with type-2 diabetes when treated with one of three doses of GWP42004 or placebo as add-on therapy, to metformin with the primary endpoint being change from baseline to the end of treatment in mean glycosylated hemoglobin A1c (HbA1c) level. The safety and tolerability of GWP42004 compared with placebo will also be assessed.

This study has now completed recruitment of its target 200 patients and top-line data is expected in mid-2016.

We believe that if the Phase 2 study confirms the Phase 2a findings, GWP42004 would have the potential to offer a novel orally administered treatment option in this large potential market.

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. In September 2015, we announced positive top line results from an exploratory Phase 2a placebo-controlled clinical trial of CBD in 88 patients with schizophrenia who had previously failed to respond adequately to first line anti-psychotic medications. Over a series of exploratory endpoints, CBD was consistently superior to placebo, with the most notable differences being in the PANSS positive sub-scale (p=0.018), the Clinical Global Impression of Severity (p=0.04) and Clinical Global Impression of Improvement (p=0.02). The proportion of responders (improvement in PANSS Total score greater than 20%) on CBD was higher than that of participants on placebo and the Scale for Assessment of Negative Symptoms showed a trend in favor of CBD which reached statistical significance for patients taking CBD together with one of the leading first line anti-psychotic medications. The safety profile of CBD was reassuring, with no serious adverse events and an overall frequency of adverse events very similar to placebo

We believe that the signals of efficacy demonstrated in this trial, together with a notably reassuring safety profile, provide us with the prospect of new and distinct cannabinoid neuropsychiatric product pipeline opportunity as the mechanism of CBD does not appear to rely on the dopamine D2 receptor augmentation of standard antipsychotics. We are now analyzing the data to fully understand the appropriate next steps regarding product development in schizophrenia with future research likely focused on pediatric orphan neuropsychiatric indications. Additionally, our pre-clinical research findings suggest that a range of other psychiatric conditions may be promising targets for cannabinoid therapeutics.

Sativex for Cancer Pain

Sativex, or nabiximols, is an oromucosal spray consisting of a formulated extract of the cannabis sativa plant that contains the principal cannabinoids delta-9-tetrahydrocannabinol, or THC, and CBD. We have been 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, the current standard of care. The costs of the Phase 3 cancer pain program have been fully funded by Otsuka Pharmaceutical Co. Ltd, who hold exclusive rights to commercialize Sativex in the U.S.

This Phase 3 program consisted of three pivotal Phase 3 trials. In January 2015, we announced top-line results from the first trial, in which Sativex did not meet the primary endpoint of demonstrating a statistically significant difference from placebo. In October, 2015, we reported on the additional two Sativex Phase 3 trials. Whilst Sativex did not meet the primary endpoint in these trials, a pre-specified subgroup analysis of US patients across the Phase 3 trials showed a statistically significant improvement for Sativex compared to placebo (n=248, p=0.02), with several significantly positive secondary efficacy endpoints. We and Otsuka plan to meet with the FDA with a view to identifying the extent of additional clinical data required for a possible future NDA submission.

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.

Sativex for Cerebral Palsy in Children

GW is currently conducting a study to assess the efficacy, safety and tolerability of Sativex as an adjunctive treatment to existing anti-spasticity medications in children aged 8 to 18 with spasticity due to cerebral palsy or traumatic central nervous system injury who have not responded adequately to existing anti-spasticity medications. This study is a randomized, double-blind, placebo-controlled study followed by a 24-week open label extension phase and is expected to enroll approximately 70 patients and to be completed in mid-2016.

Autism Spectrum Disorders

Many of the pediatric intractable epilepsy conditions within the Epidiolex Expanded Access Program share considerable overlap with Autism Spectrum Disorders (ASD). Early clinical observations from treating physicians suggest a potential role for cannabinoids in addressing problems associated with ASD; they may be able to treat deficits in cognition, behavior and communication. Consequently, we have several ongoing initiatives to evaluate a range of cannabinoids in pre-clinical models of ASD, with a focus on, but not limited to, those caused by single genetic aberrations. These conditions often fall within the orphan disease space and we are working with investigators to gain clinical experience in the use of different cannabinoids with the aim to commence clinical trials in the second half of 2016.

Pre-clinical developments

In addition to our extensive in-house research organization, we have established a global network of leading scientists in the cannabinoid field including 36 academic institutions in nine countries. Our proprietary cannabinoid product platform allows us to discover, develop and commercialize additional novel first-in-class cannabinoid products across a broad range of therapeutic areas. Some of the more advanced programs include:

Our Commercialized Product: Sativex® for MS Spasticity

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. 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. 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.

Our licensing partners are commercializing Sativex for MS spasticity in 15 countries outside the United States. We have also received regulatory approval in an additional 13 countries, and we anticipate commercial launches in several of these countries in the next 12 months. Two additional countries have recommended approval for Sativex and regulatory filings are ongoing in 11 other countries, principally in the Middle East where we expect approvals over the next 12 months.

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 functions of daily living, 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 of > 20% improvement in their spasticity NRS scores at the end of the prior four-week period were randomized to Sativex or placebo in a conventional parallel double blind group design. We designed this trial to demonstrate the size of clinical benefit achieved from Sativex in patients who had clearly shown a capacity to respond to treatment in a clinically meaningful way.

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, of 572 patients enrolled 538 patients completed and had a reduction in the mean score for spasticity on the NRS scale by 3.01 points from a baseline of 6.91 points, or 44%. In addition, Of the 538 patients’ 48% of patients’ improved their NRS score 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, double blind, 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=0.005), 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=0.0067). 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.

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, studies have been completed which report on the long-term effectiveness of Sativex clinical benefit and which support the commercialization efforts of our partners.

An observational, prospective, multi-center and non-interventional study of prescription use in Germany has been published in the European Neurology Journal in February 2014 by Flachenecker et al. This study observed 335 patients of whom 276 fit the efficacy criterion and showed that the clinical response rate on Sativex is consistent with that seen in the Phase 3 trials and it is an effective and well tolerated treatment option in clinical practice for resistant multiple sclerosis spasticity.

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 consistent with, and somewhat better than, that seen in the Phase 3 trials.

A recent publication, November 2015 in European Neurology by Trojano et al reports on a prospective, non-interventional mobility improvement study that looks at real life data on clinical outcomes of patients with treatment resistant multiple sclerosis spasticity receiving routine treatment with Sativex in Italy.   In this interim analysis, 322 patients showed a decrease in NRS of -1.6 points (p=< 0.0001) and in the mean modified Ashworth score a decrease from 2.6 to 2.3 (p=< 0.0001),     from baseline to month 3 of treatment. The study concluded that in everyday clinical practice in Italy, Sativex provides symptomatic relief of MS spasticity with good tolerability in a number of previously resistant patients.

Post-Approval Evidence of Sativex Safety Profile

In October 2014, Vachova et al published the results in the Journal of Multiple Sclerosis 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=0.002 and p=0.0014 respectively). This study concluded that long-term use of Sativex is not associated with any cognitive decline or significant mood changes in this prone population.

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.

MS Spasticity Indication in the United States

We believe that we will be required to conduct an additional development program prior to the submission of an NDA with the FDA for this indication. Consistent with the FDA’s recommendations, we have requested a Special Protocol Assessment, or SPA, for a proposed Phase 3 trial, for which we have not reached agreement. We have elected not to continue with the SPA process at the present time and intend to review plans for this indication in the U.S. during 2016.

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, and neurodegenerative disease.

Our proprietary cannabinoid product platform consists of our:

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, the Drug Enforcement Administration, or DEA, and the FDA. 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 entitled “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 entitled “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. A presentation in March 2015 by Douglas C. Throckmorton, Deputy Director for Regulatory Programs, Center for Drug Evaluation and Review, FDA, referenced Epidiolex and Sativex as examples of drugs in clinical testing, and concluded that drug development, grounded in rigorous scientific research is essential to determining the appropriate uses of marijuana in the treatment of human disease, and that the FDA is committed to making this process as efficient as possible and looking for ways to speed the availability of new drugs from marijuana for the American public.

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.

With respect to complex extracts, 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.

With respect to pure cannabinoid formulations, our approach is exemplified by Epidiolex. The active ingredient, CBD, is extracted from proprietary CBD containing chemotypes and then undergoes various processing steps to generate the isolated pure compound.

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 4,370 patients, including over 44 Phase 2 and Phase 3 trials and have undertaken post-market safety studies involving over 1,000 patients.

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. Each of our product candidates is derived from one or more selected chemotypes. For products such as Sativex that comprise complex extracts, we reproduce the chemotype solely through propagation of plant cuttings, or clones, in order to ensure that all subsequent plant material is genetically uniform. The plants are then grown under highly controlled conditions in indoor glasshouses, in which all key features of the growing climate and growing process are standardized. Plant material is grown throughout the year and batches are harvested each week. Following harvest, plant material is dried and milled under standardized conditions. For pure cannabinoid product candidates, such as Epidiolex, selected chemotypes can be grown in a range of conditions to produce plant material that meets the necessary specifications for further processing. The BRM for Sativex and our other pipeline product candidates are sourced from either our own in-house growing operations or from 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. For Epidiolex, the BDS undergoes subsequent processing steps to yield pure CBD.

BDP Production. BDP is the finished product manufactured from one or more BDSs 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 36 academic institutions in nine 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. 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 Collaboration Agreements

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 completed an amendment to the supply terms with Almirall in 2014, and this amendment provides 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.

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. The position in Australia has impacted Novartis’ commercialization strategy for its licensed territory and the parties agreed to allow Novartis to put its activities on hold whilst it waits for the results of the US cancer pain trials. Novartis is currently in a three month period of assessment, at the end of which it must recommence activities with Sativex if the results of the US cancer pain trials show, to Novartis’s reasonable satisfaction, that the endpoints for these trials have been achieved. As the results of the US cancer pain trials show that the endpoints have not been met, Novartis has 3 months to consider its options, which may include exercising its right to terminate the agreement with us without cause.

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 £400,000 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 2014 total revenue of €1,407.4 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 £17.0 million in future milestone payments in the event that the relevant milestones are achieved. Of such £17.0 million in potential future milestone payments, £4.0 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 would 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.

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, 2015, includes 60 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, 2015, we own 353 pending patent applications worldwide. Within the United States, we already have 32 issued patents with a further 32 pending patent applications under active prosecution. There are an additional 349 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 eleven distinct patent families which are either granted or filed, protecting the use of these product candidates. The latest expiry date of these families runs to June 2035. 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 the 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.

We have a portfolio of intellectual property relating to CBD in schizophrenia. This portfolio includes two distinct patent families which are either granted or filed, protecting the use of these product candidates. One of these patent families is collaboration IP derived from the now expired Otsuka research collaboration, and to which we have an exclusive sub-licensable royalty-bearing license. The latest expiry date of these families runs to September 2035. These patent families include claims to use of CBD alone or in combination with other cannabinoids / anti-psychotics in the treatment of schizophrenia as well as other families which provide protection for compositions, extraction techniques, CBD extracts and highly purified CBD. We anticipate additional patent applications being filed as new data is generated.

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.

From time to time, in the normal course of our operations, we will be a party to litigation and other dispute matters and claims relating to intellectual property. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and our view of these matters may change in the future as the litigation and events related thereto unfold. An unfavorable outcome to any legal matter, if material, could have a materially adverse effect on our operations or our financial position, liquidity or results of operations.

Our wholly-owned subsidiary GW Pharma Limited is currently subject to a claim of trademark infringement by G&W Laboratories for the use of the GW PHARMACEUTICALS name and logo in the US. We intend to robustly defend this claim, but should we be unsuccessful it may result in us being unable to commercialize our products under the GW Pharmaceuticals name in the US. An unsuccessful result would not prevent us from commercializing our products in the US per se, or prevent us from commercializing our products outside the 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 Q1 2016. 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 plus an additional third party. 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 37 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 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. Zynerba Pharmaceuticals, Inc. is developing a transdermal formulation of CBD.

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 not imposed a clinical hold on the IND or otherwise commented or 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, for Fiscal Year 2016 $2,374,200, and the manufacturer and/or sponsor under an approved NDA are also subject to annual product and establishment user fees, for Fiscal Year 2016 $114,450 per product and $585,200 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.

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.

Following NDA approval of a drug containing a Schedule I controlled substance, that substance must be rescheduled as a Schedule II, III, IV or V substance before it can be marketed. On November 17, 2015, H.R. 639, Improving Regulatory Transparency for New Medical Therapies Act, passed through both houses of Congress. On November 25, 2015 the Bill was signed into law. The new law removes uncertainty associated with timing of the DEA rescheduling process after NDA approval. Specifically, it requires DEA to issue an “interim final rule,” pursuant to which a manufacturer may market its product within 90 days of FDA approval. The new law also preserves the period of orphan marketing exclusivity for the full seven years such that this period only begins after DEA scheduling. This contrasts with the previous situation whereby the orphan “clock” began to tick upon FDA approval, even though the product could not be marketed until DEA scheduling was complete.

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 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” 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 typically sponsored by individual physicians to treat patients who fall into one of three FDA-recognized 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 authorizing 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 for regulatory purposes.