gw pharmaceuticals (nasdaq: gwph) high as a kite and too close to the sun…

8/13/2019 GW Pharmaceuticals (NASDAQ: GWPH) High as a kite and too close to the sun

1/20

GW Pharmaceuticals

(NASDAQ: GWPH)High as a k i t e and too c los e to

the sun

February 20, 2014


2/20

Infit ialis Research Collectiv e

1 Report on GW Pharmaceuticals, Inc. (NASDAQ: GWPH)(LSE AIM: GWP)

GW Pharmaceuticals: Executive Summary

Investors in industries deemed popular or in vogue by the general public have a propensity to

engage in folly often resulting in the manifestation of valuation bubbles for the pioneering

companies. As the great Charles Mackay wrote in 1841: "Men, it has been well said, think in

herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and

one by one." Nearly two hundred years later, these words are still relevant as even nowadays

men find it difficult to act against the herd while the herd goes mad.

Infitialis is a research collective that exposes fraud and folly in an effort to identify

bubbles before they implode. In this report, we will be exposing folly on the scale of our prior

exposs on NASDAQ listed firms such as $TTS & $MLNX and prior fraud reporton Medical

Marijuana Inc. (MJNA). Purportedly operating in the same sector as MJNA, GWPharmaceuticals, Inc. (NASDAQ: GWPH)(LSE AIM: GWP) appears massively over-valued and

presents a clear and present risk to long investors.

1. Marijuana Hype Over-Played: GW Pharmaceuticals will derive no benefit from the nascent

retail marijuana market opportunity in Colorado, Washington, and other legalizing states.

2. Corrupted Research: The purported research literature regarding marijuana plant-

derived cannabidiol (CBD) use in pediatric treatment-resistant epilepsy seems especially

dubious because GW Pharmaceuticals has corrupted the objectivity of the authors by being

their financial backers; it has failed to disclose this fact in SEC filings or investor materials.

3. Limited Intellectual Property & Pricing Power: Because GW Pharmaceuticals main

products are natural plant-derived extracts, they cannot be patented and there are basically

no barriers to other firms extracting and selling the same biologicals. For example, just

because orange juice is demonstrated to provide health a benefit doesnt mean that a

company can earn outsized returns by selling concentrated Vitamin C.

4. Ridiculous Market Valuation:As of yesterdays close of $57.44/ADS, GW Pharmaceuticals

is currently trading at a market capitalization of $1,098.5m, for a shocking valuation of 19.6x

LTM revenue and 18.5x P/B despite barely being break-even on an operating cash flow

basis since its reverse-merger formation in 2001.

5. Backdoor Listing onto NASDAQ: After completing a reverse-merger listing in 2001 to the

London AIM exchange (equivalent to U.S. OTC market listing), GW Pharmaceuticals listed

its American Depository Shares (ADS) on the NASDAQ on05/01/13as an emerging growth

company under the relaxed regulatory requirements of the JOBS Actat only $8.90/ADS.
http://www.scribd.com/doc/177760789/The-Tile-Shop-A-Deadly-Mosaic-Poisoned-Tile-Bad-Actors-Unsustainable-Margins-and-a-Stock-Ready-to-Crack%E2%80%A6http://www.scribd.com/doc/177760789/The-Tile-Shop-A-Deadly-Mosaic-Poisoned-Tile-Bad-Actors-Unsustainable-Margins-and-a-Stock-Ready-to-Crack%E2%80%A6http://www.scribd.com/doc/177760789/The-Tile-Shop-A-Deadly-Mosaic-Poisoned-Tile-Bad-Actors-Unsustainable-Margins-and-a-Stock-Ready-to-Crack%E2%80%A6http://seekingalpha.com/article/843191-mellanox-bubble-to-burst-with-intel-foray-possibly-threatening-existencehttp://seekingalpha.com/article/843191-mellanox-bubble-to-burst-with-intel-foray-possibly-threatening-existencehttp://www.scribd.com/doc/125669705/MJNA-for-Scribdhttp://www.scribd.com/doc/125669705/MJNA-for-Scribdhttp://www.sec.gov/Archives/edgar/data/1351288/000104746913005449/a2214931z424b4.htmhttp://www.sec.gov/Archives/edgar/data/1351288/000104746913005449/a2214931z424b4.htmhttp://www.sec.gov/Archives/edgar/data/1351288/000104746913005449/a2214931z424b4.htmhttp://www.sec.gov/Archives/edgar/data/1351288/000104746913005449/a2214931z424b4.htmhttp://www.scribd.com/doc/125669705/MJNA-for-Scribdhttp://seekingalpha.com/article/843191-mellanox-bubble-to-burst-with-intel-foray-possibly-threatening-existencehttp://www.scribd.com/doc/177760789/The-Tile-Shop-A-Deadly-Mosaic-Poisoned-Tile-Bad-Actors-Unsustainable-Margins-and-a-Stock-Ready-to-Crack%E2%80%A6


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6. Massive Shareholder Dilution: GW Pharmaceuticals has been serial issuer of equity,

massively diluting its common shareholders since its listing without significant technological

advancement or technology monetization. For example, GW Pharmaceuticals sold a 5.8%

stake in the Company for $11.2mm in 2009 ($193mm implied enterprise valuation) to a

private equity firm with a history of backing some rather dubious biotech offerings.

7. Egregious Insider Compensation: Annual management compensation has generally

exceeded annual operating income since reverse-merger formation in 2001. Moreover,

while public shareholders have been significantly diluted over GW Pharmaceuticals history

as a public company, management and insider compensation has increased 205.9%.

8. Preposterous Sell-Side Analyst Cheerleading: Underwriters of GW Pharmaceuticals

numerous equity market issuances have been relentless cheerleaders of the story since

the single digit listing of the ADS last summer. As the ADS price has rocketed up 545%

over the last 9 months since listing on the NASDAQ, the sell-side analysts have continually

raised their price targets as prior estimates were blown through and utilized goal-seek

financial models to justify their current estimates. Utilizing more realistic valuation

assumptions, GW Pharmaceuticalsintrinsic value appears to be in the teens per ADS even

in the unlikely upside case that the proposed Epidiolex epilepsy treatment is a blockbusters

success.

Long investors in GW Pharmaceuticals, Inc. (NASDAQ: GWPH)(LSE AIM: GWP) should

immediately consider reducing the position as public dissemination of these significant concerns

will likely lead to a massive correction in the Companys share price. Speculative investors

should consider a short position in GW Pharmaceuticals as it appears massively overvalued on

a fundamental basis at 19.6x LTM revenue and 18.5x P/B and the additional issues uncovered

in this report will likely accelerate a significant pricing correction.

Inf i t ial is Research Collect ive Report Track RecordInfitialis Research Collective Report Track Record

Ticker Market Recommendation Publication Price on Date Subsequent Low % Decline As of 02/19/14 % to Current

QWTR OTCBB SHORT 08/08/12 $1.54 $0.11 -93% $0.18 -88%

CHMR Halted by SEC SHORT 08/13/12 $1.83 $0.02 -99% $0.02 -99%

NVMN OTCBB SHORT 08/13/12 $1.36 $0.03 -98% $0.03 -98%

MLNX NASDAQ SHORT 09/04/12 $119.00 $37.88 -68% $37.88 -68%

CLSR OTCBB - Ticker Changed to EXAD SHORT 09/24/12 $6.06 $1.00 -83% $1.00 -83%

ZERO OTCBB SHORT 09/25/12 $1.89 $0.48 -75% $0.95 -50%

PRTN OTCBB - Ticker Changed to ESSI SHORT 09/26/12 $0.47 $0.0010 -100% $0.0033 -99%

PWEI Pink Sheet SHORT 10/16/12 $0.69 $0.00 -100% $0.00 -100%

BNNY NASDAQ SHORT 11/09/ 12 $41.00 $32.06 -22% $36.47 -11%

OSGIQ Pink Sheet SHORT 11/26/12 $0.91 $0.63 -31% $5.20 471%

CYBX NASDAQ SHORT 01/23/ 13 $47.10 $42.31 -10% $72.51 54%

MJNA OTCBB SHORT 02/13/13 $0.47 $0.11 -77% $0.32 -32%

CP NYSE SHORT 04/02/13 $126.96 $115.60 -9% $155.61 23%

TTS NASDAQ SHORT 10/21/ 13 $25.61 $10.05 -61% $13.07 -49%

Best -100% -100%

Mean -66% -16%

Median -76% -59%

Worst -9% 471%


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GW Pharmaceuticals, Inc. IntroductionFounded in 1998 by current Chairman Dr. Geoffrey Guy to monetize a product portfolio

of cannabinoid prescription medicines to meet patient needs under medical supervision, GW

Pharmaceuticals, Inc. (NASDAQ: GWPH)(LSE AIM: GWP) has purportedly assembled a large

in-house team with extensive experience in developing cannabinoids, medicines containing

controlled substances, as well as plant-based prescription pharmaceutical products.

GWs lead product, Sativex is now approved or recommended for approval in 24 minor

countries, such as Norway, Israel, and Austria. It is indicated as a treatment for symptom

improvement in patients with moderate to severe spasticity due to multiple sclerosis (MS) that

have not responded adequately to other anti-spasticity medication. GW has now entered into

five separate licensing agreements for Sativex with Bayer HealthCare in the UK and Canada;

Almirall in Europe and Mexico; Otsuka Pharmaceutical Co. Ltd. in the United States; Novartis in

the Middle East, Africa, and Asia; and Neopharm in Israel. Over the ~10 year history of Sativex

production, GW has generally been operating at a cash flow loss due to limited sales of the

product and expensive ongoing operating costs for the corporate entity.

GWs other products, Epidiolex and the GWP4200x derivatives are seen by many long

investors as providing upside opportunities and are currently beginning Phase III and II

programs, respectively, for the potential treatment of Dravet Syndrome, a form of epilepsy

particularly resistant to traditional pharmaceutical treatment regimes, and other ailments.

Capitalization Valuation Multiples

$mm, except per ADS data 2/19/2014 $mm, Consensus Estimates Figure Multiple

Current ADS Price $57.44 1q14 LTM Revenue $48.3 19.6x

Outstanding ADS Units 17.8 FY14E Revenue $57.2 16.5x

Dilutive Effect of Options/Warrants/Etc 1.3 FY15E Revenue $54.5 17.3x

Market Capitalization $1,098.5 1q14 LTM EBITDA ($17.1) (55.2x)

Less: Cash 156.8 FY14E EBITDA ($19.1) (49.6x)

Add: Debt , Leases, & Other 3.3 FY15E EBITDA ($24.0) (39.4x)

Enterprise Value $945.0 Price-to-Book $3.11 18.5x


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Marijuana Hype Over-PlayedGW Pharmaceuticalssole business model is the monetization of a product portfolio of

cannabinoid prescription medicines to meet patient needs under direct medical supervision.

The Company will derive no benefit from the nascent retail marijuana market opportunity in

Colorado, Washington, and other legalizing states. As an analogy, after the repeal of

Prohibition in 1933, the businesses that prospered were the ex-bootlegger brewers such as

Anheuser-Busch, not a pharmaceutical firm that was attempting to study the medical benefits of

a daily glass of wine in the prevention of cardiac disease.

Marijuanas Legalizat ion Is Analogou s to t he Repeal of Prohibit ion

Post-Prohibition Value Creation Unviable Business Strategy

Bootleggers

If you are an investor looking to benefit from the pending mass-market retail sales of

marijuana, open a dispensary or hothouse/hydroponic grower, but dont buy GW

Pharmaceuticals ADS based on a misguided understanding of the Companys core business.
http://video.cnbc.com/gallery/?video=739904675http://video.cnbc.com/gallery/?video=739904675


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Next, it is important to understand that medical research into potential uses of marijuana-

derived cannabidiols has been ongoing for hundreds of years and has yet to be successfully

monetized on a pharmaceutical scale. This makes it even harder to believe that a UK reverse-

merger pharmaceutical company with a limited scientific track record will be able to successfully

develop and monetize novel uses of marijuana. Simply put, GW Pharmaceuticals research

efforts show nothing new or special to warrant such a premium market valuation. For example,

in 1842, Dr. William Brooke O'Shaughnessy, a Professor of Chemistry in the Medical College of

Calcutta, published a paper describing the uses of marijuana to reduce infantile convulsions,

hydrophobia, masseter spasm, and other afflictions. More recently, there have been four limited

control independent trials to study the use of marijuana plant-derived cannabidiol (CBD) for the

treatment of drug-resistant epilepsy.

Control led Mari juana Plant-Derived Cannabidiol (CBD) Trials for Epilepsy Treatment

Study Patients CBD Daily Dose Efficacy Safety Issues

Mechoulam,1978

4 CBD5 Placebo(PBO)

200mb CBD: 2 seizure free,1improved, 1 unchangedPBO: unchanged

No adverseevents

Cunha,1980

7 CBD8 PBO

200-300mg CBD: 4 seizure freePBO: 1 seizure free

No data

Ames,1985

6 CBD6 PBO

200mg No differences betweenCBD and placebo

Drowsiness

Trembly,1990

6 CBD6 PBO

300mg No differences betweenCBD and placebo

No data

Notably, the two most recent controlled independent trials to study the use of marijuana

plant-derived cannabidiol (CBD) for the treatment of drug-resistant epilepsy showed NO

difference in treatment efficacy between the CBD and placebo (sugar-pill) patients. Moreover, in

the Ames trial, several of the CBD-treated patients suffered from adverse drowsiness (being

stoned) that would prevent them from functioning normally on a daily basis, which further calls

into question the viability of this purported potential treatment option. Finally, Dr. Orrin

Devinksy, Chairman of the NYU Epilepsy Center and leader in the study of cannabidiols,
http://books.google.com/books?id=7lI5AQAAMAAJ&pg=RA1-PA30&dq=ON+THE+PREPARATIONS+OF+THE++INDIAN+HEMP&hl=en&sa=X&ei=yNX_UpH_E4jcoATqt4DIDQ&ved=0CDsQ6AEwAQ#v=onepage&q=ON%20THE%20PREPARATIONS%20OF%20THE%20%20INDIAN%20HEMP&f=falsehttp://books.google.com/books?id=7lI5AQAAMAAJ&pg=RA1-PA30&dq=ON+THE+PREPARATIONS+OF+THE++INDIAN+HEMP&hl=en&sa=X&ei=yNX_UpH_E4jcoATqt4DIDQ&ved=0CDsQ6AEwAQ#v=onepage&q=ON%20THE%20PREPARATIONS%20OF%20THE%20%20INDIAN%20HEMP&f=falsehttp://books.google.com/books?id=7lI5AQAAMAAJ&pg=RA1-PA30&dq=ON+THE+PREPARATIONS+OF+THE++INDIAN+HEMP&hl=en&sa=X&ei=yNX_UpH_E4jcoATqt4DIDQ&ved=0CDsQ6AEwAQ#v=onepage&q=ON%20THE%20PREPARATIONS%20OF%20THE%20%20INDIAN%20HEMP&f=falsehttps://mega.co.nz/#!ks5EXaIJ!4ixb8FgtyzLLa3Sds_Ok91Kb6k-5wlBZuxxRXuzLzXIhttps://mega.co.nz/#!ks5EXaIJ!4ixb8FgtyzLLa3Sds_Ok91Kb6k-5wlBZuxxRXuzLzXIhttps://mega.co.nz/#!ho4R3QjT!1Y4bQKRPAJ-iYkhszbXP6oRqB4z9qJS3d36ohNQfXgAhttps://mega.co.nz/#!ho4R3QjT!1Y4bQKRPAJ-iYkhszbXP6oRqB4z9qJS3d36ohNQfXgAhttps://mega.co.nz/#!d0YTEZpQ!nXJZVLFv6DiWGIf-diVF3TC6PKd53ODogs3Pe2YnOMghttps://mega.co.nz/#!d0YTEZpQ!nXJZVLFv6DiWGIf-diVF3TC6PKd53ODogs3Pe2YnOMghttps://mega.co.nz/#!1t52AAiC!DQTF-zjFw60sOWMRby0xMRiKU0IZ9Dqt_I9F6GyOzxMhttps://mega.co.nz/#!1t52AAiC!DQTF-zjFw60sOWMRby0xMRiKU0IZ9Dqt_I9F6GyOzxMhttp://faces.med.nyu.edu/research-education/cannabidiol-conferencehttp://faces.med.nyu.edu/research-education/cannabidiol-conferencehttp://faces.med.nyu.edu/research-education/cannabidiol-conferencehttps://mega.co.nz/#!1t52AAiC!DQTF-zjFw60sOWMRby0xMRiKU0IZ9Dqt_I9F6GyOzxMhttps://mega.co.nz/#!d0YTEZpQ!nXJZVLFv6DiWGIf-diVF3TC6PKd53ODogs3Pe2YnOMghttps://mega.co.nz/#!ho4R3QjT!1Y4bQKRPAJ-iYkhszbXP6oRqB4z9qJS3d36ohNQfXgAhttps://mega.co.nz/#!ks5EXaIJ!4ixb8FgtyzLLa3Sds_Ok91Kb6k-5wlBZuxxRXuzLzXIhttp://books.google.com/books?id=7lI5AQAAMAAJ&pg=RA1-PA30&dq=ON+THE+PREPARATIONS+OF+THE++INDIAN+HEMP&hl=en&sa=X&ei=yNX_UpH_E4jcoATqt4DIDQ&ved=0CDsQ6AEwAQ#v=onepage&q=ON%20THE%20PREPARATIONS%20OF%20THE%20%20INDIAN%20HEMP&f=false


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recently wrote an Op-ed in the NY Times that cautioned about the risk of serious psychiatric

disorders and long-term cognitive problems associated with marijuana treatments in children.

Corrupted Research and Pseudo-ScienceThe purported research literature regarding marijuana plant-derived cannabidiol (CBD)

use in pediatric treatment-resistant epilepsy touted by the Company seems especially dubious

because GW Pharmaceuticals funded the researcher, yet failed to disclose its financial interest

in the study in itsSEC filingsorinvestor materials. Unlike previous placebo-controlled trials, the

recent December 2013article in The Journal of Epilepsy and Behaviorwas solely a 19-patient

survey of parents belonging to a Facebook group dedicated to sharing information about the

cannabidiol-enriched cannabis artisanal treatments for their childs seizures. Simply put, it is

hard to imagine a purported research project constructing a more biased self-selected sample

set (with a complete lack of placebo control group). Even worse, buried in the

Acknowledgements section on the last page of the journal, it is disclosed that Dr. Catherine

Jacobson,the corresponding author for the article, is actually funded by GW Pharmaceuticals,

which presents a massive conflict of interest, and the disclosure fails to mention GWs sole

business is the production of

marijuana plant-derived

cannabidiols. It is shocking

investors have been hoodwinked

by such flimsily pseudo-science

regarding Epidiolexs potential.
http://www.nytimes.com/2014/02/13/opinion/we-need-proof-on-marijuana.html?_r=0http://www.nytimes.com/2014/02/13/opinion/we-need-proof-on-marijuana.html?_r=0http://www.sec.gov/Archives/edgar/data/1351288/000104746913010836/a2217494z20-f.htmhttp://www.sec.gov/Archives/edgar/data/1351288/000104746913010836/a2217494z20-f.htmhttp://www.sec.gov/Archives/edgar/data/1351288/000104746913010836/a2217494z20-f.htmhttp://files.shareholder.com/downloads/AMDA-1TW341/2958233486x0x724794/0f41f04f-442e-4d2d-81c8-3d829b774eb4/GW_Pharma_-_Feb_2014_presentation_for_website.pdfhttp://files.shareholder.com/downloads/AMDA-1TW341/2958233486x0x724794/0f41f04f-442e-4d2d-81c8-3d829b774eb4/GW_Pharma_-_Feb_2014_presentation_for_website.pdfhttp://files.shareholder.com/downloads/AMDA-1TW341/2958233486x0x724794/0f41f04f-442e-4d2d-81c8-3d829b774eb4/GW_Pharma_-_Feb_2014_presentation_for_website.pdfhttp://www.ncbi.nlm.nih.gov/pubmed/24237632http://www.ncbi.nlm.nih.gov/pubmed/24237632http://www.ncbi.nlm.nih.gov/pubmed/24237632http://www.linkedin.com/pub/catherine-jacobson/7/90b/303http://www.linkedin.com/pub/catherine-jacobson/7/90b/303http://www.linkedin.com/pub/catherine-jacobson/7/90b/303http://www.linkedin.com/pub/catherine-jacobson/7/90b/303http://www.linkedin.com/pub/catherine-jacobson/7/90b/303http://www.ncbi.nlm.nih.gov/pubmed/24237632http://files.shareholder.com/downloads/AMDA-1TW341/2958233486x0x724794/0f41f04f-442e-4d2d-81c8-3d829b774eb4/GW_Pharma_-_Feb_2014_presentation_for_website.pdfhttp://www.sec.gov/Archives/edgar/data/1351288/000104746913010836/a2217494z20-f.htmhttp://www.nytimes.com/2014/02/13/opinion/we-need-proof-on-marijuana.html?_r=0


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Limited Intellectual Property Results in No Pricing PowerBecause GW Pharmaceuticalsmain products are derived from a natural plant extract, it

cannot patent its products and there are basically no barriers to other firms extracting and

selling the same biologicals. For example, just because orange juice is demonstrated to provide

health a benefit doesnt mean that a company can earn outsized returns by selling concentrated

Vitamin C. For a CBD-based treatment regimen such as Epidiolex, all which is required for

production is low-THC variety marijuana, developed via traditional horticultural crossbreeding,

and some simple drying, crushing, and centrifugal separation equipment.

Setting aside the current lack of robust scientific evidence that marijuana plant-derived

cannabidiols are actually an effective alternative cure for pediatric treatment-resistant epilepsy

(or better than a placebo treatment), if the products are ever developed for commercial

treatments (no earlier than 2018 as per most sell-side analysts), it appears GW

Pharmaceuticals will have limited pricing power because of the complete lack of barriers to entry

in the sector. In the unlikely event that Epidiolex successfully completes a Phase III trial by

2018 and launches for prescription usage, numerous other generic producers could promptly

start selling the same biologicals and undercutting GWs pricing. In addition, a variety of other

biotechnology firms, such as Cara Therapeutics, Inc. (NASDAQ: CARA) have filed for

intellectual property protection of their purported cannabinoid breakthroughs, so GW

Pharmaceuticalsmay be accused of infringing on other firms intellectual property as it attempts

to distribute Sativex and Epidiolex in the United States.

As Dr. Sanjay Gupta discussed in the recent Weed special report on CNN, some

parents are utilizing a variety of non-approved and non-standardized "artisanal" CBD

preparations to purportedly control their children's drug resistant seizures, despite a lack of

robust scientific evidence these treatments are more efficient than a placebo and without fully

understanding the risks of serious psychiatric disorders and long-term cognitive problems
http://patft1.uspto.gov/netacgi/nph-Parser?Sect1=PTO1&Sect2=HITOFF&d=PALL&p=1&u=/netahtml/PTO/srchnum.htm&r=1&f=G&l=50&s1=8653127.PN.&OS=PN/8653127&RS=PN/8653127http://patft1.uspto.gov/netacgi/nph-Parser?Sect1=PTO1&Sect2=HITOFF&d=PALL&p=1&u=/netahtml/PTO/srchnum.htm&r=1&f=G&l=50&s1=8653127.PN.&OS=PN/8653127&RS=PN/8653127http://www.youtube.com/watch?v=Dn9eTC1mNTkhttp://www.youtube.com/watch?v=Dn9eTC1mNTkhttp://www.youtube.com/watch?v=Dn9eTC1mNTkhttp://www.youtube.com/watch?v=Dn9eTC1mNTkhttp://patft1.uspto.gov/netacgi/nph-Parser?Sect1=PTO1&Sect2=HITOFF&d=PALL&p=1&u=/netahtml/PTO/srchnum.htm&r=1&f=G&l=50&s1=8653127.PN.&OS=PN/8653127&RS=PN/8653127


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associated with marijuana treatments in children. For example, Ms. Paige Figi, a housewife

with no prior scientific background, currently artisanally produces marijuana-derived CBD

extract to for her daughter Charlotte at a cost of less than $800/month. Shockingly, the current

product production competition for a $1bn market capitalization pharmaceutical company is a

hippy housewife working out of her kitchen in Colorado.

Dr. Sanjay Gupta has proven the ease and low c ost of extract ing CBD biologic als

With cost control and corresponding changes in treatment reimbursements as the

mantra of the health care industry after the passage of the Affordable Care Act, it seems

exceedingly difficult to believe GW Pharmaceuticals will ever be able to charge >$70k per

patient for CBD-derived Epidiolex and capture prescriptions for >9k patients in the United States

and a similar number abroad as currently estimated by sell-side equity analysts.


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Preposterous Sell-s ide Pric ing Power Assumptio ns for GW Pharmaceuticals

This financial model by an underwriter of GW Pharmaceuticals prolific equity market

issuances seems to a prime example of goal-seek financial modeling were a sell-side financial

analyst is forced to enter more and more ridiculous assumptions into excel in an attempt to

justify the current market price the Companys ADS. For example, Infitialis challenges this sell-

side analyst to rationalize their forecast for a massive increase in the Epidiolex retail price from

$40/k per patient per year in 2018 to $76k just four years later in 2022. In the unlikely event

Epidiolex completes a successful Phase III trial, it seems likely United Health, CIGNA, and

WellPoint would do everything in their oligopolistic power to avoid paying for marijuana

prescriptions at this price point.


11/20



Ridiculous Market ValuationEven accepting the preposterous sell-side financial model assumptions presented on the

previous page at face value, GW Pharmaceuticals currently trades at a rich 2.2x FY2020

revenue potential and is expected to be EBITDA negative thru at least 2017, and this excludes

significant continued shareholder dilution that would occur between now and 2020 and the

substantial risk that the Epidiolex Phase III trial will not produce statistically significant proof of

the efficacy of the treatment, especially relative to placebo treatments, which have an effective

cost of $0.00/patient. As of yesterdays close of $57.44/ADS, GW Pharmaceuticals is currently

trading at a market capitalization of

$1,098.5mm, for a shocking valuation of

19.6x LTM revenue and 18.5x P/B despite

barely being break-even on an operating

cash flow basis since its reverse-merger

formation in 2001. Moreover, the Companys market valuationhas increased 545% since listing

of the ADS on the NASDAQ just 9 months ago.

Additionally, even summing up all the potential milestone payments from commercial

partnership agreements for Sativex, it is

only ~$330mm in cumulative total, before

further research and development costs,

corporate costs, taxes, and with significant

time delay and execution risk. It is

shocking that GWs current market

capitalization is more than 3x these

potential milestone payments.


12/20



Backdoor Listing onto NASDAQBecause it would have never passed the due-diligence process of a traditional IPO

process underwritten by a respectable underwriter, GW Pharmaceuticals listed on the

Alternative Investment Market (AIM) in London in 2001 via a reverse-merger with an

existing shell company. The AIM market is analogous to the OTC market in the United

States because it allows smaller companies to float shares with a more flexible regulatory

system than the main London Stock Exchange market. Specifically, the AIM has reduced

disclosure requirements relative to main LSE market, has no requirements for capitalization

or shares issued, and an option for issuers to exempt out of regulatory requirements by

simply notifying the exchange why it has declined to comply. In March 2007, U.S. SEC

regulator Mr. Roel Campos expressed concerns regarding AIM's rules for share trading and

stated"I'm concerned that 30% of issuers that list on AIM are gone in a year . That feels like

a casino to me and I believe that investors will treat it as such." In addition, AIM has been

critiqued for allowing the listing of abject frauds on its exchange, such as the USD$750mm

collapse ofLangbar Internationalwhich was subsequently to found to possess none of the

assets declared at original listing.

After completing its 2001 reverse-merger AIM listing, GW Pharmaceuticals listed its

American Depository Shares (ADS) on the NASDAQ exchange on 05/01/13 as an

emerging growth company under the relaxed regulatory requirements of the Jumpstart

Our Business Startups Act of 2012 (the JOBS Act) at only $8.90/ADS. The irony of a UK

weed company selling equity to its former colonists under a regulatory framework designed

to increase domestic employment would be a humorous anecdote if it did not present such

a clear and present danger to investors. Since completing its ADS listing, GW benefited as

investors bid up its limited float and then the Company raised an additional $101.1mm on

01/14/14at $36.00/ADS, despite already having $58.5m in cash as of 12/31/13.
http://www.theguardian.com/business/2007/mar/10/1http://www.theguardian.com/business/2007/mar/10/1http://www.thelawyer.com/has-the-langbar-scandal-damaged-aims-healthy-reputation/128906.articlehttp://www.thelawyer.com/has-the-langbar-scandal-damaged-aims-healthy-reputation/128906.articlehttp://www.thelawyer.com/has-the-langbar-scandal-damaged-aims-healthy-reputation/128906.articlehttp://www.sec.gov/Archives/edgar/data/1351288/000104746913005449/a2214931z424b4.htmhttp://www.sec.gov/Archives/edgar/data/1351288/000104746913005449/a2214931z424b4.htmhttp://www.sec.gov/Archives/edgar/data/1351288/000114420414001468/v365027_424b4.htmhttp://www.sec.gov/Archives/edgar/data/1351288/000114420414001468/v365027_424b4.htmhttp://www.sec.gov/Archives/edgar/data/1351288/000114420414001468/v365027_424b4.htmhttp://www.sec.gov/Archives/edgar/data/1351288/000104746913005449/a2214931z424b4.htmhttp://www.thelawyer.com/has-the-langbar-scandal-damaged-aims-healthy-reputation/128906.articlehttp://www.theguardian.com/business/2007/mar/10/1


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Massive Shareholder DilutionGW Pharmaceuticals has been serial issuer of equity, massively diluting its common

shareholders without significant technological advancement since its reverse-merger listing on

the London AIM exchange in 2001. In addition to secondary offerings, GW Pharmaceuticals

has generously distributed stock options, warrants, and other equity-linked compensation to

insiders since going public to the dilutive determinant of public investors.

Notable GW Pharmaceuticals Equity Offerings

Date Shares, mm Price Notable Underwriters

01/09/14 2.81 $36.00 Morgan Stanley, Cowen, Piper Jaffray,Canaccord Genuity

05/01/13 3.68 $8.90 Lazard, Cowen, Roth Capital08/06/09 8.47 0.78 Rodman & Renshaw (Great Point Partners)01/04/06 6.17 1.39 Evolution Securities, Seven Hills06/28/01 13.74 21.84 Collins

As a result of these multiple equity issuances since GW Pharmaceuticals reverse-

merger listing on the London AIM exchange in 2001, common shares outstanding have

increased 139.8% despite limited scientific advancement and de minimius monetization of the

existing product portfolio. This poor capital planning has been highly dilutive to existing

shareholders and illustrates the management teams history of poor capital allocationdecisions.

GW Pharmaceuticals Shares Outstanding (1 ADS = 12 Comm on Shares)


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In 2009, after several years of Sativex sales and with basically the same product

portfolio as currently under development, GW Pharmaceuticals sold a 5.8% stake in the

Company for $11.2mm for an implied enterprise valuation of $193mm to Great Point Partners,

LLC, a U.S. private equity firm, in an equity and warrants transaction structured by the infamous

underwriters at Rodman & Renshaw, LLC. First, Great Point Partners, LLC appears to have a

history of backing some rather dubious biotech offerings, such as Biodel, Inc. (NASDAQ:BIOD),

which went from near triple

digits to single digits in less than

18 months from itsIPOin 2007.

Great Point Partners had Board

of Directors representation in

Biodel and owned 13.7% of the

shares outstanding prior to the

firms public offering. Next, Rodman & Renshaw, LLC, the underwriter of the transaction, filed

for liquidation on 09/12/12 following the collapse of a disturbing number of its issuer clients

under allegations of accounting irregularities, embezzlement, and fraud. It appears quite curious

that Rodman & Renshaws only AIM underwritten offering was for GW Pharmaceuticals.

More recently, on01/16/14,Great Point elected to exercise 50% of the warrants issued

to the firm in August 2009 for a strike of 0.1p each. The exercise of these warrants further

diluted common shareholders by 1,888,480 new ordinary shares and came at a significantly

higher valuation than that which Great Point Partners had originally bought in. Finally, Great

Point Partners, LLC now has until August of this year to exercise its remaining outstanding

warrants for the additional issuance of 1,888,480 new ordinary shares for a strike of 0.1p each.

Based on Great Point Partners prior presciently timed moves of selling out at the top, this

seems to be further indication that GW Pharmaceuticalsmarket valuation has reached its apex.
http://finance.yahoo.com/q/bc?s=BIOD+Basic+Chart&t=myhttp://finance.yahoo.com/q/bc?s=BIOD+Basic+Chart&t=myhttp://finance.yahoo.com/q/bc?s=BIOD+Basic+Chart&t=myhttp://www.sec.gov/Archives/edgar/data/1322505/000095012307007243/y33908b4e424b4.htmhttp://www.sec.gov/Archives/edgar/data/1322505/000095012307007243/y33908b4e424b4.htmhttp://www.sec.gov/Archives/edgar/data/1322505/000095012307007243/y33908b4e424b4.htmhttp://www.reuters.com/article/2012/09/12/directmarketholdings-capital-idUSL3E8KC55420120912http://www.reuters.com/article/2012/09/12/directmarketholdings-capital-idUSL3E8KC55420120912http://www.sec.gov/Archives/edgar/data/1351288/000110465914002820/a14-3795_16k.htmhttp://www.sec.gov/Archives/edgar/data/1351288/000110465914002820/a14-3795_16k.htmhttp://www.sec.gov/Archives/edgar/data/1351288/000110465914002820/a14-3795_16k.htmhttp://www.sec.gov/Archives/edgar/data/1351288/000110465914002820/a14-3795_16k.htmhttp://www.reuters.com/article/2012/09/12/directmarketholdings-capital-idUSL3E8KC55420120912http://www.sec.gov/Archives/edgar/data/1322505/000095012307007243/y33908b4e424b4.htmhttp://finance.yahoo.com/q/bc?s=BIOD+Basic+Chart&t=my


15/20



Egregious Executive CompensationGW Pharmaceuticals annual management compensation has generally exceeded

annual operating income since its reverse-merger formation in 2001. Despite producing Sativex

for ~10 years, GW Pharmaceuticals has consistently been free cash flow negative and

continued to accrue operating income losses. Finally, while public shareholders have been

diluted 139.8% over GW Pharmaceuticals history as a public company, management and

insider compensation has increased 205.9% during the same period.

GW Pharmaceuticals Selected Insider Comp ensation

Name Title 2012 TotalCompensation

2013 TotalCompensation

Dr. Geoffrey Guy Executive Director, Chairman $902,087 $855,671Justin Gover Executive Director, ChiefExecutive Officer

$734,849 $696,983

Dr. Stephen Wright Executive Director, Researchand Development Director

$621,775 $593,427

Chris Tovey Executive Director, ChiefOperating Officer

$500,485 $437,793

Adam George Executive Director, ChiefFinancial Officer

$272,729 $374,807

GW Pharmaceuticals Egregious Executive Compensation Despite History of L osses


16/20



Preposterous Sell-Side Analyst CheerleadingUnderwriters of GW Pharmaceuticals numerous equity market issuances have been

relentless cheerleaders of the story since the single digit listing of the ADS last summer. As

the ADS price has rocketed up 545% over the last 9 months, the sell-side analysts have

continually raised their price targets as prior estimates were blown through and utilized goal-

seek financial models to justify their current estimates.

For any pharmaceutical company at this stage of its development and with such a limited

product portfolio and revenue potential, it is difficult to imagine it having a market cap of greater

than $100mm. However, reefer madness and a lack of understanding regarding the business

model seems to have compelled the equity markets to bid up GW Pharmaceuticals to a

significant multiple of its intrinsic value.

I l lustr ative Sell-Side DCF with 38.2% Growt h Rate in 2022 & 9.1x Term inal Multi ple


17/20



In i t iat ing Cov erage Note - Buy B ecause They Are Br it ish?

Initiating Co verage Note With $13 Origi nal Price TargetWhat Changed Since?


18/20



Unlike the preposterous sell-side estimates presented on the previous pages, utilizing

more realistic valuation assumptions for GW Pharmaceuticals implies an intrinsic in the teens

even in the unlikely upside case the proposed Epidiolex epilepsy treatment is a blockbusters

success. For example, a base case scenario at a 12% discount rate and utilizing the 19.1mm

ADS currently outstanding under the treasury stock method for options/warrants/etc, GW

Pharmaceuticals intrinsic value is $14.75/ADS with a 50% probability of Epidiolex successfully

being monetized by 2018.

I l lustrative GW PharmaceuticalsSum of th e Parts Analysis

In a bullish upside scenario with full credit for the Epidiolex revenue potential in 2018,

the Companys intrinsic value is only $19.75/ADS. Conversely, under a bearish scenario were

Epidiolex is not successfully monetized, GW Pharmaceuticals other potential products in the

development pipeline only represent $9.74/ADS of intrinsic value and only a slight premium to

the recent May listing on NASDAQ at $8.90/ADS. Because of GW Pharmaceuticalshistory of

cash burn and poor allocation of capital funded by continued shareholder dilution, there seems

to be significant downside between the current ADS market price and their fundamental intrinsic

value.

Drug Proposed Indication Status

Estimated

Launch

Probability of

Success

Potential Annual Sales

(USD$mm)

Royalty,

%

Profitability

%

Probability

Adj. NPV $/ADS

Sativex MS - EU Marketed Marketed -- -- -- -- $25.0 $1.31

Sativex Cancer Pain - US Phase 3 2016 75% $500 25% 90% $60.1 $3.14

Sativex Cancer Pain - EU Phase 3 2017 75% $500 25% 90% $53.6 $2.80

Sativex MS - US Phase 3 2017 50% $100 25% 90% $7.1 $0.37

Epidiolex Epilepsy - Global Phase 3 2018 50% $1,500 25% 90% $95.8 $5.01

GWP42004 Diabetes Phase 2 2019 25% $750 25% 90% $21.4 $1.12

GPW42003 Ulcerative Colitis Phase 2 2020 25% $750 25% 90% $19.1 $1.00

Sum-of-Par ts Total $282.0 $14.75


19/20



Conclusion

Long investors in GW Pharmaceuticals, Inc. (NASDAQ: GWPH)(LSE AIM: GWP) should immediately consider reducing the

position as public dissemination of these significant concerns will likely lead to a massive correction in the Companys share

price. Speculative investors should consider a short position in GW Pharmaceuticals as it appears massively overvalued on

a fundamental basis at 19.6x LTM revenue and 18.5x P/B and the additional issues uncovered in this report will likely

accelerate a significant pricing correction.

1. Marijuana Hype Over-Played: GW Pharmaceuticals will derive no benefit from the nascent retail marijuana

market opportunity in Colorado, Washington, and other legalizing states.

2. Corrupted Research: The purported research literature regarding marijuana plant-derived cannabidiol (CBD)

use in pediatric treatment-resistant epilepsy seems especially dubious because GW Pharmaceuticals has

corrupted the objectivity of the authors by being their financial backers; it has failed to disclose this critical fact in

SEC filings or investor materials.

3. Limited Intellectual Property & Pricing Power: Because GW Pharmaceuticals main products are natural plant-

derived extracts, they cannot be patented and there are basically no barriers to other firms extracting and selling

the same biologicals. For example, just because orange juice is demonstrated to provide health a benefit doesnt

mean that a company can earn outsized returns by selling concentrated Vitamin C.

4. Ridiculous Market Valuation: As of yesterdays close of $57.44/ADS, GW Pharmaceuticals is currently trading at

a market capitalization of $1,098.5m, for a shocking valuation of 19.6x LTM revenue and 18.5x P/B despite barely

being break-even on an operating cash flow basis since its reverse-merger formation in 2001.

5. Backdoor Listing onto NASDAQ: After completing a reverse-merger listing in 2001 to the London AIM exchange

(equivalent to U.S. OTC market listing), GW Pharmaceuticals listed its American Depository Shares (ADS) on the

NASDAQ on 05/01/13 as an emerging growth company under the relaxed regulatory requirements of the JOBS

Act at only $8.90/ADS.

6. Massive Shareholder Dilution: GW Pharmaceuticals has been serial issuer of equity, massively diluting its

common shareholders since its listing without significant technological advancement or technology monetization.

For example, GW Pharmaceuticals sold a 5.8% stake in the Company for $11.2mm in 2009 ($193mm implied

enterprise valuation) to a private equity firm with a history of backing some rather dubious biotech offerings.

7. Egregious Insider Compensation: Annual management compensation has generally exceeded annual operating

income since reverse-merger formation in 2001. Moreover, while public shareholders have been significantly

diluted over GW Pharmaceuticals history as a public company, management and insider compensation has

increased 205.9%.

8. Preposterous Sell-Side Analyst Cheerleading: Underwriters of GW Pharmaceuticals numerous equity market

issuances have been relentless cheerleaders of the story since the single digit listing of the ADS last summer.

As the ADS price has rocketed up 545% over the last 9 months since listing on the NASDAQ, the sell-side analysts

have continually raised their price targets as prior estimates were blown through and utilized goal-seek financial

models to justify their current estimates. Utilizing more realistic valuation assumptions, GW Pharmaceuticals

intrinsic value appears to be in the teens even in the unlikely upside case that the proposed Epidiolex epilepsy

treatment is a blockbusters success.


20/20



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