GW Pharma eases pain in Spain

GW Pharmaceuticals has been building a sustainable business on the back of its research into cannabis-based medicines. Indeed, it clocked up a reimbursement for lead product Sativex in Spain last month - meaning that Spanish hospital pharmacies will begin stocking it - through its European distribution partner, Almirall. That triggered a £2.5m milestone payment.

The Spanish market is just the start for Sativex and Almirall will use the EU's approval system to launch in other countries this year - Germany looks like an obvious target, along with Scandinavia. The product's market, for spasticity (muscle stiffness) in multiple sclerosis (MS) patients, could be larger than previously estimated, too. Management thinks there are around 40,000 people suffering from MS in Spain of whom around 75 per cent suffer from spasticity - yet some analysts have modelled their valuations on a 60 per cent incidence rate.

The next big milestone will be to obtain an indication for Sativex in cancer pain. Achieving this would massively increase Sativex's potential market and, accordingly, Otsuka - GW's Japanese development partner - has started a phase III trail for Sativex in the US to test its efficacy in patients with chronic cancer pain. That will run alongside a phase II trial which will test a different cannabinoid compound in fatty liver disease.

Peel Hunt says...

Buy. Almirall anticipates more approvals for Sativex across Europe in 2011, which will further diversify the risk profile in GW from a development to a commercial stage pharmaceutical company. Sativex's progress for MS spasticity lays the foundations for the cancer pain indication, with further upside in the pipeline for use in diabetes, cancer and neurological disorders. On that basis, we maintain our risk-adjusted discounted cash flow valuation of 160p - even though Almirall's guidance makes our forecasts look conservative. Expect sales of £25.8m for 2011, generating a loss per share of 1.8p.

Singer Capital Markets...

Buy. The company has many positive attributes including a fully-funded development programme, stable income and cash reserves. The problem now is that there won't be much newsflow for a while - it will be end-2011 before Sativex launches in all the major European markets, while the first set of diabetes-related trial data isn't due until the end of this year. The Otsuka cancer trials, which are potentially very valuable, will report sometime in 2012 - but it will be 2013 before the results are filed with regulators. Consequently, while we maintain our buy stance, don't expect much share price movement in the short to medium term.