MGC Pharmaceuticals | 22 October 2018
GW Pharmaceuticals has gained FDA approval and is currently seeking approval in Europe for
Epidiolex in two severe epilepsy syndromes. Epidiolex is a highly purified formulation of cannabidiol
(CBD), the main ingredient in CannEpil. If the efficacy of CannEpil is not comparable to Epidiolex, it
may be difficult to capture a significant market share. GW has an extensive patent estate, which
affects the extraction, purification and use of CBD in refractory epilepsies. While the company’s
advice is that the GW patents will not impinge on its freedom to operate, there is a risk that GW
could pursue legal action if it believes that its patents have been infringed.
Finally, the company could potentially face competition from supplies of synthetic CBD from API
manufacturers in South Asia.
We arrive at an initial valuation of A$140m, based on a 15-year, sum-of-the-parts risked DCF
valuation model of the company’s CannEpil product for epilepsy and CogniCann for dementia in
Europe and Australia, as well as API sales of cannabis flowers and resin. We assume 3% annual
market growth but do not include any terminal value. We include a valuation of MGC Derma based
on the proposed sale consideration. Taking into account the 1,213m shares in issue and 100m
performance shares, our valuation is equivalent to A$0.11 per share. On a fully diluted basis our
valuation is A$0.10 per share, after taking into account 95m performance rights and options that
would be in-the-money if the stock traded in line with our basic valuation. Exhibit 4 summarises the
key assumptions and constituent parts of our valuation. We use a 12.5% discount rate and apply an
average tax rate of 10% from 2022 onwards. The company does not currently have patent
protection for its product pipeline.
CannEpil in treatment-resistant epilepsy
As described earlier, we estimate the number of patients with severe, refractory epilepsy who make
up the main target market for CannEpil to be ~69,000 young people aged less than 20 years and
260,000 adults aged over 20 in Europe, 3,900 young people and 11,600 adults in Australia, and
56,000 young people in the US.
We give the programme to develop CannEpil as a registered pharmaceutical product for epilepsy in
Europe and Australia a 20% probability of success, supported by the positive results reported for a
similar formulation in Israel and the fact that GW Pharmaceuticals has already demonstrated in
Phase III studies that CBD, the main component in CannEpil, significantly reduces seizure
frequency in children with two different, severe refractory epilepsy syndromes. Although MGC has
announced plans for a Phase II trial in Slovenia, it has not yet commenced recruiting patients. We
include modest pre-approval sales of CannEpil as an investigational medicine in our model with a
probability of 100%.
We do not include CannEpil for juveniles in the US in our valuation at this stage, as we do not
expect the company to decide whether to commence development for this indication in the US until
it has completed a Phase III study in Europe.
We assume that the company will commence sales of CannEpil in Europe and Australia during the
current financial year as an investigational medicine. We expect it to achieve penetration of 0.5% to
1% of the addressable market for young people as an investigational medicine in select countries
including Australia, Germany, Italy, Croatia, Greece, Macedonia and the Czech Republic, and
penetration of 10% in young people and 5% of adults if it is approved as a registered
pharmaceutical. We model a launch price as an Investigational Medicinal Product equivalent to
€4,800 per year and A$8,900 per year for children in Europe and Australia respectively (assuming
90% compliance). This compares to the list price for GW’s Epidiolex for children in the US of
US$32,500 (A$43,000) per year. For the higher dose of CannEpil required for adults, we assume