Medgenics (NYSE AMEX: MDGN) - Maxim Group Research Report


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Maxim Group research coverage on Medgenics (NYSE AMEX: MDGN), which is developing and commercializing Biopump, a proprietary tissue-based platform technology for the sustained production and delivery of therapeutic proteins using the patient's own skin biopsy for the treatment of a range of chronic diseases including anemia, hepatitis C and hemophilia. Medgenics believes this approach has multiple benefits compared with current treatments, which include regular and costly injections of therapeutic proteins.

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Medgenics (NYSE AMEX: MDGN) - Maxim Group Research Report

  1. 1. EQUITY RESEARCH COMPANY REPORTBiotechnology Initiation BuyAugust 23, 2011 Medgenics, Inc.Closing Price (8/22/11): $4.00 (MDGN –– AMEX –– $4.00)12-Month Target Price: $8.00 Potential game-changing novel platform technology for52-Week Range: $2.85 - $5.50 protein-based therapeutics; Initiating coverage with a BuyMarket Cap (MM): $38 rating and a 12-month price target of $8Shares O/S (MM): 9.6Float (MM): 2.6 Medgenics, Inc. (MDGN) is an emerging bio-therapeutic company focusing onAvg. Vol. (000) 17 the development of its Biopump Platform Technology, which providesBook Value/Share: $0.81 sustained released therapeutic protein. The company’’s lead developing products treat anemia, hemophilia, and HCV infection. Based on theDividend/Yield: NA company’’s substantial commercial potential, a potential novel game-changingRisk Profile: Speculative technology, significant near-term milestone events, and what we believe to be underexposed and undervalued shares, we are recommending MDGN with aFYE: December EPS P/E Buy rating and a 12-month target price of $8.00 for long-term investors that 2010A GAAP ($0.95) N.A. can tolerate speculative risk. 2011E GAAP ($0.71) N.A. Investment Thesis: 2012E GAAP ($0.57) N.A. Biopump: Potential game-changing technology with substantial LT Earnings Growth N.A. commercial potential. Based on encouraging pre-clinical and clinical results, mainly from EPODURE, we believe the Biopump has the potential to be a cost-effective and game-changing technology that delivers biologics in a continuous and autologous manner, revolutionizing the way patients receive drugs (currently, it’’s via repeated injections).INSERT PRICE CHART Promising EPODURE clinical results a major proof-of-concept. As a treatment for anemia, EPODURE continuously delivers erythropoietin (EPO) to end-stage renal disease (ESRD) patients, as well as to advanced stage chronic kidney disease (CKD) patients. Robust interim results presented at the 2010 ASN meeting were encouraging; full results should be reported in 4Q11. We believe these results could be an important catalyst for MDGN’’s share value. The potential cost-effectiveness of EPODURE should align well with the interests of patients and payers.Source: Biopump pipeline has the potential to address a large market and partnership prospects. Other Biopumps under development include one forYale Jen, Ph.D. (212) 895-3516 the treatment of HCV (INFRADURE for INF- ) and another for hemophilia A [HEMODURE for factor VIII in collaboration with Baxter (BAX –– NR)] The HCV Biopump Phase I/II trial should initiate in 1H12, and Baxter’’s decision is expected in late 3Q11. Biopumps may also be used in many biologic therapeutics, with a multi-billion dollar market potential. Undervalued and underexposed. Based on our probability-adjusted sum- of-the-parts and comparable analyses (and the fact that the company just went public in the U.S.), we believe that MDGN shares are undervalued and underexposed. We believe MDGN is a potentially high-growth biotech story with speculative risk, but has a possible inflection point in 2011 or 2012. Maxim Group LLC –– 405 Lexington Avenue –– New York, NY 10174 –– SEE PAGES 29 TO 31 FOR IMPORTANT DISCLOSURES AND DISCLAIMERS
  2. 2. MEDGENICS, INC. (MDGN) CORPORATE PROFILEMedgenics, Inc. (MDGN) Institutional Ownership: 20%8000 Towers Crescent Drive, Suite 1300 Insider Ownership: 40%Vienna, VA 22182 Shares Short (000): 2.27(212) 838-3777 Balance Sheet Summary: $MMSenior Management (As of June 30, 2011)Andrew Leonard Pearlman, Ph.D. Founder and CEO Equity: $7.31Clarence L. Dellio, Chief Operating Officer Assets: $11.92Baruch Stern, Ph.D. Chief Scientific Officer Long-term Debt: $0Phyllis Bellin, Director of Finance and AdministrationIncorporated: January 27, 2000 Quarterly EPSInitial Public Offering: April 2011 2010 2010E 2012E 1Q $0.28 ($0.06)A --Employees: 28 full-time employees 2Q ($0.42) ($0.26)A -- 3Q ($0.79) ($0.02) --Company Description. Medgenics, Inc. (MDGN) is an emerging 4Q $0.00 ($0.32) --bio-therapeutic company developing its novel Biopump platform FY ($0.95) ($0.71) ($0.57)technology, which is a continued, autologous delivering system forsupplying biologics (and could be a cost-effective alternative fortreating multiple diseases). Its lead product EPODURE, whichdelivers erythropoietin (EPO), is completing a Phase I/II trial as an Quarterly Revenue ($MM)anemia treatment in advanced stage chronic kidney disease (CKD) 2010 2011E 2012Epatients and end-stage renal disease (ESRD) patients. The company 1Q $0 $0A --is scheduled to commence a Phase I/II trial for its second product, 2Q $0 $0A --INFRADURE (which delivers interferon-alpha or INF- as a 3Q $0 $2.5 --potential treatment for hepatitis C infection), in 1H12. 4Q $0 $0 -- FY $0 $2.5 $10Investment Risks. Aside from general market and economic risks, Fiscal Year Ends December 31key investment risks for MDGN include: 1) the Biopump platformis a novel but nascent-stage technology with very limited clinical Analysts Following the Co.: 0validation; 2) Clinical studies might not reach their anticipated (excluding Maxim Group)outcomes; 3) Sales potential for any in-development products couldbe significantly different than expected; 4) Biopump being the only Consensus Estimates (GAAP):product offering could potentially increase risk due to a less Current Year: ($0.71)diversified portfolio; 5) With major operations outside of the U.S., Next Year: ($0.57)country-specific activities could affect share value; 6) Lack of cashcould impede corporate development; and 7) Thinly traded stocklimits shareholder options. Investor Relations Contact: Anne Marie Fields Lippert/Heilshorn & Associates, Inc. (212) 838-3777 afields@lhai.comMaxim Group LLC 2
  3. 3. MEDGENICS, INC. (MDGN) TABLE OF CONTENTSCORPORATE PROFILE …………………………………………………………………………………………………………………………………………………………………………...2SUMMARY AND INVESTMENT CONCLUSION……………………………………………………………………………………………………………….…….4COMPANY OVERVIEW………………………………………………………………………………………………………………………………………………………………………………6VALUATION…………………………………………………………………………………………………………………………………………………………………………………………………………7ANTICIPATED MILESTONES FOR 2011 AND BEYOND …………………………………………………………………………...……………………8PIPELINE OVERVIEW ………………………………………………………………………………………………………………………………………………………….……………………9DISCUSSIONS ON BIOPUMP TECHNOLOGY………………...………………………………………………………………………………………………....10DISCUSSIONS ON EPODURE…………………………………………………….…………………………………………………………………………..……..…………...……12DISCUSSIONS ON INFRADURE…………………………………………………….……………………………………………………………………..……..…………...……18DISCUSSIONS ON HEMODURE AND OTHER PIPELINE DEVELOPMENTS……………………………………....…….21RISKS……………………………………………………………………………………………………………………………………………………………………………………………………………………..24MANAGEMENT ………………………………………………………………………………...…………………………………………………………………………………………………………25FINANCIAL MODELS………………………………………………………………………………………………………………………………………………………………………………..26Maxim Group LLC 3
  4. 4. MEDGENICS, INC. (MDGN) SUMMARY AND INVESTMENT CONCLUSIONWe are initiating coverage of Medgenics, Inc. (MDGN) with a Buy rating and a 12-month price target of$8.00Medgenics, Inc. is emerging bio-therapeutic company that leverages its proprietary Biopump platformtechnology to deliver therapeutic protein continuously as a new treatment modality. The company’’s leadproducts are EPODURE (erythropoietin or EPO), HEMODURE (Factor VIII), and INFRADURE (interferon-alpha or INF- ) –– potential treatments for anemia, hemophilia, and hepatitis C, respectively.Biopump is a novel platform technology with substantial commercial potential. Biopump is a proprietaryand unconventional gene therapy platform that genetically manipulates patients’’ own excised dermal tissuesvia an ex vivo process; the modified tissue, or so-called micro-organ (MO), is subsequently implanted back topatient to continuously produce and deliver therapeutic protein. The company developed a proprietary devicecalled the DermaVac to facilitate a more reliable and straightforward removal of MOs and implantation ofBiopumps. The procedure is quick (it takes 10 to 14 days to generate therapeutic proteins) and only requireslocal anesthesia. Patient dosing can be flexible and can be customized with potential additions or ablation ofthe number of MOs in order to achieve desired therapeutic effect. The major advantage of the Biopump isavoiding the shortcomings of the current protein bolus injection methods, which include 1) frequent injections;2) higher costs; and 3) varying adverse effects and sub-optimal effectiveness due to the changing peak andtrough drug levels in plasma. Further, the Biopump’’s potential personalized therapeutic benefits and costadvantages would appeal not only to the patient and physician, but also to the payers. The Biopump platformcould also potentially be used for a broad range of therapeutic proteins and, therefore, possibly be a game-changer in the current treatment paradigm, in our opinion.Promising EPODURE clinical results demonstrated first proof-of-concept, boding well for a potentialpositive upcoming data release. The lead Biopump product, EPODURE, continuously delivers erythropoietin(EPO) to treat or prevent anemia in patients suffering from advanced stage (III and IV) chronic kidney disease(CKD). The global sales of erythropoiesis-stimulating agents (ESAs) used in nephrology (which include EPO)was approximately $5.4+ billions in 2010, but the dollar value of this market is expected to decline over thenext few years, due to several negative developments in the U.S. These developments include: a) theimplementation of reimbursement bundling by Medicare and Medicaid Services (CMS), which started onJanuary 1, 2011; and b) FDA’’s tightening of the hemoglobin (Hb) range allowed in patients with end-stagerenal disease (ESRD) and in advanced CKD patients (to 10-11g/dL, from the prior 10-12 g/dL); hence, apotential reduction of ESAs uses. Given that the number of ESRD and advanced CKD patients is expected toincrease going forward due to aging demographics across the globe, we believe that a better and cost-effectivehemoglobin management approach could gain market share, potentially at the cost of the bolus-delivered ESAmarket. Medgenics has demonstrated encouraging interim results from an ongoing Phase I/II trial evaluatingEPODURE in anemia prevention in anemic CKD patients. In 12 treated patients, hemoglobin levels werecontrolled within the 10-12 g/dL range for varying lengths of time. We believe the company will present top-line results for all patients in 4Q11. If positive, these results could be a substantial catalyst for MDGNshareholders, in our opinion. The company could also commence a Phase IIb trial in ESRD patients in 2012.The Biopump pipeline has the potential to address a large market and spark partnership interest. Inaddition to EPODURE, two Biopumps in development include INFRADURE (interferon or IFN for hepatitisC infection) and HEMODURE (factor VIII for hemophilia A). Preclinical results of INFRADURE areencouraging and show clinical validity for the modality of continuously delivered IFN as Medtronic (NTD ––NR) conducts a Phase II study for delivering Intron A via its insulin pump as a treatment for HCV infection.INFRADURE could potentially be even more cost-effective. Medgenics is planning to initiate a Phase I/II trialin 1H12 to evaluate INFRADURE as a potential HCV treatment. Baxter (BAX –– NR) is in collaboration withMedgenics for a development of HEMODURE as a potential treatment or prophylactic for hemophilia A. Webelieve Baxter will make a go/no-go decision in late 3Q11, and if positive, will continue negotiations withMedgenics to possibly advance the program into human clinical studies. Based on the continued delivery, selfsupply, and possible lower cost nature of the Biopump platform, many protein-based (biologics) therapiesMaxim Group LLC 4
  5. 5. MEDGENICS, INC. (MDGN)could benefit from this novel alternative delivery system. Together, they potentially represent multiple billiondollar markets, and we believe the company is actively seeking additional opportunities going forward.Undervalued and underexposed shares provide upside, and timing is favorable. Based on our probability-adjusted sum-of-the-parts and comparable analyses (and the fact that the company just went public in the U.S.),we believe that MDGN shares are currently undervalued and underexposed. As such, we believe that MDGNis a potentially high-growth biotech story with speculative risk, but has a possible inflection point in 2011or 2012.Maxim Group LLC 5
  6. 6. MEDGENICS, INC. (MDGN) COMPANY OVERVIEWMedgenics was incorporated as a Delaware corporation on January 27, 2000. The company’’s principalexecutive offices are located at 8000 Towers Crescent Drive, Suite 1300, Vienna, Virginia 22182; however, thecompany conducts research and development activities primarily at its Israeli location in Misgav BusinessPark, Misgav, Israel.Medgenics is a developmental-stage, bio-therapeutic company initially listed and traded on the AIM Market inthe U.K. in December 2007, and the volumes and trading of its common stock has been relatively sporadic. InApril 2011, the company issued an initial public offering in the U.S with net proceeds of approximately$10.6MM. The company is developing a novel platform technology, Biopump, as a continuous and autologousdelivering system for supplying therapeutic biologics as a potentially cost effective alternative treatmentmodality. Its lead product, EPODURE, delivers erythropoietin (EPO) and is completing a Phase I/II trial as ananemia treatment in advanced stage chronic kidney disease (CKD) or in end-stage renal disease (ESRD)patients. The second product, INFRADURE, delivers interferon-alpha or INF- and is scheduled to commencea Phase I/II trial, possibly in 1H12 as a potential treatment in hepatitis C (HCV) infection. The company isalso in collaboration with Baxter (BAX –– NR) for the evaluation of a pre-clinical stage HEMODURE, whichshould deliver factor VIII continuously as a potential treatment for hemophilia A (with a decision potentially inlate September 2011).Maxim Group LLC 6
  7. 7. MEDGENICS, INC. (MDGN) VALUATIONWe have elected to use sum-of-the-parts and comparable analyses as the two major valuation metrics to deriveour valuation for Medgenics. Together, we are recommending MDGN shares with a Buy rating and a 12-month target price of $8 for long-term-oriented investors that can tolerate speculative risk.Based on our probability-adjusted sum-of-the-parts analyses, our 12-month fair value for MDGN shares is$7.89 (Figure 1). Without insight as to whether the company will establish its own marketing and sales teams,we assume the company will partner out all current in-development programs with milestone payments androyalties as its major method for generating revenue.Figure 1: Sum-of-the-parts analysis EPODURE Anemia Total NPV = 194.4 Probability = 37% Prob. Adj. NPV = 72.7 Value per share = $5.68 72% INFRADURE HCV Total NPV = 57.9 Probability = 21% Prob. Adj. NPV = 12.2 Value per share = $0.95 12% HEMODURE hemophilia A Total NPV = 34.4 Probability = 21% Prob. Adj. NPV = 7.2 Value per share = $0.56 7% Other Biopump pipeline Value per share = $0.70 9% Debt-free cash Value in Mid-2012 = 0.0 Value per share = $0.00 0% Total = $7.89 100%Source: Maxim Group LLC researchFor our comparable analysis, we have used a peer group comprised of mid-stage cell therapy and anemiaproduct development companies, especially given that Medgenics remains in a relatively early stage ofdevelopment. Judged from an on par enterprise value (technology value), MDGN could trade at $8.20 as a fairvalue.Figure 2: Comparable peer analysis Shares Stage of Most Share Price Market Cap Cash Debt Tech Value Major Indication of AdvancedCompany Ticker Outstanding Advanced ($) (8/2/11) ($ MM) ($ MM) ($ MM) ($ MM) Products (MM) Product Stem cell in cardio andPluristem Therapeutics PSTI 3.34 42 140 45 0 95 Phase III orthopediatricAffymax AFFY 6.59 35 233 142 0 91 Filed NDA Anemia in ESRD patients Stem cells in cardiovascular,Athersys ATHX 2.60 24 61 25 0 36 Phase II CNS and inflammation Stem cells in cardiovascularNeostem NBS 0.81 80 65 32 0 33 Phase II and orthopedatric in ChinaAastrom ASTM 2.62 39 101 15 0 87 Phase II Stem cells in cardiovascular Average 165 47 0 68Medgenics MDGN 4.80 10 46 10 0 36 Phase II Anemia MDGN per share fair value matching its cell therapy and anemia peers = $8 Potential upside = 71%Source: Bloomberg, Thomson Analytics and Maxim Group LLC researchMaxim Group LLC 7
  8. 8. MEDGENICS, INC. (MDGN) ANTICIPATED MILESTONES FOR 2011 AND BEYONDProgram Indication Event Timing Possible release Phase I/II trial top-line results Nov. 11 Chronic kidneyEPODURE disease (CKD) with Potential partnership 2011 / 2012 anemia Potential commence Phase IIb trial on ESRD patients 2012 Potential Baxter decision on option for 6-month negotiation withHEMODURE Hemophilia Sep. 30, 2011 MDGNINFRADURE HCV infection Potential commence Phase I/II trial 1H12Source: Company reports and Maxim Group LLC researchMaxim Group LLC 8
  9. 9. MEDGENICS, INC. (MDGN) PIPELINE OVERVIEWMDGN has a broad Biopump product pipeline, covering several disease indications. These products are leadby EPODURE for anemia in patients suffering from advanced stages of chronic kidney disease (CKD), as wellas INFRADURE for hepatitis C infection and HEMODURE for hemophilia A. Figure 5 details thedevelopment pipeline.Figure 5: MDGN Pipeline Overview Product Indication Preclinical Phase I Phase II Phase III Filing Launched PartneredEPODURE CKD patients with anemiaINFRADURE Hepatitis C infectionHEMODURE Hemophilia A BaxterSource: Company data and Maxim Group LLCMaxim Group LLC 9
  10. 10. MEDGENICS, INC. (MDGN) DISCUSSIONS ON BIOPUMP TECHNOLOGYBiopump could be a paradigm-changing technology for biologics-relevant therapeuticsBiopump technology is a novel and unconventional gene therapy that utilizes toothpick-size slivers of thepatient’’s dermal tissue, transfected with an engineered gene to produce and secrete a therapeutic proteincontinuously. The transfected tissue is called the micro-organ (MO), since it acts as a basis of the biologicalpump to supply therapeutic protein. Medgenics has developed a proprietary device called DermaVac tofacilitate removal of MOs and the implantation of Biopumps. The process starts with harvesting a patient’’sdermis tissues under local anesthesia and is followed by transfection of the Adenoviral gutless vector-carryinggene for the desired protein ex vivo for 10 to 14 days. After determining the level of protein expressed in eachBiopump, each MO will be washed for several days to remove excess viral vector. Based on each patient’’sparticular dosage need, the company would determine the number of Biopumps needed to be inserted under thepatient’’s skin (Figure 1 and 2). After the initial implant, the protein dosages can be further adjusted by addingor ablating Biopumps to provide personalized dosing requirements for each patient. The expected life of aBiopump may exceed six months, with sustained local delivery of protein. Further, Medgenics hasdemonstrated that Biopumps can be transported over long distances with maintained viability, and the companyis developing devices to automate and scale up the cost-effective production of Biopumps in local or regionalprocessing centers.Figure 1: The process of generating Biopump b a a – Harvest dermis tissue (“micro-organs”) from patient. d c b – Transfer to processing station. i c – Adenoviral gutless vector carrying h gene for desired protein. e d – Process each micro-organ into f Biopump. g e – Biopump producing protein. f – Measure daily protein production per Biopump for dosing. g – Wash several days to remove vector. h – Re-implant Biopumps subcutaneously per dosing. i – Sustained local delivery of protein for life of cells in Biopump (> 6 months). BioCryoSource: Company reportsFigure 2: The size of a Biopump (left) and example of the sites of tissue harvest and implantation (right)Source: Company reportsMaxim Group LLC 10
  11. 11. MEDGENICS, INC. (MDGN)Well protected intellectual property estate for Biopump technology. Medgenics owns and licenses theBiopump Platform Technology patent portfolio, which contains 10 issued patents and 53 pending U.S. andinternational patent applications.With a continuous, autonomously produced therapeutic protein, Biopump’’s value proposition could be realizedon several fronts (Figure 3): Lower treatment costs —— Given the autonomous and continuous nature of Biopumps, the system could incur lower costs for developers (and could potentially be transferred to patients and payers) compared to the conventional cost structure of biologics production, which incurs fixed (such as capital manufacture equipments) and variable (production and operational) expenses. Per-patient cost of the Biopump could be even further reduced if the company scales up and automates the manufacturing of Biopumps in regional centers. Reduced side effects and improved safety —— The Biopump can potentially deliver therapeutic protein within a pre-determined, narrow, and relatively steady dose range. Compared to repeated bolus delivery, this could potentially reduce adverse effects due to the transient peak level of the conventional injection administration (Figure 3). Therapeutic protein from the Biopump would be similar to the patient’’s endogenous counterpart, since it is produced by the patient’’s own protein production machinery and therefore, would be potentially safer and trigger less of an adverse immune response.Figure 3: Major benefits of Biopump vs. repeated bolus injectionsProtein Injection overshoot – Adverse side effectsconcentration EPO: Cardiovascular Riskin serum IFN-a: Severe flu symptoms Therapeutic .. window Biopump Sustained Clinical Dose # of Days Injection undershoot Missed injection Injected dose in range (No Effect)Source: Company reports Improved patient compliance and increased chronic disease management efficacy —— With only two visits to the clinic typically needed for Biopump procedure (one for MO harvesting and the second for Biopump implantation), we believe that patient treatment compliance would be better than having frequent injections over an extended period. In addition, with a more consistent and sustained production and delivery of therapeutic protein (over six months via a single administration), Biopump could potentially reduce a shortcoming of the bolus injection as the serum protein concentration at the trough level could exhibit insufficient therapeutic impact. As such, Biopump could potentially be a more efficacious treatment than the current method of repeated bolus injections. Flexible dosing and the personalization of medicine —— One major differences between conventional gene therapy and the Biopump is that Biopump treatment is reversible; it can be ablated by a laser, radiofrequency needle, or local surgical removal to reduce or halt protein production and secretion. With such versatility, it is possible that Biopump would be customized as ““personalized medicine.””Maxim Group LLC 11
  12. 12. MEDGENICS, INC. (MDGN) DISCUSSIONS ON EPODUREMDGN’’s lead product, EPODURE, has exhibited promising (though still early) clinical resultsMedgenics’’ lead product, the EPODURE Biopump, is designed to deliver erythropoietin (Epoetin alfa, or EPO)to prevent anemia in both end-stage renal disease (ESRD) patients and advanced stage (III and IV) chronickidney disease (CKD) patients. EPO belongs to a class called erythropoiesis-stimulating agents (or ESAs),which interact directly with the EPO receptor on the red blood cell (RBC) surface, triggering activation ofseveral signal transduction pathways, resulting in the proliferation and terminal differentiation of erythroidprecursor cells. Advanced CKD and ESRD patients suffer from anemia since they have experiencedendogenous erythropoietin production insufficiency, caused by a decrease in red blood cells production in thebone marrow –– one of results from their damaged kidney. The United States’’ current standard of therapy foranemia management in ESRD patients is to inject Epogen three times per week or once a week with Aranesp tomaintain hemoglobin (Hb) levels exceeding 10 g/dL. Both products are developed by Amgen (AMGN –– NR);and Epogen has a half-life of approximately eight hours, while Aranesp has a half-life of 25 hours.In Israel, Medgenics is conducting a Phase I/II proof-of-concept, dose-ranging trial to evaluate EPODURE forthe management of anemia in anemic CKD patients. The study should enroll 18 anemia CKD stage III and IVpatients with estimated GFR of 15-60 ml/min, assigning patients to one of the three dose cohorts: low (18-25IU/kg/day), intermediate (35-45 IU/kg/day), or high (55-65 IU/kg/day). EPODURE is produced by ex vivotransduction of MOs, with helper dependent Adenoviral EPO vectors (HDAd-EPO) that express and secretEPO. Patients will undergo six months of treatment, followed by a six-month observation and possibly non-trial extension. The trial’’s primary endpoint is safety (including adverse events, immune response determinedby the presence of anti-EPO antibodies, and dermal safety outcomes). Secondary endpoints include elevationof serum EPO levels: at least 10 mU/ml above the baseline for a duration of at least six weeks followingimplantation.At the annual American Society of Nephrology (ASN) meeting in November 2010, Medgenics reportedencouraging interim results, suggesting that EPODURE is safe and doseable –– and that it doesn’’t generate anantigenic response. Further, clinical feasibility has been demonstrated with a single EPODURE administration;it raised and maintained hemoglobin levels for up to 24 months (29 months after the most recent update)without further ESA injection. Figure 4 illustrates the results in 12 patients (six receiving low doses and sixreceiving intermediate doses), with Hb reaching and maintaining the pre-determined 10-12 mg/dL range. Theobservation period of sustained hemoglobin elevation in most patients (10 out of 12) exceeded three months;five exceeded five months. Patients were both injected-EPO naïve and experienced (Figure 5) and haveretained a stabilized Hb levels within the accepted range. Figure 6 illustrates the patient demographicpresented at the 2010 ASN meeting.Figure 4: Interim results from the low (left) and intermediate (right) dose groups of the EPODUREPhase I/II study in anemic CKDSource: Company reportsMaxim Group LLC 12
  13. 13. MEDGENICS, INC. (MDGN)Figure 5: Interim results from individual patients in the EPODURE Phase I/II study in anemic CKD Estimated baseline 100 days after last injection EPO Injections EPODURE EPO Injections EPODURE EPODURE EPODURESource: Company reportsIt should be noted that these encouraging interim results were based on a sub-optimal trial protocol, as patientscould only be assigned a fixed dose of EPODURE (low or intermediate), instead of customized andsubsequently adjustable doses (which could potentially better meet the needs of each patient). A recent updateindicated that the study has recruited 14 patients –– six to receive low doses, seven to receive mid-range doses,and one to receive high doses of EPODURE. Recruitment is ongoing.Figure 6: Patient demographics of the Phase I/II trialSource: Besarab, A.,, ASN 2010 presentationWe anticipate the company to provide additional updates on the Phase I/II trial in 2H11, possibly at the annualmeeting of American Society of Nephrology in November 2011. We believe the company will provide resultsfrom all patients, as well as treatment effect durations reported last year. Should the outcome be robust, wewould view it as a pivotal event for MDGN’’s share value appreciation.We also believe that positive Phase I/II trial results could lead to a commencement of a Phase IIb trial(potentially in 2012) to evaluate EPODURE’’s ability to manage anemia in ESRD patients by maintaining HbMaxim Group LLC 13
  14. 14. MEDGENICS, INC. (MDGN)levels. We believe the company is currently preparing for an Investigational New Drug (IND) discussion withthe FDA to launch a Phase IIb trial in the U.S. Several modifications might be in place: Based on recently issued guidance by the FDA (in June 2011), the target Hb range would likely be between slightly lower than 10 gm/dL to up to 11 gm/dL, instead of the prior 10 gm/dL to 12 gm/dL. EPODURE dosing may be more flexible, allowing optimization for each patient’’s needs, instead of a fixed dose regimen. Patients may mainly be ESRD (stage V CKD), instead of stage III or IV CKD.Major benefits of EPODURE compare to the current standard of care in anemia managementCompared to the current standard of care, we believe the EPODURE Biopump could exhibit the followingadvantages: Better safety and efficacy: With the potential for Hb levels to be stabilized at a more narrow range over a longer period, patients could potentially avoid hemoglobin cycling (which is often experienced in patients with periodic injections of EPO). Further, more consistent and durable delivered Epogen could also prevent potential adverse effects, such as hypertension or emboli (which can occur from overshooting EPO during repeated injections). In addition, a more reliable and sustained EPO could potentially prevent trough EPO levels, with sub-par efficacy and better compliance compared to repeat visits to clinics for injections. Cost savings: With a continuous, self-supplied EPO potentially exceeding six months, the costs of EPODURE could be lower than repeated injections of ESAs (based on high-fixed and continued variable costs of biologics facility construction and operations). Further, it could potentially reduce the frequent clinic visits needed. Cost savings could become increasingly more important under the current financially challenging healthcare system in the U.S. As such, dialysis service reimbursement offered by the Centers for Medicare & Medicaid Services (CMS) is under a bundling structure, instead of the prior separated billing system, as ESAs has accounted for $2 billion per year as a major drug expense for dialysis payment –– a circumstance that could potentially bode well for the outlook of EPODURE, in our opinion.Anemia in nephrology market landscape:According to the United States Renal Data System (USRDS), there were approximately 550,000 patientssuffering from ESRD (Figure 7) with annual incidences exceed 100,000 (Figure 8) in 2008 in the U.S.,. Withan aging demographic in the U.S., USRDS estimates that the prevalence could reach 800,000 by 2020, andannual incidences could reach 143,000 (Figure 9).Figure 7: The U.S. ESRD prevalence and Y/Y growth rate ESRD prevalence and Y/Y grow th rates in the U.S. 600,000 20% 450,000 15% Patient Size 300,000 10% 150,000 5% 0 0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008Sources: USRDS, the U.S. Census and Maxim Group LLCMaxim Group LLC 14
  15. 15. MEDGENICS, INC. (MDGN)Figure 8: The U.S. ESRD annual incidences and Y/Y growth rate ESRD incidences and Y/Y grow th rates in the U.S. 120,000 16% 100,000 13% Patient Size 80,000 10% 60,000 7% 40,000 4% 20,000 1% 0 -2% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008Sources: USRDS, the U.S. Census and Maxim Group LLCFigure 9: Projected U.S. ESRD prevalence (left) and annual incidences (right) by 2020Sources: USRDS and Maxim Group LLCAnemia is a common complication of ESRD patients who undergo dialysis (approximately 70%), mainly dueto the fact that their kidneys no longer produce adequate amounts of erythropoietin (EPO) –– a principal factorthat stimulates red blood cell production in bone marrow. The major treatment is to supplement patients withESAs. The same types of agents are also used for anemia resulting from cancer, HIV infection, and othercauses. However, some cardiovascular adverse effects from ESAs were recently identified, and reimbursementis increasingly being tightened, so sales of ESAs have been in decline over the last two years –– and we believethis trend could continue near term. The global sales for ESAs were approximately $5 billion in 2010, and weestimate three-quarters of sales might come from nephrology use (Figure 10) –– the majority of which are ESRD(dialysis) patients, while a much smaller portion are advanced CKD (pre-dialysis) patients. Amgen (AMGN ––NR), Johnson and Johnson (JNJ –– NR), and Roche (RHHBY –– NR) are major players in the ESAs market, withbiosimilars in Europe accounting for a minor position. Further, an NDA for Hematide from Affymax (AFFY ––NR) and Takeda (4502 –– NR) was recently filed (with a potential FDA decision in 2012).Figure 10: Global anemia in nephrology market in 2010Company Product Global nephrology sales ($) EPOGEN 2.5 BAmgen Aranesp ~500 MMJohnson and Johnson Procrit / Eprex ~400 MM NeoRecormon /Roche ~200 MM Mircera Biosimilars < 100 MM Total global ESAs in nephrology ~3.7 BSources: Amgen presentation, SEC filings and Maxim Group LLCMaxim Group LLC 15
  16. 16. MEDGENICS, INC. (MDGN)Payment bundling and narrowed therapeutically-benefited Hb levels should have near-term impactsBundling payment. In the United States, it is estimated that the vast majority (about 60% to 65%) of ESRD-related management, particularly dialysis and accompanied treatments, are paid for by the CMS. The initialMedicare payment method includes a flat rate dialysis associated service (which accounted for nearly 60% ofexpenses, or $4.8 billion, in 2005) and a separate bill for certain Part B drugs (EPO, IV iron, and vitamin D)and lab tests (which accounted for 40%, or approximately $3.2 billion, in 2005 –– and of which ESAs accountedfor more than $2 billion). In 2008, the total combined ESRD-related related services (CMS and private healthplans), including hospitalization, were $39.5 billion. With continued increases in use of ESAs, the paymentmethod has created an incentive to potentially over-utilize those drugs for many dialysis providers, andCongress has called upon CMS to develop a plan to bundle ESAs and other separately billable drugs into asingle case-mix adjusted payment to dialysis facilities.As of January 2011, CMS started to implement a bundled ESRD payment system. The base payment rate perpatient is $230 per treatment, compared to the prior dialysis portion rate of approximately $130. The industry(dialysis center) has the option to phase-in the bundling system over a four-year period till January 1, 2014 andfor each year, 25% of the total industry needs to adapt. A current survey suggested that the majority offacilities might immediately adapt to the bundling payment system instead of going through a more gradualtransition. Overall, the implementation of the bundling payment system is likely to continue to reduce the useof ESAs over the next few years. Further, dialysis providers are likely to seek more cost-effective ESAalternatives to replace the current standard of care. As such, we believe this landscape should bode well forEPODURE, given its potential cost and efficacy advantages.Therapeutically benefited Hb level narrowed. In June 2011, the FDA changed the label for Epogen andAranesp and narrowed the desired hemoglobin (Hb) range for chronic renal failure patients to 10-11g/dL, fromthe prior range of 10-12 g/dL, due to clinical studies that demonstrated that patients risked experiencing deathor sAE of cardiovascular reaction and stroke if they were administrated ESAs to target Hb levels of greaterthan 11g/gL. Although the new guidelines also potentially would like to reduce the use of conventional ESAs,we believe this could also potentially provide additional opportunities for EPODURE, given that itspreliminary data has demonstrated that it can deliver EPO of a narrowed range over a long period of time.The global market for anemia treatment in nephrology is also substantial, in our opinion. According to a reportby Fesenius Medical (FNEG –– NR), the global dialysis population in 2008 was 1.76 million, with the top fivecountries (the U.S., Japan, China, Brazil, and Germany) accounting for 52% (916,000) and the top 15 countriesaccounting for 75% (approximately 1.3 million) (Figure 11). The dialysis process also can be divided into twotypes: hemodialysis (HD) and peritoneal dialysis (PD). HD removes waste from the blood through ahemodialysis machine, usually three times per week for about 3 to 4 hours for each treatment (which typicallyoccurs in dialysis center). More infrequently, HD can be carried out at home (the patient might own themachine and do procedures on a daily basis, typically for 2 hours six days a week). Peritoneal dialysis uses thepatients peritoneum in the abdomen as a membrane to remove waste from the blood. PD is frequentlyconducted at home as well as other locations, such as the workplace. HD accounts for the dominant majority ofdialysis in most countries (Figure 11).Emerging home dialysis trends could bode well for EPODURE. With increased pressure from healthcarecost reductions for renal failure patients, a growing trend is emerging: Patients are seeking ways to get dialysistreatment at home, instead of in the dialysis clinics (or to at least reduce the visits). One of the major challengesfor home dialysis practice is for patient to receive needed medications, especially for anemia managementgiven self administration of EPO safely and appropriately is more difficult to accomplish.As such, we believe that EPODURE could potentially overcome some hurdles in home anemia managementfor ESRD patients, given that patients could potentially maintain sufficient EPO without repeated dosing, eitherthrough visiting clinics or by self-administration. Lower costs could be another big advantage.Maxim Group LLC 16
  17. 17. MEDGENICS, INC. (MDGN)Figure 11: Global anemia market in nephrology (2010)Sources: Fresenius Medical Care 2009 presentationMaxim Group LLC 17
  18. 18. MEDGENICS, INC. (MDGN) DISCUSSION ON INFRADUREINFRADURE Biopump developmentINFRADURE is a Biopump that continuously produces interferon as a potential treatment for hepatitis C virus(HCV) infection. Interferon-based therapies have been the mainstay of HSV treatment, and its use is expectedto continue going forward.The company presented two posters at the 2010 European Association for the Study of the Liver (EASL)annual meeting, highlighting results from INFRADURE pre-clinical in vitro and SCID animal model studies.Based on the Intron-A package insert, daily need for interferon (IFN ) is 5 g/day; however, the currentINFRADURE has demonstrated that it could secrete IFN at approximately 1 g/day. In an in vitro study,researchers could generate adjusted levels of INFRADURE potency based on titration of vector concentration(Figure 12, left) and exhibited sustained IFN production over an eight-month period (Figure 12, right).Figure 12: In vitro INFRADURE expression levels can be adjusted through varying vectorconcentration (left), and sustained IFN production (right) INFRADURE Long term in-vitro production 10000 1000 IFN ng/Biopump/day 100 10 1 6 9 16 27 37 48 62 76 97 118 139 160 181 202 223 244 Days from harvesting Ti Time to Implant in PatientSource: Company reportsFrom a SCID mouse animal model study, two different doses that anticipated expressing 1300ng/day and4000ng/day of human IFN have demonstrated continued expression, with declines exceeding 100 days(Figure 13). Continued decreased protein production over time was also observed in prior EPODURE SCIDanimal model studies, but appropriate levels of EPO production were accomplished in patients. The reducedand declined production of human protein in the animal models could be due to the mouse’’s ability to reducethe exogenous protein to diminish the negative impact of these proteins on its normal functions. Further, adose-dependent relationship between expression levels and bio-activities was also demonstrated in the animalmodel (Figure 14).Figure 13: In animal model, INFRADURE demonstrated sustained expression of human IFNSource: Company reportsMaxim Group LLC 18
  19. 19. MEDGENICS, INC. (MDGN)Figure 14: Dose-dependent relationship between expression level and bio-activitiesSource: Company reportsThe company is planning to commence a Phase I/IIa trial (possibly in 1H12) to evaluate INFRADURE’’spotential as an alternative to the weekly injection of interferon as a HCV treatment. We anticipate that thecompany will provide more details going forward.Continuously delivered interferon could be more beneficial in HCV treatmentThe major value proposition for delivering interferon continuously over the treatment period in HCV therapy isto reduce some of the adverse effects, which have been major obstacles for patients taking treatment due toserious intolerability. Two developments have provided validity for this thesis: 1) Research conducted by Dr.Steve Schenker and colleagues 1 demonstrated that patients reported better tolerability via continuoussubcutaneous infusion of IFN b compare to three times weekly injection of Intron A and with similarefficacy between the two methods; and 2) Metronic’’s (MDT –– NR) current development for deliveredinterferon continuously via the company’’s insulin pump.Medtronic’’s COPE-HCV Phase II trial underwayMedtronic is conducting a Phase II trial (COPE-HCV or COntinuous Interferon Delivery via the MedtronicParadigm Pump Infusion System Clinical Evaluation for Chronic HCV) that evaluates interferon delivered viaan external pump infusion system to treat patients with hepatitis C virus (HCV) infection. Medtroniccommenced the study in September 2009. This trial is a single blind, 250+ patient study designed to evaluateIntron A delivered in one of three doses via continuous subcutaneous infusion through the MiniMe ParadigmInsulin Pump Infusion System for 48 weeks. All patients will also concurrently receive oral ribavirin(Rebetol). The comparator should be patients receiving the standard of care of 1.5 g/kg PegIntronsubcutaneous weekly plus oral ribavirin (Rebetol) for 48 weeks. The study is designed as a first line treatmentfor hepatitis C genotype 1 patients. The primary endpoint is the incidence of sustained virologic response(SVR) at 24 weeks after treatment is completed, as well as safety and tolerability. Secondary endpoints includerapid virologic response (RVR), early virologic response (EVR), end-of-treatment response (EOT), PK, PD andfunctional health, depression score, and fatigue level. We estimate that the top-line results potentially could beavailable in late 2011 or early 2012. We believe a positive outcome from the COPE-HCV trial could afford asubstantial validation of continuously delivered interferon –– a better modality for HCV treatment, in ouropinion.Commencement of the COPE-HCV trial is on the heel of a completed European SCIN-C Phase II study. Thisis a randomized, open label, and 30-patient study to evaluate three doses (12, 9, or 3 MU) of IFN 2b delivereddaily via an insulin pump in hepatitis C genotype 1 patients unresponsive to (peg) interferon/ribavirin therapy.The treatment duration lasts 48 weeks, and patients also take ribavirin (15 mg/kg/day). Primary endpoints are1 Schenker, S., et. al., J of Interferon and Cytokine Research, 17:665 –– 670 (1997)Maxim Group LLC 19
  20. 20. MEDGENICS, INC. (MDGN)safety and tolerability of high-dose continuously, subcutaneously infused IFN- 2b. Secondary endpointsinclude 1) HCV RNA negativity at week 48, as well as 24 weeks after end of treatment; 2) biological activityof IFN-a2b; 3) PK; 4) HCV-specific immune responses; and 5) quality of life assessment.Hepatitis C virus (HCV) treatment market landscape:Hepatitis C virus (HCV) is a RNA-based virus that targets liver cells. According to the Centers for DiseaseControl and Prevention (CDC) analysis, HCV infection incidences were high before early 1990 due tocontamination from blood transfusions prior to well established blood screenings. Annual incidences havesince been in decline over the subsequent years, with estimated incidences of 18,000 in 2008. The majority ofinfected patients (>70%) has developed chronic infection with a propensity causing varying levels of scarringof the liver (fibrosis and cirrhosis) (Figure 15). The CDC estimated that the prevalence of chronic HCVinfection in the U.S. is 3.1 million. According to World Health Organization (WHO), global prevalence forchronic HCV infection is 130 to 170 million, with an estimated 3 to 4 million annual incidences and 350,000deaths due to HCV-related liver diseases each year. With an asymptomatic and chronic nature of the disease,HCV infection is substantially under-diagnosed.Figure 15: Natural history of HCV infectionSources: CDC and Maxim Group LLCThe current standard of treatment for HCV is a combination of pegylated interferon and orally administratedribavirin (PEG/RBV). Treatment duration for patients diagnosed with genotype 1 (approximately >70% oftotal HCV infections in the U.S.) was up to 48 weeks, with only of 50% success (determined by SVR orsustained virologic response, which is a measure for eradication of the virus at 24 weeks after the completion oftreatment). Treatment duration for patients infected with genotypes 2 and 3 HCV was usually 24 weeks, withcure rates of 70-90%. Two newly approved protease inhibitor based medications –– Victelis [boceprevir fromMerck (MRK –– NR)] and Incivek [telaprevir from Vertex (VRTX –– NR)] –– will be administrated concurrentlywith PEG/RBV, with potentially overall shorter treatment duration. HCV infection is under-treated, not onlydue to modest treatment efficacy and its asymptomatic nature, but mainly due to poor tolerability of the currentstandard of care (PEG/RBV). Despite current developments of various oral medications and the speculation offuture all-oral medication (interferon sparing) HCV treatment, we believe that interferon-containing regimenscould remain the backbone for HCV therapy (especially if adverse effects can be improved). As such, we areencouraged by the potential represented by continuously delivered interferon –– and even more interested inINFRADURE Biopump, as it could potentially be more cost effective.The current pegylated interferon market is dominated by two products: Peg-Intron of Merck and Pegasys fromRoche –– with total 2010 sales of $2.7 billion (Figure 16).Figure 16: Global interferon sales in 2010Product Company 2010 Sales ($ MM)Pegasys Roche 2,007PegIntron Merck 737 Total 2,744Sources: Amgen presentation, SEC filings and Maxim Group LLCMaxim Group LLC 20
  21. 21. MEDGENICS, INC. (MDGN) DISCUSSION ON HEMODURE AND OTHER PROSPECTSHEMODURE Biopump developmentHEMODURE is a Biopump that continuously produces factor VIII as a potential treatment for hemophilia A.Baxter (BAX –– NR), the market leader in hemophilia treatments, approached Medgenics in October 2009 toform a collaboration requesting the latter to develop HEMODURE. Medgenics has received $3.9MM in R&Dfunding and standstill fees as a result of this collaboration. Although MDGN has successfully createdHEMODURE over the initial 12-month period, the amounts of protein were below the level necessary toprovide effective treatment of hemophilia. Both companies have subsequently extended the collaborationagreement, and with additional inputs from licensing with the University of Michigan in February 2011,Medgenics believes it can overcome this hurdle. Baxter announced in July 2011 that the company will furthervalidate HEMODURE Biopumps through tests in mice, with a potential go/no go decision toward the end ofSeptember 2011. Medgenics is eligible for a $2.5MM in option fees, allowing Baxter to gain a six-monthperiod to further negotiate with Medgenics for a deal to advance HEMODURE into clinical development.Although it is unclear which criteria Baxter might employ to determine whether it wants to advance theHEMODURE Biopump program, our analysis suggests that an early report could provide some insight as to thelevel of factor VIII activities needed for prophylactic use in severe hemophilia A patients 2 . The reportindicated that 1 to 2 percent of normal levels of factor VIII activities would be sufficient to protect severehemophilia A patients (defined as having >1% of factor VIII activity remaining) from spontaneous bleeding.Hemophilia A market landscape:Hemophilia A is a hereditary disorder (linked to the X chromosome) due to defects in producing functionalfactor VIII (FVIII) protein. As such, patients have damaging or fatal bleeding episodes because of theirdiminished clotting ability. Hemophilia A is an orphan disease, with more than 25,000 patients in the U.S.Based on levels of FVIII, hemophilia A can be categorized into three levels: severe, moderate, and mild –– andmore than 50% of patients are categorized as severe.Treatment for hemophilia A is mainly through the replacement of FVIII protein via injection. In the 1950s,patients were treated with a frozen blood plasma transfusion to supply FVIII. In the 70s, treatment advanced asplasma derived FVIII (pd-FVIII) were collected from a more complex fractionation process from plasma,which became a major product with substantial improvements in patient life expectancy. In the early 80s,during the first breakout of HIV infections, a significant portion of hemophilia patients were infected by thevirus due to pd-FVIII products getting contaminated. A strong push for the development of recombinant FVIII(rFVIII) in order to mitigate viral infection led to the successful development and commercialization of rFVIIIin the 90s. The current global hemophilia A treatment market is comprised of both pd-FVIII and rFVIII(Figure 17). Based on its better safety profile and more generous reimbursement systems, rFVIII use hasaccounted for more than 80% of shares in the developed markets, but accounted for less than 20% indeveloping markets due to rFVIII’’s higher price tag.The hemophilia A treatment market is relatively mature, with an estimated single digit annual growth goingforward. We estimate the global hemophilia A treatment market is approximately $5.5 billion, with rFVIIIaccounting for $4.45 billion. Approximately half a dozen companies dominate the market, with Baxteraccounting for nearly half of the market (Figure 17), followed by Bayer AG (BAYN –– NR), CSL Behring,Pfizer (PFE –– NR), Grifols (GRLS –– NR), and Octapharma. Bexter’’s Advate –– a third generation of rFVIII –– isthe market leader, with annual sales of $1.7 billion in 2010.Two major trends for the future development of the hemophilia A treatment market are increased prophylaxistherapy and development of longer-acting rFVIII.2 Roth, D.A., et. al., NEJM, 344: 1735 –– 1742 (2001)Maxim Group LLC 21
  22. 22. MEDGENICS, INC. (MDGN)In the developed market, particularly in the U.S., patients with severe hemophilia A receive rFVIIIprophylatically every two to three days in order to prevent future bleeding episodes (instead of on-demand useafter a bleeding incidence). Severe patients are very likely to bleed up to 30-40 times per year. In the U.S., itis estimated that nearly 40% of the severe hemophilia A patients use rFVIII prophylatically. With an improvedquality of life and appropriate reimbursement, prophylactic rFVIII use is increasing, especially in children andnew patients. Prophylactic rFVIII use outside of the U.S. remains more challenging because reluctantreimbursement by payers due to high costs.Figure 17: Global hemophilia A (Factor VIII) market landscapeCompany Product Type 2010 sales ($) Advate 3rd generation recombinant 1.7 BBaxter Recombinate 1st generation recombinant 400MM Hemofil M Plasma-derived ~ 315MM Kogenate / KogenateBayer 1st and 2nd generation recombinant 1.4 B FS Helixate / Helixate 1st and 2nd generation recombinant 544MM FSCSL Behring Monoclate-P Plasma-derived ~100+MM ReFacto 1st generation recombinantPfizer 404MM Xyntha 4th generation recombinant Koate DVI /Grifols / Talecris Plasma-derived ~ 255MM AlphanateOctapharma Plasma-derived ~ 320MM Total recombinant factor VIII 4.45 B Total plasma-derived factor VIII ~1.00 B Total global factor VIII market 5.50 BSources: SEC filings and Maxim Group LLCThere are about a half-dozen treatments in development for hemophilia A (Figure 18). Some are moreadvanced generations of rFVIII (which is third generation), and others are more differentiated, longer-actingrFVIII products. Longer-acting rFVIII products could require less frequent dosing, which would be more user-friendly as a prophylactic, as well as the potential for less inhibitor formation. We also believe thatHEMODURE could be even more user friendly and, if successful, could be substantially better than the longer-acting rFVIII products in development. Further, with increased competition of the hemophilia A treatmentmarket (and Baxter having the most to lose), it is no surprise that the company would like to catch thepotentially leading technology for FVIII product development.Figure 18: Selected hemophilia A development pipelineCompany Product Development Stage Type Potential LaunchBayer BAY81-8973 Kogenate PF Phase III 3rd Generation rFVIII 2014Novo Nordisk NN7008 (N8) Phase III 3rd Generation rFVIII 2013Octapharma Human-cl rhFVIII Phase II/III 2013Baxter BAX 513 Phase I Longer Acting rFVIII 2015Biogen Idec / Biovitrum rFVIIIFc Phase II/III Longer Acting rFVIII 2014Sources: SEC filings and Maxim Group LLCMaxim Group LLC 22
  23. 23. MEDGENICS, INC. (MDGN)Other prospects for the Biopump platformBased on continuous delivery, self supply, and the potentially lower cost nature of the Biopump platform, manyprotein-(biologics)-based therapies could benefit from this novel alternative delivery system. Figure 19illustrates some therapeutics that could be replaced by the Biopump. Together, they represent a multi-billiondollar market potential, and we believe the company will actively seek additional opportunities going forward.Figure 19: Selected hemophilia A development pipelineDisease Indication Protein 2009 sales ($B)Growth Retardation Growth hormone 2.9Multiple Sclerosis Interferon Beta 5.2Diabetes Insulin 13.3Arthritis IL-1Ra 18.1Cancer Recovery G-CSF 5.2Wound Healing PDGF-BB NAObesity Peptide YY3-36 NAChronic Pain IL-10 NASources: Company report and Maxim Group LLCMaxim Group LLC 23
  24. 24. MEDGENICS, INC. (MDGN) RISKSThe Biopump platform is a novel but nascent-stage technology with limited clinical validation. Despitethe Biopump platform exhibiting the potential to express functional proteins of different therapeutic biologicsin animal models (with a good safety profile), the actual clinical practice has only been realized experimentallyvia EPODURE with very limited patient sizes over short periods of time. As such, risks remain as to whetherany products developed based on the Biopump platform could have real-world utility and would be approvedby regulatory agencies.Clinical studies might not accomplish the anticipated outcome. The company is completing an ongoingEPODURE Phase I/II trial, with the potential to report top-line results in 4Q11. Significant risks exist if theresults from the current or any future trials might not be successful, and such outcomes could have significantnegative impact on the MDGN share value.Sales potential for any in-development products could be significantly different than expected. Althoughseveral in-development disease markets, such as anemia, hemophilia A, and HCV infection, representsubstantial unmet medical needs and market potential, it is possible that the future market dynamic and patientneeds might not align with current projections. As such, the future market potential could be substantiallydifferent than anticipated (despite a successful product development and approval by regulatory agencies in theU.S. and other territories).With Biopump being the only product offering, this could potentially increase risk due to a lessdiversified portfolio. All products currently offered by Medgenics are based on the Biopump platform. With amore nascent nature of the platform and lack of pipeline products derived from other sources, potential risksexist for MDGN investors: Concentrated portfolios afford less diversity if Biopump products do not realizetheir commercial value.As a company with major operations outside of the U.S., country-specific activities could affect sharevalue. With most of the key operations outside of the U.S., Medgenics could face greater risks of disruptedoperations due to the instability of the Middle East region (with Israel being a constant attack target by Hamasand other Islamist terrorist groups). Further, foreign currency exchange risks could be another factor affectingthe non-U.S.-based company.Lack of cash could impede corporate development. If the company cannot generate sufficient financialsupport to advance its pipeline development from either financial markets or non-dilutive sources, MDGN’’sshareholder value could be impaired. In addition, future equity offerings could dilute the value of existingshareholders.Thinly traded stock limits shareholder options. The stock just started getting traded in the U.S. exchangesand are currently thinly traded, which results in low liquidity. Shareholders could have limited options inchanging their positions in a volatile stock market.Maxim Group LLC 24
  25. 25. MEDGENICS, INC. (MDGN) MANAGEMENTAndrew Leonard Pearlman, Ph.D., is the founder and CEO of Medgenics. Prior to Medgenics, Dr. Pearlmanserved as CEO and chief scientist for TransScan Research & Development Co., Limited, developing the T-scan2000 breast impedance scanner, which was the first new medical imaging method for cancer detection toreceive FDA pre-market approval in over 20 years. Prior, Dr. Pearlman also founded or co-founded severalother companies in the fields of diagnosis and patient monitoring. He has more than 25 years experiencefounding and managing biotechnology and medical device companies and holds a Ph.D. in biophysics from theUniversity of California, Berkley.Clarence L. Dellio rejoined Medgenics as COO in June 2011. Prior, he was a consultant to a variety ofemerging biotechnology and medical technology companies since 2008. From 2004 to 2008, Mr. Dellio servedas President and Chief Operating Officer of Neosil, Inc., a venture-backed dermatology company thatsubsequently merged with Peplin, Inc. Prior to Neosil, Mr. Dellio was the Chief Operating Officer and SeniorVice President-Operations for XOMA Ltd., from 1984 to 2004. Previously, Mr. Dellio was VP ofmanufacturing/new product development manager at Becton-Dickinson & Company for 11 years. Mr. Dellioearned his B.S. in accounting from Bentley College.Baruch Stern, Ph.D. joined Medgenics as Chief Scientific Officer in 2006. Prior to Medgenics, Dr. Sternserved as tissue engineering project manager at ProChon Biotech Limited, a company developing cell therapysolutions to damaged cartilage from 2004 to 2006. Prior, he served as a group development leader of themicrobiology section at Medgenics, where he spearheaded tissue engineering and development of the BiopumpPlatform Technology, including viral vector and assay development, implementing GMP production andstandard operating procedures for the company’’s phase I clinical trial, as well as assisting the development ofits skin harvesting, handling, and implantation devices from 2001 to 2004. He received a Ph.D. in molecularbiology and biotechnology from Tel Aviv University in 1994 and completed a postdoctoral fellowship at theNIH.Phyllis Bellin joined Medgenics as Director of Finance and Administration in November 2005. Prior, she wasa founder and vice president of Gintec Active Safety Limited and was responsible for finance andadministration of its subsidiaries, including RoadEye Limited. She has managed finance and administration forseveral early stage, high-tech ventures in Israel since 1980. She received an MBA from Columbia University.Maxim Group LLC 25
  26. 26. MEDGENICS, INC. (MDGN) FINANCIAL MODELS MEDGENICS INC. INCOME STATEMENT ($ MM) 2009 2010 2011E 2012E 2013E 1Q11 2Q11 3Q11E 4Q11E Total Revenue 0.0 0.0 - 0.0 2.5 - 2.5 10.0 10.0 Cost of goods sold 0.0 0.0 - - - - 0.0 0.0 0.0 Gross profit 0.0 0.0 - 0.0 2.5 - 2.5 10.0 10.0 Research and development expenses 2.3 3.4 1.2 1.5 1.6 1.9 6.2 12.1 18.2 Less-Participation by the Office of the Chief Scientist (0.5) (0.7) 0.0 (0.5) 0.0 0.0 (0.5) 0.0 0.0 US government grant (0.2) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Participation by third party (0.1) (0.9) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Research and development expenses, net 1.7 1.5 1.2 1.0 1.6 1.9 5.7 12.1 18.2 General and administrative expenses 2.5 4.4 0.8 1.1 1.0 1.0 3.8 4.5 5.4 Operaing expense 4.2 5.9 2.0 2.1 2.6 2.9 9.5 16.6 23.6 Excess amount of participation in research and development fro (0.3) (2.6) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Operating income (3.9) (3.4) (2.0) (2.1) (0.1) (2.9) (7.0) (6.6) (13.6) Financial expenses 3.1 0.8 0.1 0.2 0.1 0.1 0.5 0.6 0.7 Financial income (0.0) (0.1) (1.7) (0.0) (0.0) (0.0) (1.7) 0.0 0.0 Income (loss) before taxes (6.9) (4.1) (0.3) (2.3) (0.2) (3.0) (5.8) (7.3) (14.3) Income tax expense (0.0) (0.0) 0.0 (0.0) 0.0 0.0 (0.0) 0.0 0.0 Net income (6.9) (4.1) (0.3) (2.3) (0.2) (3.0) (5.8) (7.3) (14.3) Dividend in respect of reduction in exercise price of certain Warr 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net income attributable to common shareholders ($6.9) ($4.1) ($0.3) ($2.3) ($0.2) ($3.0) ($5.8) ($7.3) ($14.3) Net Earnings (Losses) Per Share—Basic ($2.06) ($0.95) ($0.06) ($0.26) ($0.02) ($0.32) ($0.71) ($0.57) ($1.07) Net Earnings (Losses) Per Share—Diluted ($2.06) ($0.95) ($0.06) ($0.26) ($0.02) ($0.32) ($0.71) ($0.57) ($1.07) Shares outstanding—basic 3,367 4,375 5,370 9,034 9,134 9,234 8,193 12,805 13,405 Shares outstanding—diluted 3,367 4,375 5,370 9,034 9,134 9,234 8,193 12,805 13,405 Margin Analysis (% of Sales/Revenue) COGS NA NA NA NA 0% NA 0 0 0 R&D NA NA NA NA 64% NA 229% 121% 182% MG&A NA NA NA NA 39% NA 151% 45% 54% Operating Income (loss) NA NA NA NA -3% NA -279% -66% -136% Pretax NA NA NA NA -7% NA -231% -73% -143% Tax Rate NA NA NA NA NA NA 0% NA NA Net Income NA NA NA NA -7% NA -232% -73% -143% Financial Indicator Growth Analysis (YoY%) Total Revenue NA NA NA NA NA NA 300% 0% Cost of goods sold N.A. N.A. N.A. N.A. N.A. N.A. N.A. R&D expenses 49% 112% 90% 58% 90% 84% 15% 15% Less-Participation by the Office of the Chief Scientist 44% NA 242% -100% -100% -29% 15% 15% US government grant NA N.A. N.A. -100% -100% 15% 15% Participation by third party 902% NA -100% -100% -100% -100% 15% 15% G&A 74% 16% 139% -63% 43% -14% 20% 20% Other income 688% -100% -100% -100% -100% -100% 15% 15% Operating Incomes (Losses) -14% 438% 1281% -97% 449% 108% -5% 105% Financial expenses -72% 194% 225% -92% -119% -36% 15% 15% Financial income 450% -36% -100% -131% -200% 3053% 15% 15% Pretax Income -40% -115% -19% -95% -29738% 40% 26% 96% Net Income -40% -115% -19% -95% -37148% 40% 26% 96% EPS - Basic -54% -110% -63% -98% -20872% -25% -19% 88% EPS - Diluted -54% -123% -38% -98% -20872% -25% -19% 88% Source: Maxim Group LLC research and SEC filingMaxim Group LLC 26
  27. 27. MEDGENICS, INC. (MDGN) MEDGENICS INC. CASH FLOW STATEMENT (in millions) ($ MM) 2009 2010 2011E 2012E 2013ECash Flows From Operating Activities: 1Q11 2Q11 3Q11E 4Q11E Net profit (loss) (6.94) (4.15) (0.34) (2.32) (0.16) (2.96) (5.79) (7.29) (14.32)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 0.12 0.12 0.02 0.02 0.10 0.10 0.24 0.22 0.19 Loss from disposal of property and equipment 0.00 0.00 0.00 0.00 0.00 Issuance of shares as consideration for providing security for letter of credit 0.00 0.00 0.00 Stock based compensation related to options and warrants granted to employees 0.52 1.83 0.09 0.12 0.05 0.05 0.30 0.55 0.98 Interest and amortization of beneficial conversation feature of Convertible note 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Change in fair value of convertible debentures and warrants 2.95 0.63 (1.69) 0.21 0.21 0.21 (1.07) (1.07) (1.07) Accrued severance pay, net 0.08 0.04 0.05 (0.02) (0.04) 0.06 0.05 0.22 0.15 Exchange differences on a restricted lease deposit (0.00) 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) Exchange differences on a long term loan 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Changes in operating assets and liabilities: Increase (decrease) in trade payables 0.07 (0.20) 0.28 (0.15) 0.62 0.33 1.07 0.72 0.70 Decrease (increase) in accounts receivables, prepaid expenses and deferred issu 0.11 (1.64) (0.03) 0.66 0.13 (0.83) (0.07) (0.87) (0.65) Increase (decrease) in other accounts payable, accrued expenses and advance p 1.41 (0.79) 0.09 0.03 (0.12) 0.27 0.27 0.24 0.70 Net Cash Used In Operating Activities (1.69) (4.15) (1.53) (1.47) 0.78 (2.78) (4.99) (7.29) (13.33)Cash Flows From Investing Activities: Proceeds from disposal of property and equipment 0.00 0.000 0.00 0.00 0.00 0.00 0.00 Decrease (increase) in restricted lease deposit and prepaid lease payments 0.01 (0.01) - (0.00) (0.00) (0.00) (0.01) (0.01) (0.01) Purchases of property and equipment (0.03) (0.06) (0.05) (0.13) (0.05) (0.05) (0.27) (0.33) (0.39) Net Cash Used in Investing Activities (0.03) (0.07) (0.05) (0.13) (0.05) (0.05) (0.28) (0.33) (0.40)Cash Flows From Financing Activities: Proceeds from issuance of shares, net 0.36 2.08 10.39 0.00 0.00 10.39 23.25 0.00 Proceeds from exercise of options and warrants, net 0.26 0.53 0.04 0.00 0.00 0.00 0.04 0.04 0.04 Repayment of a long - term loan 0.00 0.00 0.00 0.00 0.00 Proceeds from long term loan 0.00 0.00 0.00 0.00 0.00 Issuance of a convertible debenture and warrants 0.57 4.00 0.00 0.00 0.00 0.00 0.00 Increase (decrease) in short-term bank credit (0.05) 0.03 (0.03) 0.10 0.20 0.30 0.20 0.20 Net Cash Provided by Financing Activities 1.15 6.61 0.06 10.36 0.10 0.20 10.73 23.49 0.24 Net increase (decrease) in cash (0.57) 2.39 (1.51) 8.77 0.83 (2.63) 5.46 15.87 (13.49) Cash at beginning of period 1.04 0.47 2.86 1.35 10.12 10.95 2.86 8.32 24.19 Cash at end of period 0.47 2.86 1.35 10.12 10.95 8.32 8.32 24.19 10.70Source: Maxim Group LLC research and SEC filingsMaxim Group LLC 27