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†BOLD WORDS ARE REFERENCED IN THE GLOSSARY ON PAGES 42-44.

Novel Peptides to Treat a Range of Fungal and Bacterial Infections

Snapshot November 2, 2009

NovaBiotics Ltd (“NovaBiotics” or “the Company”) is a closely held clinical-stage biotechnology company that designs and develops novel antifungal and antibacterial products to treat infectious conditions and diseases for which there are presently no fully effective therapies. Founded in 2004 as a spin-out from the University of Aberdeen’s Rowett Institute, the Company delivered its first clinical product in less than five years through the use of informed drug design†. NovaBiotics’ business strategy entails advancing candidates through preclinical and early clinical development and subsequently seeking strategic partnerships with pharmaceutical or biopharmaceutical entities for later-stage clinical and regulatory development, manufacture, and marketing. The Company’s lead clinical-stage initiative is Novexatin® (NP213), a topical, brush-on treatment that has been shown in preclinical testing to clear fungal nail infections (onychomycosis) within 28 days when applied daily, versus the four currently available treatment options, which could require 12 to 48 weeks. Although Novexatin® can efficiently penetrate the nail, no skin absorption has been observed, even after applying concentrations 100 times the clinical dose daily for four weeks. NovaBiotics expected this result as the molecule was designed to perform in this manner. In July 2009, the Company initiated a Phase I/IIa clinical study with Novexatin®. NovaBiotics’ second drug candidate is Novamycin™ (NP339/NP341), an antifungal peptide for the treatment of potentially life-threatening systemic yeast and mold infections. In preclinical evaluation, Novamycin™ was rapidly fungicidal and capable of killing yeasts within 30 minutes of exposure. NovaBiotics’ pipeline also includes antimicrobial peptides and compounds for respiratory, systemic, and dermal infections. In addition, the Company has anti-infective peptides and several botanically derived compounds that could be incorporated into consumer healthcare and cosmetic products, which are available for licensing. The Company is headquartered in Aberdeen, Scotland (UK).

Key Points

Note: Unless otherwise stated, all monetary amounts are in U.S. dollars. At 11/02/2009, US$1.00 ≈ £0.61.

Fungal nail infections affect roughly 12% of individuals worldwide, with a greater incidence observed in elderly patients. While the annual global market for onychomycosis infections is static at ~$2 billion, the potential remains for expansion to $5 billion if products are introduced that can meet current demand.

There is a deficiency in both the quantity and quality of approved medications available to treat nail fungus. Only two topical therapies and two systemic (oral) treatments have been approved for this indication, two of which are now off patent. Available topical medicines offer limited efficacy. Penlac® (ciclopirox) Topical Solution, 8%, an off-patent prescription lacquer, requires daily application for up to 48 weeks and, in clinical testing, completely cured only 5.5% to 8.5% of patients. Preclinical models of Novexatin® demonstrated that once-daily application could clear fungal nail infections within 28 days.

Oral therapies are the current standard of care for nail fungus. However, these medicines are costly and are associated with harmful side effects (e.g., liver or kidney damage). Lamisil®, an off-patent systemic therapy (generic as terbinafine), costs $1,100 to $2,000 per treatment course and requires blood tests to monitor hepatic and renal health during the course of therapy. NovaBiotics expects treatment costs for Novexatin® to compare very favorably with generic terbinafine.

Phase I/IIa clinical studies for Novexatin® are progressing well. Data from the 12-patient Phase I portion of the two-stage trial demonstrated the safety and tolerability of Novexatin® and confirmed that there was no systemic exposure through skin penetration. As well, the recruitment of 48 patients for the Phase IIa trial is nearly complete. Using clinical data from these trials, the Company aims to out-license Novexatin® to a pharmaceutical or biotechnology partner for further clinical development.

In fiscal 2008, NovaBiotics received £15,000 for the co-development of one of its Luminaderm™ molecules after establishing a relationship with an undisclosed global consumer healthcare provider. A further £52,000 has been generated for this work in fiscal 2009.

The Company’s intellectual property portfolio is composed of more than 40 patents, both granted and pending worldwide, which are contained within six patent families.

NovaBiotics’ Board of Directors offers expertise in the biotechnology and pharmaceutical industries, including negotiating licensing agreements for technology companies, driving shareholder exit events, and closing significant commercial transactions. The Company is also supported by a team of senior scientists who are experienced in immunology, microbiology, and peptide antimicrobials.

Since its inception in 2004, NovaBiotics has raised circa £5 million in funding, largely from existing shareholders. The Company has also received funding from Scottish Enterprise, Scotland’s main government-sponsored economic development agency and has continued bank support by way of an overdraft facility. As of August 31, 2009, NovaBiotics had a net overdraft of £224,774.63 in cash and cash equivalents, with headroom of £175,225.37.

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NovaBiotics Ltd

Cruickshank Building Craibstone

Aberdeen, AB21 9TR, UK Phone: +44 (0)1224 711377

Fax: +44 (0)1224 711370 www.novabiotics.co.uk

CRYSTAL RESEARCH ASSOCIATES, LLC EXECUTIVE INFORMATIONAL OVERVIEW® PAGE 2

Table of Contents

Snapshot ....................................................................................................................................................... 1

Key Points ..................................................................................................................................................... 1

Executive Overview ....................................................................................................................................... 3

Growth Strategy ............................................................................................................................................ 8

Intellectual Property ...................................................................................................................................... 9

Company Leadership .................................................................................................................................. 10

Core Story ................................................................................................................................................... 13

Anti-Infectives Market Overview ........................................................................................................... 13

Novexatin®: A Topical Treatment for Fungal Nail Infections ................................................................ 14

Novamycin™: An Antifungal Peptide for Systemic Fungal Infections .................................................. 19

Antimicrobial Peptides for Respiratory Infections ................................................................................. 20

Antimicrobial Compounds to Treat Dermal Infections and Acne .......................................................... 23

Consumer Healthcare/Cosmetics ......................................................................................................... 24

Competition ................................................................................................................................................. 25

Milestones ................................................................................................................................................... 30

Key Points to Consider ................................................................................................................................ 31

Historical Financial Results ......................................................................................................................... 33

Risks ............................................................................................................................................................ 36

Recent Events ............................................................................................................................................. 40

Glossary ...................................................................................................................................................... 42


Executive Overview

Note: Unless otherwise stated, all monetary amounts are in U.S. dollars. At 11/02/2009, US$1.00 ≈ £0.61. NovaBiotics Ltd (“NovaBiotics” or “the Company”) is focused on the discovery and early-stage development of novel anti-infective compounds. The anti-infectives market provides a significant and growing opportunity for NovaBiotics as infectious diseases continue to be a major healthcare issue worldwide. In general, the anti-infectives market has been largely underserved by major pharmaceutical companies, in part, because these medicines do not address chronic conditions—such as cancer, heart disease, or diabetes—which are progressive and may last for a patient’s lifetime. Nevertheless, a significant, unmet need exists for anti-infective medications as infectious diseases continue to cause the deaths of 14 million to 17 million individuals worldwide each year, many of whom live in developing countries (Source: the Global Health Council). Of the top 10 causes of death compiled by the World Health Organization (WHO), five are due to infectious diseases. The increase in drug-resistant and emerging pathogen populations has also become a worsening public health problem, in part, due to the lack of choice in appropriate medicines to combat even the most common microbial infections. Bacterial strains have surfaced that are resistant to almost all classes of antibiotics and, in a few rare cases, resistant to all antibiotics. Beyond the trend of increasing drug resistance, there is also concern of an inadequate pipeline of therapeutics to treat drug-resistant infections, particularly those caused by gram-negative pathogens (Source: Clinical Infectious Diseases 2009, 48:1-12). This lack of choice in the antifungal arena combined with drug resistance in fungal species has become a significant problem. Medical societies around the world, including the U.S. Centers for Disease Control and Prevention (CDC) and the WHO, have announced concerns regarding the dwindling pipeline of therapeutics available for drug-resistant infections. To address the trends of increasing resistance and a decreasing pipeline of candidates to treat such conditions, NovaBiotics is focused on the discovery and early-stage development of anti-infective compounds to treat infectious diseases for which there are presently no effective therapies. NovaBiotics seeks to offer a potential step-change in the industry versus a reinvention or reformulation of existing classes of antimicrobials. The Company believes that its stepwise approach is key in reducing the risk of encountering the same problems that the industry currently faces (e.g., lack of choice and antibiotic resistance). To NovaBiotics’ knowledge, there are currently no peptide antimicrobials in development for the indications that the Company is pursuing. Fungal Nail Infections (Onychomycosis) Nail fungal infections are frequently caused by a fungus that belongs to a group of fungi called dermatophytes. However, yeasts and molds also can be responsible. Each of these microscopic organisms live in warm, moist environments, such as in swimming pools or showers, and have the potential to invade an individual’s skin through even a small, invisible cut or a minute separation between one’s nail and nail bed. Problems often result if the nail is continually exposed to warmth and moisture. Infection with nail fungus occurs more frequently in toenails than in fingernails because toenails are often confined in a dark, warm, moist environment inside shoes, where fungi can thrive. Another reason may be the diminished blood circulation to the toes versus the fingers, which makes it more difficult for the body’s immune system to detect and eliminate the infection. Should a fungal nail infection be left untreated, it can spread to tissues underneath the nail, to adjacent skin, or to other nearby nails. In extreme cases, as sometimes is seen in immunosuppressed individuals, the infection can be debilitating or require amputation of the affected extremity. Even the most common forms of mild to moderate onychomycosis (affecting less than half of the nail plate) can cause discomfort and negatively impact a patient’s quality of life. As well, the social stigmas associated with nail fungus can impact the psychological or social well-being of those affected.


Onychomycosis is considered to be one of the most difficult fungal infections to treat due to its location between the nail bed and nail plate, which is slow-growing, hardy, and receives very little blood supply. Treatments for fungal nail infections comprise either oral or topical therapies. Although oral antifungals are considered to be the most effective treatment method—leading to a “complete cure” (mycologic cure plus clinical cure) in up to 59% of patients with fingernail infections and in up to 38% of those with toenail infections—these medicines can be costly, require lengthy treatment regimens, are associated with negative side effects, and can become ineffective if the fungi become resistant to the medication. Currently available topical agents for nail fungus are only indicated for use in mild to moderate infections, while systemic therapies, alone or in combination with topical medicines, are recommended (depending on the health status of the patient) for more severe cases—particularly those with nail bed involvement. Topical therapies are presently the preferred treatment method by patients and healthcare providers. The nail is a highly efficient biological barrier. As such, the delivery of therapeutic molecules into and across its various strata (layers) is a significant challenge. There is a strong need for effective topical treatments for economically significant conditions of the toenails, fingernails, and nail bed, such as fungal infections, for which chemistry-led approaches and small, hydrophobic, solvent-delivered topical antifungals have failed to deliver completely effective solutions thus far. Currently available topical antifungals, such as prescription lacquers, are believed to have a complete cure rate of less than 10%, even when applied daily to the toenail for up to 48 weeks. Due to the disadvantages of marketed therapies, NovaBiotics believes that there is an unmet need for a medicine that has a shorter treatment period and offers increased efficacy over available treatment options. The Company believes that these factors are behind the market only realizing less than 50% of its theoretical $5 billion value. It is noteworthy that although the off-patent systemic therapy Lamisil® kills fungi (i.e., is fungicidal), others in this category are only fungistatic, inhibiting the growth of but not killing the source of the infection. NovaBiotics maintains that the combination of a fungicidal drug that is delivered topically, acts rapidly, and is safe is best suited for this market. Novexatin®: A Topical Treatment for Fungal Nail Infections

NovaBiotics’ lead drug candidate is Novexatin® (NP213), a brush-on treatment for fungal nail infections, which affect more than 23 million individuals in the U.S. alone. Symptoms of a fungal nail infection include a thick, discolored, disfigured, and brittle nail, as illustrated in Figure 1. The nail may even become detached from the nail bed. In general, fungus of the toenail takes much longer to treat than an infection located beneath a fingernail. NovaBiotics believes that Novexatin® can be applied across all types of nail infections. However, since the majority of fungal nail infections are mild to moderate, the Company initially intends to target the largest population of mild to moderate patients through its ongoing Phase I/IIa clinical studies. Thereafter, the Company expects to target a broader range of patients in subsequent clinical evaluation, including patients with fungal infection of the fingernails. NovaBiotics’ intention is to eventually position Novexatin® as a therapy to cover all degrees of fungal nail infections in the toenail or fingernail.

A FUNGAL NAIL INFECTION

Figure 1

Source: www.ehow.com.

Nail Fungus


Using a biology-led informed drug design approach, NovaBiotics has re-engineered the endogenous peptide antimicrobials—natural infection-fighting agents that provide antimicrobial protection within the skin and nail—and have produced a novel, third-generation, first-in-class peptide therapeutic, Novexatin®, which is able to clear fungal toenail infections within a fraction of the time it takes for currently available small molecule alternatives to do so. Novexatin® is a fast-drying solution that is applied once daily to the surface of infected nails. The compound was designed, on the basis of its charge, size, and cyclic structure, to achieve the following: (1) efficiently penetrate the nail but to be excluded from skin; (2) remain stable and bioavailable within the nail; and (3) rapidly kill the causative dermatophyte fungi associated with onychomycosis. These abilities have been demonstrated in both preclinical and clinical evaluation. Despite the ability of Novexatin® to efficiently penetrate the nail, no skin absorption has been observed in the Phase I component of the current first-in-man clinical study or during pivotal preclinical development in which concentrations 100 times the clinical dose were applied daily for 28 days. This safety characteristic was expected by NovaBiotics as the molecule was designed to perform in this manner. Furthermore, preclinical studies demonstrated the ability of Novexatin® to remain bioavailable and bioactive within the nail. The bioavailability and biostability of Novexatin® was confirmed by microbiological, biochemical, and radiochemical assays in an ex vivo nail model. These characteristics are key among those that NovaBiotics believes may separate its candidate from the limited number of currently available treatments and from therapies in development, providing a potential solution to a poorly served global market that could exceed $5 billion. To date, Novexatin® has been well tolerated and highly active against dermatophytes and, with its ability to penetrate thoroughly into the infected nail, has been shown to rapidly kill fungal infections. In July 2009, the Company received clearance from Germany’s Federal Institute for Drugs and Medical Devices and the Ethics Commission to initiate first-in-man Phase I/IIa clinical studies with Novexatin® and subsequently commenced clinical testing. In September 2009, NovaBiotics announced the completion of the Phase I in-life component of the two-part trial, which successfully demonstrated the safety and tolerability of Novexatin®. A Phase IIa trial is now underway in which 48 patients are receiving daily doses of Novexatin® over a 28-day period. On October 1, 2009, the Company announced that the study was progressing well. NovaBiotics expected to receive preliminary data for the Phase IIa component during the fourth quarter 2009. The directors of the Company aim to use the data received to date as well as the Phase IIa data to establish an out-licensing agreement with a pharmaceutical or biotechnology partner for further clinical development. According to NovaBiotics, the Company is already in ongoing dialogue with a number of parties that have expressed interest and that continue to monitor NovaBiotics’ progress. NovaBiotics believes that Novexatin® could follow a development path similar to Novartis AG’s (NVS-NYSE) off-patent systemic therapy Lamisil®. Branching out from the onychomycosis indication, Novexatin® may be used to treat other fungal infections of the skin that are caused by the same groups of organisms. As such, there is potential for a product extension for indications such as ring worm or athlete’s foot. Novamycin™: An Antifungal Peptide for Systemic Fungal Infections Potentially life-threatening systemic (related to internal tissue and/or the bloodstream) fungal infections are caused by a variety of opportunistic pathogens that can cause disease in individuals with weakened or otherwise compromised immune systems (e.g., the elderly, newborns, and post-transplant, chemotherapy, and HIV/AIDS patients). Long-term hospital care and indwelling medical devices, such as catheters or intravenous lines, are also risk factors for these infections, which are among the leading causes of nosocomial (hospital-acquired) infections worldwide. Conventional first-line antifungal treatments for systemic fungal infections are limited in number, in most cases, more so than the choice for bacterial infections. These therapies are also associated with serious, potentially fatal complications and side effects that are more significant than for antibacterials, as fungal cells are more similar to human cells than bacteria. This includes a small risk of developing potentially fatal liver disease when taking oral or intravenous Diflucan® (fluconazole) or Vfend® (voriconazole), or the more significant risk of damage to the kidneys associated with amphotericin B treatment (liposomal forms of amphotericin, such as Ambisome®, reduce this risk but are costly).


Systemic fungal infections are a growing problem in medicine. Chemotherapies and immunosuppressive agents, which compromise patients’ immune systems and leave them more susceptible to infection, are more commonly and successfully employed in medicine (e.g., cancer treatment, transplantation, etc.). Antifungal resistance is prevalent in the pathogens that cause these infections. The limited choice of treatments currently available, combined with safety shortcomings in some cases, leaves a significant unmet medical need in this space. To address this, NovaBiotics has created Novamycin™ (NP339/NP341), an antifungal peptide for the treatment of systemic fungal infections caused by various forms of yeast (but predominantly Candida). NovaBiotics derived Novamycin™ from the same platform as Novexatin®, its lead clinical-stage compound. In preclinical evaluation, Novamycin™ was rapidly fungicidal and capable of killing Candida yeasts within 30 minutes of exposure and demonstrated little to no cytotoxicity in vitro against human lung, skin, and liver cell lines when administered at concentrations higher than any potential therapeutic dose. Based upon preliminary in vivo studies with Novamycin™, NovaBiotics believes that the peptide could have a promising safety and toxicity profile. The Company’s peptide has demonstrated fungicidal activity across representatives of all Candida species, both type strains and clinical isolates, including those known to be resistant to conventional systemic antifungal therapies. Life-threatening systemic Candida infections or invasive candidiasis places a $1.8 billion burden on the U.S. healthcare system annually (Source: Georgetown University Medical Center, October 2008). Based on the preclinical data to date, the Company believes that its systemic antifungal peptide technology provides the opportunity for early co-development with an appropriate partner in the future. NovaBiotics will likely pursue the development of Novamycin™ after reaching a partnering or out-licensing agreement for Novexatin®, and continues with preclinical development in the meantime. Antimicrobial Peptides for Respiratory Infections NovaBiotics also aims to develop technologies that address respiratory infections caused by gram-negative Pseudomonas aeruginosa (P. aeruginosa), an opportunistic pathogen that causes various community-associated and hospital-acquired infections, including pneumonia, urinary tract infections, and bacteremia. P. aeruginosa is also known to colonize in the lungs of cystic fibrosis and severe chronic obstructive pulmonary disease (COPD) patients. Cystic fibrosis is an inherited disease that is characterized by unusually thick, sticky mucus that can clog the lungs and provides an environment that promotes bacteria growth. Pseudomonas, including P. aeruginosa, can colonize the lungs of cystic fibrosis patients and thus increase the risk of pulmonary damage and the high mortality rates that are already associated with this disease. Current therapies include Tobramycin Inhalation Solution USP, or TOBI®, which delivers antibiotics directly into the lungs to treat infections caused by P. aeruginosa and other pathogens. However, the cost of tobramycin is approximately $20,000 per patient. Similar to TOBI®, NovaBiotics plans to administer its antimicrobial peptides in an aerosol form to facilitate delivery of the medicine directly to the infection site within the lung. NovaBiotics’ peptides have demonstrated antimicrobial activity against planktonic, persister, and biofilm bacterial cells, which are believed to be a main cause of recurring respiratory infections. Each year in the U.S., biofilm-associated infections cause approximately 500,000 deaths—an annual figure that is nearly as high as cancer-related deaths in the U.S., which were estimated to be 565,650 in 2008 (Source: Discover, a magazine dedicated to science, technology, and the future, July 2009). Treatment of biofilms is difficult because these organisms can resist the effects of both the human immune response and conventional antibiotics, and are considered to be up to 1,000 times more resistant to antimicrobials than the same bacteria growing in a state of suspension (versus in a biofilm). Among other advantages, NovaBiotics anticipates that its antimicrobial peptides may be less likely to trigger resistance by targeted pathogens than currently marketed antibiotics. The Company expects to have in vivo data for its antimicrobial peptides for respiratory infections during 2009/2010.

Antimicrobial Compounds to Treat Acne/Dermal Infections NovaBiotics’ antimicrobial compounds also have potential to treat polymicrobial infections, which are the result of infection by multiple organisms. The pathogens comprising these complex infections consist of various combinations of viruses, bacteria, fungi, and parasites. Infection by more than one organism can occur at the same time or one after the other. Polymicrobial infections are widely found on several


anatomic sites, including the oral cavity, respiratory tract (both upper and lower), and gastrointestinal tract—all of which provide a moist, nutrient-rich environment for microorganisms. Open wounds caused by surgery, accident, burns, or ulcers, among others, are also common locations for infection. Patients that are immunosuppressed by medicine, disease (e.g., diabetes or cancer), or injury are at a higher risk of developing a polymicrobial infection. These individuals are also more susceptible to infection by drug-resistant pathogens, which are costly to treat and are potentially life-threatening, particularly for patients that are already immunosuppressed or critically ill. NovaBiotics believes that its compounds may be less toxic than existing antibiotics while maintaining microbicidal activity. As such, the Company expects that its proprietary compounds could have the potential to more safely and effectively treat polymicrobial infections, such as dermal infections and acne, than conventional therapies when administered as a topical formulation. NovaBiotics’ antimicrobial compounds have not been shown to carry the same risks of acquired resistance development as most conventional antibiotics. The Company’s data has suggested that resistance cannot develop because its compounds act via a “physical kill” mechanism and cause membrane disruption. There is no single pathway or set of genes that the compounds target, which is a key factor in the development of drug-resistant bacteria. Consumer Healthcare/Cosmetics In addition to its therapeutic compounds, NovaBiotics has other anti-infective peptides and some botanically derived compounds available for license that could be incorporated into over-the-counter healthcare and cosmetic products for the skin, hair, and nails. NovaBiotics has established relationships with undisclosed global consumer healthcare providers and cosmetics entities for the development and commercialization of its Luminaderm™ technology, which entails various therapeutic molecules that may be used to enhance consumer healthcare and cosmetic products. In fiscal 2008, the Company received £15,000 from co-development activities for one of its Luminaderm™ molecules. A further £52,000 has been generated for this work in fiscal 2009. NovaBiotics has also been in discussions with other parties for the use of Luminaderm™ in further indications. In the short term, the Company may seek to market this technology for various applications, including dandruff, acne, athlete’s foot, and nail care, among others. Corporate Information NovaBiotics was founded by Dr. Deborah A. O’Neil in 2004 as a spin-out from research performed at the University of Aberdeen’s Rowett Institute of Nutrition and Health (www.rowett.ac.uk). The Company’s corporate headquarters are located in Aberdeen, Scotland. To date, NovaBiotics has raised circa (c.) £5 million in private equity funding. The Company recently completed the second part of its fundraising initiatives for the first half of 2009, meeting its financing target of £1.1 million in July 2009 to fund the development of Novexatin® through the end of Phase IIa clinical development. NovaBiotics has announced its intention to complete a subsequent private placing of c. £2.5 million before the end of 2009 in order to fund operations to mid-2011, facilitating further clinical development of Novexatin® and the delivery of key milestones on its pipeline products. The Company’s Board of Directors and management team are focused on high-value opportunities and the delivery of commercial success from its solid technology base. NovaBiotics employs 17 individuals, including the members of its Board, 10 of which are full time. Awards Since inception, NovaBiotics has received several accolades for its business initiatives. In 2006, Scottish Enterprise named NovaBiotics the “Most Promising New Life Science Company” and the Royal Bank of Scotland awarded the Company the “Sir Ian Wood Award for Innovation” at the Grampian Awards for Business Enterprise 2006. In February 2009, the Company also received the UK BioIndustry Association’s Rising Star Award, which recognizes companies with a clear vision and development objectives.


Growth Strategy NovaBiotics has implemented a stepwise market penetration approach as a means to attract both investors and companies interested in licensing or merger or acquisition agreements. This strategy entails three primary initiatives, as listed below: (1) Develop candidates through preclinical and early clinical research and development for each

indication; (2) Form strategic alliances or out-licensing partnerships with pharmaceutical or biopharmaceutical

entities for later-stage clinical and regulatory development, manufacture, and marketing; and (3) Reinvest the revenue received from such alliances into further pipeline development and the growth

of the Company’s technology platform. Through this approach, NovaBiotics aims to minimize the investments required to develop its products while maximizing investor returns. By reinvesting income received from potential upfront and milestone payments and royalties into its pipeline and technologies, the Company seeks to continually develop opportunities for additional revenue-generating alliances. NovaBiotics believes that the establishment of a steady income stream could enable the Company to build significant value and expand its business. Presently, the Company is focused on the development of Novexatin®, a topical treatment for nail fungus. NovaBiotics is aware of at least 13 co-development, commercialization, licensing, or acquisition agreements that have been reached since 2003 for companies developing antifungal and antibacterial products. These arrangements have varied in value from a total of $11 million for a co-development partnership between FOB Synthesis, Inc. and Achillion Pharmaceuticals, Inc. (ACHN -NASDAQ) to more than $600 million for a licensing agreement with Schering-Plough Corporation (SGP-NYSE) for Anacor Pharmaceuticals, Inc.’s topical antifungal AN2690, as further detailed in the Competition section on page 27.


Intellectual Property As of March 30, 2009, NovaBiotics had six patent families and more than 40 patents both granted and pending worldwide. The Company owns its entire intellectual property (IP) portfolio and currently does not have any licensees. NovaBiotics’ IP is divided into two categories: (1) core IP encompassing technology relating to the Company’s antifungal and antibacterial peptides for

the treatment of fungal nail infections, systemic fungal infections, and respiratory infections; and (2) non-core IP, which entails peptides and botanicals as anti-infectives in the consumer healthcare and

cosmetics markets. As of July 2009, NovaBiotics had five applications filed under the Patent Cooperation Treaty (PCT), as listed in Table 1. Filing patent applications under the PCT enables the Company to seek patent protection simultaneously in 141 countries. Although the PCT does not grant an international patent, it facilitates the process of obtaining a patent in each member country. The PCT also provides additional benefits to the applicant, including priority over more recent third-party applications.

Pub. No. Pub. Date

WO/2008/093060 Peptides and their use Aug. 07, 2008

WO/2008/093059 Basic peptides and their use as combined antibacterial-antifungine agents Aug. 07, 2008

WO/2008/093058 Peptides and their use Aug. 07, 2008

WO/2007/141513 Use of coumarin derivatives in antifungal therapy Dec. 13, 2007

WO/2007/072037 Cyclic antimicrobial peptides Jun. 28, 2007

Sources: NovaBiotics Ltd, the World Intellectual Property Association (www.wipo.int), and Crystal Research Associates, LLC.

Table 1

NovaBiotics Ltd

INTELLECTUAL PROPERTY

Filed Under the Patent Cooperation Treaty (PCT)

Title


Company Leadership Management and Senior Scientists Table 2 summarizes NovaBiotics’ key management and senior scientists, followed by detailed biographies. The Company’s management is supported by a team of senior scientists that have technological know-how and skills in various areas, including immunology, microbiology, and peptide antimicrobials. The microbiology expertise within the Company covers specific mycology specialties across dermatophytes, filamentous fungi, and yeasts as well as the manipulation of difficult to culture clinical, anaerobic, antibiotic-resistant bacterial and fungal pathogens, among others. This expert knowledge base—when combined with capabilities in innovative bio-assay design for drug efficacy and safety assessment (in particular, the Company’s ex vivo nail infection model)—facilitates the rational drug design principles that support NovaBiotics’ technical operations.

Dr. Deborah A. O’Neil, Founder, Chief Scientific Officer, and Director Dr. O’Neil founded NovaBiotics in August 2004. She is an immunologist by training with more than 10 years of experience in the natural antimicrobials field. Dr. O’Neil studied at the University College London and then worked in internationally acclaimed laboratories in San Diego, California, and Ghent, Belgium. Subsequently, Dr. O’Neil moved to Aberdeen, Scotland, where she founded NovaBiotics in order to fully develop the commercial potential of novel antimicrobial peptide therapies. Dr. Derry K. Mercer, Head of Research Dr. Mercer is head of research at NovaBiotics. He is a biological scientist with more than 10 years of experience within the areas of microbiology, molecular biology, protein biochemistry, cell biology, and bioinformatics. Having begun his career at the University of Liverpool, Dr. Mercer has worked with other research institutes, universities, and small- and medium-sized enterprises in Aberdeen to gain extensive experience in an array of subject areas. Dr. Mercer’s range of skills and experience assists in driving NovaBiotics’ research and development strategies forward. Dr. Colin S. Stewart, Head of Microbiology Dr. Stewart is NovaBiotics’ head of microbiology. A fungal expert by training, Dr. Stewart brings a wealth of expertise to the Company, gleaned from a distinguished and varied career in the field of microbiology. He is an advisor to the UK’s Food Standards Agency, a named inventor on several patents, and in 2002, was awarded a prestigious Scottish Enterprise Proof-of-Concept Award to study the impact of novel microbicides on pathogenic E. coli 0157. Dr. Stewart’s technical input is considered to be an important factor to NovaBiotics’ success.

Dr. Deborah A. O’Neil Founder, Chief Scientific Officer, and Director

Dr. Derry K. Mercer Head of Research

Dr. Colin S. Stewart Head of Microbiology

Paul McIntosh Personal Assistant to the Chief Scientific Officer and Head of Administration

Dr. Vanessa Duncan Senior Research Associate

Dr. Cedric Charrier Senior Research Associate

MANAGEMENT AND SENIOR SCIENTISTS

NovaBiotics Ltd

Table 2

Source: NovaBiotics Ltd.


Paul McIntosh, Personal Assistant to the Chief Scientific Officer and Head of Administration Mr. McIntosh is the personal assistant to the chief scientific officer and NovaBiotics’ head of administration. Mr. McIntosh has worked in administration for over 10 years. During this time, he gained a Professional Diploma in management. Mr. McIntosh joined NovaBiotics in 2005 as personal assistant to the chief scientific officer and has since become the head of administration. This position entails overseeing the administrative staff, having a role in the achievement of Investors in People status, and implementing the Company’s quality management systems. Dr. Vanessa Duncan, Senior Research Associate Dr. Duncan is a senior research associate with NovaBiotics. She is a mycologist with over 10 years of experience in Candida albicans (C. albicans) biology. Having completed her degree at the University of Aberdeen, Dr. Duncan continued her career at the university, studying for a Ph.D. under Professor Neil Gow prior to embarking on post-doctoral work with Professor Frank Odds. Through her post-doctoral work, Dr. Duncan sought to understand the effect that antifungal agents can have on C. albicans beyond their known inhibitory effects. Dr. Duncan’s knowledge and skills with C. albicans and molecular biology assists the development of the systemic antifungal program at NovaBiotics. Dr. Cedric Charrier, Senior Research Associate Dr. Charrier is a senior research associate with NovaBiotics. He was initially recruited through the Scottish Network International scheme for his experience in microbial ecology and anaerobic microbiology. Dr. Charrier has proven to be a valuable addition to the scientific team through his contributions to the development of pipeline projects, including novel antibacterials for the prevention and treatment of biofilms. Further to his scientific input, Dr. Charrier has played a key role in implementing and maintaining a quality management system that reflects ISO 9001 and ISO 17025 standards. Board of Directors NovaBiotics’ Board of Directors possesses expertise in the biotechnology and pharmaceutical sectors. The Board oversees the conduct of and supervises the Company’s management. Table 3 provides a summary of Board members, followed by detailed biographies.

Dr. Deborah A. O’Neil, Founder, Chief Scientific Officer, and Director Biography provided on page 10. Bryan Bodek, Non-executive Chairman of the Board Mr. Bodek is a member of NovaBiotics’ Board with over 30 years of experience advising public and private companies in all aspects of their businesses and in leading commercial transactions valued up to £1,500 million. Mr. Bodek’s background is in corporate finance/company law. He also has significant experience in leading successful healthcare licensing and marketing agreements. Mr. Bodek has served on the Boards of three public companies and is currently a director of the University of Manchester Intellectual Property Limited, the University of Manchester’s managing agent for IP commercialization.

Dr. Deborah A. O’Neil Founder, Chief Scientific Officer, and Director

Bryan Bodek Non-executive Chairman of the Board

John K. Pool Non-executive Director

Andy Porter Non-executive Director

BOARD OF DIRECTORS

NovaBiotics Ltd

Table 3



John K. Pool, Non-executive Director Mr. Pool has more than 40 years of experience in the biomedical and healthcare sectors. He currently resides on the Boards of a number of leading biotechnology companies in the UK and Ireland, consults for several U.S. life science companies, and has specific experience in negotiating successful license agreements for technology companies. Mr. Pool is also responsible for creating, funding, and taking a number of entities to Initial Public Offering (IPO). His expertise with successful biotechnology start-ups was the cornerstone for creating NovaBiotics. Andy Porter, Non-executive Director Professor Porter is a key figure in the UK biotechnology sector and international biologics sphere. He was chief scientific officer and on the founding team of Haptogen Ltd., a biopharmaceutical company that was acquired by Wyeth (WYE-NYSE) in October 2007. Professor Porter had a key role in facilitating the sale of Haptogen to Wyeth. Professor Porter is a Fellow of the Royal Society of Edinburgh, advises the Scottish Government on science policy and strategy through his role on the Scottish Science Advisory Committee, and serves on the UK BioIndustry Association’s Scotland Committee.


Core Story

Note: Unless otherwise stated, all monetary amounts are in U.S. dollars. At 11/02/2009, US$1.00 ≈ £0.61. The overuse of traditional antimicrobials has driven the development of pathogen resistance and a spectrum of emerging microorganisms. These factors, when added to the paucity of new antibacterial and antifungal drugs that have been developed and approved for use in the past four decades, have led to an unmet global need for improved therapies against bacterial, fungal, viral, and other infectious diseases and conditions. In particular, these next-generation treatments must be safe and effective with modes of action that prevent or hinder resistance. To address this need, NovaBiotics Ltd (“NovaBiotics” or “the Company”) is developing antifungal and antibacterial peptides to treat fungal nail infections, systemic fungal infections, and respiratory infections, as well as for consumer healthcare and cosmetics products. Individuals encounter numerous potentially harmful microorganisms on a daily basis through physical contact with infected surfaces or by breathing in airborne bacteria or viruses. Peptide antimicrobials—natural infection-fighting agents—are the foundation of the body’s first line of defense against these microorganisms. Capitalizing on the microbicidal properties of natural peptide antimicrobials, NovaBiotics has designed and developed a highly flexible platform technology of potent antifungal and antibacterial peptides. These third-generation antimicrobials have been engineered from natural peptides to develop a novel class of antimicrobial therapies. The peptides developed from this class may be used to treat or prevent a range of fungal and bacterial infections. NovaBiotics believes that its technology platform has the potential to meet the significant and acute need for safer, more effective antimicrobials because its proprietary technology may address the various shortcomings of conventional anti-infective therapies. Primarily, the mode of action for NovaBiotics’ compounds is such that the development of acquired or transmitted pathogen resistance is highly unlikely if not impossible. To develop its technology, the Company uses informed drug design. This compares to other companies that may use screening, biology, and chemistry-led discovery processes. With this approach—which NovaBiotics believes is more tailored and efficient both commercially and scientifically than other techniques—the Company has been able to deliver a product to the clinic in only five years, while spending just £5 million. ANTI-INFECTIVES MARKET OVERVIEW The anti-infectives market provides a significant opportunity for NovaBiotics as infectious diseases continue to be a major healthcare issue worldwide. Infectious diseases account for more than half of all deaths in children under the age of five. In total, infectious diseases are believed to cause the deaths of 14 million to 17 million individuals each year (Source: the Global Health Council). The emergence of drug-resistant microbes has further complicated this issue in part due to the lack of appropriate medicines to treat such illnesses. The Infectious Diseases Society of America (IDSA), the U.S. Centers for Disease Control and Prevention (CDC), the World Health Organization (WHO), and other medical communities around the world have announced concerns regarding the dwindling pipeline of therapeutics available to address drug-resistant infections. This is believed to be the result of a lack of incentives to develop new antimicrobials as well as the opportunities available for manufacturers that develop drugs in other markets (e.g., chronic diseases such as cancer, heart disease, or diabetes). In the U.S., the number of U.S. Food and Drug Administration (FDA)-approved antibacterial agents has been declining over the past 25 years, with only one new class of antibacterials developed and brought to market since the 1970s (Source: IDSA). Resistance is a costly, potentially life-threatening problem that could place pressure on both global stability and national security (Source: WHO). To address the trends of increasing resistance and a decreasing pipeline to target such conditions, NovaBiotics is focused on the discovery and early-stage development of anti-infective compounds to treat infectious diseases for which there are presently no effective therapies. In the anti-infectives market, large pharmaceutical companies are reducing early research and development in favor of acquiring these technologies through in-licensing or acquisition agreements. These transactions are often being completed earlier in the development cycle as companies are valuing a lengthier patent life versus “de-risked” technology. Longer patent life provides large pharmaceutical entities with more time to recuperate the costs of developing a product prior to patent expiry.


NOVEXATIN®: A TOPICAL TREATMENT FOR FUNGAL NAIL INFECTIONS (ONYCHOMYCOSIS) Presently, NovaBiotics’ lead clinical-stage initiative is Novexatin® (NP213), a topical brush-on treatment for fungal nail infections. Onychomycosis is an infection of the fingernail or toenail that is predominantly caused by dermatophyte fungi. In the U.S., the condition affects an estimated 23 million people, or roughly 10% of the population (Source: The New York Times, March 2009). Worldwide, fungal nail infections affect closer to 12% of the population or, when applying this figure to the current global population of nearly 6.8 billion people, more than 800 million individuals. In the early stages of nail fungus, the only visible sign of an infection may be a small white or yellow spot underneath the tip of the nail. However, once the fungus spreads, the nail often becomes thick, discolored, disfigured, or brittle. The nail can also detach from the nail bed, called oncholysis. Over time, the infection can spread to tissues underneath the nail, adjacent skin, or even other nearby nails. Further, the infection could become painful, cause permanent damage to the nail, or lead to more serious health complications. In particular, nail fungus may pose a serious health risk to individuals with a suppressed immune system, which may allow the infection to impact a broader region of the body than the nail area alone. If the fungus spreads beyond the nail area, the infection could become debilitating or, in extreme situations, require amputation of the affected extremity. Currently available topical agents for nail fungus are only indicated for use in mild to moderate infections, while systemic therapies, alone or in combination with topical medicines, are recommended for more severe cases (depending on the health status of the patient), particularly those with nail bed involvement. NovaBiotics believes that Novexatin® could be applied across all types of nail infections. However, as the majority of fungal nail infections are mild to moderate, the Company initially intends to target the largest population of mild to moderate patients through its ongoing Phase I/IIa clinical studies. Thereafter, the Company expects to include both a broader range of patients in subsequent clinical evaluation as well as patients with fungal infection of the fingernail. NovaBiotics’ intention is to eventually position Novexatin® as a therapy to cover all degrees of fungal infections in both toenails and fingernails. There are three classes of fungi that primarily cause onychomycosis: (1) dermatophytes; (2) yeasts; and (3) non-dermatophytes. Dermatophytes are fungi that feed on keratin in hair, skin, and nail tissues. In particular, two pathogens that are part of the dermatophyte class—Trichophyton rubrum and Trichophyton mentagrophytes—are known to cause roughly 90% of all fungal nail infections, as shown in Figure 2. Yeasts and non-dermatophytes are responsible for 8% and 2% of onychomycosis cases, respectively (Source: eMedicine, part of WebMD Health Corp. [WBMD -NASDAQ], April 2007).

THREE MAIN CLASSES OF FUNGI THAT CAUSE ONYCHOMYCOSIS

Figure 2

Source: eMedicine, part of WebMD Health Corp. (April 2007).

Dermatophytes

Yeasts

Non-dermatophytesDermatophytes

90%

Non-Dermatophytes2%Yeasts

8%


The risk factors for developing a fungal nail infection, which are listed in Table 4, include being older and male, having a family history of the infection, or being exposed to environments that are moist or humid. Further, individuals that have diabetes, circulation problems, a weakened immune system, or have experienced a previous injury or infection are also more likely to acquire nail fungus. Infection with nail fungus occurs more frequently in toenails than in fingernails because toenails are often confined in a dark, warm, moist environment inside shoes, where fungi can thrive.

Similar to other skin diseases that affect an individual’s physical appearance, the psychological or social well-being of a patient with onychomycosis may be negatively impacted due to the perceived social stigmas of fungal nail infections. A study of 1,684 individuals with onychomycosis showed that these patients experienced significantly increased feelings of stigmatization, particularly when the effects of the fungus were visible on a fingernail. The authors of the study concluded that while the stigmatization of onychomycosis, whether actual or perceived, resulted in a marked reduction in patients’ physical, mental, and social well-being, the use of anti-mycotic therapy was able to reduce all of the documented factors of stigmatization by approximately 40% (Source: Mycoses, “Stigmatisation in onychomycosis patients: a population-based study,” September 2008). Current Therapies for Onychomycosis There are a limited number of medicines and procedures that are commonly used to treat onychomycosis, which are available in the following forms: (1) topical antifungals; (2) oral therapies; and (3) surgical care. Although oral antifungals are considered to be the most effective treatment method—leading to a “complete cure” (mycologic cure plus clinical cure) in up to 59% of patients with fingernail infections and in up to 38% of those with toenail infections—these medicines can be costly and are associated with several negative side effects and risks (greater details provided under Oral Therapy on page 16). Presently, there are only two approved oral antifungals for onychomycosis and only two approved topical antifungals (only one licensed in the U.S.) for onychomycosis. Topical antifungals, such as prescription lacquers, are believed to have a complete cure rate of less than 10%, even when applied daily to the toenail for 48 weeks. Nevertheless, approximately 20% to 50% of individuals who have undergone successful therapy for nail fungus using current treatment options experience a relapse of the infection within five years (Source: Foot Problems in Older People: Assessment and Management, 2008). Onychomycosis is considered to be one of the most difficult fungal infections to treat due to its location between the nail bed and nail plate, which is slow-growing, hardy, and receives very little blood supply. As such, physicians often prescribe a combination of therapies in order to increase the efficacy of a treatment regimen as well as to minimize the risk of recurrence. In general, onychomycosis of the toenail takes much longer to treat than an infection located beneath a fingernail. Nevertheless, any nail that has been damaged as a result of an onychomycosis infection may take six months to one year to regain a healthy appearance regardless of the selected treatment method.

▪ Being older

▪ Being male

▪ Family history of fungal nail infections

▪ Heavy perspiration

▪ Working in a humid or moist environment

▪ Wearing socks or shoes that are not well ventilated or do not absorb perspiration

▪ Walking barefoot in public places that are damp or wet (e.g., swimming pools, gyms, or shower rooms)

▪ A minor skin or nail injury, a damaged nail, or another infection

▪ Diabetes, circulation problems, or a weakened immune system

Source: the Mayo Foundation for Medical Education and Research.

RISK FACTORS FOR DEVELOPING A FUNGAL NAIL INFECTION

Table 4


The nail is a highly efficient biological barrier and delivery of therapeutic molecules into and across its various strata remains a significant challenge. There is a material need for effective topical treatments for economically significant conditions of the toenails and fingernails and nail bed, such as fungal infections, for which chemistry-led approaches and small, hydrophobic, solvent-delivered topical antifungals have failed to provide completely effective solutions. In addition to the main therapies currently used to treat nail fungus, as described below, there are also a number of over-the-counter antifungal nail creams and ointments that are designed to treat onychomycosis. However, these medicines have not proven to be efficacious largely due to their inability to penetrate the hardy nail plate. Further, some patients also use unproven home remedies in an attempt to kill the fungi by applying fairly common household ingredients to the affected area. The products and chemicals used in these therapies include tea tree oil, vinegar, Vicks® VapoRub®, Listerine®, and Clorox®, among others. Topical Antifungals. Medicines in this category include lacquers and creams that prevent the growth

of or kill fungi. These products are generally prescribed to treat mild to moderate onychomycosis infections (affecting less than half of the nail plate) and can be used by individuals who are unable to tolerate systemic treatment. Topical antifungals often require a lengthy treatment period and are only able to cure the infection in a small percentage of patients. For example, Penlac® (ciclopirox) Topical Solution, 8%, which must be applied daily for 48 weeks, was effective in less than 12% of patients in clinical studies. Due to the low cure rates and extensive treatment regimens, topical antifungals are typically prescribed by physicians as adjuvant therapies.

Oral Therapy. Orally administered antifungals slowly reduce fungus-infected nail areas by gradually

replacing these regions with newly grown, healthy nail. These medicines entail a treatment period that is considerably shorter than topical agents (generally requiring 6 to 12 weeks of therapy) and offer higher efficacy rates due to their ability to penetrate the nail plate shortly after the initial treatment. Oral antifungals may cause side effects ranging from skin rashes to liver damage. As such, these medicines are often combined with topical or surgical treatments to decrease the risk of adverse effects by minimizing the length of time that the oral therapies must be administered. The two currently approved oral treatments for onychomycosis are terbinafine and itraconazole, which are described in the Competition section on page 26.

Surgical Care. In severe cases of onychomycosis or in situations where prior therapies have failed,

the nail may need to be surgically removed. This type of treatment is typically combined with oral and topical medicines to increase efficacy and reduce costs.

Based on the disadvantages of these marketed therapies, as described above, there is an unmet need for a medicine that has a shorter treatment period, demonstrates a lower relapse rate, and offers increased efficacy over current options. Using a biology-led informed drug design approach, NovaBiotics has re-engineered the endogenous peptide antimicrobials that provide antimicrobial protection within the skin and nail to produce a novel, third-generation, first-in-class peptide therapeutic, Novexatin® (NP213), which is able to clear fungal toenail infections within a fraction of the time it takes for currently available small molecule alternatives to do so. Novexatin® was designed, on the basis of its charge, size, and cyclic structure, to achieve the following: (1) efficiently penetrate the nail but to be excluded from skin; (2) remain stable and bioavailable within the nail; and (3) to rapidly kill the causative dermatophyte fungi associated with onychomycosis within the nail. As such, NovaBiotics believes that Novexatin® could become a solution to a poorly served global market valued in excess of $5 billion. The Company has completed a comprehensive preclinical package for Novexatin® and commenced Phase I/IIa clinical testing in July 2009.


Clinical Evaluation of Novexatin® In July 2009, the Company received clearance from Germany’s Federal Institute for Drugs and Medical Devices and the Ethics Commission for its first-in-man clinical trials with Novexatin®. Subsequently, the Company commenced a randomized, double-blind, placebo-controlled Phase I/IIa clinical study in humans. In September 2009, NovaBiotics announced the completion of the Phase I portion of the two-part trial, which assessed the safety, tolerability, and pharmacokinetics of a single dose of Novexatin® and also the placebo (delivery vehicle alone) in 12 patients. The data from the Phase I trial demonstrated that Novexatin® could not be detected in the plasma of any patients for up to 16 hours after exposure to the drug. In addition, no adverse reactions were reported. NovaBiotics has commenced the second part of the study, a Phase IIa trial with 48 patients. Participants are expected to receive daily doses of Novexatin® over a 28-day period. In October 2009, NovaBiotics announced that the trial is progressing well. The Company expects to receive preliminary data for the Phase IIa component during the fourth quarter 2009. Previous Findings from the Preclinical Evaluation of Novexatin® Through a comprehensive preclinical program, NovaBiotics established the safety and toxicity profile of Novexatin®. Supporting the initial clinical data reported in September 2009, despite the ability of Novexatin® to efficiently penetrate the nail, no skin absorption was observed in preclinical testing, even when concentrations 100 times the clinical dose were applied daily for 28 days. NovaBiotics expected this result as the molecule was designed to perform in this manner based upon its physicochemical characteristics (e.g., size, charge, and hydrophilicity). In preclinical evaluation, Novexatin® was able to penetrate the nail and remain bioavailable and active within it—two characteristics that NovaBiotics believes may separate Novexatin® from currently available therapies. The bioavailability and biostability of Novexatin® was confirmed by microbiological, biochemical and radiochemical assays in an ex vivo nail model. Further, as illustrated in Figure 3, the Company’s fungicidal solution was able to clear the infection from full thickness toenails within 28 days of the initial application. In addition, because it is a water-soluble peptide molecule delivered in aqueous, hydrating vehicles, Novexatin® may also improve the appearance and hydration of the nail.

SAMPLES OF TREATED VERSUS UNTREATED TOENAIL FRAGMENTS

NovaBiotics Ltd

Figure 3


Untreated Treated with Novexatin®

Infection cleared


The primary mode of action for Novexatin® is membranolysis, a process that leads to perturbation and disruption of the membrane, loss of structural integrity, and consequent microbial death. As such, Novexatin® kills the causative fungi that lead to infection (i.e., is fungicidal) versus several marketed antifungals—including Sporanox®, Penlac®, and Curanail/Loceryl®—which only inhibit the fungi’s growth (i.e., are fungistatic). A mode of action such as this improves the likelihood of long-term therapeutic benefit and minimizes or perhaps negates the risk of resistance developing in target pathogen populations. Following multiple exposure cycles, resistance of dermatophytes to Novexatin® was not observed in vitro—even in strains that are known to develop resistance to current treatments (e.g., azoles). Further, Novexatin® is fungicidal against dermatophytes within three hours of initial contact and its effect is not compromised by the presence of keratin in the nail, unlike some other available antifungals (e.g., terbinafine). Novexatin® is also effective against other clinically relevant dermatophyte pathogens in addition to members of the Trichophyton species that are known to infect the nail and surrounding skin. Market Opportunity Fungal nail infections affect roughly 12% of individuals globally, with higher proportions seen in elderly patients. The proportion of infected individuals was expected to increase largely due to an aging global population, as onychomycosis has been reported to occur in up to 90% of elderly patients (Source: eMedicine, part of WebMD). In the past, children five years and younger have typically outnumbered individuals over age 65, as shown in Figure 4. However, within the next 10 years, the group of individuals aged 65 and older are expected to outnumber children under the age five for the first time in history (Source: Why Population Aging Matters: A Global Perspective, March 2007). The aging population trend is expected to continue for at least the next 30 years. In mid-2008, an estimated 506 million individuals were over the age of 65, accounting for roughly 7% of the global population. By 2040, the U.S. Census Bureau anticipates that this segment could reach 1.3 billion individuals or 14% of the global population (Source: the U.S. Census Bureau’s An Aging World: 2008).

In addition to age, health conditions such as diabetes and immunosuppression also increase the likelihood of developing a fungal nail infection. In 2006, a study of 271 diabetes patients demonstrated that fungal toenail infections affected roughly 22% of this patient population (Source: Acta Dermato-Venereologica, a journal for dermatology and venereology research, 2006, 86[5]:425-428). In 2007, the International Diabetes Federation estimated that approximately 246 million individuals had diabetes worldwide. Due to an aging population, unhealthy eating habits, greater levels of obesity, and increasingly sedentary lifestyles, diabetes is expected to affect roughly 380 million individuals globally by 2025. In addition to being at a higher risk for acquiring a fungal nail infection, these individuals are also more likely to experience more severe complications as a result of onychomycosis, including foot ulcers or additional infections.

Figure 4

YOUNG CHILDREN AND OLDER PEOPLE AS A PERCENTAGE OF GLOBAL POPULATION: 1950 TO 2050

Source: the U.S. Census Bureau's "An Aging Population: 2008" (June 2009).


IMS Health, Inc. (RX-NYSE ) estimates that the current U.S. market for both oral and topical prescriptions for nail fungus is roughly $1.26 billion annually. However, industry experts anticipate that therapies that offer increased efficacy could broaden this market to $3 billion annually (Source: The New York Times, March 2009). Similarly, NovaBiotics estimates that while the global market for onychomycosis is static at nearly $2 billion, enhancements beyond available therapies could expand the market to $5 billion worldwide. The Company believes that its lead candidate, Novexatin®, improves upon existing therapies as it is less costly, requires a shorter treatment period, and may provide improved safety and efficacy in onychomycosis patients. Thus, Novexatin® could stimulate the expansion of the market by better serving patients’ needs. NOVAMYCIN™: AN ANTIFUNGAL PEPTIDE FOR SYSTEMIC FUNGAL INFECTIONS Potentially fatal systemic (bloodstream and/or tissue) fungal infections are largely caused by several types of fungi, including Candida and Aspergillus species, with Cryptococcus and Fusarium species as emerging forms. These opportunistic pathogens commonly produce infection in patients who are already weakened or immunocompromised by disease, treatment, another infection, or injury. For example, while Candida albicans typically exists in the intestinal tract as a commensal organism without causing any serious effects, a window of opportunity, such as abdominal surgery or immune-system ablating chemotherapy, can convert carriage to infection and lead to invasive candidiasis or candidemia. Candida is the cause of vaginal yeast infections, thrush, skin and diaper rash, and nail bed infections, as well as several bloodborne and life-threatening diseases. In particular, invasive candidiasis occurs when Candida species enter the blood, causing an infection within the bloodstream that can spread throughout the body. Invasive candidiasis can present when the Candida organisms from the digestive tract enter into a weakened or immunocompromised individual’s bloodstream or when these fungi are provided with a route of entry via medical equipment or devices, such as catheters, central venous and arterial lines, and respiratory tubes and drains (Source: MedicineNet, Inc., part of WebMD). While superficial Candida infections are often treatable, the mortality rate for systemic candidemia is greater than 50% (Source: Medical Mycology 2007, 45:321-46). A contributing factor in mortality for these infections is the delay of diagnosis in immunocompromised individuals following chemotherapy, bone marrow transplants, or surgery because the symptoms of the infection may be masked by the effects of the primary therapies or initially assumed to be a bacterial infection. In addition, the emergence of drug-resistant pathogens also complicates the treatment process (as described in greater detail on pages 22-23). Conventional first-line fungicidal treatments for systemic fungal infections are associated with serious and potentially fatal complications and side effects as well. This includes a small risk of developing potentially fatal liver disease when taking oral or intravenous Diflucan® (fluconazole) or Vfend® (voriconazole), or more frequent kidney damage as seen with amphotericin B injections. Current treatments for Candida infections are also costly. Researchers estimate that it costs roughly $40,000 to treat an invasive candidiasis infection (Source: Critical Care Medicine 2006). In total, this bloodborne infection places a $1.8 billion burden on the U.S. healthcare system annually (Source: Georgetown University Medical Center, October 2008).

Findings from the Preclinical Evaluation of Novamycin™ NovaBiotics is developing Novamycin™ (NP339/NP341), an antifungal peptide for the treatment of systemic fungal infections caused by various forms of yeast. The primary mode of action behind Novamycin™ is membranolysis, which entails membrane perturbation and disruption. In preclinical evaluation, Novamycin™ was rapidly fungicidal and capable of killing yeasts within 30 minutes of exposure. The Company’s peptide has demonstrated fungicidal activity against Candida species (C. albicans, C. glabrata, C. krusei, C. parapsilosis, and C. tropicalis), including some species that have demonstrated resistance to conventional systemic antifungal therapies. The Company’s peptide has also shown activity against select Aspergillus and Cryptococcus forms. These clinically relevant fungi (molds and yeasts) can cause potentially fatal systemic and central nervous system infections in select patient populations. Systemic infection by Aspergillus species—called invasive aspergillosis—is associated with mortality rates of up to 80% (Source: Transplant Infectious Disease 2008, 10:156-161). In addition, one of the major species of Cryptococcus that causes illness in


humans is Cryptococcus neoformans, which causes a potentially fatal fungal disease called cryptococcosis. The majority of cryptococcosis cases are found in people with a weakened immune system. In healthy individuals, the pulmonary form of cryptococcosis may go unnoticed; however, in patients with impaired immune systems, this infection may spread to the brain, causing meningoencephalitis (swelling and irritation of the brain and spinal cord). Cryptococcus is considered to be one of the most common life-threatening fungal infections in AIDS patients. Activity has been confirmed in vitro against the Trichosporon species, which can cause white piedra, superficial infections, and invasive trichosporonosis. NovaBiotics is currently investigating additional systemic fungal pathogens for which its peptides may also demonstrate antifungal properties against, including other Aspergillus and Fusarium species. To date, the application of concentrations of Novamycin™ that are above or below the minimum inhibitory concentration (MIC) has not caused the development of resistance or tolerance in tested yeast isolates. Based upon preliminary in vivo studies with Novamycin™, NovaBiotics believes that the peptide could have a promising safety/toxicity profile. Specifically, the Company’s antifungal demonstrated little to no cytotoxicity in vitro against lung, skin, and liver cell lines when administered at concentrations higher than any potential therapeutic dose. In addition, when used in combination with azoles or amphotericin B, Novamycin™ has demonstrated synergistic effects in vitro against a range of clinically relevant yeasts and molds.

Development Plans for Novamycin™ NovaBiotics aims to develop its systemic antifungal peptide technology for intravenous delivery. However, the Company anticipates that the physicochemical and biological properties of the compounds resulting from this technology may also enable the development of oral and topical formulations in parallel. It is important to note that the Company derived Novamycin™ from the same platform as Novexatin®, which is supported by a comprehensive preclinical safety and toxicity data package. The work that the Company has completed on its lead candidate has improved the Novamycin™ program in parallel. With the commencement of the Phase I/IIa trial with Novexatin®, NovaBiotics seeks to capitalize on the clinical data it receives to further bolster value in the Novamycin™ program. NovaBiotics believes that this technology provides the opportunity for co-development with an appropriate partner. In the next 24 months, the Company plans to progress into the regulatory preclinical phase of research and development with Novamycin™ and potentially enter into a Phase I study, depending upon the candidate’s preclinical results. At either stage of development, the Company may pursue a co-development or out-licensing agreement, including potentially completing a Novexatin® agreement where an option to Novamycin™ is included. ANTIMICROBIAL PEPTIDES FOR RESPIRATORY INFECTIONS NovaBiotics also aims to develop technologies to address respiratory infections caused by gram-negative Pseudomonas aeruginosa (P. aeruginosa). P. aeruginosa is an opportunistic pathogen that is a major cause of community-associated and hospital-acquired infections, including pneumonia, urinary tract infections, and bacteremia, as well as chronic infections in the lungs of cystic fibrosis patients. Although virtually all infections caused by P. aeruginosa are treatable, the pathogen rarely causes disease in healthy individuals. As such, because the majority of patients that are infected with P. aeruginosa have been immunocompromised by a prior illness, the infection can cause complications that may be life threatening. In particular, patients that have been hospitalized as a result of cancer, cystic fibrosis, or burns have a 50% fatality rate if they acquire a P. aeruginosa infection (Source: the Online Textbook of Bacteriology). NovaBiotics’ antimicrobial peptides to treat such infections are designed in a manner that enables delivery through both systemic (oral) and inhaled routes of administration. P. aeruginosa frequently colonize in the airways of severe chronic obstructive pulmonary disease (COPD) patients—potentially leading to progressive inflammatory damage in these individuals (Source: Advances in Therapy 2008, 25[10]:1019-1030). COPD encompasses several lung diseases—including emphysema and chronic bronchitis—that block a patient’s airflow, progressively making breathing more difficult. The effects of COPD can be life-threatening and are not fully reversible. COPD affects roughly 210 million individuals globally, and the WHO estimates that this disease could be the third leading cause of death worldwide by 2030.


P. aeruginosa is also a cause of chronic infections in the lungs of cystic fibrosis patients. Cystic fibrosis is an inherited disease that causes abnormal mucus secretion and can affect a patient’s lungs, pancreas, liver, intestines, sinuses, and sex organs. Worldwide, approximately 70,000 individuals have cystic fibrosis. This disease is characterized by unusually thick, sticky mucus that may clog the lungs and provide an environment that promotes bacteria growth. This combination of effects can lead to repeated lung infections, lung damage, and even respiratory failure—one of the most dangerous consequences of cystic fibrosis. Although substantial improvements have been made in treatments for cystic fibrosis, the average life expectancy of a patient with the disease is roughly 37 years (Source: the Cystic Fibrosis Foundation). Pseudomonas, including P. aeruginosa, can colonize the lungs of cystic fibrosis patients and thus increase the risk of pulmonary damage and mortality rates that are already associated with this disease. Tobramycin Inhalation Solution USP, or TOBI®, is a widely used medication for cystic fibrosis patients who are over age six and whose lung function is within an acceptable range. Inhaled administration of tobramycin delivers antibiotics directly into the lungs to treat infections caused by P. aeruginosa and other pathogens. In particular, in a study of 13 patients with severe COPD, treatment with TOBI® reduced the inflammatory impact of multi-resistant P. aeruginosa (Source: Advances in Therapy 2008, 25[10]:1019-1030). However, the cost of tobramycin is approximately $20,000 per patient. Due to the physiochemical nature of NovaBiotics’ peptides (e.g., charge, size, and hydrophilicity), potential exists for these therapies to be administered in aerosol form directly to infection sites within the lung in a manner that is similar to TOBI®. In addition, the primary cause of cystic fibrosis is a mutation in a gene known as the cystic fibrosis transmembrane conductance regulator (CFTR). This defect prevents the formation of ion channels in the body’s cells. In healthy individuals, epithelial cells have ion channels in their membranes that perform several key processes: (1) transfer chloride and sodium; and (2) direct the flow of water in and out of the cells. When the CFTR gene is mutated, ion channels are not produced and the movement of chlorine throughout the body is hindered, causing cells to absorb excess water. This over-absorption of water by cells causes a depletion of water in mucus, making it thick and sticky. NovaBiotics has demonstrated in vitro that its antimicrobial peptide technology is not sensitive to the form of ionic environment of the mucosal epithelial tissues in cystic fibrosis patients. Biofilm Bacteria and NovaBiotics’ Antimicrobial Peptides NovaBiotics’ antimicrobial peptides have demonstrated antimicrobial activity against planktonic, persister, and biofilm bacterial cells, which are believed to be a main cause of recurring respiratory infections. Biofilm is a slime excreted by colonizing bacteria that serves as both an adhesive as well as a protective barrier (Source: Chemie.DE Information Service GmbH [http://www.chemie.de], an information and software technology provider to chemical, biotechnology, and pharmaceutical industries in Europe). Biofilms can grow on both living and non-living surfaces where moisture and nutrients are present, including on wet rocks, on teeth, or on human or animal tissue, such as in the ears or in the lungs of cystic fibrosis patients. Biofilms form on many surfaces within a hospital, including catheter lines, contact lenses, and a range of surgical implants (e.g., pacemakers, heart valve replacements, and artificial joints). As such, these bacteria are a common source of hospital-acquired infections. Each year in the U.S., biofilm-associated infections cause approximately 500,000 deaths—an annual figure that is nearly as high as cancer-related deaths (Source: Discover, a magazine dedicated to science, technology, and the future, July 2009). Treatment of biofilms is difficult because these organisms can resist the effects of both the human immune response and conventional antibiotics (Source: Ohio State University, Science Daily, April 2009). The majority of pharmaceutical companies produce antibiotics that attack bacteria that move freely within a state of suspension; however, biofilm bacteria grow differently than those in suspension and thus are resistant to traditional therapies (Source: Chemie.DE). Biofilm bacteria are considered to be up to 1,000 times more resistant to antimicrobials than the same bacteria growing in suspension (Source: Guideline for Disinfection and Sterilization in Healthcare Facilities, 2008).


Antimicrobials and Drug Resistance Since the first commercial introduction of antibiotics in the 1940s, these medicines have revolutionized the treatment of bacterial infections. However, the ability of disease-causing microbes to become resistant to antibiotic drug therapy has become a worsening public health problem. Bacterial strains have emerged that are resistant to almost all classes of antibiotics, and in a few rare cases, resistant to all antibiotics. As well, resistance to fungi has become more of a problem than bacteria. In addition to the trend of increasing drug resistance, there is also concern of an inadequate pipeline of therapeutics to treat drug-resistant infections, particularly those caused by gram-negative pathogens (Source: Clinical Infectious Diseases 2009, 48:1-12). Bacteria and other microorganisms that cause infection are remarkably resilient and can develop techniques to survive even when drugs are used that are meant to kill or weaken them. Bacteria can become resistant to drugs in a number of ways if they are not already naturally resistant. For example, microbes can develop resistance through mutation, by acquiring resistant genes from other pathogens, or through selective pressure—an evolutionary process whereby microbes with resistant genes survive and continue to proliferate in the presence of an antimicrobial, while those that are non-resistant are killed. In addition to the biological mechanisms of resistance, there are also societal pressures that accelerate the rates of antimicrobial resistance. In particular, the use of antibiotics when they are not needed (e.g., physicians prescribing antibiotics for an illness caused by a viral infection), the over-use of antibiotics in hospitals, and the practice of adding antibiotics to agricultural feed are factors that lead to selective pressure and thus stimulate antimicrobial resistance. For some patients, bacterial resistance could mean more visits to the doctor, a lengthier illness, and possibly the need for more toxic drugs that may also entail a higher cost. For others, however, it could ultimately result in death after serial failure of multiple unsuccessful treatment attempts. In particular, antibiotic resistance poses several major dangers to critically ill patients: (1) it increases the difficultly in clearing infections from the body; and (2) it heightens the risk of acquiring infections in a hospital or through contact with a growing number of carriers. In short, antimicrobial resistance contributes to escalating healthcare costs, increases disease severity, and increases mortality rates from certain infections. According to the U.S. Centers of Disease Control and Prevention (CDC), virtually all significant species of bacterial human pathogens throughout the world are becoming resistant to the antibiotic treatments designed to eradicate them. Recently, researchers have identified six pathogens, as identified in Table 5, which are known to resist the effects of conventional antibacterials and cause of the majority of hospital-acquired infections (Source: The Journal of Infectious Diseases 2008, 197:1079-1081). In particular, P. aeruginosa and Acinetobacter baumannii employ a variety of resistance mechanisms and, in some cases, have demonstrated resistance against all clinically available compounds (Source: Respiratory Care, April 2008, 53[4]:471-479).

The emergence of drug resistance has caused a public health dilemma that is compounded by a shortage of therapeutics capable of combating such infections. Drug-resistant pathogens are becoming increasingly prevalent in the hospital setting and, as such, the use of any single treatment as a monotherapy may be ineffective. The use of a combination therapy composed of two or more drugs may therefore reduce the risk of a pathogen being resistant to treatment. As such, physicians are moving away from traditional antibiotic therapy, which entailed treating a patient with one antibiotic at a time, and upon failure to resolve the infection, switching to another type. Instead, physicians and researchers are focused on attacking biofilm communities using a combination of antimicrobial agents simultaneously in order to target the colony’s defense mechanisms versus the individual bacteria (Source: Discover, July

▪ Enterococcus faecium ▪ Klebsiella pneumoniae ▪ Pseudomonas aerginosa

▪ Staphylococcus aureus ▪ Acinetobacter baumanii ▪ Enterobacter species

DRUG-RESISTANT PATHOGENS THAT CAUSE THE MAJORITY OF HOSPITAL-ACQUIRED INFECTIONS

Table 5

Source: the Journal of Infectious Diseases (2008) 197:1079-1081.


2009). NovaBiotics’ data to date has demonstrated that its antimicrobial peptides have potential for use in combination with existing antibiotic therapies to treat recurrent respiratory infections caused by biofilms and other cell types. Because of their mode of action, NovaBiotics’ antimicrobial peptides may not be subject to the same acquired resistance issues in target pathogen populations—a significant advantage over traditional antibiotic therapies. The Company expects to have in vivo data for its antimicrobial peptides during 2009/2010. ANTIMICROBIAL COMPOUNDS TO TREAT DERMAL INFECTIONS AND ACNE NovaBiotics’ antimicrobial compounds also have the potential to treat infections that are caused by more than one organism—called polymicrobial infections. The pathogens comprising these complex infections consist of various combinations of viruses, bacteria, fungi, and parasites. Polymicrobial diseases can cause infection simultaneously or sequentially—occurring one after another. In some cases, a microorganism may create a suitable environment for pathogens to colonize or an existing infection may predispose an individual to colonization by additional pathogens. In other instances, two or more organisms that are non-pathogenic individually may cause disease when colonized together. Polymicrobial infections are widely found on several anatomic sites, including the oral cavity, respiratory tract (both upper and lower), and gastrointestinal tract—all of which provide a moist, nutrient-rich environment for microorganisms. Patients that are immunosuppressed by medicine or disease (e.g., diabetes or cancer) or that have wounds or burns are at a higher risk of developing a polymicrobial infection. For example, in immunosuppressed cancer patients, polymicrobial infections account for 15% of all infections (Source: Clinical Infectious Diseases, July 2007, 45[2]:228-233). Wound Infections The skin is the body’s first mechanism of defense against infection by serving as a physical barrier against dangerous microorganisms. However, when this barrier is damaged—whether as a result of injury, burns, ulcers, or surgery—pathogens can enter the body more freely and potentially cause infection. These infections are rarely caused by a single pathogen. The majority of wound infections are caused by two or more pathogens living synergistically, and thus are classified as polymicrobial infections. These communities of organisms can develop into biofilms, which—in addition to causing other pathologies and clinical symptoms—are believed to slow wound healing (Source: the Association for the Advancement of Wound Care, March 2008). The U.S. National Institutes of Health estimates that biofilms cause chronic infections that account for approximately 80% of infectious diseases in humans. Pathogens that frequently cause infections in wounds include gram-positive bacteria such as methicillin-resistant Staphylococcus aureus (MRSA) and gram-negative bacteria such as Acinetobacter baumannii-calcoaceticus and P. aeruginosa, among others. These pathogens have been associated with an increasing resistance to numerous antimicrobials—further complicating the treatment procedure. Wounds are also prone to fungal infections, which can occur after broad-spectrum antibiotics are administered or if treatment is delayed. Acne Acne is an inflammatory disease of the skin that is caused by the overproduction of sebum (oil), which affects nearly 85% of individuals between the ages of 12 and 24. Acne appears on the skin in the form of congested pores, whiteheads, blackheads, pimples, pustules, or cysts. In addition to the visible symptoms associated with this condition, the physical manifestation of acne can also cause psychological effects, including decreased self-esteem and self-confidence, social withdrawal, or even depression.


The excess oil production associated with acne can form a plug in hair follicles, as shown in Figure 5, which may cause the hair follicle to become enlarged or to rupture. When a hair follicle ruptures, it releases the oil and debris that once resided within the pore into the surrounding skin, causing inflammation. The oil surrounding blocked hair follicles can also become stagnant, thus providing a breeding area for several types of commensal skin microorganisms, including gram-positive cocci (including Staphylococcus aureus and S. epidermidis); anaerobic diphteroids (e.g., Propionibacterium acnes); and Malassezia furfur, a lipophilic yeast. These organisms are involved in the pathogenesis of other skin and soft-tissue infections, including pityriasis, tinea versicolor, and impetigo, among others. In particular, Propionibacterium acnes is a ubiquitous organism commonly found on the skin that causes acne and many other human polymicrobial diseases.

There are several issues associated with currently available therapies for acne: (1) antibiotics are widely used to treat acne, and as a result, there has been an increase in the development of antibiotic-resistant strains of Propionibacterium acnes bacteria; (2) current antibiotic therapy for acne is non-specific and typically short-lasting; and (3) non-antibiotic-based acne treatments, such as oral isotretinoin (Accutane®) for severe acne cases, may also cause toxic or undesirable side effects. NovaBiotics’ Initiatives NovaBiotics’ pipeline includes antimicrobial compounds to treat dermal infections and acne, particularly those caused by polymicrobial diseases. The Company’s compounds may be less likely to lead to resistance development than current therapies due to their novel mode of action. The Company’s peptides act via a “physical kill” mechanism that causes membrane disruption. As such, there is no single pathway or set of genes that the compounds target, a key characteristic in avoiding the development of resistance. The Company anticipates that its compounds may also be less toxic than existing therapies for select polymicrobial infections, while maintaining microbicidal activity. In addition, NovaBiotics’ technology has the ability to kill both the bacteria and yeasts associated with acne, unlike some other currently available therapies. As such, the Company believes that its proprietary compounds have the potential to safely and effectively treat dermal infections and acne when administered in a topical formulation. CONSUMER HEALTHCARE/COSMETICS NovaBiotics is also pursuing the use of peptides and botanicals as anti-infectives in the consumer healthcare and cosmetics markets. Products in this category are based on the Company’s non-core intellectual property and apply to areas such as skin, hair, and nail care. NovaBiotics has established relationships with undisclosed global consumer healthcare providers and cosmetics entities for the development and commercialization of its Luminaderm™ technology assets, which includes peptide and botanical compounds that can be used as anti-infective components of cosmeceutical and consumer healthcare products. In September 2008, NovaBiotics’ Board selected several potential commercial partners for continued discussions and negotiations regarding the continued development of the Luminaderm™ assets. In the short term, the Company may seek to market this technology for various applications, including dandruff, acne, athlete’s foot, and nail care, among other indications.

Figure 5

EXAMPLE OF A PLUGGED HAIR FOLLICLE

Source: the National Institute of Arthritis and Musculoskeletal and Skin Diseases (NIAMS), a component of the U.S. National Institutes of Health.

Bacteria

Follicle

Skin surfaceBlockage of follicle opening

Sebaceousgland


Competition NovaBiotics’ competition is composed of the companies listed and detailed in the following sections that presently market or are developing topical or systemic products for nail fungus and, to a lesser extent, novel delivery mechanisms for known or currently approved nail fungus treatments. Due to the many challenges associated with developing effective and safe treatments for nail fungus and the consequent, well-described shortcomings of currently available products (described on pages 15-16 under Current Therapies for Onychomycosis), the competition in this space remains somewhat limited. Specifically, while the current global market for nail fungus therapies is estimated to be roughly $2 billion, NovaBiotics believes that the total potential market size could be in the order of $5 billion. To address these unmet market needs, NovaBiotics is developing Novexatin®, designed to be a novel, more effective, rapid-acting, and safe alternative to conventional therapies. NovaBiotics believes that Novexatin® represents a step-change in therapeutic approach to this clinical problem and that its advantages could enable the Company to acquire a significant share in the total, underserved nail fungus market. In addition to the products marketed or actively being developed to treat nail fungus, there have been several product candidates for this indication that are no longer in development: (1) EcoNail, a Phase II topical fungistatic that was being developed by MacroChem Corporation, which merged with Access Pharmaceuticals, Inc. (ACCP-OTC.BB) in 2008; (2) a reformulation of Lamisil® (detailed on page 26) using drug delivery technology licensed from NexMed, Inc. (NEXM-NASDAQ) that ceased after negative Phase III study results were received; and (3) TLT Therapy, Arpida Ltd.’s (ARPN-SIX) Phase III antifungal treatment for onychomycosis that included both a one-time laser treatment and daily topical applications of terbinafine, which was ceased due to financial constraints. Although NovaBiotics is largely focused on the clinical development of Novexatin®, competition also exists in the markets for other indications that the Company is considering, including respiratory infections, systemic fungal infections, and acne/dermal infections. NovaBiotics’ current and potential competitors are shown in Table 6 and described in greater detail on pages 26-29. The following list is not an exhaustive collection of NovaBiotics’ competitors; however, it is believed to be representative of the type of competition that the Company may face.

P/E

Novartis AG NVS (NYSE) $51.95 1,356,390 15.70 119.08B

L'Oréal* OR (EURONEXT) € 69.67 963,853 21.36 42.20B

Nestlé AG** NESN (SIX) CHF 47.82 8,773,694 15.65 176.30B

Johnson & Johnson JNJ (NYSE) $59.05 10,840,200 13.06 164.77B

Medicis Pharmaceutical Corporation MRX (NYSE) $21.17 1,028,060 — 1.23B

sanofi-aventis SA SNY (NYSE) $36.92 1,432,370 19.76 97.03B

Anacor Pharmaceuticals, Inc. Closely Held — — — —

Celtic Pharmaceutical Holdings L.P. Closely Held — — — —

NanoBio Corporation Closely Held — — — —

Nomir Medical Technologies, Inc. Closely Held — — — —

GlaxoSmithKline plc GSK (NYSE) $41.16 1,273,060 12.93 103.17B

Access Pharmaceuticals, Inc. ACCP (OTC.BB) $3.00 57,686 12.56 38.39M

NexMed, Inc. NEXM (NASDAQ) $0.13 1,870,470 — 11.31M

Arpida Ltd.** ARPN (SIX) CHF 1.42 354,228 — 30.00M

* Amounts in euros; €1 is approximately US$1.48. ** Amounts in Swiss francs; CHF 1 is approximately US$0.98.

COMPETITION

NovaBiotics Ltd

Table 6

—

Company Symbol (Exchange)

Last Trade (10/30/09)

52-week Range

Avg. Vol. (3 month)

23.95 - 40.17

33.34 - 52.78

—

Sources: NovaBiotics Ltd, Crystal Research Associates, LLC, and Yahoo! Finance (www.finance.yahoo.com).

Companies with Marketed Products

Companies with Products In Development

Market Cap.

46.00 - 71.00

—

—

35.04 - 48.70

46.25 - 63.01

7.85 - 23.53

27.15 - 42.18

0.75 - 5.00

0.05 - 0.54

0.50 - 7.05


MARKETED PRODUCTS Novartis AG/Various Entities Lamisil® (terbinafine hydrochloride)/Generic Terbinafine Headquartered in Basel, Switzerland, Novartis AG is a healthcare company that provides innovative medicines, generic pharmaceuticals, preventive vaccines, diagnostic tools, and consumer health products. The company distributes Lamisil® Tablets to treat onychomycosis of the fingernails or toenails that is caused by dermatophytes (tinea unguium). Terbinafine, the active ingredient in Lamisil®, is an antifungal antibiotic that has been shown to be active against most strains of Trichophyton mentagrophytes and Trichophyton rubrum in vitro and in clinical infections. Lamisil® has been off patent in Europe since December 2006. In addition, the U.S. patent for Lamisil® expired on June 30, 2007, and in July 2007, the FDA approved the first generic versions of prescription Lamisil® tablets. Companies making generic tablets include Dr. Reddy’s Laboratories Limited (RDY-NYSE), Apotex Corp., Genpharm ULC, Glenmark Generics Ltd. (part of Glenmark Pharmaceuticals Ltd. [532296-BSE]), Mylan Pharmaceuticals Inc. (part of Mylan, Inc. [MYL-NASDAQ]), and Teva Pharmaceuticals Industries Limited (TEVA-NASDAQ), among others. Terbinafine sales exceed $1 billion annually (Source: BioPharm Insight [www.biopharminsight.com]). Galderma S.A. Loceryl®/Curanail 5% Nail Lacquer (amorolfine) A joint venture between Nestlé AG and L’Oréal, Galderma S.A. is a dermatology company that provides therapeutic, corrective, and aesthetic solutions. Galderma is headquartered in Paris, France. The company’s product portfolio entails therapeutics to treat various skin conditions, including acne, rosacea, psoriasis, seborrheic dermatitis, and fungal nail infections, among others. To treat mild fungal infections affecting one or two nails, the company offers amorolfine, an over-the-counter treatment marketed primarily as Loceryl®, but also sold as Curanail in the UK and several other European regions. Galderma acquired the rights to Loceryl® from F. Hoffmann-La Roche Ltd in 1999. Amorolfine, which was once only available by prescription, is the active ingredient in Curanail. Treatment with Curanail requires weekly applications of the nail lacquer and can take roughly six months for fingernails and 9 to 12 months for toenails, as the infected part of the nail must completely grow out to fully eliminate the fungus from the nail. According to Galderma, amorolfine has been shown to clear 85% of fungal infections of the fingernails and 76% of toenail infections after six months of treatment. Ortho-McNeil-Janssen Pharmaceuticals, Inc. Sporanox® (itraconazole) Headquartered in Raritan, New Jersey, Ortho-McNeil-Janssen Pharmaceuticals, Inc. is a healthcare company that is a member of the Johnson & Johnson (JNJ-NYSE) family of companies. The Ortho-McNeil® division of Ortho-McNeil-Janssen is designed to serve the broad needs of primary care, hospitals, and other care facilities. Ortho-McNeil® markets Sporanox® (itraconazole), an azole antifungal that interferes with the formation of the fungal cell membrane to kill select fungi. Itraconazole was approved by the FDA in 1992. Sporanox® Capsules can be used to treat both immunocompromised and non-immunocompromised patients who have blastomycosis, histoplasmosis, or aspergillosis—serious fungal infections that can affect any part of the body. In particular, Sporanox® Capsules are often used in non-immunocompromised patients with infections of the fingernails or toenails that are caused by dermatophytes (tinea unguium). Based on data from three Sporanox® clinical trials of 214 patients who had onychomycosis of the toenail, 35% of patients met the criteria to be classified as an overall success, which entails mycological cure as well as significantly decreased abnormalities of the nail. Further, in a double-blind, placebo-controlled study of 73 patients with a fungal infection of the fingernail, 56% experienced an overall success with Sporanox®. In the treatment of systemic fungal infections, treatment with Sporanox® Capsules was discontinued in 10.5% of 602 patients in U.S. clinical trials due to adverse events. Generic versions of Sporanox® are currently available through a variety of manufacturers, including Glenmark Generics Ltd. and Patriot Pharmaceuticals, LLC (a wholly owned subsidiary of Ortho-McNeil-Janssen Pharmaceuticals, Inc.), among others.


Medicis Pharmaceutical Corporation Loprox® (ciclopirox) Headquartered in Scottsdale, Arizona, Medicis Pharmaceutical Corporation is a specialty pharmaceutical company that develops products to treat dermatological and podiatric conditions. In particular, Medicis offers products that address acne, fungal infections, psoriasis, rosacea, seborrheic dermatitis, and skin and skin-structure infections. To treat fungal infections, the company has developed Loprox® (ciclopirox), which is available in both shampoo and gel formulations. Loprox® Shampoo is a topical treatment for seborrheic dermatitis of the scalp. Loprox® Gel is approved to treat superficial dermatophyte infections, including those caused by Trichophyton rubrum and Trichophyton mentagrophytes, among others, as well as for the treatment of seborrheic dermatitis. sanofi-aventis SA Penlac® (ciclopirox) Topical Solution, 8% Sanofi-aventis SA is a global pharmaceutical company that discovers, develops, produces, and markets therapies to enhance people’s lives. The company is headquartered in Paris, France, with U.S. headquarters in Bridgewater, New Jersey. Sanofi-aventis has developed Penlac®, a fungal nail infection treatment that is marketed by Dermik Laboratories, sanofi-aventis’ U.S. dermatology business. Penlac® is a topical nail lacquer licensed in the U.S. for use on fingernails and toenails and adjacent skin. The active ingredient in Penlac® is ciclopirox, a synthetic antifungal agent that prevents the growth of fungus. Penlac® is often prescribed as a component of a comprehensive treatment plan, which entails frequent removal of unattached, infected nails by a trained physician. The efficacy of Penlac® was evaluated in two double-blind, placebo-controlled studies. After 48 weeks of treatment in these two studies, complete cure rates of 5.5% and 8.5% were recorded. Patent protection for Penlac® expired in September 2007. As such, formulations of topical ciclopirox are also available generically through Perrigo Company (PRGO-NASDAQ) , Taro Pharmaceutical Industries Ltd. (TAROF-OTC.PK), and Apotex Corp., among others. PRODUCTS IN DEVELOPMENT Anacor Pharmaceuticals, Inc. AN2690 Anacor Pharmaceuticals, Inc. is a closely held pharmaceutical company headquartered in Palo Alto, California, that develops novel small-molecule therapeutics to treat infectious and inflammatory diseases. Anacor is developing AN2690 as a topical antifungal for the treatment of fungal nail infections. Preclinical studies performed by Anacor indicated that AN2690 may be able to penetrate the human nail plate 250 times more effectively than Penlac®. Using the results from the Phase II evaluation of AN2690, Anacor defined multiple well-tolerated, efficacious doses of the antifungal and determined a dose-response relationship. AN2690 also caused minimal or no detectable systemic drug exposure in blood or urine. The company entered into an agreement with Schering-Plough Corporation in 2007 for the global development and commercialization of AN2690 for onychomycosis and other potential indications. Schering-Plough paid Anacor $40 million upfront and agreed to pay Anacor double-digit royalties up to 20% on sales of AN2690 and up to an additional $505 million if select development, regulatory, and commercial milestones for onychomycosis are achieved, among other agreed-upon payments. Phase III clinical development for AN2690 is expected to commence by the end of 2009 through Schering-Plough. Schering-Plough entered into an agreement with Merck & Co., Inc. (MRK-NYSE) in March 2009, in which Merck plans to acquire Schering-Plough for $41.1 billion in cash and stock. Celtic Pharmaceutical Holdings L.P. TDT-067 Celtic Pharmaceutical Holdings L.P. (Celtic Pharma) is a global private equity investment firm focused on the biotechnology and pharmaceutical industries. The company has headquarters in Bermuda and satellite offices in New York and London. Celtic Pharma is developing TDT-067, a topical treatment for fungal nail infections. TDT-067 uses Transfersome® Technology to deliver the leading drug for the oral treatment of local fungal infections directly to the infection site. Transfersome® technology is designed as a non-invasive method to deliver therapeutic molecules through open biological barriers and functions by


pairing an active agent with sub-microscopic vesicles that are both highly hydrophilic (drawn to water) and ultra-deformable. According to Celtic Pharma, Transfersome® technology may enable the active agents within TDT-067 to penetrate the nail bed and necrotic tissue in order to directly attack fungi. NanoBio Corporation NB-002 NanoBio Corporation is a closely held biopharmaceutical company that aims to develop and commercialize products that prevent and treat infectious diseases. The company has headquarters and laboratory facilities in Ann Arbor, Michigan. NanoBio is developing NB-002, a drug candidate for the topical treatment of onychomycosis. NB-002 was created using the company’s nanoemulsion technology, which employs oil-in-water emulsions that are between 150 and 400 nanometers in size. Preclinical and Phase I data indicated that NB-002 is safe when applied to a patient’s skin, even at doses that are 1,000 times greater than that required to kill the fungi in vitro. NB-002 is presently involved in a randomized, double-blind, vehicle-controlled Phase II study of 443 onychomycosis patients. Each participant is expected to receive daily topical applications of NB-002 for 42 weeks. NanoBio reported that interim data from this trial showed that NB-002 has demonstrated a robust clinical response and appeared to be safe. To date, more than 900 patients have received NB-002 treatment without experiencing any significant safety concerns or systemic absorption of the medicine. In addition to active forms of dermatophytes that are seen with onychomycosis, NB-002 has also demonstrated in vitro activity against azole-resistant and non-growing resting forms of parasitic fungi. Stiefel Laboratories, Inc. Albaconazole and Itraconazole Headquartered in Coral Gables, Florida, Stiefel Laboratories, Inc. is a pharmaceutical company focused on the advancement of dermatology and skin care. In 2005, Stiefel in-licensed worldwide rights to albaconazole, an oral and topical antifungal agent, from Palau Pharma, S.A., a biopharmaceutical company based in Barcelona, Spain. To date, albaconazole has demonstrated safety and is potent in vitro against various fungal pathogens, including several drug-resistant strains. The agent is presently in a Phase II study in patients with distal subungual onychomycosis. The study is designed to assess the safety and efficacy of four dose regimens of oral albaconazole (W0027) and is scheduled to be completed in 2010. In addition, in June 2009, Stiefel Laboratories announced the completion of a pivotal Phase III clinical trial comparing its 200 mg Hyphanox™ (itraconazole) tablet to two 100 mg capsules of itraconazole taken once a day for three months in 1,381 onychomycosis patients. The results of the trial showed that the endpoint was reached by 22.3% of the patients treated with Hyphanox™ versus 21.7% of the itraconazole capsules. Further, mycological cure was attained by 44% of Hyphanox™-treated patients versus 37% of those on the itraconazole regimen. A New Drug Application (NDA) was filed for Hyphanox™ in March 2009. In April 2009, Stiefel Laboratories was acquired by GlaxoSmithKline plc (GSK-NYSE) in an agreement valued up to $3.6 billion. Access Pharmaceuticals, Inc. EcoNail (econazole and SEPA) Headquartered in Dallas, Texas, Access Pharmaceuticals, Inc. is a biopharmaceutical company that develops and commercializes products to treat cancer and other diseases. Access’ product pipeline presently includes one approved product, a Phase III antimicrobial peptide, four Phase II candidates, and six preclinical oncology programs. EcoNail, a lacquer formulation to treat onychomycosis, is one of the company’s Phase II candidates. EcoNail was originally developed by MacroChem Corporation, which was acquired by Access in 2009. The lacquer is composed of econazole, an antifungal, and a compound derived from Soft Enhancement of Percutaneous Absorption (SEPA®) technology. When incorporated into EcoNail, SEPA 0009 (a SEPA® compound) softens the lacquer in order to facilitate a more rapid and complete release of econazole when applied to the nail. A Phase I study of demonstrated that EcoNail was well tolerated and was not absorbed systemically. After completing a Phase II clinical trial with EcoNail, MacroChem announced that none of the 37 participants met the composite primary efficacy endpoint of “complete cure” (negative mycology). Access is presently evaluating its development and partnering strategy for the product.


NexMed, Inc. NM100060 Headquartered in East Windsor, New Jersey, NexMed, Inc. uses its NexACT® drug delivery platform to develop treatments for a variety of conditions, including nail fungus and sexual disorders. NexACT® drug delivery technology incorporates penetration enhancers that enable active ingredients to be better absorbed through the skin via creams, gels, ointments, lotions, solutions, or intranasal sprays. In addition to using this technology to develop its own drugs, NexMed also licenses NexACT® to large pharmaceutical companies. In September 2005, NexMed licensed the exclusive worldwide rights to develop NM100060, an onychomycosis treatment incorporating a topical formulation of terbinafine (Lamisil®) and NexACT® technology, to Novartis AG under an agreement valued up to $51 million in upfront and milestone payments. However, in July 2009, NexMed and Novartis announced the mutual decision to terminate this agreement after results from a comparator Phase III study of NM100060 versus Loceryl® in Europe demonstrated that while the topical therapy provided comparable results, it did not provide the necessary results to submit an application for marketing approval in the EU. These results were consistent with two pivotal Phase III studies completed in 2008. NexMed has begun to analyze data from three studies completed by Novartis. Upon completion of its analysis, the company intends to proceed with potential licensing discussions. Arpida Ltd. TLT Therapy: Laser Pretreatment and Terbinafine Arpida Ltd. has headquarters in Reinach, Switzerland. Arpida’s TLT therapy is a Phase III antifungal treatment for onychomycosis. Patients that receive TLT therapy undergo a one-time laser pretreatment, and then continue with a daily application of a topical terbinafine for 48 weeks. Open-label Phase III clinical trials with TLT therapy are ongoing in Europe to compare TLT therapy to daily applications of Penlac®. These trials were intended to enroll roughly 220 patients in total; however, due to financial constraints, Arpida ceased further patient enrollment in December 2008. The primary efficacy endpoint of these trials is complete cure, with secondary endpoints including time to cure, safety, and tolerability.


Milestones Recent Milestones In the past 12 months, NovaBiotics has achieved the following milestones: Completed a Phase I trial and commenced a Phase IIa trial with Novexatin® in the second half of

2009; Secured initial clinical safety data for Novexatin® through the Phase I component of clinical

development;

Received regulatory clearance from Germany’s Federal Institute for Drugs and Medical Devices and the Ethics Commission to initiate first-in-man clinical trials with Novexatin®;

Secured £220,000 of grant funding through various initiatives in the third quarter 2009;

Raised a total of £1.1 million during the first half of 2009; Completed a comprehensive preclinical package for Novexatin®; Received the UK BioIndustry Association’s Rising Star Award in February 2009; and

Raised £750,000 from existing investors at the end of the third quarter 2008. Potential Milestones NovaBiotics plans to achieve the following milestones within the next 12 to 24 months: Gather further safety data and indication of efficacy for Novexatin® in the fourth quarter 2009, which

NovaBiotics believes may trigger an out-licensing or other commercial agreement (e.g., merger or acquisition activity) to be completed in the first half of 2010;

Progress into the regulatory preclinical phase of research and development with the Company’s next

drug candidate, Novamycin™, and potentially enter into a Phase I study in the next 24 months, depending upon the candidate’s preclinical results;

Seek a co-development or out-licensing agreement at either stage of development for Novamycin™,

including potentially completing a Novexatin® agreement where an option to Novamycin™ is included;

Note: Novamycin™ is related to Novexatin®. The preclinical work that the Company has completed on its lead candidate has also improved the Novamycin™ program in parallel. With the commencement of the Phase I/IIa trial with Novexatin®, NovaBiotics is looking to capitalize on the clinical data it receives to further bolster value in the Novamycin™ program. If NovaBiotics is able to establish co-development or out-licensing agreements for both of these molecules, the Company may look to in-license or acquire other antifungals at this stage, developing these molecules using a similar strategy.

Further co-development work and partnering on Luminaderm™ by late 2009 or early 2010; Receive grants of patents and trademarks; Progress Novexatin® through further clinical development and achieve any necessary licensing

milestones; and Acquire early in vivo data on respiratory pseudomonal infections in 2010.


Key Points to Consider

Note: Unless otherwise stated, all monetary amounts are in U.S. dollars. At 11/02/2009, US$1.00 ≈ £0.61. NovaBiotics is focused on the discovery and early-stage development of anti-infective compounds to

treat infectious conditions and diseases for which there are presently no effective therapies. After advancing these candidates through early clinical stages, the Company will likely seek strategic alliances or out-licensing partnerships with pharmaceutical or biopharmaceutical entities for later-stage clinical and regulatory development, manufacture, and marketing. NovaBiotics plans to reinvest any revenue received from such an agreement into its pipeline to further develop its technologies.

o In the anti-infectives market, large pharmaceutical companies are reducing early research and

development in favor of acquiring early-stage products and technologies through in-licensing or acquisition agreements. These transactions are being completed earlier in the development cycle as companies are valuing a lengthier patent life versus “de-risked” technology.

o The anti-infectives market provides a significant opportunity for NovaBiotics as infectious

diseases continue to be a major healthcare issue worldwide, causing the deaths of 14 million to 17 million individuals annually, primarily in developing countries. The emergence of drug-resistant microbes has further complicated this issue in part due to the lack of appropriate medicines to treat such illnesses.

The Company’s lead, clinical-stage initiative is Novexatin® (NP213), a topical, brush-on treatment for

nail fungus (onychomycosis). NovaBiotics has successfully concluded Phase I clinical development for Novexatin®, which proved to be safe and well tolerated in patients. Regarding efficacy, preclinical studies demonstrated that Novexatin® can clear a fungal infection from full thickness toenails within 28 days.

NovaBiotics estimates that while the global market for onychomycosis is static at nearly $2 billion,

introduction of a more effective, safer therapy that is applicable to the majority of patients could expand the market to $5 billion worldwide. Present treatment options for nail fungus have sufficient shortcomings that limit the size and growth of the market.

o Topical delivery for onychomycosis therapies is the preferred treatment route by patients and

healthcare providers. Currently available topical antifungals, such as prescription lacquers, are believed to have a complete cure rate of less than 10%, even when applied daily to the toenail for up to 48 weeks. In two separate pivotal studies, Penlac® topical solution led to a complete cure in 8.5% and 5.5% of patients.

o Presently, oral (systemic) antifungals are considered to be the most effective treatment method

available for onychomycosis. However, while oral antifungals can lead to a complete cure in a greater number of patients than topical therapies, the efficacy of these treatments continues to be limited, particularly in fungal toenail infections. For example, although Lamisil® led to a “complete cure” (mycologic cure plus clinical cure) in up to 59% of patients with fingernail infections in clinical evaluation, the medicine only completely cured up to 38% of fungal toenail infections.

o The Company believes that its lead candidate, Novexatin®, improves upon existing therapies as it

is less costly, requires a shorter treatment period, and may provide improved safety and efficacy in onychomycosis patients. Thus, Novexatin® could serve as a stimulus to expand the market by better serving the market’s needs.

After receiving regulatory and ethical clearance, the Company commenced a Phase I/IIa clinical study

with Novexatin® in July 2009. Data released from the 12-patient Phase I portion of the two-stage trials demonstrated the safety and tolerability of Novexatin® and confirmed that there was no systemic exposure through skin penetration. As well, the recruitment of 48 patients for the Phase IIa trial is nearly complete. As clinical data becomes available, the Company seeks to out-license Novexatin® to a pharmaceutical, specialty pharmaceutical, or larger biotechnology partner for further clinical development. According to NovaBiotics, the Company is already in dialogue with a number of parties that have expressed interest and that continue to monitor NovaBiotics’ progress.


The Company has selected Phase II for potential partnering and M&A activity as this stage of development has historically been a main value inflection point for product candidates in development in this area. Several previous benchmark deals include an agreement valued at up to $625 million between Anacor Pharmaceuticals and Schering-Plough for Anacor’s then Phase II candidate, AN2690, as well as a transaction valued at up to $51 million between NexMed, Inc. and Novartis for NexMed’s then Phase I nail lacquer treatment for onychomycosis, NM100060.

Within its pipeline portfolio, NovaBiotics also has proprietary antifungal peptides to treat systemic fungal (yeast and mold) infections as well as antimicrobial peptides and compounds for the treatment of respiratory, systemic, and dermal bacterial and polymicrobial infections—infections caused by more than one organism and, in most cases, combinations of bacteria and fungi. In addition to these therapeutic compounds, NovaBiotics also has other anti-infective peptides and some botanically derived compounds available for license that could be incorporated into over-the-counter healthcare and cosmetic products.

o NovaBiotics has established relationships with undisclosed global consumer healthcare providers

and cosmetics entities around the potential to commercialize its Luminaderm™ technology, which entails various therapeutic molecules that may be used to enhance consumer healthcare and cosmetic products. In fiscal 2008, the Company received £15,000 from co-development activities for one of its Luminaderm™ molecules. A further £52,000 has been generated for this work in fiscal 2009.

In February 2009, NovaBiotics received the UK BioIndustry Association’s Rising Star Award for 2009,

which recognizes companies that demonstrate a clear vision for development. The Company was named the “Most Promising New Life Science Company” in 2006 by Scottish Enterprise and received the “Sir Ian Wood Award for Innovation” at the 2006 Grampian Awards for Business Enterprise.

NovaBiotics’ intellectual property portfolio is composed of more than 40 patents both granted and pending worldwide, which are contained within six patent families. Because the Company has developed its molecules rapidly—with its first product candidate reaching the clinical stage in less than five years—significant patent life remains for potential pharmaceutical or biotechnology partners, providing these entities with more time to recuperate costs prior to patent expiry.

In July 2009, the Company completed the second part of its planned fundraising initiatives for the first

half of 2009, meeting its objective of £1.1 million for the period, which is expected to fund the development of Novexatin® through the end of Phase IIa clinical development. NovaBiotics has announced a subsequent private placing of circa (c.) £2.5 million, which the Company plans to close before the end of 2009 to fund operations through mid-2011. This funding is expected to facilitate further clinical development of Novexatin® and allow completion of the next key technical milestones for the Company’s most advanced pipeline products. Since its inception in 2004, the Company has raised c. £5 million. As of August 31, 2009, the Company had a net overdraft of £224,774.63 in cash and cash equivalents, with headroom of £175,225.37.


Historical Financial Results Tables 7, 8, and 9 provide a summary of NovaBiotics’ key historical financial statements: its audited Balance Sheet, Profit and Loss Account, and Trading and Profit and Loss Account for the fiscal year ended August 31, 2008. Note: Financial statements are in British pounds (£). At August 31, 2008, £1.00 ≈ US$1.82.

2008 2007

£ £ £ £

Fixed assets

Intangible assets 965,273 868,653

Tangible assets 173,176 277,418

1,138,449 1,146,071

Current assets

Debtors 148,636 289,742

Cash at bank and in hand 1,721 2,080

150,357 291,822

Creditors: amounts falling due within one year (1,500,155) (1,808,411)

Net current liabilities (1,349,798) (1,516,589)

Total assets less current liabilities (211,349) (370,518)

Accruals and deferred income (10,000) —

Net liabilities (221,349) (370,518)

Capital and reserves

Called up share capital 834,338 598,079

Share premium account 3,559,115 2,040,833

Profit and loss account (4,614,802) (3,009,430)

Equity shareholders' funds (221,349) (370,518)

BALANCE SHEET

NovaBiotics Ltd

Table 7

As at August 31, 2008



2008 2007

£ £

Turnover 15,000 —

Administrative expenses (1,862,955) (2,000,602)

Other operating income 121,187 34,603

Operating loss (1,726,768) (1,965,999)

Other interest receivable and similar income 362 48

Interest payable and similar charges (43,037) (20,932)

Loss on ordinary activities before taxation (1,769,443) (1,986,883)

Tax on loss on ordinary activities 125,049 146,326

Loss for the financial year (1,644,394) (1,840,557)

For the Year Ended August 31, 2008

PROFIT AND LOSS ACCOUNT

NovaBiotics Ltd

Table 8



2008 2007

£ £ £

INCOME

Sales 15,000 —

Rent Receivable 27,856 15,516

Government Grants 48,957 5,367

Gain on Disposal of Fixed Assets 24,750 —

Sundry Income 19,624 13,720

Bank Interest Received 362 48

136,549 34,651

EXPENSES

Director's Remuneration 17,500 73,600

Director's Pension Contributions 854 2,500

Administration Salaries 43,177 50,563

Research and Development Salaries 395,770 274,816

Employer's National Insurance Contributions 6,214 41,595

Staff Pension Contributions 244 12,893

Laboratory Subcontractors 106,251 23,095

Staff Training 4,959 9,241

Recruitment Expenses — 524

Legal and Professional Fees 435,943 223,869

Accountancy Fees 22,501 49,645

Auditors Remuneration 8,000 9,000

Rent, Rates, and Water 85,389 108,679

Insurance 31,451 20,694

Heat, Light, and Power — 606

Postage, Stationery, and Advertising 8,302 7,631

Telephone 6,309 6,345

Travel and Subsistence 109,632 73,863

Conference Costs 10,682 5,592

Entertaining 4,409 7,315

Research and Development Costs 292,592 767,261

Computer Consumables 9,329 15,540

Premises Expenses 14,626 21,230

Subscriptions 14,078 12,158

General Expenses 15,132 6,525

Bank Charges 15,920 8,461

Foreign Currency Losses 38,642 354

Interest on Convertible Loans 7,296 17,995

Bank Interest 42,920 12,278

Interest on Overdue Tax 117 8,654

Amortization 48,824 48,823

Depreciation 108,929 100,189

1,905,992 2,021,534

LOSS FOR YEAR (1,769,443) (1,986,883)

TRADING AND PROFIT AND LOSS ACCOUNT

NovaBiotics Ltd

Table 9

For the Year Ended August 31, 2008



Risks Some of the information in this Executive Informational Overview® (EIO®) relates to future events or future business and financial performance. Such statements can only be predictions and the actual events or results may differ from those described due to the risks presented below. The content of this report with respect to NovaBiotics has been compiled primarily from information available to the public released by the Company. NovaBiotics is solely responsible for the accuracy of this information. Information as to other companies has been prepared from publicly available information and has not been independently verified by the Company. Certain summaries of activities have been condensed to aid the reader in gaining a general understanding. For more information about NovaBiotics, please refer to the Company’s website at www.novabiotics.co.uk. Investors should carefully consider the risks and information about NovaBiotics’ business described below. Investors should not interpret the order in which these considerations are presented as an indication of their relative importance. The risks and uncertainties described below are not the only risks that the Company faces. Additional risks and uncertainties not presently known to NovaBiotics or that the Company currently believes to be immaterial may also adversely affect its business. If any of the following risks and uncertainties develops into actual events, NovaBiotics’ business, financial condition, and results of operations could be materially and adversely affected. RISKS RELATED TO NOVABIOTICS’ FINANCIALS The Company has incurred losses since inception and could continue to incur losses for the foreseeable future. Since NovaBiotics’ inception, it has incurred operating losses. Although NovaBiotics’ model is to fund the business through equity finance and bank facility, the Company also receives limited revenue through grant support from various sources, some fees for service work, and a commercialization partnership with an undisclosed global consumer healthcare provider for Luminaderm™. Based on the Company’s development strategy, NovaBiotics’ pipeline development efforts will only be significantly increased following the commercialization of Novexatin® (NP213), when it may perform the following: conduct research and development on new product candidates;

seek regulatory approvals, as needed, for select product candidates; and

conduct clinical trials on these product candidates. If NovaBiotics out-licenses Novexatin®, the Company expects to receive a significant upfront payment (reflecting the up to $51 million benchmarked by a licensing agreement between NexMed and Novartis), with additional milestone payments and sales royalties. NovaBiotics cannot guarantee that such a deal will materialize, or that upfront and milestone payments and sales royalties will be equivalent to that expected by the Company. In addition, NovaBiotics cannot assure investors that the business will ever become profitable. NovaBiotics needs to generate significant revenue to achieve profitability. If an out-licensing agreement for Novexatin® is not achieved, the Company may continue to incur operating losses for the foreseeable future. NovaBiotics may need additional funding and may be unable to raise capital when needed, which could force the Company to delay, reduce, or eliminate its product development programs. In July 2009, the Company completed the second part of its planned fundraising initiatives for the first half of 2009, meeting its objective of £1.1 million for the period, which supports NovaBiotics through the completion of Phase IIa clinical development for Novexatin®. In total, the Company has raised c. £5 million in funding since it was established in 2004. At July 1, 2009, NovaBiotics anticipated that its funding to date was sufficient to support the Company through the early commercialization of Novexatin®. NovaBiotics has announced a subsequent private placing of c. £2.5 million, which the Company expects to close before the end of 2009 to fund operations through mid-2011. This initiative will likely be used to


facilitate further clinical development of Novexatin® and allow completion of the next key technical milestones for the most advanced pipeline products. The Company’s future capital requirements will likely depend on the following factors: the completion of preclinical and early clinical research and development for each candidate and

indication; NovaBiotics’ ability to establish and maintain strategic alliances or out-licensing partnerships with

appropriate pharmaceutical or biopharmaceutical entities for later-stage clinical and regulatory development, manufacture, and marketing;

the success of NovaBiotics’ development and commercialization of its product candidates; the scope and results of the Company’s clinical trials; the timing of, and the costs involved in, obtaining regulatory approvals as necessary; and the costs involved in preparing, filing, prosecuting, maintaining, and enforcing patent claims and other

intellectual property (IP)-related costs, including any possible litigation costs. RISKS RELATED TO INTELLECTUAL PROPERTY Although NovaBiotics is proactive in performing early patentability and freedom-to-operate (FTO) searches on its applications, the Company may be unable to obtain or maintain patent protection for its IP, which could reduce demand for its product candidates. The Company presently has more than 40 patents pending worldwide for its proprietary technologies and product candidates. NovaBiotics’ success will depend in part on its ability to obtain and maintain patent protection for its proprietary technologies and product candidates and to prevent third parties from infringing its proprietary rights. In addition, changes in either patent laws or in interpretations of patent laws in the UK, U.S., and other countries may diminish the value of NovaBiotics’ IP or narrow the scope of its patent protection. Due to the length of time and expense associated with bringing new products to market, the dermatological and cosmeceutical industries place considerable importance on patent protection for new technologies, products, and processes. Accordingly, the Company expects to seek patent protection for its new proprietary technologies and some of its product candidates. The risk exists, however, that new patents may be unobtainable and that the breadth of the claims in a patent, if obtained, may not provide adequate protection for NovaBiotics’ proprietary technologies or product candidates, including Novexatin®, the Company’s leading drug candidate. While these risks are inherent with any IP, NovaBiotics believes that there is less of a risk with peptide technology, particularly the area in which the Company’s technology is focused. NovaBiotics also believes that the combination of the speed at which it has obtained grants as well as the rate at which the Company has developed its technology is attractive to potential partners. Moreover, companies competing against NovaBiotics may infringe upon or successfully avoid its IP rights through design innovation. To prevent infringement or unauthorized use, NovaBiotics may need to file infringement lawsuits, which can be both costly and time-consuming. Interference proceedings brought in the UK Intellectual Property Office or the U.S. Patent and Trademark Office may be necessary to determine whether the Company’s prospective patent applications or those of its collaborators are entitled to priority of invention relative to third parties. Litigation, interference, or opposition proceedings may result in adverse rulings and may result in substantial costs, and could be a distraction to NovaBiotics’ management. The Company may not be able to prevent misappropriation of its respective proprietary rights, particularly in countries where the laws may not protect its rights as fully as in the UK or U.S.


RISKS RELATED TO THE DEVELOPMENT OF PRODUCT CANDIDATES The Company or its partners will not be able to gain regulatory approvals for or commercialize select product candidates if its preclinical studies do not produce successful results or if its clinical trials do not demonstrate safety and efficacy in humans. Although successful thus far in delivering Novexatin® to the clinic, NovaBiotics and/or its potential partners must conduct extensive preclinical studies and clinical trials to demonstrate the safety and efficacy in humans of these product candidates prior to obtaining regulatory approval for the clinical development and eventual sale its pipeline product candidates. Preclinical studies and clinical trials are costly, time-consuming, and have uncertain outcomes. In addition, the regulatory approval procedures vary among countries and additional testing may be required in some jurisdictions. The Company and its partners’ success will depend in part on the success of its clinical trials that have not yet begun or for which data has not yet been received. As with any therapeutic candidate, failure of one or more of NovaBiotics’ current and future product candidates can occur at any stage of clinical testing. Nonetheless, NovaBiotics benefits from several advantages: (1) the lower attrition rates of anti-infectives during development compared to other classes of therapeutic compounds; and (2) insights into therapeutic success and safety offered by biologics such as peptides and an informed drug design process (predicted safety and known mode of action from outset) versus a more shot-gun approach of screening. If clinical trial difficulties and failures arise, the Company may not be able to establish co-development partnerships or licensing agreements and its product candidates may never be approved for sale or become commercially viable. RISKS RELATED TO NOVABIOTICS’ DEPENDENCE ON THIRD PARTIES FOR RESEARCH AND DEVELOPMENT AND MANUFACTURING NovaBiotics has no experience manufacturing its product candidates and relies on third-party manufacturers for its research and development efforts. The Company relies on specialist third-party manufacturers for the production of its product candidates for preclinical and clinical testing. For clinical testing, this must be to good manufacturing practice (GMP) standards. If NovaBiotics experiences problems with any of these suppliers, the manufacturing of the compounds it is developing could be delayed, which in turn could set back the Company’s preclinical and early clinical research development efforts. NovaBiotics’ risk management and standard operating procedures for supplier selection minimizes such risks wherever possible (e.g., selection of a manufacturer with more than one site and fully transferable processes) and its business interruption insurance also takes such risks into account. If third parties on whom NovaBiotics relies upon do not perform as contractually required or expected, the Company may not be able to commercialize its product candidates or obtain regulatory approval for those select product candidates requiring regulatory approval. The Company may depend on independent clinical investigators and contract research organizations (CROs) to conduct part or all of its clinical trials for product candidates that require such trials. CROs may also assist NovaBiotics in the collection and analysis of trial data. The investigators and CROs are not the Company’s employees, and NovaBiotics cannot control, other than by contract, the amount of resources, including time, which they devote to its product candidates. However, the Company is responsible for ensuring that each of its clinical trials is conducted in accordance with the general investigational plan and protocols for the trial that have been approved by regulatory agencies. Furthermore, regulatory agencies in Europe and the U.S. require NovaBiotics to comply with standards required for sponsors of activities performed to good clinical or manufacturing practices for conducting, recording, and reporting clinical trials and supporting activities to assure that data and reported results are credible and accurate and that the rights, integrity, and confidentiality of trial participants are protected. Extensions, delays, suspensions, or terminations of NovaBiotics’ clinical trials as a result of the performance of its independent clinical investigators and CROs will delay, and make more costly, regulatory approval for any product candidates that the Company may develop. NovaBiotics’ quality system, risk management system, and standard operating procedures for suppliers/partner CRO selection minimizes such risks wherever possible.


RISKS RELATED TO COMMERCIALIZATION NovaBiotics’ product development strategy is dependent on the formation of strategic alliances and/or out-licensing partnerships with appropriate pharmaceutical/biopharmaceutical entities for later-stage clinical and regulatory development, manufacture, and marketing. The Company is implementing a stepwise market penetration approach for the development of its product candidates. After advancing its candidates through preclinical or early-stage clinical development, the Company will likely seek a licensing or partnership agreement to continue development and commercialization. Revenue received from such alliances will be reinvested into pipeline development and growth of the technology base to create potential candidates for future revenue-generating alliances. Failure to establish a strategic alliance agreement or an out-licensing partnership for Novexatin® could have a material adverse effect on NovaBiotics’ business. RISKS RELATED TO EMPLOYEE MATTERS AND MANAGING GROWTH NovaBiotics may not be able to manage its business effectively if the Company is unable to attract and retain key personnel or advisors. NovaBiotics may not be able to attract or retain qualified management, scientific, and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical, and other businesses. If NovaBiotics is unable to attract and retain necessary personnel to accomplish its business objectives, the Company may experience constraints that could impede the achievement of its development objectives, its ability to raise additional capital, and its ability to implement its business strategy. In addition, NovaBiotics has scientific and clinical advisors who assist the Company in its product development and clinical strategies. The loss of such advisors could weaken or harm NovaBiotics’ ability to develop and commercialize its product candidates, and the Company may experience difficulty in attracting and retaining qualified advisors. However, NovaBiotics believes that Aberdeen, Scotland, is unusual regarding the accessibility of scientific talent.


Recent Events

Note: Unless otherwise stated, all monetary amounts are in U.S. dollars. At 11/02/2009, US$1.00 ≈ £0.61. An overview of NovaBiotics Ltd’s recent press releases and news features are provided below and on page 41. Greater details of these announcements and articles are provided on the Company’s website (www.novabiotics.co.uk) under Press and News. On October 1, 2009, NovaBiotics announced that the Phase IIa component of its first-in-man clinical

trial to assess the safety, tolerability, and pharmacodynamics of its topical fungal nail infection treatment, Novexatin®, was underway and proceeding well.

On September 9, 2009, NovaBiotics announced that Dr. Deborah A. O’Neil, the Company’s founder and chief scientific officer, was scheduled to present the science behind Novexatin® for the first time at the Interscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC) in San Francisco on September 12-16, 2009. The ICAAC is a leading event in the international anti-infectives industry and a showcase for novel antimicrobial technologies.

The Company also announced that it had secured £220,000 of grant funding from the Scottish Government (SMART funding), the Royal Commission for the Great Exhibition of 1851, and through a Knowledge Transfer Partnership (KTP) in partnership with the University of Aberdeen. NovaBiotics is expected to use the majority of the funding to advance the development of Novamycin™ (NP339), a treatment for life-threatening yeast and fungal infections, and to further expand the applications for the Company’s novel platform technology.

On September 1, 2009, NovaBiotics announced the close of and released data from its Phase I trial

of its two-part first-in-man clinical trials with Novexatin® in patients with mild to moderate onychomycosis. The data from this 12-patient trial demonstrated that Novexatin® could not be detected in plasma from any patients up to 16 hours after exposure to the drug and no adverse reactions were reported. The Company also announced recruitment for the subsequent 48-patient trial was nearly complete. This announcement was featured in The Scotsman (www.thescotsman.scotsman.com), the Press and Journal (www.pressandjournal.co.uk), and The Herald (www.theherald.co.uk).

On August 25, 2009, the Company announced the conclusion of its Phase I clinical study in patients

with mild to moderate onychomycosis to determine the safety and tolerability of Novexatin®.

On July 6, 2009, NovaBiotics announced that it received regulatory clearance from Germany’s Federal Institute for Drugs and Medical Devices and the Ethics Commission to commence its first-in-man clinical trials with Novexatin®. NovaBiotics also reaffirmed its plans to out-license Novexatin® to an appropriate pharmaceutical company for further clinical development, which the Company will likely pursue once it receives initial clinical data from these trials. This announcement was featured in The Scotsman, The Financial Times (www.ft.com), the Press and Journal, as well as on STV (Scottish Television) News (www.stv.tv).

On July 1, 2009, NovaBiotics’ directors announced that the Company had completed the second part

of its fundraising activities for the first half of 2009, meeting its financing target of £1.1 million for the period. NovaBiotics anticipated that its funding to date was sufficient to support the Company through early commercialization of Novexatin®. NovaBiotics also welcomed three Scottish investment syndicates to its shareholder family in addition to receiving further support from existing investors.

On May 18, 2009, Scottish Enterprise (www.scottish-enterprise.com), Scotland’s main government-

sponsored economic development agency, issued a press release featuring NovaBiotics Ltd. The article announced over 30 Scottish companies and organizations that were scheduled to be showcased at the 2009 BIO International Convention on May 18-21, 2009, in Atlanta, Georgia, and highlighted Scotland’s latest partnerships and cutting-edge drug discovery research, including NovaBiotics’ proprietary drug candidate, Novexatin®.


On March 28, 2009, NovaBiotics was featured in The Aberdeen Press and Journal, an Aberdeen, Scotland-based newspaper with daily readership of approximately 154,000. The article summarized NovaBiotics’ development strategy for Novexatin® as well as the Company’s recent attainment of £1.5 million in funding and announced that NovaBiotics had also identified suitable partners for manufacturing and marketing of Novexatin® following the completion of clinical trials.

On March 18, 2009, Professor Andy Porter, NovaBiotics’ non-executive director, was interviewed by

The Aberdeen Press and Journal about his career in the life science sector. On February 11, 2009, NovaBiotics received the UK BioIndustry Association’s Rising Star Award for

2009 at the Thistle Bioscience Forum, which is a venue for life science companies to meet and discuss collaborations, agreements, and new ventures. The Rising Star Award recognizes companies that demonstrate a clear vision for development as well as an analysis of their business model and technologies.

In February 2009, Mr. John K. Pool, NovaBiotics’ non-executive director, was interviewed about the funding of life science companies by www.talentscotland.com, a website managed and funded by the Scottish Enterprise. In the article, Mr. Pool asserted his belief that a solid management team is the key to surviving the current economic situation. In addition, Mr. Pool also expected life science companies coming into early revenue and those developing and producing medical devices to benefit from the economy.

In January 2009, NovaBiotics and its clinical plans for Novexatin® were featured in Issue 121 of

Young Company Finance (Scotland), an internet magazine that follows and reports on early-stage, high-growth companies in Scotland. The article summarized the Company’s development plans for Novexatin®, including its clinical initiatives as well as the desire to obtain partners for the commercialization of the product.

On September 25, 2008, an interview with Dr. O’Neil was published by the Gateway2investment (g2i) organization (www.g2i.org). G2i is an investment readiness program designed to maximize the success of London-based companies that seek to raise private investment.

In July 2008, NovaBiotics was featured in the Life Sciences section of Aberdeen City and Shire (www.aberdeencityandshire.com), a collaborative venture of public and private organizations in the Aberdeenshire area in the North East of Scotland.

On March 10, 2008, Dr. O’Neil and Professor Porter spoke at the University of Aberdeen’s bioscience careers event, which coincided with the UK’s National Science and Engineering Week—a 10-day celebration of science, engineering, and technology that stimulates roughly 3,500 events throughout the country.


Glossary Amphotericin B—An antifungal polyene antibiotic obtained from a strain of Streptomyces nodosus. The medicine is delivered via an injection into patients with progressive, potentially life-threatening fungal infections. Anti-Mycotic Therapy—A form of treatment that uses an agent to destroy or prevent the growth of fungi. Antimicrobial Peptides—Host defense peptides that are produced by all complex organisms. These peptides demonstrate a broad range of antiviral and antibacterial activities and modes of action. Aspergillosis—The name given to a wide variety of diseases caused by fungi of the genus Aspergillus. Azoles—A class of drugs used to treat fungal infections. Bioactive—A protein’s ability to function correctly after it has been delivered to the active site of the body (in vivo). Bioavailable—The extent to which a compound is available for intake by organisms. Biochemical—Of or relating to biochemistry, the study of chemical processes in living organisms. Biofilm—A collection of microorganisms that are surrounded by the slime they secrete and attached to either an inert or living surface. More than 99% of all bacteria live in biofilm communities. P. aeruginosa is a common biofilm bacterium that can infect animals with suppressed immune systems. Blastomycosis—Any of several infections of the skin or mucous membrane caused by Blastomyces. Candidemia—Bloodstream infection with Candida, a yeast-like fungus. Persons at high risk for candidemia include low-birth-weight babies, surgical patients, and individuals whose immune systems are deficient. Also called invasive candidiasis. Chronic Obstructive Pulmonary Disease (COPD)—A general term for diseases that are characterized by long-term or permanent narrowing of small airways (known as bronchi) connected to the lungs. Commensal—A relationship among two or more species in which one or both benefits from the other without causing harm. Cryptococcosis—A fungal infection characterized by nodular lesions that first appear in the lungs and then spread to the nervous system. Cystic Fibrosis—A recessive genetic disorder that affects the mucus lining of the lungs, leading to breathing problems and other difficulties. Dermatophytes—Fungi that can cause infection of the skin, hair, or nails due to their ability to utilize keratin. Diflucan® (Fluconazole)—An oral antifungal antibiotic that is used to treat or prevent infections caused by fungus. Drug-Resistant—The ability of bacteria and other microorganisms to withstand a drug to which they were once sensitive (and were once stalled or killed outright). Ethics Commission—An independent body based in Freiburg, Germany, which provides an expert review of clinical studies with human subjects that are in the planning stages.


Federal Institute for Drugs and Medical Devices—An independent federal authority under Germany’s Federal Ministry of Health that aims to continuously improve the safety of medicinal products. Fungicidal—Destroys or inhibits growth of fungi. Fungistatic—The ability to inhibit the growth of (but not kill) fungi. Gram-Negative—A classification of bacteria based upon its inability to take up a specific stain (dye) in the laboratory. Gram-Positive—Being or relating to a bacterium that retains the violet stain used in Gram’s method (a staining technique used to classify bacteria). Gram-Positive Cocci—Commensal organisms that cause pneumonia, septicemia, and skin infections. Although the majority of gram-positive cocci are susceptible to many antibiotics, several strains have developed resistance to the majority of currently available antimicrobials. Histoplasmosis—Disease due to a parasitic fungus (Histoplasma) that infects the skin, the ganglia, the bones, and the internal organs. Hydrophilicity—A qualitative term referring to the water-preferring nature of a species. Hydrophobic—Having little or no affinity for water. Impetigo—A bacterial skin infection that produces blisters or sores on the face, neck, and hands, among other areas of the body. Informed Drug Design—Believed to be a more tailored and efficient approach to drug design (versus screening, biology, and chemistry-led discovery processes) that uses predicted safety and known mode of action from outset. Invasive Candidiasis—A fungal infection that occurs when Candida (a yeast-like fungus) enters the bloodstream and then spreads throughout the body. Invasive Trichosporonosis—An uncommon but frequently fatal infection of immunocompromised patients caused by Trichosporon species. Itraconazole—An oral antifungal drug that is taken for cases of fungal nail disease. Meningoencephalitis—Inflammation of the brain and spinal cord and their meninges. Methicillin-Resistant Staphylococcus Aureus (MRSA)—A type of Staphylococcus aureus resistant to select antibiotics including methicillin and the more common antibiotics such as oxacillin, penicillin, and amoxicillin. MRSA incidence is on the rise in the U.S. and is recognized as a major community-acquired pathogen. Microbiological—Of or pertaining to microbiology, the science and study of microorganisms, including protozoans, algae, fungi, bacteria, and viruses. Minimum Inhibitory Concentration (MIC)—The maximum dilution of a product that can still inhibit the growth of a test microorganism. Mycologist—A botanist who specializes in the study of fungi. Necrotic—Relating to or affected by necrosis, the localized death of living cells (as from infection or the interruption of blood supply). New Drug Application (NDA)—The vehicle through which drug sponsors formally propose that the U.S. Food and Drug Administration approve a new pharmaceutical for sale and marketing in the U.S.


Non-Dermatophytes—Filamentous fungi that are commonly found in nature as soil saprophytes and plant pathogens. Onychomycosis—The medical name for nail and toenail fungus. Opportunistic Pathogens—Organisms that cause infections only when the host is weak or injured. These pathogens rarely infect patients who are otherwise healthy. Peptide—Any compound consisting of two or more amino acids, the building blocks of proteins. Persister—A term used to describe a cell state in which microorganisms are protected from all types of antimicrobial insults. Even when biofilms are treated for prolonged periods of time or with elevated microbial concentrations, a small fraction of the population persists. Perturbation—A disturbance of motion, course, arrangement, or state of equilibrium. Pityriasis—Any of several skin disorders characterized by shedding dry flakes of skin. Planktonic—Bacteria that are suspended or growing in a fluid environment versus those that grow while attached to a surface. Polymicrobial—Marked by the presence of several species of microorganisms. A polymicrobial infection is caused by more than one organism (in most cases a combination of bacteria and fungi). Psoriasis—A reddish, scaly rash that is often located over the surfaces of the elbows, knees, scalp, navel, genitals, buttocks, or around or in the ears. Radiochemical—Of or relating to radiochemistry, the chemistry of radioactive substances. Rosacea—A skin condition characterized by inflamed, red, oily, acne-prone areas. Seborrheic Dermatitis—A skin condition affecting the scalp, face, and trunk causing scaly, flaky, itchy, red skin. Step-change—A change that happens over a very short period of time that makes a significant difference to the size or value of something or the way in which something is done. Step change is different from incremental change, which occurs gradually over an extended period of time. Stepwise—Marked by or proceeding in steps. Synergistically—Working in concert to create an outcome that is greater than individual inputs. In the case of pathogens, bacteria, fungi, and viruses may work together to cause heightened levels of disease. Terbinafine—An oral antifungal drug used to treat cases of fungal nail infections. Thrush—A yeast infection that is characterized by whitish spots and ulcers on the membranes of the mouth and tongue. It is commonly found in infants or debilitated adults. Thrush can be painful and requires treatment with a prescription medication. Tinea Unguium—Fungal infection of the nails (especially toenails). Tinea Versicolor—A common fungal infection that causes discolored patches of the skin. Vfend® (voriconazole)—An antifungal agent that is available for intravenous infusion, oral administration, or oral suspension. Vfend® is indicated for use in the treatment of various fungal infections. White Piedra—A fungal infection caused by the yeast Trichosporon beigelii that forms light-colored nodules on the beard and mustache. Yeast—A type of single-celled fungus.


Intentionally Blank.

Executive Informational Overview

Jeffrey J. Kraws and Karen B. Goldfarb

Phone: (609) 306-2274 Fax: (609) 395-9339

Email: [email protected] Web: www.crystalra.com

Legal Notes and Disclosures: This report has been prepared by NovaBiotics Ltd (“NovaBiotics” or “the Company”) with the assistance of Crystal Research Associates, LLC (“CRA”) based upon information provided by the Company. CRA has not independently verified such information. In addition, CRA has been compensated by the Company in cash of thirty-eight thousand five hundred U.S. dollars and one hundred thousand Warrants/Options for its services in creating this report, for updates, and for printing costs. Some of the information in this report relates to future events or future business and financial performance. Such statements constitute forward-looking information within the meaning of the Private Securities Litigation Act of 1995. Such statements can be only predictions and the actual events or results may differ from those discussed due to, among other things, the risks described in NovaBiotics’ reports and press releases issued from time to time. The content of this report with respect to NovaBiotics has been compiled primarily from information available to the public released by NovaBiotics. The Company is solely responsible for the accuracy of that information. Information as to other companies has been prepared from publicly available information and has not been independently verified by NovaBiotics or CRA. Certain summaries of scientific activities and outcomes have been condensed to aid the reader in gaining a general understanding. For more complete information about NovaBiotics, the reader is directed to the Company’s website at www.novabiotics.co.uk. This report is published solely for information purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any state. Past performance does not guarantee future performance. Free additional information about NovaBiotics and its public filings, as well as free copies of this report, can be obtained in either a paper or electronic format by calling +44 (0)1224 711377.

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