Industry Report Healthcare - VMBL · 22-10-2007 · Industry Report Healthcare October 22, 2007...

Industry Report Healthcare

October 22, 2007

Two Names Worth Remembering

Recommendations: Allon Therapeutics Inc. Buy (S)

Transition Therapeutics Inc. Buy (S)

Catherine Bouchard, MSc, MBAHealthcare Analyst

(514) [email protected]

Catherine Bouchard, MSc, MBA Healthcare Analyst 514.350.2938 [email protected] October 22, 2007

Two Names Worth Remembering Investment Summary.........................................................................................................................................2

Allon Therapeutics Inc. .....................................................................................................................................3

Investment Thesis .........................................................................................................................................4

Company Profile............................................................................................................................................4

Objectives & Strategy....................................................................................................................................6

Competitive Analysis: Alzheimer’s Disease .................................................................................................6

Competitive Analysis: Schizophrenia ...........................................................................................................7

Competitive Analysis: MCI-CABG ................................................................................................................8

Management Profile......................................................................................................................................9

Recent Results ............................................................................................................................................10

Financial Forecast.......................................................................................................................................11

Valuation......................................................................................................................................................13

Risks ............................................................................................................................................................14

Financial Statements...................................................................................................................................15

Transition Therapeutics Inc. ..........................................................................................................................18

Investment Thesis .......................................................................................................................................19

Company Profile..........................................................................................................................................19

Objectives & Strategy..................................................................................................................................20

Competitive Analysis: Alzheimer’s Disease ...............................................................................................21

Competitive Analysis : Diabetes .................................................................................................................22

Management Profile....................................................................................................................................23

Recent Results ............................................................................................................................................24

Financial Forecast.......................................................................................................................................25

Valuation......................................................................................................................................................29

Risks ............................................................................................................................................................30

Financial Statements...................................................................................................................................31

Appendix I – Alzheimer’s Disease .................................................................................................................34

Appendix II – Schizophrenia...........................................................................................................................39

Appendix III – Diabetes....................................................................................................................................40

Appendix IV – Important Disclosures ...........................................................................................................41

Industry Report

2 Catherine Bouchard, MSc, MBA Healthcare Analyst 514.350.2938 [email protected] October 22, 2007

Investment Summary

Alzheimer’s disease (AD) affects millions of people worldwide and the prevalence is expected to increase considerably as the baby boomers age. Currently, only symptomatic drugs are approved by the FDA and their efficacy remains modest. Nevertheless, the AD market is currently estimated to be worth over US$3 billion. It should continue to experience solid growth over the next years driven by the growing elderly population, increased level of awareness, improved diagnostic tools, and introduction of new treatments. Therefore, we believe the AD market offers tremendous opportunities, especially for disease-modifying drugs that would cure or stop the progression of the disease. Numerous therapies are currently under development with a number of them targeting the beta-amyloid plaques, a major hallmark of AD.

We are initiating coverage on the following two companies in this report:

♦ Allon Therapeutics Inc., rated a Speculative Buy with a one-year share price target of $2.10, implying a total return of 108%. Allon develops drugs that treat neurodegenerative diseases. The company has three ongoing Phase II clinical trials for unmet medical needs: AD, schizophrenia-related cognitive impairment, and mild cognitive impairment associated with coronary artery bypass graft (MCI-CABG) surgery. Its AD drug candidate, AL-108, could obtain marketing approval by 2012 and be the first disease-modifying drug targeting both neurofibrillary tangles and beta-amyloid plaques. In addition, Allon has established scientific partnerships and has good cash reserves.

♦ Transition Therapeutics Inc., rated a Speculative Buy with a one-year share price target of $23.00, implying a total return of 130%. Transition is developing a disease-modifying therapy, AZD-103, that inhibits the formation of beta-amyloid plaques and potentially reduces AD progression. The company is also developing gastrin-based therapies for diabetes, a large and growing market. Transition should begin three Phase II clinical trials with its lead products in the next months.The company has established value-added partnerships with major pharmaceutical companies, and has significant cash reserves.

LastCompany TSX NASDAQ Rating* 10/22/2007 1-Yr Target Dividend ROR

Allon Therapeutics Inc. NPC - B (S) $1.01 $2.10 $0.00 108%Transition Therapeutics Inc. TTH TTHI B (S) $10.00 $23.00 $0.00 130%

*B (S) = Buy (Speculative)

Source: Bloomberg; Laurentian Bank Securities (LBS) estimates.

Exhibit 1 - Company Ratings And Recommendations

Ticker



Allon Therapeutics Inc. (NPC-T)

Company Profile

Allon Therapeutics (Allon) is a clinical-stage biotechnology company developing drugs that treat neurodegenerative diseases. The company’s compounds come from two technology platforms, which are neuroprotective proteins naturally formed in the brain.

Source: BigCharts.com

Ticker NPC-T Shares O/S (M) 59.0Rating Buy (S) Market Cap (M) $59.6Risk High Float O/S (M) 47.5Price $1.01 Float Value (M) $48.01-Yr Target $2.10 Avg Daily Volume (K) 41.1Dividend $0.00 Control Blocks 19.5%1-Yr ROR 108% Voting -52-Wk High-Low $1.80-$0.80 Equity -Next Reporting Management 7.0%Valuation DCF; 35% WACC

Fully Diluted EPS (December 31 Year End)Q1 Q2 Q3 Q4 Annual

F2006 ($0.05) A ($0.06) A ($0.06) A ($0.09) A ($0.26)F2007 ($0.06) A ($0.05) A ($0.04) ($0.05) ($0.20)F2008 ($0.05)F2009 ($0.11)

EBITDA (millions)

F2006 ($1.7) A ($1.9) A ($1.9) A ($3.5) A ($9.0)F2007 ($2.8) A ($2.5) A ($2.8) ($3.7) ($11.8)F2008 ($4.3)F2009 ($7.9)Source: Company reports; Thomson One; LBS estimates.

Market Data

Dec-07

Buy (S) – Target Price: $2.10

We are initiating coverage on Allon with a Speculative Buy rating and a one-year share price target of $2.10. This implies a total return of 108%. Our target is based on a DCF using a WACC of 35%. We have a share risk rating of High. We highlight the following:

♦ Opportunities in the neurodegenerative diseases market: Neurological illnesses affect more than 50 million Americans, including 5 million with Alzheimer’s disease (AD), 2 million with schizophrenia, and over 10 million with stroke or traumatic brain injury. However, the medications currently approved to treat these diseases only manage their symptoms.

♦ Healthy pipeline of products: Allon is developing disease-modifying therapies for AD, schizophrenia-related cognitive impairment, and mild cognitive impairment associated with coronary artery bypass graft (MCI-CABG) surgery, a stroke-like condition. The company is currently conducting three Phase II clinical trials.

♦ Strategic partnerships: Allon has established and continues to seek value-added partnerships with pharmaceutical companies and research institutes to benefit from existing expertise, sales and distribution channels, as well as to fund its activities. Current collaborators include the National Institute of Mental Health, the Alzheimer's Drug Discovery Foundation, and the Michael J. Fox Foundation for Parkinson’s Research.

♦ Strong scientific team: Allon is led by a CEO and a CFO with significant experience in the healthcare industry, supported by a team of PhDs with a strong background in research and drug development. As of October 11, 2007, founding directors and management owned 7.0% of the common shares outstanding and only one institution, NDI Capital, owned more than 10% of the issued shares.

♦ Months of cash: During Q2/2007, Allon completed a $15.7 million bought deal equity financing. At June 30, 2007, the company had cash and short-term investments of $19.2 million. With a cash burn rate of about $0.9 million per month, we believe Allon has the resources to fund its operations until 2009.



Allon Therapeutics Inc.

Buy (S), Target $2.10 We are initiating coverage on Allon Therapeutics with a Speculative Buy rating and a one-year share price target of $2.10. This target implies a 108% return from current levels and is based on a DCF model. We have a share risk rating of High.

Investment Thesis

Healthy Pipeline In A Large And Unsatisfied Market

Allon is well positioned to benefit from the opportunities in the large neurodegenerative diseases market. The company has three Phase II clinical programs for unmet medical needs: Alzheimer’s disease (AD), schizophrenia-related cognitive impairment, and mild cognitive impairment (MCI) associated with coronary artery bypass graft (CABG) surgery. In addition, Allon has established scientific partnerships and has good cash reserves.

Company Profile

Small Peptides Derived From Two Platforms

Allon Therapeutics Inc. develops drugs that treat neurodegenerative conditions that impact the central nervous system. Allon’s therapies consist of small peptides all derived from two neuroprotective proteins naturally formed in the brain: the activity dependent neuroprotective protein (ADNP) and the activity dependent neurotrophic factor (ADNF). ADNP and ADNF are regulated by the vasoactive intestinal peptide (VIP) and secreted by the glial cells, which support and nourish the neurons (Exhibit 2).

Source: Gozes & Brenneman.

Exhibit 2 - Allon's Neuroprotective Platforms



Well-Defined Mechanism Of Action

Allon’s compounds have a unique fundamental mechanism. They have been shown to cross the blood brain barrier, interact with brain-specific tubulin, reduce tau hyperphosphorylation, and repair and stabilize microtubules. As a result, they restore axonal transport of nutrients and chemical signals between nerve cells. They could therefore protect neurons against various neurodegenerative conditions. The company currently has two drugs in clinical trials for three diseases (Exhibit 3), and multiple ongoing preclinical programs.

♦ AL-108 is an intranasally formulated, eight amino acid neuroprotective peptide (NAP) derived from the ADNP platform. AL-108 is currently in Phase II clinical studies for amnestic MCI as part of Allon’s AD program, and for schizophrenia-related cognitive impairment.

♦ AL-208 is an intravenously delivered form of NAP. It is currently in a Phase II clinical trial for MCI-CABG surgery, an acute neurodegenerative disease.

♦ AL-408 is a D-amino acid derivative of AL-108. It has demonstrated neuroprotective effects in animal models of AD and fetal alcohol syndrome. This compound has also shown oral bioavailability, which would make it suitable for chronic neurodegenerative diseases. Al-408 is currently in preclinical development.

♦ AL-209 is a nine amino acid peptide (SAL) derived from the ADNF platform. It has demonstrated neuroprotective effects in animal models of AD, fetal alcohol syndrome and amylotrophic lateral sclerosis (ALS). This product is also in preclinical development.

♦ AL-309 is a D-amino acid derivative of AL-209. It has shown efficacy and oral bioavailability in animal models of AD and fetal alcohol syndrome. Preclinical studies have confirmed that AL-309 penetrates the brain and that effective concentrations can be detected for extended periods of time. AL-309 is in preclinical development, with an Investigational New Drug (IND) application scheduled in 2008.

Date MilestonesAL-108 (Amnestic MCI / AD)

Q1/2007 Phase II initiated10/2/2007 Enrolment completedQ1/2008 Phase II resultsQ2/2008 Second Phase II initiationH2/2008 Partnership agreement2009 Phase III initiation

AL-108 (Schizophrenia-related cognitive impairment)2/23/2007 IND submitted9/12/2007 Phase II initiatedH2/2008 Phase II results

AL-208 (MCI-CABG)H1/2008 Phase II results2008 Partnership agreementSource: Company reports; LBS estimates.

Exhibit 3 - Allon Major Milestones



Objectives & Strategy

Ground-Breaking Therapies For Unmet Medical Needs

Allon’s objective is to become a leader in the development and commercialization of neuroprotective treatments for diseases and injuries affecting the central nervous system. The company’s strategies include:

♦ Targeting large and unsatisfied markets: Allon develops innovative, disease-modifying therapeutics targeting multi-billion dollar markets of unmet medical needs. The company is focusing on chronic and acute neurodegenerative diseases including AD, schizophrenia, neuropathy, stroke, traumatic brain injury (TBI) and glaucoma.

♦ Maintaining a healthy pipeline: Allon’s neuroprotective platforms are generating numerous peptide programs. The company already has five compounds in preclinical and clinical development and their mechanism of action allows their use in multiple diseases. It is also part of the company’s strategy to broaden its pipeline by in-licensing or acquiring additional technology.

♦ Establishing strategic partnerships: Allon has established and continues to seek value-added partnerships with pharmaceutical companies and research institutes to benefit from existing know-how, sales and distribution channels, as well as to fund its activities. Allon’s tactic is to advance its drug candidates through Phase I and Phase II clinical studies prior to a partnership. The company’s current collaborators include the National Institute of Mental Health, the Alzheimer's Drug Discovery Foundation, and the Michael J. Fox Foundation for Parkinson’s Research.

♦ Developing a strong patent portfolio: Allon actively protects its core technology and its drug candidates by maintaining existing patent protection and applying for new patents in key countries. The company has currently 32 granted patents and pending claims for 12 patent families worldwide.

Competitive Analysis: Alzheimer’s Disease

First AD Therapy Targeting Tangles

AD currently affects about 5 million Americans; with this number expected to increase significantly in the next decades due to demographic changes (Appendix I). However, there is still no effective treatment for AD. Numerous therapies are in clinical development but we believe that AL-108 has significant advantages over them including:

♦ Innovative disease-modifying therapy: Five medications have been approved by the FDA to treat the symptoms of AD but they do not cure the disease. AL-108 is the most advanced AD program in the world targeting neurofibrillary tangles, a major hallmark of the disease.

♦ Robust preclinical validation: AL-108 is the first product to show a significant reduction in levels of both beta-amyloid and phosphorylated tau. The drug was also shown to increase learning and memory capacities in rats with induced AD (Exhibit 4).



Source: Company reports.

Exhibit 4 - AL-108 Alzheimer's Memory Loss Protection

♦ Promising Phase I results: Results from a single ascending dose Phase Ia and a 7-day multiple ascending dose Phase Ib demonstrated that AL-108 was safe and well tolerated in healthy elderly adults. In addition, the pharmacokinetic profile of AL-108 supports its long-term use, an important benefit since AD can last 3 to 20 years.

♦ Well-designed Phase II clinical trial: The ongoing Phase II is a double-blind, randomized, placebo-controlled, two-dose study to evaluate the effect of AL-108 on cognitive function after 12 weeks of intranasal administration. Through 15-20 US sites, Allon completed enrolment of 150 patients with amnestic MCI aged 55 to 85 years. These patients experience substantial memory loss, have neurofibrillary tangles in their brain, and are at high risk of developing AD. Currently, there is no FDA-approved treatment for MCI. Because patients with amnestic MCI have better cognitive function than patients with AD, more tests can be performed during the clinical studies. Thus, the objective of this trial is to get as much data as possible to help design a larger, more focused Phase II trial with about 350 patients. Results are expected in Q1/2008.

Competitive Analysis: Schizophrenia

First Disease-Modifying Drug For Schizophrenia

Schizophrenia currently affects about 2 million Americans; with more than 60% suffering from cognitive impairment (Appendix II). Available medications are successful in treating positive symptoms, but have limited capacity in treating negative and cognitive symptoms. As a result, a number of drugs targeting cognitive deficits are currently in clinical development, the majority being in Phase II. We believe that AL-108 has noteworthy competitive advantages including:

♦ Disease-modifying therapy: Scientific literature suggests that hyperphosphorylation of tau and cytoskeletal alterations in neurons are an underlying cause of schizophrenia and thus, a potential therapeutic target. By reducing tau hyperphosphorylation and repairing microtubules, AL-108 could treat cognitive deficits and be the first disease-modifying therapy for schizophrenia.

♦ Well-designed Phase II clinical trial: In September 2007, Allon started enrolment in a Phase II clinical trial to evaluate AL-108 as a treatment for cognitive impairment in schizophrenia. This double-blind, randomized, placebo-controlled study is being conducted at eight US sites. It involves daily intranasal administration of AL-108 to 60 clinically stable



schizophrenia patients over a period of 12 weeks. The trial will evaluate the effect of AL-108 on cognitive function (using the MATRICS tests) and brain structure (using imaging techniques). Results are expected in H2/2008. A larger Phase II clinical trial should follow.

♦ Important partnerships: The Phase II trial is conducted by the National Institute of Mental Health – Treatment Units for Research on Neurocognition and Schizophrenia (TURNS). As a result, no R&D expenses are incurred by Allon for this study. It is also supported by the National Association for Research in Schizophrenia and Affective Disorders (NARSAD).

Competitive Analysis: MCI-CABG

Innovative Treatment For Acute Neurodegenerative Disorders

Coronary artery disease is the most common type of heart disease and a leading cause of death in the US. Treatments include lifestyle changes, medicines, and special procedures such as angioplasty and CABG surgery. In the US, about 500,000 CABG surgeries are performed every year, and about 800,000 worldwide. In 2005, the global CABG device market was valued at over $560 million. Cognitive impairment following CABG surgery is a well-recognized problem. About 53-79% of CABG patients develop MCI immediately after surgery; with 10-30% still affected after six months. The causes of MCI-CABG are not well understood but it seems to be a multifactorial problem. Risk factors include demographic, medical history, and the type of surgery (traditional vs. off-pump). There is currently no treatment available for MCI-CABG. AL-208’s competitive advantages include:

♦ Innovative therapy: AL-208 was shown to protect against loss of function following a single intravenous administration in animal models of ischemic stoke and TBI. If proven to be effective in humans, it could represent a major breakthrough in treating several acute neurodegenerative diseases.

♦ Safe and well tolerated: Results from a double-blind, placebo-controlled, multiple ascending dose Phase Ib confirmed that AL-208 was safe and well tolerated in both healthy elderly adults and type I and II diabetic subjects.

♦ Well-designed Phase II clinical trial: To study the human efficacy of AL-208 in acute neurodegenerative diseases, Allon is recruiting patients with MCI-CABG, a stroke-like condition, because doctors know when the “stroke” happens and can control patient variability. Allon is conducting a randomized, placebo-controlled, single-dose study to determine the impact of AL-208 on approximately 200 patients. The drug is administered intravenously pre-pump (during traditional CABG surgery) and its impact on cognitive function is measured using standard cognitive tests 14-21 days post surgery. The trial is being conducted at approximately 30 sites in the US and Canada. We note that enrolment is slower than expected due to the conservative trial design. Results are expected in H2/2008.



Management Profile

Strong Scientific and Management Teams

As of October 11, 2007, founding directors and management owned 7.0% of the common shares outstanding (Exhibit 5). Many of them have been at the company for several years and we feel that their interests are aligned with those of the shareholders. Key executives are listed below:

♦ Gordon C. McCauley - President and CEO: Mr. McCauley was appointed CEO of Allon in April 2005. He is a co-founder, and the former President and COO of Neuro Discovery Inc. (now NDI Capital). Previously, he led the development of two Canadian healthcare companies. Mr. McCauley has also been a senior sales and public affairs executive for a Canadian multinational energy company and served in a staff capacity to two Prime Ministers. Mr. McCauley serves on the Board of Hallmark Insurance and BioTalent Canada.

♦ Matthew J. Carlyle, CFA - CFO: Mr. Carlyle is the former Director of Finance at Neuro Discovery Inc., which he helped to found in 2001. Previously, he has served in corporate finance and development roles for a number of public and private early-stage life science and technology companies, and has been involved in a number of financings.

♦ Illana Gozes, PhD - Chief Scientific Officer: Prof. Gozes is a founder of Allon and Professor of Clinical Biochemistry. She has the Lily and Avraham Gildor Chair for the Investigation of Growth Factors at Tel Aviv University (TAU), where she heads the Dr. Diana and Zelman Elton (Elbaum) Laboratory for Molecular Neuroendocrinology. She is also Director of the Adams Super Center for Brain Studies and The Edersheim Levi-Gitter fMRI Institute. Prof. Gozes serves as a member of several university committees and is currently the Editor-in Chief of the Journal of Molecular Neuroscience.

♦ Anthony W. Fox, PhD - Advisor, Clinical Development and Regulatory Affairs: Prior to Allon, Dr. Fox was VP Drug Development and Regulatory Affairs at Cypros Pharmaceuticals. He was also Director of Cardiovascular and Anaesthesia clinical research at Glaxo, and Group Leader at Procter and Gamble.

♦ Bruce H. Morimoto, PhD - VP, Drug Development: Prior to Allon, Dr. Morimoto was Director of Drug Development at NeuroMed Technologies. He has also held positions as the Director of Business Development for Phoenix International Life Sciences, Director of R&D and Director of Drug Discovery at AMUR Pharmaceuticals, and Program Director at MDS Pharma Services. He has received the Sigma Kappa Foundation Alzheimer's Research Award.

♦ Karole A. Sutherland - VP, Clinical Operations: Ms. Sutherland has more than 30 years of experience in the healthcare industry, including 17 years at QLT Inc. where she was Director of Clinical Operations.

♦ Annette Kleiser, PhD - VP, Business Development: Dr. Kleiser is the former VP of Licensing at Epigenomics in Seattle Washington, where she was leading a team of professionals who conducted market research, identified potential collaboration partners, and completed the execution of licenses. Prior to Epigenomics, Dr. Kleiser was the Senior Licensing Manager with Amgen Inc.



The shares of Allon are widely held (Exhibit 5). As of October 11, 2007, only NDI Capital owned more than 10% of the issued shares. Other institutions include IG Investment Management, AEGON Capital, RBC Asset Management, Stone & Co, and mutual funds such as Northwest Mutual Funds.

Retail35.8%

Other institutions24.2%

Lions Capital5.2%

Deans Knight Capital8.2%

NDI Capital19.5%

Insiders7.0%

Source: Bloomberg; Thomson One.

Exhibit 5 - Allon Major Shareholders

Recent Results

Increased Net Loss Due To Larger R&D Expenditures

On June 30, 2007, Allon reported results for the second quarter of 2007; as had been expected, the company’s net loss was larger YOY. Highlights of the quarter include:

♦ EBITDA declined to -$2.5 million in Q2/2007 from -$1.9 million in Q2/2006. Allon is an R&D focused company and thus, does not generate any sales. The reduction in EBITDA is partly attributable to higher R&D spending (27% increase YOY). During the second quarter, Allon continued to advance two unpartnered Phase II clinical trials with AL-108 and AL-208. SG&A expenses were also higher in Q2/2007 (22% YOY) due to the increase in corporate and business developments. We note that Allon suffered from foreign exchange rate fluctuations as it lost -$0.4 million in translation (106% increase YOY).

♦ Net loss was -$2.6 million (-$0.05 per share) in Q2/2007 compared to -$2.0 million ($0.06 per share) in Q2/2006. From January to May 2007, Allon’s shares have outperformed the Canadian healthcare sector and the S&P/TSX index (Exhibit 6). On March 9, 2007, the stock closed at $1.42, a high since April 2002. However, since the beginning of June, the stock has traded slightly under the S&P/TSX Index.

♦ During Q2/2007, Allon completed a $15.7 million bought deal equity financing. At June 30, 2007, the company had cash and short-term investments of $19.2 million. With a cash burn rate of about $0.9 million per month, we believe Allon has the resources to fund its operations until 2009.



0.0

0.5

1.0

1.5

2.0

2.5

Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07

S&P/TSX S&P/TSX Health Care Allon

Exhibit 6 - Relative Stock Price Performance

Source: Bloomberg; LBS.

Financial Forecast

Al-108 Driving Revenue Growth

AL-108 could obtain marketing approval by 2012E and be the first disease-modifying drug targeting neurofibrillary tangles, a classic hallmark of AD. This could translate in impressive revenue for the company. Our revenue forecast includes the following assumptions (Exhibit 7):

♦ The AD market is large and unsatisfied. There are more than 10 million people suffering from AD in the US and Europe and the prevalence of the disease is expected to increase in the coming decades (Appendix I). Available medications do not cure the disease; they only manage its symptoms. Drugs in development also focus on symptoms or, in a few cases, on inhibiting beta-amyloid plaque formation. AL-108 could be the first AD-modifying therapy targeting tangles and it could be given in combination with a beta-amyloid inhibitor. Given its competitive advantages, we believe that Allon could attain a market share of 5.5% in 2016E.

♦ If proven to be safe and effective, we believe AL-108 could be priced significantly higher than available medications. We forecast a 50% premium to the current annual cost of AD medications, which is approximately $1,825 according to the Alzheimer Society of Canada. We anticipate an annual growth rate of 5% based on an AARP Public Policy Institute study, which demonstrated that the average annual percentage change in manufacturer price for anti-dementia agents is higher than inflation (6% in 2006).

♦ Allon should establish a strategic partnership in H2/2008. We believe that Allon should be successful in signing a licensing agreement with a large healthcare company to support the clinical development and marketing of AL-108. We therefore assume an upfront payment of $10 million in 2008E, milestone payments ($10 million upon Phase III initiation, $40 million upon Phase III results, and $80 million upon marketing approval) as well as royalties (15%) on future product sales (Exhibit 7).

♦ Contributions from other clinical programs have not been included. If approved for AD, we believe AL-108 should be the main value driver of the company. Although we think AL-208 could generate substantial revenue if approved for stroke and TBI, more clinical results are needed to estimate the potential price and market penetration of this product.



2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016EMilestone payments ($M) 0.0 10.0 10.0 0.0 40.0 80.0 0.0 0.0 0.0 0.0RoyaltiesPrevalence of AD in US/Europe (M) 10.5 11.0 11.5 12.0 12.5 13.0 13.5 14.0 14.5 15.0Market penetration of AL-108 0.0% 0.0% 0.0% 0.0% 0.0% 1.0% 2.5% 3.5% 4.5% 5.5%# of patients on AL-108 0 0 0 0 0 130,000 337,500 490,000 652,500 825,000Average price per patient ($) 2,738 2,874 3,018 3,169 3,327 3,494 3,669 3,852 4,045 4,247AL-108 revenue ($M) 0.0 0.0 0.0 0.0 0.0 454.2 1238.1 1887.4 2639.1 3503.6NPC royalties 15% 15% 15% 15% 15%NPC revenue ($M) 0.0 0.0 0.0 0.0 0.0 68.1 185.7 283.1 395.9 525.5Total revenue ($M) 0.0 10.0 10.0 0.0 40.0 148.1 185.7 283.1 395.9 525.5Source: LBS estimates.

Exhibit 7 - Revenue Forecast For AL-108

Allon should incur significant R&D expenditures until 2011E. The company should initiate its Phase III studies with AL-108 and AL-208 by 2009E, and continue to advance its other preclinical programs. In addition, SG&A expenses should increase due to corporate development and investor relations activities.

Allon should not have income taxes payable before 2012E. At December 31, 2006, Allon had non-capital losses carried forward of $10.1 million in Canada and $10.5 million in US, which can be used to reduce future taxable income.

The net loss is expected to increase in the next quarters. However, we believe the company should generate positive net earnings beyond 2010E due to potential milestone payments and royalties from partners (Exhibit 8).

-1000

100200300400500600

2005

2006

2007

2008

E

2009

E

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

($Mi

llions

)

Exhibit 8 - Allon Net Earnings Outlook

Source: Company reports; LBS estimates.

Free Cash Flow Positive By 2011E

We do not expect any significant capital expenditure in the upcoming years. Allon is seeking to establish value-added partnerships to support the clinical development, manufacturing, distribution and sales of its products. We believe the company will be free cash flow positive by 2011E.



At June 30, 2007, Allon had cash and short-term investments of $19.2 million. With increased R&D expenditures due to Phase III studies, no marketed products before 2012E, and no milestone payments in 2010E, Allon’s cash burn rate should reach $1.6 million per month in 2010E. We believe the company will need additional financing by the end of 2009E to sustain its activities. Hence, we assume a $25 million equity financing during that year.

Valuation

Target of $2.10, Total Return of 108 %

We rate the shares of Allon a Speculative Buy with a one-year share target price of $2.10. This target implies a total return of 108%. It is based on a DCF using a WACC of 35% (Exhibit 9) to take into account the risks associated with a Canadian company that has three drugs in early-stage development, no major commercial partners, a very small capitalization and a low trading volume. In our valuation, we have used a cash flow growth rate to infinity of 10%.

Term.2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E Year

EBIT(1-tax rate) (12.2) (4.6) (8.1) (22.2) 14.7 88.6 101.6 163.7 235.8 318.8 351.5+ Depreciation 0.4 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2+ Deferred taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0- Capex 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2- Additions to W/C 0.5 (0.3) (0.1) (0.5) (0.1) 0.7 0.9 1.6 3.4 3.7 5.8= FCFF (12.4) (4.1) (7.9) (21.6) 14.9 88.0 100.8 162.2 232.4 315.1 345.8

Terminal value 1,544.4PV of equity 124.7 = (9.2) (2.2) (3.2) (6.5) 3.3 14.5 12.3 14.7 15.6 15.7 69.6

- BV net debt 0.0- BV prefs 0.0- Options/Warrants 0.9= PV of equity 123.8/ Share O/S 59.0= Equity value per share 2.10 Source: LBS estimates.

Exhibit 9 - Valuation

$ (Million)

25% 50% 75%$1.70 $2.10 $2.50

$0 $140 $200$1.60 $2.10 $2.40

10% 15% 20%$1.25 $2.10 $2.95

30% 35% 40%$3.50 $2.10 $1.30

* All other things being equalSource: LBS estimates.

Equity value per share

Price premium on AL-108

Milestone payments for AL-108 ($M)

Royalties for AL-108

Exhibit 10 - Sensitivity Analysis*




Discount rate



Risks

Clinical And Regulatory Risks

Allon is an R&D focused company with two products in Phase II clinical trials for three diseases. It is not possible to predict, based upon preclinical and early clinical data, whether these drugs will prove to be effective in humans and beyond that, whether the company will obtain regulatory approval.

Financial Risk Allon has not realized any profit since inception. The company has sustained its activities through equity financings, collaborative agreements, research tax credits and grants. In the next four years, Allon expects to incur substantial R&D and SG&A expenses without generating significant revenues. Therefore, its financial health will greatly depend upon the capacity of Allon’s executives to raise additional financing or to establish strategic partnerships that will include milestone payments.

Commercial Risks If a drug is ultimately approved for sale, there is no assurance that it will result in significant revenues. Future profitability will depend upon different factors including:

♦ Allon’s capacity to manufacture and market its products: Allon could decide to develop both manufacturing capacities and a direct sales force. Another option would be to establish a partnership and benefit from existing know-how, and distribution and sales channels. Both strategies have intrinsic risks and there is thus no assurance that the company will successfully penetrate the market and generate sales.

♦ Allon’s ability to face competition: Several companies are developing new drugs for the treatment of neurodegenerative diseases. Some of these competitors have greater resources than Allon and may market therapies that would overshadow Allon’s competitive advantages.

♦ Allon’s capacity to protect its intellectual property: The company relies on patents to protect its two platforms and the peptides derived from them. However, there is no assurance that the company is adequately protected from misappropriation by another company.

♦ Reimbursement: There is no assurance that government and insurance reimbursements will be available for Allon’s therapeutics.

♦ Product liability: Allon is subject to the risk that it will incur product liability claims. No assurances can be given that the insurance coverage limits of the company are adequate to protect it against product liability claims that may arise.



Financial Statements

Fiscal Year Ending December 31($Millions, except per share amounts) 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E

Revenue 0.0 0.0 0.0 10.0 10.0 0.0 40.0 148.1 185.7 283.1 395.9 525.5Cost Of Sales 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net Research & Development Expenses 5.0 6.7 8.7 11.2 14.0 17.5 20.1 22.1 23.2 24.4 25.6 26.9General & Administrative Expenses 1.5 2.0 2.5 3.2 3.9 4.5 5.0 5.5 6.0 6.6 7.3 8.0Stock-Based Compensation Expense 0.1 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Foreign Exchange Loss (Gain) 0.1 0.1 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0EBITDA (6.7) (9.0) (11.8) (4.3) (7.9) (22.0) 14.9 120.6 156.5 252.1 363.0 490.7

Amortization 0.5 0.6 0.4 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2Net Interest Expense (Income) (0.2) (0.3) (1.2) (1.5) (1.4) (3.0) (2.9) (10.2) (22.7) (41.2) (72.5) (120.0)Special Items (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0EBT (7.0) (9.3) (10.9) (3.1) (6.7) (19.2) 17.7 130.5 179.0 293.1 435.2 610.4

Current Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 34.4 62.6 102.6 152.3 213.6Future Tax (1.5) (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net Earnings (5.5) (9.2) (10.9) (3.1) (6.7) (19.2) 17.7 96.0 116.3 190.5 282.9 396.8

After-Tax (Addback) Of Special Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net Earnings Before Special Items (5.5) (9.2) (10.9) (3.1) (6.7) (19.2) 17.7 96.0 116.3 190.5 282.9 396.8

Dil. EPS From Cont. Op. Before Sp. Items ($0.19) ($0.26) ($0.20) ($0.05) ($0.11) ($0.27) $0.20 $1.08 $1.31 $2.14 $3.18 $4.45Diluted EPS ($0.19) ($0.26) ($0.20) ($0.05) ($0.11) ($0.27) $0.20 $1.08 $1.31 $2.14 $3.18 $4.45

Weighted Average S/O - Basic (M) 29.2 35.0 53.6 59.0 62.1 71.5 71.5 71.5 71.5 71.5 71.5 71.5Weighted Average S/O - Diluted (M) 29.2 35.0 53.6 59.0 62.1 71.5 88.6 88.7 88.8 88.9 89.0 89.1

Income Statement StatisticsRevenue Growth nm nm nm nm 0% nm nm 270% 25% 52% 40% 33%EBITDA Growth nm nm nm nm 83% 178% nm 708% 30% 61% 44% 35%Net Earn. From Cont. Op. B. Sp. Items Growth nm nm nm nm 120% 184% nm 443% 21% 64% 48% 40%Dil. EPS From Cont. Op. B. Sp. Items Growth nm nm nm nm 109% 147% nm 443% 21% 64% 48% 40%

Gross Margin (Includes D&A) nm nm nm 100% nm nm 100% 100% 100% 100% 100% 100%EBITDA Margin nm nm nm -43% nm nm 37% 81% 84% 89% 92% 93%EBT Margin Before Special Items nm nm nm -31% nm nm 44% 88% 96% 104% 110% 116%Net Margin From Cont. Op. Before Sp. Items nm nm nm -31% nm nm 44% 65% 63% 67% 71% 75%

Tax Rate 0% 0% 0% 0% 0% 0% 0% 26% 35% 35% 35% 35%


Exhibit 11 - Allon Therapeutics Inc. Income Statement (F2005-2016E)



Financial Statements (continued)


AssetsCash & Cash Equivalents 0.0 10.4 1.0 5.3 34.1 15.3 32.9 28.2 43.5 32.4 0.0 0.0Short-Term Investments 9.5 0.0 12.7 5.6 0.0 0.0 0.0 100.0 200.0 400.0 800.0 1200.0Accounts Receivable 0.1 0.2 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1Inventories 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 0.1 0.3 0.2 0.2 0.4 0.2 0.4 1.4 2.5 4.4 8.2 12.2Total Current Assets 9.7 10.8 14.1 11.4 34.9 16.0 33.9 130.3 246.9 437.7 809.2 1213.3

Property, Plant & Equipment 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2Intangible Assets 7.1 6.6 6.4 6.5 6.6 6.7 6.8 6.9 7.0 7.1 7.2 7.3Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Non-Current Assets 7.2 6.6 6.4 6.5 6.7 6.8 6.9 7.0 7.1 7.2 7.3 7.4

Total Assets 16.9 17.5 20.6 17.9 41.6 22.8 40.9 137.3 254.0 444.9 816.5 1220.7

Liabilities & Shareholders' EquityBank Indebtedness 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 88.3 95.3Accounts Payable & Accrued Liabilities 1.1 1.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0 4.4Long-term Debt Due Within One Year 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Current Liabilities 1.1 1.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 92.3 99.8

Long-Term Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Non-Current Liabilities 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Liabilities 1.3 1.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 92.3 99.8

Shareholders' EquityCapital Stock 27.0 36.4 50.9 50.9 80.9 80.9 80.9 80.9 80.9 80.9 80.9 80.9Additional Paid-In Capital 0.9 1.1 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3Retained Earnings (Deficit) (12.3) (21.5) (32.4) (35.5) (42.2) (61.4) (43.7) 52.3 168.7 359.2 642.1 1038.8Total Shareholders' Equity 15.6 16.0 19.7 16.7 39.9 20.8 38.4 134.5 250.8 441.3 724.2 1121.0

Total Liabilities & Shareholders' Equity 16.9 17.5 20.6 17.9 41.6 22.8 40.9 137.3 254.0 444.9 816.5 1220.7

Balance Sheet StatisticsNet Total Debt/Equity 0% -65% -5% -32% -85% -74% -86% -21% -17% -7% 12% 9%Net Total Debt/Capital 0% -65% -5% -32% -85% -74% -86% -21% -17% -7% 11% 8%Net Total Debt/LTM EBITDA 0.0x 0.3x 0.5x 0.7x 2.5x 1.1x (1.6x) (0.3x) (0.2x) (0.2x) 0.1x 0.2x EBIT Coverage 33.4x 35.9x 9.9x 3.0x 5.8x 7x (5.0x) (11.8x) (6.9x) (6.1x) (5.0x) (4.1x)

ROE (Annualized) -134% -280% -51% -18% -26% -81% 48% 78% 49% 46% 41% 37%Book Value $0.47 $0.35 $0.33 $0.28 $0.56 $0.29 $0.54 $1.88 $3.51 $6.17 $10.13 $15.68


Exhibit 12 - Allon Therapeutics Inc. Balance Sheet (F2005-F2016E)





OPERATING ACTIVITIESNet Income (Loss) For The Year (5.5) (9.2) (10.9) (3.1) (6.7) (19.2) 17.7 96.0 116.3 190.5 282.9 396.8Non-Cash Items:

Amortization 0.5 0.6 0.4 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2Stock-Based Compensation 0.1 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Future Income Taxes (1.5) (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Special Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Operating Cash Flow (6.3) (8.6) (10.4) (2.8) (6.5) (19.0) 17.9 96.3 116.6 190.8 283.1 397.0

Decrease (Increase) In Non-Cash WC 0.7 0.1 (0.5) 0.3 0.1 0.5 0.1 (0.7) (0.9) (1.6) (3.4) (3.7)Net Cash Provided By Operating Activities (5.6) (8.5) (10.9) (2.5) (6.4) (18.5) 18.0 95.6 115.7 189.2 279.7 393.3

INVESTING ACTIVITIESNet Short-Term Investments (1.2) 9.5 (12.7) 7.1 5.6 0.0 0.0 (100.0) (100.0) (200.0) (400.0) (400.0)Acquisitions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Capital Expenditures (0.0) (0.0) (0.1) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3)Acquisition Of Intangible Assets 0.0 0.0 (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1)Other (0.3) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net Cash Provided By Investing Activities (1.6) 9.5 (12.9) 6.8 5.3 (0.4) (0.4) (100.4) (100.4) (200.4) (400.4) (400.4)

FINANCING ACTIVITIESProceeds of Long-Term Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Repayment Of Long-Term Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Issuance Of Common Stock 6.3 9.4 14.5 0.0 30.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 0.0 (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net Cash Provided By Financing Activities 6.3 9.4 14.5 0.0 30.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cash From Discontinued Operations 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Increase (Decrease) In Net Cash (1.0) 10.4 (9.4) 4.3 28.9 (18.8) 17.6 (4.7) 15.3 (11.2) (120.6) (7.1)Net Cash At Beginning Of Period 1.0 (0.0) 10.4 1.0 5.3 34.1 15.3 32.9 28.2 43.5 32.4 (88.3)Net Cash At End Of Period (0.0) 10.4 1.0 5.3 34.1 15.3 32.9 28.2 43.5 32.4 (88.3) (95.3)

Free Cash FlowOperating Cash Flow (6.3) (8.6) (10.4) (2.8) (6.5) (19.0) 17.9 96.3 116.6 190.8 283.1 397.0Change In Working Capital 0.7 0.1 (0.5) 0.3 0.1 0.5 0.1 (0.7) (0.9) (1.6) (3.4) (3.7)Capital Expenditures (0.0) (0.0) (0.1) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3)Free Cash Flow (5.7) (8.5) (11.1) (2.7) (6.7) (18.7) 17.7 95.4 115.4 188.9 279.5 393.0

Free Cash Flow Per Share ($0.19) ($0.24) ($0.21) ($0.05) ($0.11) ($0.26) $0.20 $1.08 $1.30 $2.13 $3.14 $4.41Diluted Shares Outstanding 29.2 35.0 53.6 59.0 62.1 71.5 88.6 88.7 88.8 88.9 89.0 89.1


Exhibit 13 - Allon Therapeutics Inc. Statement Of Cash Flows (F2005-F2016E)



Transition Therapeutics Inc. (TTH-T, TTHI-O)

Company Profile

Transition Therapeutics (Transition) is a biopharmaceutical company developing novel therapeutics for large unsatisfied markets including neurodegenerative and metabolic diseases.

Source: BigCharts.com

Ticker TTH-T, TTHI-O Shares O/S (M) 21.2Rating Buy (S) Market Cap (M) $212.3Risk High Float O/S (M) 21.2Price $10.00 Float Value (M) $212.31-Yr Target $23.00 Avg Daily Volume (K) 72.5Dividend $0.00 Control Blocks 0.0%1-Yr ROR 130% Voting -52-Wk High-Low $21.42- $6.75 Equity -Next Reporting Management 4.3%Valuation DCF; 35% WACC

Fully Diluted EPS (June 30 Year End)Q1 Q2 Q3 Q4 Annual

F2007 $0.10 A ($0.26) A ($0.15) A ($0.51) A ($0.87)F2008 ($0.07) ($0.09) ($0.07) ($0.11) ($0.33)F2009 ($0.04)F2010 ($0.97)

EBITDA (millions)

F2007 ($2.1) A ($2.8) A ($2.8) A ($6.8) A ($14.5)F2008 ($1.7) ($2.0) ($1.9) ($2.7) ($8.4)F2009 ($2.4)F2010 ($20.3)Source: Company reports; Thomson One; LBS estimates.

Market Data

Dec-07

Buy (S) – Target Price: $23.00

We are initiating coverage on Transition with a Speculative Buy rating and a one-year share price target of $23.00. This implies a total return of 130%. Our target is based on a DCF using a WACC of 35%. We have a share risk rating of High. We highlight the following:

♦ Opportunities in the Alzheimer’s disease (AD) and the diabetes markets: AD and diabetes affect millions of people worldwide and their prevalence is expected to increase considerably over time. There is currently no effective cure for AD; FDA-approved treatments only manage the symptoms of the disease.

♦ Innovative products: Transition is developing a disease-modifying therapy for AD that inhibits the formation of beta-amyloid plaques and potentially reduces disease progression. The company is also developing gastrin-based therapies for diabetes that regenerate insulin-producing cells in the body and regulate blood glucose.

♦ Value-added partnerships: To benefit from existing know-how, sales and distribution channels, and to finance its R&D activities, Transition has established strategic alliances including a US$200 million collaboration with Elan.

♦ Experienced management team: Management has significant experience in the healthcare industry, in operating a public company, and in international dealings. As of September 19, 2007, founding directors and management owned 4.3% of the common shares outstanding. Only two institutions, Fidelity and Great Point, owned more than 10% of the issued shares.

♦ Excellent cash position: During the last twelve months, Transition completed two private placements of common shares for gross proceeds of $50 million. As of September 28, 2007, Transition had cash and short-term investments of $53 million and a cash burn rate of about $1.2 million per month.



Transition Therapeutics Inc.

Buy (S), Target $23.00 We are initiating coverage on Transition Therapeutics with a Speculative Buy rating and a one-year share price target of $23.00. This target implies a 130% return from current levels and is based on a DCF model. We have a share risk rating of High.

Investment Thesis

Ground-Breaking Therapies In Development With Partners

Transition is well positioned to benefit from the large opportunities in the Alzheimer’s disease (AD) market. The company is developing a disease-modifying agent that could be the first cure to this debilitating neurological disorder. Transition is also developing gastrin-based products for diabetes, a large and growing market. To benefit from existing know-how and to finance its activities, Transition has established and continues to seek value-added partnerships. In addition, the company has a healthy balance sheet with significant cash reserves.

Company Profile

Three Drug Candidates In Clinical Trials

Founded in 1998, Transition is a biopharmaceutical company developing novel therapeutics for large unmet medical needs including AD and metabolic diseases. The company has a proprietary patented drug discovery system, the Optimol technology, which combines affinity columns and mass spectrometry (FAC-MS) to identify novel drug candidates binding to selected protein targets. Transition currently has two clinical programs in development with major upcoming milestones (Exhibit 14):

♦ AZD-103 / ELND-005: Acquired in 2006, this small molecule crosses the blood brain barrier, breaks down neurotoxic fibrils, and thus potentially inhibits the formation of beta-amyloid plaques, a hallmark of AD. The company anticipates starting a large US Phase II trial during Q4/2007 or Q1/2008.

♦ Islet Neogenesis Therapy (INT): Transition’s INT is based on gastrin’s ability to regenerate insulin-producing cells in the body (islet beta cells in the pancreas). Gastrin can also synergize with other agents to treat hyperglycemia in diabetes patients. Transition is actively developing three INT products: a gastrin analogue (G1), a combination of G1 and metformin, and a combination of G1 and a GLP-1 analogue (GLP1-INT). The company has also completed a Phase IIa clinical trial with E1-INT, a combination of G1 and an epidermal growth factor analogue (E1).



Date MilestonesAZD-103 (Alzheimer's disease)

2006-09-27 Partnership agreement with Elan2007-04-03 Fast Track Status received from FDA2007-08-30 Positive Phase I resultsQ1/2008 Phase II initiation (US)Q4/2009 Phase II results

INT (Type 1 and type 2 diabetes)2007-06-28 Positive Phase IIa results with E1-INTQ4/2007 Single ascending dose Phase I initiation with G1 (Canada)Q4/2007 Multiple ascending dose Phase I initiation with G1 (Canada)H1/2008 Phase II initiation with G1 + Metformin in type 2 diabetes (US)H2/2008 Phase II initiation with G1+ Byetta in type 2 diabetes (US)2008 Partnership agreementSource: Company reports; LBS estimates.

Exhibit 14 - Transition Major Milestones

Objectives & Strategy

R&D Focused Company With Partners

Transition’s objective is to develop ground-breaking and effective therapies targeting large diseases. To succeed, the company is pursuing different strategies:

♦ Dedicated to R&D: After a series of acquisitions (Exhibit 15), Transition is now concentrating on the development of drugs from discovery stage to Phase II. Using its proprietary drug discovery system, Transition is building a pipeline of preclinical drug candidates targeting large unmet medical needs. As of September 19, 2007, Transition’s intellectual property was protected by more than 50 US patents (41 issued), including 16 issued patents and several patent applications for the INT therapies, and a number of patent applications for AZD-103.

DateJun-02Nov-05Mar-06Jun-07Source: Company reports; LBS estimates.

100% of Ellipsis Neurotherapeutics Inc. (ENI) (key asset: AZD-103)

Waratah Pharmaceuticals Inc. (key asset: INT)Optimol technology from Protana Inc.

100% of NeuroMedix Inc. (key asset: Minozac)

Company Or Asset AcquiredExhibit 15 - Transition's Acquisitions

♦ Building value through alliances: To benefit from existing scientific expertise, sales and distribution channels, and to finance its activities, Transition has established and continues to seek value-added partnerships. Current collaborators include Elan Pharma International Limited (Elan), Novo Nordisk A/S, and the Juvenile Diabetes Research Foundation International (JDRF).



♦ Outsourcing manufacturing: To benefit from existing installations and expertise, and to stay focused on its core competencies, Transition relies on contract research organizations to perform its clinical studies and on third party manufacturers to supply all of its drug substances. Transition should also eventually rely on a contract organization to manufacture its product for sales. This strategy is possible due to the high stability of Transition’s products and the simple cost-effective manufacturing process.

Competitive Analysis: Alzheimer’s Disease

Early-Stage But Promising Therapy For AD

AD affects millions of people worldwide and is characterized by a progressive loss of cognitive function (Appendix I). There is currently no effective treatment for AD. As a result, several companies are trying to develop a cure to meet this enormous medical need. In this competition, Transition’s AZD-103 has several advantages including:

♦ Disease-modifying therapy: FDA-approved therapies for AD are only effective in managing symptoms of the disease. By inhibiting the formation of beta-amyloid plaques, AZD-103 could reduce disease progression, which would represent a major break-through in the industry. However, a few other drugs in late-stage development also target the formation of plaques (e.g. Flurizan, Alzhemed, and ABB-001). Hence, Transition must distinguish itself from competitors by developing a more effective product with fewer side effects, and in a timely manner.

♦ Fast Track designation: In April, AZD-103 received Fast Track designation from the FDA, which should help reduce time before commercialization.

♦ Strong preclinical validation: In animal models of AD, AZD-103 easily crossed the blood brain barrier and was well tolerated. In addition, it was shown to prevent disease onset, to slow, stop and reverse disease progression, and to improve cognitive function (Exhibit 16).

Source: Company reports.*Morris water maze test, a well-accepted model for spatial memory function studies.

AD mice + AZD-103

Exhibit 16 - AZD-103 Improves Cognitive Function In Transgenic Mice Model*

AD mice untreatedNormal mice

♦ Promising Phase I results: In August 2007, Transition completed its Phase I clinical studies with AZD-103 including single and multiple ascending dosing on approximately 110 healthy adults. AZD-103 was shown to be safe, well tolerated, and orally bio-available. It was also able to cross the blood brain barrier and to reach levels in the brain that were effective in animal models of AD. In the upcoming months, the company anticipates starting a large four-arm Phase II trial with over 300 patients. Each patient's participation could last about 18 months and thus, results are expected in late 2009. Based on interim data from the Phase II study, the company could initiate a Phase III clinical trial during 2009.



♦ Value-added partnerships: Transition has signed a US$200 million global collaboration agreement with Elan, a large neuroscience-based biotechnology company, to develop and commercialize AZD-103. Elan develops, manufactures and markets advanced therapies in neurology, including research in beta-amyloid immunotherapy and with secretase inhibitors. Hence, the company has the know-how and resources to assist Transition in developing and eventually marketing its beta-amyloid aggregation inhibitor.

Competitive Analysis : Diabetes

Unique Regenerative Therapies For Diabetes

Diabetes is a chronic disorder marked by high levels of blood glucose, resulting from defects in insulin metabolism (Appendix III). Approximately 35% of all patients diagnosed with diabetes are treated with insulin. Transition is well positioned to benefit from the large opportunities in the diabetes market. Its INT program has numerous competitive advantages including:

♦ Ground-breaking therapy: Transition’s gastrin-based therapies could be the first to restore the body’s ability to produce insulin on its own and to control blood glucose. These disease-modifying therapies could have great advantages over constant insulin injections and other available medicines, which are not always effective in reducing blood glucose levels and have several side effects.

♦ Positive preclinical and clinical results with E1-INT: In animal models of diabetes, E1-INT was shown to regenerate pancreatic islet cells, which led to a significant increase in insulin production. Transition completed a Phase I clinical trial evaluating the safety, tolerability, and pharmacokinetic profile of E1-INT. No serious adverse events were observed but mild to moderate side effects were reported including nausea and headaches. In the unblinded exploratory US Phase IIa trials, patients with type 1 or type 2 diabetes received daily administration of E1-INT for 28 days and were followed for six months post-treatment. Type 1 diabetic patients remained on insulin and type 2 diabetic patients remained on metformin with/without thiazolidinediones throughout the trials. Side effects were consistent with the Phase I study. Results from the Phase IIa trials are described below:

− Interim data in the type 1 diabetes study: Six of 11 patients responded to the E1-INT therapy, either by decreasing their average daily insulin usage by more than 20% or reducing their HbA1c levels by 1.2 to 2%. No response was observed in the placebo group.

− Final results in the type 2 diabetes study: Patients treated with E1-INT showed significant reductions in blood glucose levels (reductions in haemoglobin A1c (HbA1c) and in fasting blood glucose levels, improvements in glucose tolerance) (Exhibit 17). These improvements were sustained for six months, which could represent a unique benefit for diabetic patients.



Source: Company reports.

Exhibit 17 - E1-INT Reduces HbA1c Levels In Type 2 Diabetes Patients

♦ Value-added partnerships: Transition has established and continues to seek value-added partnership to support the development of its gastrin-based therapies. Current collaborators include:

− Novo Nordisk: Novo Nordisk, a world leader in diabetes care, has exclusive, worldwide rights option to the E1-INT product. The decision regarding this option should be made in Q4/2007. If Novo Nordisk decides to finalize the development of E1-INT, Transition could receive future developmental milestone payments totaling US$46 million plus commercial milestone payments and royalties on sales of this product

− JDRF: Located in the US, the JDRF has agreed to support the clinical development of GLP1-INT over two years with milestone payments of up to US$4 million.

Management Profile

Experienced Management Team

As of September 19, 2007, founding directors and management owned 4.3% of the common shares outstanding (Exhibit 18). Management has significant experience in the healthcare industry, international exposure, and expertise in operating a public company. Key executives include:

♦ Tony Cruz, PhD - CEO and Chairman: Dr. Cruz is a co-founder of Transition and has held the position of CEO since the company’s inception. Dr. Cruz was a co-founder, VP and Director at Angiotech Pharmaceuticals Inc. He has been a Senior Scientist at Mount Sinai Hospital since 1995 and was the CEO and President of the Canadian Arthritis Network until 2001. He has also served as a consultant for biotechnology companies and investment firms.

♦ Elie Farah, CFA, CA, MAcc - CFO & VP Corporate Development: Mr. Farah joined Transition in May 2005 as the CFO and VP Corporate Development. Prior to Transition, Mr. Farah worked at Boehringer Ingelheim, an international pharmaceutical company based in Germany, where he headed their global mergers and acquisitions initiative. He brings



expertise in technology and company valuations, integration of management teams, and licensing and partnership of technologies with large pharmaceutical compangies. Prior to Boehringer Ingelheim, Mr. Farah held a number of positions at Price Waterhouse in Canada.

♦ Aleksandra Pastrak, MD, PhD - VP Research: Dr. Pastrak joined Transition in 1999, assuming the role of VP Research since May 2005. Dr. Pastrak holds an MD degree from the School of Medicine at the University of Belgrade, and a PhD degree in Clinical Pharmacology from the University of Toronto.

The shares of Transition are widely held. Only two institutions owned or controlled more than 10% of the issued shares: Fidelity Management (12.4%) and Great Point Partners (13.0%). Other institutions include Oracle Partners (6.9%), Acuity Investment Management, Elliott & Page, Aegon Fund Management, and Carnegie Asset Management.

Recent Results

Advancing Clinical Studies

On June 30, 2007, Transition reported its annual results for fiscal 2007. During the year, the company concluded a strategic collaboration and an acquisition, advanced its clinical and preclinical programs, completed two financings, and began trading on the NASDAQ. Highlights include the following:

♦ Revenue for fiscal 2007 has increased by 84% YOY to $0.7 million. Transition is an R&D focused company and does not generate any sales. However, during fiscal 2007, the company has received milestone payments of $0.6 million and licensing fees of $0.1 million from its collaborators.

♦ EBITDA declined to -$14.5 million in fiscal 2007 from -$13.7 million in fiscal 2006. This reduction is attributable to higher SG&A expenses (69% YOY). This was partially offset by lower R&D expenses (-11% YOY) resulting from reimbursements by partners.

♦ Net loss was -$17.0 million (-$0.87 per share) in fiscal 2007 compared to -$23.0 million (-$1.53 per share) in fiscal 2006. This improvement is a result of lower amortization, increased interest income due to higher cash balances, and increased future income taxes recovery. Since November 2006, Transition’s shares have outperformed the Canadian healthcare sector (Exhibit 18).

♦ In June 2007, Transition completed the acquisition of 100% of the common shares of NeuroMedix Inc. This acquisition deepened the company’s pipeline in neurodegenerative diseases. NeuroMedix is a biotechnology company focused on central nervous system. Its lead compound, Minozac, was shown to prevent neuronal dysfunction in animal models of AD and traumatic brain injury (TBI).



0.0

0.5

1.0

1.5

2.0

2.5

Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07

S&P/TSX S&P/TSX Health Care Transition

Exhibit 18 - Relative Stock Price Performance

Source: Bloomberg.

Strengthening Cash Position

♦ During the last twelve months, Transition completed two private placements of common shares. In November 2006, the company raised gross proceeds of $25 million from Great Point Partners. In July 2007, it raised another $25 million from Oracle Investment Management, The Invus Group and a large Boston based investment management company. As of September 28, 2007, Transition had cash and short-term investments of $53 million and a cash burn rate of about $1.2 million per month.

Financial Forecast

AZD-103 Is The Value-Driver

If approved by the regulatory authorities in a timely-manner, AZD-103 could be a blockbuster and create significant value to Transition’s shareholders. AZD-103 has numerous competitive advantages, and its potential market is large and untapped. In addition, Transition has signed a global collaboration agreement with a major biotechnology company. Our forecast includes the following assumptions (Exhibit 19):

♦ The potential market of AZD-103 is large and unsatisfied. There are more than 10 million people suffering from AD in the US and Europe and the prevalence of the disease is expected to increase considerably in the next decades (Appendix I). Five medications are currently approved by the FDA to treat the symptoms of AD but they do not cure the disease. Given its competitive advantages, we believe that Transition should attain a market share of 6% in 2017E.

♦ If proven to be effective in treating AD, we believe AZD-103 could be priced significantly higher than available medications. Hence, we forecast a 50% premium to the current cost of AD medications. According to the Alzheimer Society of Canada, AD medications cost approximately $5.00 a day per patient (annual cost of $1,825). We anticipate an annual growth rate of 5% based on an AARP Public Policy Institute study, which demonstrated that the average annual percentage change in manufacturer price for anti-dementia agents is higher than inflation (6% in 2006).

♦ Transition and Elan signed a US$200 million global collaboration agreement to develop and commercialize AZD-103. Under the terms of the agreement, Transition shares the costs



of development and profits, and has the option to increase its collaboration share to up to 50%. Transition received an upfront payment of US$7.5 million in fiscal 2007 and should receive an additional upfront payment of US$7.5 million before the end October 2007. Dependent upon the successful development, regulatory approval, and commercial launch of AZD-103, Transition will be eligible to receive milestone payments of up to US$185 million. In our forecast, we assume a collaboration share of 40% and the following milestone payments:

− Fiscal 2008: $5 million upon initiation of the Phase II clinical studies.

− Fiscal 2009: $10 million upon positive Phase II results and $20 million upon initiation of the Phase III clinical studies.

− Fiscal 2011: $50 million upon positive Phase III results.

− Fiscal 2012: $100 million upon marketing approval in Canada/Europe and US.

2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017EMilestone payments ($M) 12.5 30.0 0.0 50.0 100.0 0.0 0.0 0.0 0.0 0.0Revenue sharePrevalence of AD in US/Europe (M) 11.0 11.5 12.0 12.5 13.0 13.5 14.0 14.5 15.0 15.5Market penetration of AZD-103 0.0% 0.0% 0.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%# of patients on AZD-103 0 0 0 0 130,000 270,000 420,000 580,000 750,000 930,000Average price per patient ($) 2,874 3,018 3,169 3,327 3,494 3,669 3,852 4,045 4,247 4,459AZD-103 revenue ($M) 0.0 0.0 0.0 0.0 454.2 990.5 1617.8 2345.8 3185.1 4147.0TTH revenue share 40% 40% 40% 40% 40% 40%TTH revenue ($M) 0.0 0.0 0.0 0.0 181.7 396.2 647.1 938.3 1274.0 1658.8Total revenue ($M) 12.5 30.0 0.0 50.0 281.7 396.2 647.1 938.3 1274.0 1658.8Source: LBS estimates.

Exhibit 19 - Revenue Forecast For AZD-103

Value-Added Licensing Agreement In 2008

Transition’s gastrin-based therapies could be the first to restore the body’s ability to produce insulin on its own and to regulate blood glucose. Hence, they could have great advantages over constant insulin injections and generate significant revenue. Our forecast includes the following assumptions (Exhibit 20):

♦ The insulin-dependant, diagnosed diabetes market is large and growing. In 2007, it is estimated that more than 30 million Americans and Europeans will have been diagnosed with diabetes; about 5-10% will have type 1 diabetes, and 25-30% will have type 2 diabetes and will use insulin therapy. Hence, about 35% of the diabetic population will be treated with insulin: We assume that Transition should attain a market share of 5% in 2017E.

♦ If proven to be effective in regenerating islet cells, we believe the gastrin-based therapies could be priced significantly higher than current insulin therapies. We forecast a 50% premium to the current average annual cost of insulin therapies, which is approximately $2,700. We anticipate an annual growth rate of 5% based on an AARP Public Policy Institute study, which demonstrated that the average annual percentage change in manufacturer price for anti-diabetics is higher than inflation (7.1% in 2006).



♦ Transition has an option agreement with Novo Nordisk for E1-INT. During Q4/2007, Novo Nordisk should make a decision regarding this option. We do not believe that Novo Nordisk will continue to support E1-INT, due to the difficulties associated with the clinical development of a combination of two unapproved products. Instead, we believe that Transition will establish a licensing agreement with a large pharmaceutical company to develop and commercialize its G1 and GPL1-INT therapies. In our forecast, we assume milestone payments ($10 million upon Phase II results, $15 million upon Phase III initiation, $25 million upon Phase III results, and $50 million upon marketing approval) and royalties (12,5%) on future product sales (Exhibit 20).

2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017EMilestone payments ($M) 0.0 0.0 25.0 0.0 25.0 50.0 0.0 0.0 0.0 0.0RoyaltiesPrevalence* in US/Europe (M) 10.7 10.9 11.1 11.4 11.6 11.8 12.1 12.3 12.5 12.8Market penetration of INT 0.0% 0.0% 0.0% 0.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0%# of patients on INT 0 0 0 0 0 118,247 241,224 369,073 501,939 639,972Average price per patient ($) 4,253 4,465 4,688 4,923 5,169 5,427 5,699 5,984 6,283 6,597INT revenue ($M) 0.0 0.0 0.0 0.0 0.0 641.8 1374.7 2208.4 3153.6 4221.9TTH royalties 12.5% 12.5% 12.5% 12.5% 12.5%TTH revenue ($M) 0.0 0.0 0.0 0.0 0.0 80.2 171.8 276.1 394.2 527.7Total revenue ($M) 0.0 0.0 25.0 0.0 25.0 130.2 171.8 276.1 394.2 527.7*Prevalence of insulin-dependant, diagnosed diabetesSource: LBS estimates.

Exhibit 20 - Revenue Forecast For The INT Program

Break-Even In Fiscal 2009E

In the upcoming quarters, Transition should continue to generate net losses, as the company advances the clinical development of its products (Exhibit 21). These losses should be partially offset by milestone payments from partners and an increase in interest income resulting from the significantly higher cash and short-term investment balances.

♦ We anticipate higher R&D and SG&A expenses in the next several years. Transition should begin three Phase II trials in fiscal 2008 and a Phase III trial with AZD-103 in fiscal 2010. The company should also advance its other preclinical and clinical programs.

♦ Amortization expenses should decrease as the Waratah technology is now fully amortized. This reduction should be partially offset by a full year impact of the amortization relating to the NeuroMedix technology.

♦ We believe the company should not pay taxes before fiscal 2012. As of June 30, 2007, Transition had non-capital losses of approximately $39.7 million available for carryfoward, $20.0 million in R&D tax credits, and $4.2 million in federal ITCs that can be used to reduce future income taxes payable.



-500

0

500

1,000

1,500

2005

2006

2007

2008

E

2009

E

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

($Mi

llions

)

Exhibit 21 - Transition Net Earnings Outlook


Excellent Cash Position

As of September 28, 2007, Transition had $53 million in cash and short-term investments. We do not expect any major acquisitions in upcoming years, since Transition is now focusing on the development of its clinical and preclinical programs as part of its business strategy. Furthermore, we do not anticipate any significant expenditure in capital or intangible assets in the next years. Therefore, the company’s cash burn rate should increase mainly as a result of higher R&D and SG&A expenses. Transition should be free cash flow positive in fiscal 2009 given the important developmental milestone payments anticipated during that year. However, the company could return to negative free cash flow in fiscal 2010 due to the significant expenses related to its Phase III clinical studies, and the absence of both milestone payments and product sales.

From 2012, Transition should start to generate significant cash from its operations. In our forecast, we assume that the company will distribute a dividend to its shareholders. However, Transition could also decide to buy-back shares or to acquire new products.



Valuation

Target of $23.00, Total Return of 130%

We rate the shares of Transition a Speculative Buy with a one-year share target price of $23.00. This target implies a total return of 130%. It is based on a DCF using a WACC of 35% (Exhibit 22) to take into account the risks associated with a Canadian company that has several therapies in early-stage development, a major strategic partner, a small capitalization and a low trading volume. In our valuation, we used a growth rate to infinity of 10%.

Term.2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E Year

EBIT(1-tax rate) (11.6) (5.5) (23.4) (7.9) 151.9 220.8 361.6 561.2 790.2 1,052.2 1,160.0+ Depreciation 3.2 3.1 3.1 2.6 2.3 2.3 2.3 2.2 2.2 2.1 2.0+ Deferred taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0- Capex 0.9 0.8 0.9 1.0 1.1 1.2 1.4 1.5 1.5 1.5 1.5- Additions to W/C 0.6 (0.2) 3.0 1.1 4.7 3.0 1.2 0.4 (2.9) (5.8) (16.6)= FCFF (9.9) (3.0) (24.2) (7.5) 148.4 218.9 361.4 561.6 793.8 1,058.6 1,177.1

Terminal value 5,318.5PV of equity 491.2 = (7.4) (1.7) (9.8) (2.3) 33.2 36.3 44.4 51.1 53.6 52.9 240.8

- BV net debt 0.0- BV prefs 0.0- Options/Warrants 2.9= PV of equity 488.2/ Share O/S 21.2= Equity value per share 23.00 Source: LBS estimates.

Exhibit 22 - Valuation

$ (Million)

25% 50% 75%

25% 50% 75%

10% 12.5% 15%

30% 35% 40%

* All other things being equalSource: LBS estimates.

$21.85

$23.00

$21.60

$26.10

$24.15

$24.40

$23.00

$23.00

Equity value per shareDiscount rate

$36.50 $15.10$23.00

Price premium on INTEquity value per shareRoyalties for INTEquity value per share

Exhibit 23 - Sensitivity Analysis*Price premium on AZD-103Equity value per share $19.90



Risks

Clinical And Regulatory Risks

Transition is an R&D focused company with three products in clinical trials for three diseases. It is not possible to predict, based upon preclinical and early clinical data, whether these drugs will prove to be effective in humans and obtain regulatory approval.

Financial Risk Transition has not realized any profit since inception. The company has sustained its activities through public and private sales of equity, the exercise of warrants and stock options, interest earned on cash deposits, short-term investments and investment tax credits, revenues and reimbursements from partners, and proceeds from the sale of assets transferred under contractual arrangement. In the next several years, Transition expects to incur substantial R&D and SG&A expenses without generating significant revenues. Therefore, its financial health will greatly depend upon the capacity of Transition’s executives to reach clinical and regulatory milestones, to maintain or establish new strategic partnerships, and to raise additional financing.

Commercial Risks If a drug is ultimately approved for sale, there is no assurance that it will result in significant revenues. Future profitability will depend upon different factors including:

♦ Transition’s capacity to manufacture and market its products: Transition is outsourcing its research and manufacturing to benefit from existing installations and expertise. However, this dependency limits Transition’s control over price, availability, quality, and delivery schedules. Misappropriation of intellectual property is another important risk inherent to outsourcing. In addition, Transition has established partnerships to benefit from existing know-how, and distribution and sales channels. However, there is no assurance that these partners will be successful in growing sales.

♦ Transition’s ability to face competition: Several companies are developing new drugs for the treatment of AD and diabetes. Some of these competitors have greater resources than Transition and may introduce therapies that would reduce Transition’s competitive advantages.

♦ Transition’s capacity to protect its intellectual property: The company relies on patents to protect its platform and its products. However, there is no assurance that the company is adequately protected from misappropriation by another company.

♦ Reimbursement: There is no assurance that government and insurance reimbursements will be available for Transition’s therapeutics.

♦ Product liability: Transition may be subject to product liability claims in connection with the use of its products. No assurances can be given that the insurance coverage limits of the company are adequate to protect it against product liability claims that may arise.



Financial Statements

Fiscal Year Ending June 30($Millions, except per share amounts) 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E

Revenue 0.4 0.7 12.5 30.0 25.0 50.0 306.7 526.4 819.0 1,214.4 1,668.2 2,186.5Cost Of Sales 0.0 0.0 0.0 0.0 0.0 0.0 45.4 99.0 161.8 234.6 318.5 414.7Net Research & Development Expenses 11.1 9.8 13.9 24.3 36.5 45.6 57.1 59.9 62.9 66.1 69.4 72.8General & Administrative Expenses 3.1 5.3 7.0 8.0 8.8 9.7 17.0 25.4 35.6 48.1 62.5 78.1Foreign Exchange Loss (Gain) (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0EBITDA (13.7) (14.5) (8.4) (2.4) (20.3) (5.3) 187.2 342.0 558.7 865.7 1,217.9 1,620.9

Amortization 10.7 6.8 3.2 3.1 3.1 2.6 2.3 2.3 2.3 2.2 2.2 2.1Net Interest Expense (Income) (0.4) (1.2) (4.3) (4.5) (2.8) (1.5) (15.7) (33.0) (42.7) (39.3) (39.7) (46.4)Special Items 1.2 (0.4) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0EBT (25.3) (19.7) (7.3) (1.0) (20.6) (6.4) 200.6 372.7 599.1 902.8 1,255.4 1,665.1

Current Tax 0.0 0.0 0.0 0.0 0.0 0.0 35.8 130.5 209.7 316.0 439.4 582.8Future Tax (1.8) (2.7) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net Earnings (23.5) (17.0) (7.3) (1.0) (20.6) (6.4) 164.8 242.3 389.4 586.8 816.0 1,082.3

After-Tax (Addback) Of Special Items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net Earnings Before Special Items (23.5) (17.0) (7.3) (1.0) (20.6) (6.4) 164.8 242.3 389.4 586.8 816.0 1,082.3

Dil. EPS From Cont. Op. Before Sp. Items ($1.57) ($0.87) ($0.33) ($0.04) ($0.97) ($0.30) $7.38 $10.80 $17.28 $25.92 $35.89 $47.39Diluted EPS ($1.57) ($0.87) ($0.33) ($0.04) ($0.97) ($0.30) $7.38 $10.80 $17.28 $25.92 $35.89 $47.39

Weighted Average S/O - Basic (M) 15.0 19.4 21.2 21.2 21.2 21.2 21.2 21.2 21.2 21.2 21.2 21.2Weighted Average S/O - Diluted (M) 15.0 19.4 21.9 22.0 21.2 21.2 22.3 22.4 22.5 22.6 22.7 22.8

Income Statement StatisticsRevenue Growth 239% 84% 1728% 140% -17% 100% 513% 72% 56% 48% 37% 31%EBITDA Growth nm nm nm nm nm nm nm 83% 63% 55% 41% 33%Net Earn. From Cont. Op. B. Sp. Items Growth nm nm nm nm nm nm nm 47% 61% 51% 39% 33%Dil. EPS From Cont. Op. B. Sp. Items Growth nm nm nm nm nm nm nm 46% 60% 50% 38% 32%

Gross Margin (Includes D&A) 100% 100% 100% 100% 100% 100% 85% 81% 80% 81% 81% 81%EBITDA Margin -3704% -2117% -67% -8% -81% -11% 61% 65% 68% 71% 73% 74%EBT Margin Before Special Items -6489% -2936% -59% -3% -82% -13% 65% 71% 73% 74% 75% 76%Net Margin From Cont. Op. Before Sp. Items -6342% -2480% -59% -3% -82% -13% 54% 46% 48% 48% 49% 50%

Tax Rate 0% 0% 0% 0% 0% 0% 18% 35% 35% 35% 35% 35%


Exhibit 24 - Transition Therapeutics Inc. Income Statement (F2006-2017E)





AssetsCash & Cash Equivalents 4.1 1.4 0.0 0.0 0.0 10.5 71.9 42.6 92.2 0.3 55.8 25.8Short-Term Investments 10.9 33.0 55.0 55.0 27.0 0.0 100.0 200.0 200.0 200.0 200.0 300.0Receivables 0.4 0.7 1.0 0.8 2.1 1.4 4.2 7.2 11.2 16.7 22.9 30.0Tax Credits Receivable 1.2 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6Research Inventory 0.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 0.9 0.5 0.8 0.8 0.5 0.3 2.0 2.7 1.6 2.3 3.0 3.7Total Current Assets 18.0 36.2 57.5 57.4 30.4 13.1 179.1 253.7 306.4 220.7 283.2 361.2

Long-term Reasearch Inventory 2.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Capital Assets 1.6 1.2 0.9 0.8 0.9 1.0 1.1 1.2 1.4 1.5 1.5 1.5Intangible Assets 37.1 26.6 24.2 21.7 19.4 17.7 16.2 14.8 13.6 12.5 11.5 10.6Other 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Non-Current Assets 41.4 27.8 25.1 22.5 20.3 18.6 17.3 16.1 15.0 13.9 13.0 12.1

Total Assets 59.4 64.0 82.6 79.9 50.7 31.8 196.4 269.7 321.3 234.6 296.2 373.3

Liabilities & Shareholders' EquityBank Indebtedness 0.0 0.0 19.0 17.3 10.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0Accounts Payable & Accrued Liabilities 3.4 2.9 3.1 3.3 3.5 3.7 5.7 8.7 12.7 20.7 32.7 48.7Current Portion Of Long-term Debt 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 0.7 0.8 0.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 0.1Total Current Liabilities 4.4 3.7 22.2 22.7 16.2 5.8 7.8 10.8 14.8 22.8 34.8 48.8

Long-Term Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Deferred Revenue & Advances 1.6 9.9 17.3 15.1 13.0 10.9 8.7 6.6 4.5 2.3 0.2 0.1Other 18.7 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1Total Non-Current Liabilities 20.3 10.0 17.3 15.2 13.1 11.0 8.8 6.7 4.6 2.4 0.3 0.2

Total Liabilities 24.6 13.7 39.6 37.9 29.3 16.8 16.6 17.5 19.4 25.2 35.1 49.0

Shareholders' EquityCommon Shares 99.6 134.0 134.0 134.0 134.0 134.0 134.0 134.0 134.0 134.0 134.0 134.0Contributed Surplus 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5Other 0.8 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5Retained Earnings (Deficit) (70.0) (89.7) (97.0) (98.0) (118.6) (125.0) 39.8 112.2 162.0 69.4 121.1 184.3Total Shareholders' Equity 34.8 50.3 43.0 42.1 21.4 15.0 179.8 252.2 302.0 209.4 261.1 324.3

Total Liabilities & Shareholders' Equity 59.4 64.0 82.6 79.9 50.7 31.8 196.4 269.7 321.3 234.6 296.2 373.3

Balance Sheet StatisticsNet Total Debt/Equity -11% -3% 44% 41% 49% -70% -40% -17% -31% 0% -21% -8%Net Total Debt/Capital -11% -3% 31% 29% 33% -70% -40% -17% -31% 0% -21% -8%Net Total Debt/LTM EBITDA 0.2x 0.1x (1.1x) (7.7x) (0.7x) (0.0x) (0.2x) (0.2x) (0.1x) (0.1x) (0.0x) (0.0x) EBIT Coverage 59.3x 17.4x 2.7x 1.2x 8x 5.4x (11.8x) (10.3x) (13.0x) (22.0x) (30.6x) (34.9x)

ROE (Annualized) -245% -135% -17% -2% -83% -39% 101% 99% 131% 264% 306% 341%Book Value $1.99 $2.37 $2.03 $1.98 $1.01 $0.71 $8.47 $11.88 $14.22 $9.86 $12.30 $15.28


Exhibit 25 - Transition Therapeutics Inc. Balance Sheet (F2006-F2017E)





OPERATING ACTIVITIESNet Income (Loss) For The Year (23.5) (17.0) (7.3) (1.0) (20.6) (6.4) 164.8 242.3 389.4 586.8 816.0 1,082.3Non-Cash Items:

Amortization 11.1 7.1 3.2 3.1 3.1 2.6 2.3 2.3 2.3 2.2 2.2 2.1Future Income Taxes (1.8) (2.7) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Special Items 1.2 (0.4) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 0.5 1.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Operating Cash Flow (12.5) (11.6) (4.1) 2.2 (17.5) (3.9) 167.1 244.6 391.7 589.0 818.2 1,084.4

Decrease (Increase) In Non-Cash WC 0.2 6.8 (0.6) 0.2 (3.0) (1.1) (4.7) (3.0) (1.2) (0.4) 2.9 5.8Net Cash Provided By Operating Activities (12.3) (4.8) (4.7) 2.3 (20.5) (5.0) 162.4 241.6 390.5 588.7 821.1 1,090.3

INVESTING ACTIVITIESNet Short-term Investments 3.2 (22.1) (22.0) 0.0 28.0 27.0 (100.0) (100.0) 0.0 0.0 0.0 (100.0)Acquisitions (3.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Capital Expenditures (0.2) 0.0 (0.4) (0.5) (0.6) (0.7) (0.8) (0.9) (1.0) (1.0) (1.0) (1.0)Acquisition Of Intangible Assets 0.0 (0.3) (0.1) (0.1) (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (0.2)Other 0.9 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net Cash Provided By Investing Activities 0.7 (21.9) (22.5) (0.6) 27.2 26.1 (101.0) (101.1) (1.2) (1.2) (1.2) (101.2)

FINANCING ACTIVITIESProceeds of Long-Term Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Repayment Of Long-Term Debt (2.7) (0.3) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Issuance Of Common Shares 0.0 24.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 11.7 0.0 6.8 0.0 0.0 0.0 0.0 (169.8) (339.7) (679.4) (764.3) (1,019.1)Net Cash Provided By Financing Activities 9.0 24.0 6.8 0.0 0.0 0.0 0.0 (169.8) (339.7) (679.4) (764.3) (1,019.1)

Cash From Discontinued Operations 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Increase (Decrease) In Net Cash (2.5) (2.7) (20.4) 1.7 6.7 21.0 61.4 (29.3) 49.6 (91.9) 55.5 (30.0)Net Cash At Beginning Of Period 6.6 4.1 1.4 (19.0) (17.3) (10.6) 10.5 71.9 42.6 92.2 0.3 55.8Net Cash At End Of Period 4.1 1.4 (19.0) (17.3) (10.6) 10.5 71.9 42.6 92.2 0.3 55.8 25.8

Free Cash FlowOperating Cash Flow (12.5) (11.6) (4.1) 2.2 (17.5) (3.9) 167.1 244.6 391.7 589.0 818.2 1,084.4Change In Working Capital 0.2 6.8 (0.6) 0.2 (3.0) (1.1) (4.7) (3.0) (1.2) (0.4) 2.9 5.8Capital Expenditures (0.2) 0.0 (0.4) (0.5) (0.6) (0.7) (0.8) (0.9) (1.0) (1.0) (1.0) (1.0)Free Cash Flow (12.5) (4.8) (5.1) 1.8 (21.1) (5.7) 161.6 240.7 389.5 587.7 820.1 1,089.3

Free Cash Flow Per Share ($0.83) ($0.25) ($0.23) $0.08 ($0.99) ($0.27) $7.24 $10.73 $17.28 $25.96 $36.07 $47.70Diluted Shares Outstanding 15.0 19.4 21.9 22.0 21.2 21.2 22.3 22.4 22.5 22.6 22.7 22.8


Exhibit 26 - Transition Therapeutics Inc. Statement Of Cash Flows (F2006-F2017E)



Appendix I – Alzheimer’s Disease

Shocking Numbers Alzheimer’s disease (AD) is a significant cause of death in the US, killing approximately 100,000 people a year. It affects more than 5 million Americans and 15 million people worldwide. These numbers are expected to increase dramatically over time (Exhibit A) simply as a function of a growing elderly population. By 2050, it is predicted that AD will affect 11 to 16 million Americans. In the US alone, direct and indirect costs associated with AD are at least US$100 billion annually.

Source: US Census Bureau; Hebert et al.

Exhibit A - Projected AD Prevalence (2000-2100)

Understanding AD AD, the most common cause of dementia, is a neurological disorder with a progressive loss of cognitive function. Earliest symptoms include memory loss, disorientation to time or place, difficulty with concentration, calculation, language, and judgement. As AD progresses, about 60% of patients experience severe behavioural disturbances such as anxiety, suspiciousness, aggression, and hallucinations. In late stages of the disease, patients are incapable of self-care.

The only definitive way of diagnosing AD is to perform brain autopsy after death. However, specialized doctors can diagnose AD correctly up to 90% of the time. The duration of the illness can vary from 3 to 20 years. On average, AD patients live from 8 to 10 years after they are diagnosed or after the first symptoms of memory loss. Patients usually do not die from AD itself, but rather from secondary infections (e.g. pneumonia) that take over as the body’s organs decline in function.

AD is characterized by the development of plaques (clumps) and tangles (knots) in the brain (Exhibit B). Although scientists have not yet determined their exact role in AD, plaques and tangles are mostly found in brain regions important for cognitive function such as memory.

♦ Beta-amyloid plaques: Beta-amyloid is a small fibrillar peptide that is cleaved by a series of enzymes called secretases from the amyloid precursor protein (APP), a transmembrane protein found in healthy neurons. In a healthy brain, these fragments of protein are broken down and eliminated. In AD, beta-amyloid peptides abnormally accumulate in the spaces between neurons to form hard, insoluble, neuritic plaques.



♦ Neurofibrillary tangles: In healthy neurons, the tau protein interacts with tubulin to stabilize microtubules and promote tubulin assembly into microtubules, which are involved in axonal transport. In AD, a hyperphosphorylated form of the protein tau accumulates inside the neurons and forms neurofibrillary tangles. It causes the microtubule structures to collapse. As a result, the axonal transport of nutrients and chemical signals becomes defective, and the affected neurons degenerate and die.

Scientists have found other brain changes in people with AD. As the disease progresses, there is an overall shrinkage of brain tissue, particularly in areas of memory and thinking (Exhibit B). In addition, the brain produces less neurotransmitters, like acetylcholine, which carry messages between nerve cells. Scientists have also observed brain inflammation in AD patients.

Source: American Health Association Foundation.

Exhibit B - Brain Changes During AD

Numerous Risk Factors

The causes of AD are not well understood. However, a number of risk factors that increase the likelihood of developing AD have been identified.

♦ Aging: Increasing age is the most important risk factor. Most individuals with the disease are 65 or older. AD touches 5%-10% of people over 65 and nearly half of those over 85. This sporadic form of AD is responsible of about 90-95% of all AD cases.

♦ Genetic: Those who have a family member with AD are more likely to develop the disease, and the risk increases if more than one family member have the illness. Scientists have identified four genes that increase the risk of developing AD:

− Mutations in the gene encoding amyloid precursor protein (APP) on chromosome 21. This mutation results in the production of beta-amyloid plaques and early onset AD, a rare form of AD that usually occurs between the ages of 30 and 60.

− Mutations in the genes encoding presenilin 1 and 2 (PS1 and PS2), which are located on chromosome 14 and 1, respectively. These mutations also result in the production of beta-amyloid plaques and early onset AD.

− One form of the apolipoprotein E gene located on chromosome 19, the apoE4 form. In addition to raising the risk of developing AD in late life, apoE4 tends to make symptoms appear at a younger age than usual. About 15% of people have the apoE4 form.



♦ Other risk factors include head injury, cardiovascular diseases, type 2 diabetes, chronic inflammation conditions, post-menopausal state (twice as many women get AD than men), Down’s syndrome, and unhealthy lifestyles.

AD appears to develop when the combined effects of the risk factors cross a certain threshold. At this point, they overwhelm the natural self-repair mechanisms in the brain and cause the loss of cognitive function.

Approved Treatments Are Suboptimal

There is currently no effective treatment for AD. Five medications are currently approved by the FDA to treat the symptoms of AD (Exhibit C). They improve memory deficits temporarily but do not cure or halt the disease. In addition, AD medications do not work for everyone; some of the most commonly used drugs work in less than half the people tested. Antidepressants, antipsychotics and axiolytics are also commonly prescribed for AD to help control behavioral symptoms.

* Previously know as Reminyl.** Still available but no longer actively marketed by the manufacturer.*** ChEI = Cholinesterase inhibitor; NMDARA = NMDA receptor antagonist.

Source: National Institute On Aging.

NovartisFirst HorizonForestMemantine Namenda NMDARA

All stagesMild-moderateMild-moderateMild-moderateModer.-severe

Exelon ChEITacrine Cognex** ChEI

200019932003

Donepezil Aricept ChEIGalantamine Razadyne* ChEIRivastigmine

Year Manufacturer

19962001

Pfizer/EsaiJNJ

Drug Trade Name Class*** Approved For

Exhibit C - FDA-Approved Treatments For AD

Four of the FDA-approved AD treatments work by inhibiting the enzyme cholinesterase. Cholinesterase inhibitors are believed to prevent the breakdown of acetylcholine, and help preserve the ability of nerve cells to transmit messages. However, as AD progresses, less acetylcholine is produced by the brain; therefore, cholinesterase inhibitors may eventually lose their effect. Common side effects of these drugs include nausea, vomiting, and weight loss. They also increase the risk of having gastrointestinal problems. Tacrine also causes troublesome side effects and as a result, it is rarely used. No published study directly compares these drugs and since they have the same mechanism, it is not expected that switching from one to another will produce different results. However, an AD patient may respond better to one drug than another.

Memantine is classified as a N-methyl-D-aspartate (NMDA) receptor antagonist. It is prescribed for moderate to severe AD, although it is also limited in its effects. By blocking NMDA receptors, Memantine is believed to protect brain cells against excess glutamate. When produced in excessive amounts, glutamate overstimulates NMDA receptors allowing too much calcium into nerve cells, leading to cells death. Side effects include dizziness, headache, constipation, and confusion. Cholinesterase inhibitors and NMDA antagonists can be prescribed in combination.



Products In Development

New types of agents are being developed to slow or stop the progression of AD (Exhibits D, E, F). Treatments under investigation include secretase inhibitors, anti-inflammatory drugs, statins, omega-3 fatty acid, antioxidants, ginkgo biloba, estrogen, antibodies, and vaccines. The majority of disease-modifying drugs in development target the formation of amyloid plaques. New delivery systems are also being developed to overcome the side effects associated with current treatments.

Bapineuzumab (AAB-001) Beta-amyloid antibody Mild-moderate Wyeth/Elan

NeurotrophicTramiprosate (Alzhemed)Xaliproden (SR57746)Source: NIH; PhRMA; Company reports.

Mild-moderateMild-moderateMild-moderate

NeurochemSanofi-Aventis

Amyloid cascade inhibitor

Omega-3 supplementsSecretase modulatorGnRH hormone agonistNMDA receptor antagonist

Unspecified ForestRivastigmine transdermal patchRosiglitazone XR (Avandia)

Novartis/OnoGSK

NMDA receptor antagonistCholinesterase inhibitorPPAR gamma agonist

Mild-moderate

Memantine MR (Namenda)Neramexane

Mild MyriadMild-moderate Voyager

FlurizanLeuprolide acetate (VP4896)

Moder.-severe Forest

Stage Company

Mild-moderate NIA/Martek

Drug

Docosahexaenoic acid (DHA)

MechanismExhibit D - AD Treatments In Phase III Clinical Development

ZT-1 Cholinesterase inhibitor Moderate DebiopharmTTP488 RAGE antagonist Mild-moderate Pfizer/TransT.Simvastatin (Zocor) HMG-CoA reductase inhibitor Mild-moderate NIA/MerckSGS742 GABAB receptor antagonist Mild-moderate SaegisSAM-531 n.a. Mild-moderate WyethRasagiline (Agilect) MAO-B inhibitor Mild-moderate Teva/EsaiRaloxifene Estrogen receptor modulator Unspecified NIA/KaiserPRX-03140 5-HT4 receptor agonist Mild Epix/GSKPBT2 n.a. Mild PranaNovasoy Soy isoflavone supplements Mild-moderate Wisconsin UnivMK-0952 n.a. Mild-moderate MerckMK-0249 n.a. Mild-moderate MerckMEM-3454 Nicotinic alpha-7 agonist Mild-moderate Memory/RocheMEM-1003 L-type Ca channel modulator Mild-moderate MemoryLY450139 Dihydrate Gamma-secretase inhibitor Mild-moderate Eli LillyLY2062430 Beta-amyloid antibody Mild-moderate Eli LillyLecozotan SR (SRA-333) n.a. Mild-moderate WyethIntravenous immunoglobulin Antibodies Mild-moderate Weill/BaxterHF0220 Natural human steroid Mild-moderate Hunter-FlemingEgb 761 (Tanakan) Extract of Ginkgo Biloba Mild-moderate IpsenCX717 AMPA receptor enhancer Mild-moderate CortexAZD3480 (TC-1734) Nicotinic receptor agonist Mild-moderate Targacept/Astra

Mild-moderate Wyeth/ElanAL-108 Peptide derived from ADNP Unspecified AllonACC-001 Active immunization

Exhibit E - AD Treatments In Phase II Clinical DevelopmentDrug Mechanism Stage Company

Source: NIH; PhRMA; Company reports.



Source: NIH; PhRMA; Company reports.

UnspecifiedUnspecifiedUnspecified

Wyeth

T-817MA NeuroprotectorSSR 180711

Toyama

UnspecifiedUnspecifiedMild-moderateUnspecifiedUnspecifiedMild-moderateMild-moderate

UnspecifiedMild-moderate

Veterans AffairsGSKWyethMemory

Sanofi-Aventis

PfizerMerckWyeth

TransitionNovartisCeregene

Affiris AstraZenecaAstraZenecaNIASanofi-Aventis

Mild-moderate

UnspecifiedUnspecified

n.a.

Unspecified

Mild-moderateUnspecified

SRA-444 n.a.alpha7 nicotinic agonist

V950 VaccineSAM-315 n.a.

MEM-1414 PDE4 inhibitorPF-04360365 n.a.

GSK933776A n.a.GSI-953 n.a.

CERE-110 Growth factor gene therapyD-Pinitol (NIC5-15) Natural product

AZD-103 Neurotoxic fibrils break downCAD-106 n.a.

Vit. E, vit. C, a-lipoic acid, CoQ Anti-oxydant treatmentAVE8112 PDE IV inhibitor

Exhibit F - AD Treatments In Phase I Clinical DevelopmentDrug Mechanism Stage CompanyAffitope AD01AZD0328 n.a.AZD1080

Vaccine

The AD Market The market for AD drug therapy in the US, Europe, and Japan exceeded US$3 billion in 2006; with the US market accounting for over half of the revenues. The global AD market should continue to experience solid growth over time driven by demographic changes, increased physician and patient awareness, improved diagnostic tools, and introduction of new treatments. Sales of Alzheimer’s therapies are estimated to reach over US$7.8 billion by 2010 in the US, Europe, and Japan. However, the level of reimbursement for AD drugs is currently very low and could be a restraint to market expansion.

Cholinesterase inhibitors currently account for about 80% of the market, Aricept being the most popular. However, cholinesterase inhibitors are expected to gradually decline following the entry of generics from 2008 onwards. The launch of disease-modifying drugs would represent a major breakthrough in the AD market.



Appendix II – Schizophrenia

No Effective Treatment For Cognitive-Impairment Related To Schizophrenia

Schizophrenia affects about 2 millions Americans; with more than 60% suffering from cognitive impairment. In the US alone, direct and indirect costs associated with schizophrenia exceed US$32.5 billion annually. The disorder usually begins between the ages of 15 and 25. Symptoms are classified in three categories: 1) positive (e.g. hallucinations, delusions), 2) negative (e.g. blunted emotions, disturbances in social behaviour), and 3) cognitive (e.g. impairments in attention, memory, and problem-solving). The exact cause of schizophrenia remains unknown. Several genes and environmental stressors (e.g. disease or injury at the time of birth) have been identified as risk factors that increase the likelihood of developing schizophrenia.

Medications currently approved for schizophrenia have limited capacity in treating negative and cognitive symptoms. Antipsychotic medications are usually prescribed and most of them are successful in treating hallucinations and thought disorders. Older antipsychotics, such as Chlorpromazine, may cause important side effects including abnormal muscle movements and tremors. Newer, atypical antipsychotics, such as Clozapine and Risperidone, are effective even in people who do not respond to older drugs (about 30%), but several side effects are also associated with their chronic use. Because patients respond differently to antipsychotic drugs, it may take several months to find the right one and the right dosing. Global sales of antipsychotics were approximately US$15.5 billion in 2005. Hence, there is an acute need to develop treatments for schizophrenia that are more effective in treating negative and cognitive symptoms and that have fewer side effects. A number of medications to treat cognitive deficits are currently in clinical development, the majority being in Phase II (Exhibit G).

For Cognitive Impairment Related To Schizophrenia

nananaCOMT gene inhibitor

Noradrenaline reuptake inhibitorSelective cannabionoid 1 antagonistNicotinic receptor agonistCholinesterase inhibitor

MerckNIMH/MerckNIMH/Roche

Partial dopamine agonist/antagonist andserotonin receptor agonistDopamin and serotonin receptor antagonistNMDA receptor antagonist

8 a.a. peptide derived from ADNPActivation of sleep/wake centers

Sanofi-AventisAstraZenecaJNJMerck

MK0777Tolcapone

Wyeth

TitanForest

NIMH/AllonCephalonEli Lilly

AZ3480GalantineMK0249MK0557

Bifeprunox

IloperidoneMemantine

AL-108ArmodafinilAtomoxetineAVE1625

Source: NIH; Schizophrenia.com

Phase Drug Mechanism

III

II

Exhibit G - Treatments In Clinical Development

Company



Appendix III – Diabetes

A Large And Growing Disease

Diabetes is a chronic disorder marked by high levels of blood glucose, resulting from defects in insulin metabolism. It increases the risk of many serious complications; two out of three diabetic people die from heart disease or stroke. In 2005, 20.8 million Americans were suffering from diabetes (14.6 million diagnosed cases and 6.2 million undiagnosed), and 41 million more were considered pre-diabetic. The prevalence of diagnosed persons in the US could reach 30 million by 2050. In the US only, total costs associated with diabetes exceed US$132 billion per year. In 2005, the global insulin market was worth US$7.5 billion and the anti-diabetic medications market was about US$10 billion. There are two major types of diabetes:

♦ Type 1 diabetes develops when the pancreatic cells are unable to produce insulin. Usually identified in children and young adults, it accounts for about 5-10% of all diagnosed cases of diabetes. Risk factors include autoimmune disorders, genetic mutations, and environmental stressors. Type 1 diabetes is usually treated with insulin (injected or inhaled). The FDA recently approved a pill for type 1 diabetes called Symlin (Exhibit H).

♦ Type 2 diabetes develops when the body is unable to properly use insulin. As the need for insulin increases, the beta cells gradually lose their ability to produce it. Type 2 diabetes accounts for 90-95% of all diagnosed cases. Risk factors include aging, obesity, family history, level of physical activity, and ethnicity. Type 2 diabetes is treated with anti-diabetic pills (Exhibit H) and insulin.

Source: American Diabetes Association; NIH.

Synthetic form of exendin-4, a naturally occuring hormoneproduced by the intestines that increase insulin secretion.

slow the breakdown of some sugar.Synthetic form of amylin, a hormone produced along withinsulin by the beta cells.

Prevent the breakdown of GLP-1, which reduces bloodglucose.Block the breakdown of starches in the insulin,

Decrease the amount of glucose produced by the liver,help insulin work better in the muscle and fat.

Decrease the amount of glucose produced by the liver,make muscle more sensitive to insulin.

Incretin mimetics(e.g. Byetta)

Stimulate the beta cells to release insulin.



Synthetic amylin(e.g. Symlin)

(e.g. Januvia)Alpha-glucosidase inhibitors(e.g. Glyset, Precose)

Thiazolidinediones(e.g. Actos, Avandia)DPP-4 inhibitors

Biguanides(e.g. Glucophage)

(e.g. Prandin)D-phenylalanine derivatives(e.g. Starlix)

Sulfonylureas(e.g. Amaryl, Glucotrol)Meglitinides

Exhibit H - FDA-Approved Medicines For Diabetes

Class Of Drugs Mechanism Of Action



Percentage of companies covered by Laurentian Bank Securities Equity Research within each rating category.

Appendix IV – Important Disclosures

Company Ticker Disclosures*

Allon Therapeutics Inc. NPC-T Nil Transition Therapeutics Inc. TTH-T, TTHI-O Nil

The analyst(s) certify that (1) the views expressed in this report in connection with securities or issuers they analyze accurately reflect their personal views and (2) no part of their compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by them in this report. The Research Analyst’s compensation is based on various performance and market criteria and is charged as an expense to certain departments of Laurentian Bank Securities (LBS), including investment banking.

* Legend

A The Analyst, in his/her own account or in a related account, owns securities of this issuer.

L LBS collectively beneficially owns in excess of 1% of one or more classes of the issued and outstanding equity securities of this issuer.

O The Director of Equity Research/Co-Director, in his/her own account or in a related account, owns securities of this issuer.

U Within the last 24 months, LBS has undertaken an underwriting liability with respect to equity securities of, or has provided advice for a fee with respect to, this issuer.

V The Analyst has visited material operations of this issuer.

P This issuer paid a portion of the travel-related expenses incurred by the Analyst to visit material operations of this issuer Laurentian Bank Securities Equity Research Ratings Distribution

4%

43%

4%

9%4%

35%

0%

10%

20%

30%

40%

50%

Top Pick Buy Spec Buy Hold Reduce Tender



Recommendation LBS (Laurentian Bank Securities) recommendation terminology is as follows: Terminology

Top Pick Our best investment idea, the greatest potential value appreciation. Buy The stock is expected to generate significant risk-adjusted returns over the next 12 months. Hold The stock is expected to generate modest risk-adjusted returns over the next 12 months. Reduce The stock is expected to generate negative risk-adjusted returns over the next 12 months.

Our ratings may be followed by “(S)” which denotes that the investment is speculative and has a higher degree of risk associated with it.

Additionally, our target prices are based on a 12-month investment horizon.

The information contained in this document is based on what we deem to be reliable sources, but no guarantee or promise, explicit or implicit, is given as to the accuracy and exhaustiveness of these sources. This report shall under no circumstances be considered an offer to buy or sell, or a request to buy and/or sell the stocks mentioned. Laurentian Bank Securities Inc. and its employees may not be held liable for any monetary losses stemming from the implementation of the recommendations contained in this document. Laurentian Bank Securities Inc. and/or its officers, directors, representatives, traders, analysts and members of their families may hold positions in the stocks mentioned in this document and may buy and/or sell these stocks on the market or otherwise. Stocks in foreign currency may be adversely affected by exchange rate fluctuations. Laurentian Bank Securities Inc. is a wholly-owned subsidiary of Laurentian Bank of Canada. The opinions, projections and estimates are those of the Economic and Financial Research department of Laurentian Bank Securities Inc. as at the date appearing on the cover page, and are subject to change without prior notice. Laurentian Bank Securities Inc. may, in exchange for remuneration, act as a financial advisor or tax consultant for, or participate in the financing of companies mentioned in this document. This study may not be reproduced, in whole or in part, without the consent of Laurentian Bank Securities Inc.



Laurentian Bank Securities (LBS)President

Michel Trudeau, MBA Institutional Equity

Simon Lussier, MBA (514) 350-3060 Senior Vice President [email protected]

Research

Yuri Lynk, MSc, CFA (514) 350-2876 Head of Equity Research Materials Analyst [email protected] David Buma, CFA (514) 350-2957 Deputy Head of Equity Research Industrial Products Analyst [email protected] Alex Grassino, MSc (514) 350-2855 Information Technology Analyst [email protected] Catherine Bouchard, MSc, MBA (514) 350-2938 Healthcare Analyst [email protected] Qing Ji, MSc, MBA (514) 350-2874 Financial Services Analyst [email protected] Alka Patel (514) 350-2941 Consumer Products Analyst [email protected] Mathieu Chevrier (514) 350-2949 Research Associate [email protected]

Trading

Maurice Gariepy (514) 350-3055 Head Trader [email protected] Demitri Prassinos (514) 350-2823 [email protected]

Sales

Suzy Champagne, MSc, CFA (514) 350-3055 [email protected] Marcia Wisniewski, CFA (416) 865-5982 [email protected] Patrick D’Amico, MBA (514) 350-2988 [email protected]

Investment Banking

Patrick Langlois, CFA, MBA (514) 350-3045 [email protected]

Frédéric Beausoleil, CFA (514) 350-2839 [email protected]

Fixed Income Sales Division

Chris B. Ward (514) 350-2904 Vice President Sales [email protected]

Syndication

Pierre Godbout, CIM (514) 350-3050 Vice President [email protected]

Retail Division

Riccardo Magini (514) 350-2960 Vice President [email protected]

Economics & Strategy

Carlos Leitao (514) 350-3000 Chief Economist [email protected] Sébastien Lavoie (514) 350-2931 Economist [email protected]

Stéphane Martial (514) 350-2881 Trainee [email protected]

Martine Bérubé (514) 350-3006 Research Assistant [email protected]

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