Sirona Biochem Si - cash.ch · 2015-01-12 · 12 January 2015 B Sirona Biochem Page 3/33...

12 January 2015 Sirona Biochem

FIRST BERLIN Equity Research

Analyst: Jens Hasselmeier, Tel. +49 (0)30 - 80 93 96 83

12

Sirona Biochem Siro

Canada / Pharmaceutical/Biotechnology

Primary: TSX Venture Secondary: Quotation Board Frankfurt

RATING BUY PRICE TARGET C$0.90

Bloomberg: SBM CN Return Potential 542.9% ISIN: CA82967M1005

Initiation of Coverage

Risk Rating High

MAXIMIZING THE COMMERCIAL VALUE OF CARBOHYDRATE-BAS ED DRUGS Jens Hasselmeier, Tel. +49 (0)30 - 80 93 96 83

FINANCIAL HISTORY & PROJECTIONS 2012 2013 2014E 2015E 2016E 2017E

Revenue (C$m) 0.00 0.00 0.00 0.00 7.26 18.51

Y-o-y growth n.a. n.a. n.a. n.a. n.a. 155.0%

EBIT (C$m) -3.02 -2.64 -3.41 -3.50 3.86 15.02

EBIT margin n.a. n.a. n.a. n.a. 53.2% 81.1%

Net income (C$m) -3.10 -2.57 -3.41 -3.50 3.29 12.77

EPS (diluted) (C$) -0.04 -0.03 -0.03 -0.02 0.02 0.09

DPS (C$) 0.00 0.00 0.00 0.00 0.00 0.00

FCF (C$m) -2.22 -2.62 -2.54 -3.49 2.12 10.87

Net gearing 57.1% 55.7% 49.1% 206.9% 24.5% 11.0%

Liquidity (C$m) 0.13 0.93 0.56 0.31 0.93 11.80

RISKS Risks to our price target include but are not limited to: development risk, financial risk, marketing risk and regulatory risk.

COMPANY PROFILE Vancouver-based Sirona Biochem is a cosmetic ingredient and drug discovery company with a proprietary platform technology. The firm’s laboratory, TFChem, is located in France and specialises in stabilising carbohydrate molecules with the goal of improving efficacy and safety.

MARKET DATA As of 1/9/2015

Closing Price C$ 0.14 Shares outstanding 128.15m Market Capitalisation C$ 17.94m 52-week Range C$ 0.09 / 0.19 Avg. Volume (12 Months) 469,108 Multiples 2013 2014E 2015E P/E n.a. n.a. n.a. EV/Sales 0.0 0.0 0.0 EV/EBIT n.a. n.a. n.a. Div. Yield 0.0% 0.0% 0.0% STOCK OVERVIEW

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Sirona Biochem Corp S&P/TSX Venture Composite Index

COMPANY DATA As of 31 Jul 2014

Liquid Assets C$ 0.34m Current Assets C$ 0.92m Intangible Assets C$ 2.21m Total Assets C$ 3.16m Current Liabilities C$ 0.87m Shareholders’ Equity C$ 1.64m SHAREHOLDERS Géraldine Deliencourt-Godefroy 8.1% Gestys 4.9% Howard J. Verrico 3.4% Douglas B. Johnson 3.1% Free Float 80.5%

Sirona Biochem is a cosmetic ingredient and drug discovery firm with a proprietary platform technology. Through its French subsidiary, TFChem , the company specialises in stabilising carbohydrate molec ules with the goal of improving efficacy and safety. Sirona Biochem is focusing on attractive indications such as the treatment of dia betes, which is predicted to be the 7th leading cause of death by 2030 . Our pipeline valuation yields a price target of CAD0.90. We initiate coverage with a Buy recommendation.

Innovative, multifaceted R&D approach Sirona Biochem’s proprietary fluoridation technology is a novel technique for strengthening carbohydrate molecules. The advantage of this technology is that it can be widely applied in many different fields, with the aim of designing new compounds and technologies as well as for the improvement of existing ones. TFChem won several scientific awards and received European Union and French government grants for its R&D projects.

Promising new technologies Sirona Biochem’s two leading technologies are its anti-diabetes treatment SBM-TFC-039 and its skin lightening compounds TFC-723 and TFC-849, which have displayed promising performance results.

Strong partnerships Sirona Biochem closed a global exclusive licensing agreement with Obagi Medicare Products, a subsidiary of Valeant Pharmaceuticals International, for the commercialisation of skin lightening compound TFC-849. Sirona Biochem also signed an exclusive licensing agreement with Chinese pharma company Wanbang Biopharmaceuticals for development of SBM-TFC-039 in the People’s Republic of China.

Buy recommendation In our valuation, we focus on those projects/products which are most advanced – skin lightening compound TFC-723 and TFC-849 as well as the anti-diabetes treatment SBM-TFC-039. Our pipeline valuation model yields a price target of CAD0.90, corresponding to a return potential of 543%.

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CONTENTS PAGE

Sirona Biochem – Executive Summary......................................................................................................... 1 Investment Case ........................................................................................................................................... 3 SWOT Analysis............................................................................................................................................. 4 Valuation....................................................................................................................................................... 6

Pipeline Valuation Methodology .............................................................................................................. 6 Financial Analysis.................................................................................................................................... 7 Products .................................................................................................................................................. 9

Technology, Pipeline and Products............................................................................................................... 9 Technology.............................................................................................................................................. 9 Pipeline ................................................................................................................................................. 10 Products ................................................................................................................................................ 10

Market Environment.................................................................................................................................... 17 Type 2 Diabetes Market ........................................................................................................................ 17 Skin Lightening Treatment Market......................................................................................................... 21

Partnerships and Collaborations ................................................................................................................. 22 Partnerships/Licensing Agreements...................................................................................................... 22 Existing Collaborations.......................................................................................................................... 23 Letters Of Intent for Collaboration ......................................................................................................... 23

Financial History And Outlook..................................................................................................................... 24 Financial History.................................................................................................................................... 24 Income Statement: Q3 and 9M 2014..................................................................................................... 24 Cash Flow Statement ............................................................................................................................ 24 Balance Sheet....................................................................................................................................... 25 Financial Outlook................................................................................................................................... 25

Newsflow..................................................................................................................................................... 26 Key Events in the Last 6 Months........................................................................................................... 26

Management ............................................................................................................................................... 27 Shareholders & Stock Information .............................................................................................................. 29 Income Statement....................................................................................................................................... 30 Balance Sheet............................................................................................................................................. 31 Cash Flow Statement.................................................................................................................................. 32

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INVESTMENT CASE

Innovative, multifaceted technology Carbohydrate molecules are vital to countless biological processes and hence their manipulated use has a vast untapped potential in pharmaceuticals and cosmetics. The sensitivity of carbohydrate molecules to enzymes, and their subsequent tendency to degradation has in the past meant that it was not possible to develop effective carbohydrate based medical/cosmetic compounds. Sirona Biochem’s proprietary fluorination technology is a novel technique for strengthening carbohydrate molecules that allows this problem to be overcome and opens up several potential markets in pharmaceuticals, cosmetics and biological ingredients. The advantage of this technology is that it can be widely applied in many different fields, with the aim of designing new compounds and technologies, as well as for the improvement of existing ones. With this foundation, Sirona Biochem have already managed to develop compounds for the treatment of diabetes, for skin lightening, anti-aging, and cell/transplant tissue preservation. Multiple attractive potential markets Due to the multifaceted nature of Sirona Biochem’s technology, the compounds that have been developed target unrelated but very promising markets. Two of Sirona Biochem’s leading technologies are in the treatment of diabetes and skin lightening products. At present there are a total of 387 million people worldwide suffering from diabetes of whom 209 million are diagnosed. This number is consistently increasing, with a forecasted 592 million sufferers expected by 2035. As yet there is no cure for diabetes, only treatment options for its management, there is subsequently a perpetual need for diabetic medications, with guaranteed room in the market for new and innovative technologies. In addition to this, Sirona Biochem has access to the skin lightening market, which particularly in Asia-Pacific and Japan where fair skin is a highly valued virtue is also large and rapidly expanding. The Japanese market is forecast to grow to USD7.2bn in 2015E and the market in Asia-Pacific is anticipated to have a volume of USD2.6bn in 2015E. Promising new technologies Sirona Biochem’s two leading technologies are its anti-diabetes treatment SBM-TFC-039 and its skin lightening compounds TFC-723 and TFC-849, which have displayed promising performance results. SBM-TFC-039 has undergone four pre-clinical studies all of which have demonstrated the hoped for results, as well as the outperformance of a similar FDA approved anti-diabetes treatment currently on the market. These positive results have since been corroborated by licensing partner Wanbang Pharmaceuticals. Skin lightening treatments TFC-723 and TFC-849 have been shown to be effective in depigmentation whilst passing industry standard tests for safety and have proved to be safer and more effective than other skin lightening compounds on the market. Licensing Agreements Despite its small size Sirona Biochem has been successful in securing a large number of licensing and collaboration agreements comprising a total of three licensing agreements, three collaboration agreements and two signed Letters of Intent for collaboration. Most significantly, Sirona has managed to secure a global licensing agreement for its skin lightening product TFC-849 with Obagi Medical Products, subsidiary of Valeant Pharmaceuticals, who will carry out the manufacture, distribution and global sales of the final commercial products and have already announced the beginning of the manufacture upscale procedure. For diabetes treatment compound SBM-TFC-039 Sirona has managed to secure a licensing agreement for China with pharmaceutical company Wanbang Pharmaceuticals. Sirona is expecting up to USD9.5m in upfront and milestone payments from this licensing agreement.

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SWOT ANALYSIS

STRENGTHS

● Technology has many potential applications Rather than being restricted to just one specific pharmaceutical or cosmetic field, Sirona’s expertise lie in their proprietary fluoridation technology, which has a wide range of potential applications, to the end of both the development of new compounds/technologies as well as the improvement of those already existing.

● Unique expertise in carbohydrate chemistry TFChem has developed a fluorination chemistry that can improve the pharmaceutical qualities of carbohydrate-based molecules by stabilising them.

● Promising lead products Sirona Biochem has so far delivered promising pre-clinical study data for its leading products; anti-diabetic SGLT2 inhibitor SBM-TFC-039 and skin lightening compounds TFC-723 and TFC-849. The products displayed the desired effects and have been shown to be more effective/safer than comparable existing products on the market.

● Strong management team Sirona Biochem has a strong management team that has experience in risk management.

● Several licensing/collaboration agreements secured Despite the small size of Sirona Biochem, they have been successful in obtaining several licensing and collaboration agreements with companies that have overlapping expertise, this helps with relieving the pressure on Sirona for product development through the necessary stages.

WEAKNESSES

● Necessary constant output of new technologies Given the necessity that Sirona Biochem transfers the responsibility for funding, clinical development, regulatory requirements, manufacturing, sales and marketing to licensing partners fairly early on in the development stage, it is necessary that they have a constant output of new technologies in order to insure company growth.

● Dependent on licensing agreements Due to the fact that Sirona Biochem is a small company with limited resources, in order to take compounds from the development stage, bring them to the market and sell them, Sirona is dependent on the obtaining of licensing agreements with leading pharmaceutical, cosmetic and biological ingredient companies that have the resources to carry out these industry necessities.

● Low royalty rates Sirona Biochem’s business model is reliant on the obtaining of licensing agreements at a very early development stage when the associated risk is still high. The price that they pay for letting other companies fund this risk is a low royalty rate when the product hits the market. It is subsequently necessary that product sales are high to ensure Sirona a substantial profit.

● Loss of key personnel Dr. Géraldine Deliencourt-Godefroy, the company’s Chief Scientific Officer, is a well-known award-winning synthetic chemist. It would be difficult for the company to compensate for the loss of Dr. Deliencourt-Godefroy and her expertise in the field of carbohydrate molecules.

● Product failures All of Sirona’s products are at early stages in the development process. As is the case with any R&D stage pharmaceutical/cosmetic company this carries an associated risk that with further investigation the products may prove to be less effective than hoped or in some way unsuitable for the market.

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● Milestone payments dependent on success of products Sirona’s income in the coming years is dependent on the milestone payments of licensing partners, these are dependent on the progress of the development of the products which at this early stage is an uncertain factor.

OPPORTUNITIES

● Attractive growth prospects for global diabetes mar ket The global number of diabetes sufferers is substantial and, due to modern lifestyle choices and population growth, constantly increasing. The chronic and incurable nature of diabetes mean that there is a perpetual need for medications to manage the disease, with guaranteed room in the market for new and innovative technologies, precisely what Sirona is providing.

● Attractive growth prospects for skin lightening mar ket For deep rooted cultural and historical reasons, fair skin is a highly desired physical attribute within Asia and Asia Pacific, particularly in China and India, where skin lightening products make up 71% and 45% of the skin care market respectively. The market is forecasted to continue growing at a rapid rate and there is currently no safe and effective skin lightening active ingredient on the market. This implies a distinct market opportunity for Sirona, should their product continue appearing as promising as it currently does.

● Easy to extend technologies to new applications Due to the nature of Sirona Biochem’s research, which is unspecific to any particular pharmaceutical or cosmetic sector, but rather a general technology which can be used to a wide variety of ends, Sirona is able, and should in future be able to generate a wide range of compounds for different purposes. The novel glycoproteins that Sirona have succeeded in developing stand as a good example of this. These proteins have cell-preservation properties and are currently being developed in two unrelated but promising directions; as anti-aging treatment and for cell preservation.

THREATS

● Change in regulation As with any activity in the pharmaceuticals sector, Sirona Biochem has to abide current legislation. Whilst we believe that the rules governing the development of biopharmaceuticals are sturdy at this time following years of uncertainty after legislation was drafted in the early 2000’s, we cannot rule out the possibility that a change in regulation may occur and cause a negative impact on Sirona’s business activities.

● Increased safety data requirements Since regulatory agencies such as the US Food and Drug Administration (FDA) are increasingly focusing on patient safety, additional safety data is required. This increases the timelines and costs for research and development projects.

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VALUATION

We have a CAD0.90 price target on Sirona Biochem shares. Possible future funding rounds and their potential dilutive impact are considered in our valuation. In our valuation, we focus on those projects/products which are most advanced or are already being marketed. These include skin lightening compound TFC-849 (Licensing partner Valeant Pharmaceuticals International are working on the development, commercialisation and sales of products containing this compound, market approval pending) and the SGLT2 inhibitor anti-diabetes treatment SBM-TFC-039 (pre-clinical trials). Our DCF and risk-adjusted NPV valuation model for the company is based on our biotechnology pipeline valuation model, which we have adjusted to Sirona Biochem’s business model. Our price target is derived in a four-step process:

1. We estimate the present value of post-approval cash flows for the main development projects in the company’s pipeline, using a DCF/rNPV approach.

2. We subtract the expected PV of development costs, company overhead, and financing costs to arrive at the pipeline’s NPV.

3. We factor in the risk-adjusted present value of any future milestone payments. We deliberately separate these pre-approval cash inflows in our valuation model.

4. We subtract net debt from the enterprise value arrived at in the previous steps which leads to the fair value.

Figure 1: Pipeline Valuation Summary

Compound Project1) Patient Pop

Treatment Cost

Market Size

Market Share

Peak Sales

PACME

Margin2)Discount Factor

Patent

Life3)Time to Market

SGLT 2 Inhibitor DI-CN C $21M 88,560K $203 $17,995M 5% $3,028M 5% 25% 9 8 YearsSGLT 2 Inhibitor DI-RoW C $58M 138,418K $362 $50,163M 5% $8,442M 5% 25% 9 8 YearsTFC-849/-723 SKL-Asia C $96M 509,443K $15 $7,458M 6% $614M 5% 25% 16 1 YearsTFC-849/-723 SKL-US C $14M 16,480K $33 $541M 12% $89M 5% 25% 16 1 YearsPACME PV C $189M $76,157M $11,707M

Costs PV4) C $31MNPV C $158MMilestones PV C $2MNet cash (pro-forma) C $10MFair Value C $170MShare Count (pro-forma)Price Target C $0.911) A project typically refers to a specific indication or, where necessary or relevant, a combination between indication and geographic market

3) Remaining patent life after the point of approval

4) Includes company-level R&D, G&A, Financing Costs and CapEx; COGS and S&M are factored into the PACME margin for each project

2) PACME (Profit After Costs and Marketing Expenses) reflects the company's profit share on future revenues. This share may be derived in the form of royalties (outsourced marketing/manufacturing) or operating EBITDA margin (in-house model), or some mix of both (depending on the specific parameters of partnership agreements)

Present Value

186,272K

Source: First Berlin Equity Research

PIPELINE VALUATION METHODOLOGY

Our valuation of Sirona Biochem’s R&D portfolio is based on a two-step DCF and risk-adjusted NPV methodology. Development risks, including clinical and regulatory risks, are taken into account. Moreover, the market size and the expected timing of cash flows post-approval for each project are considered. Since we separate pre-approval milestone payments from post-approval cash flows, our valuation methodology is sensitive to development milestone payments. Each future milestone payment would result in an increase in the pipeline value.

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Figure 2: Valuation Methodology

Source: First Berlin Equity Research

Our valuation approach (see graph) is backward-propagating. We apply the same methodology for each R&D project and indication:

• Estimation of the total available market for the indication.

• Consideration of market share targets for each drug in the respective indication to forecast peak sales.

• Modelling of PACME (Profit After Costs and Marketing Expenses) margins as a function of target market share to derive potential peak cash flows.

• Estimation of timing and size of future cash flows by plotting a projected post-approval sales curve for the projects. Subsequently, future cash flows are discounted back to their present value as of the point of approval.

• Discounting the output of the above post-approval DCF valuation back to present, adjusting for two factors:

o Risk-to-market: the value at the end of each development stage for the inferred transition probability for that stage is discounted by using a recursive backward expected value method.

o Time-to-market: risk-adjusted future values at each stage based on expected timing, also considering planned development costs, are discounted.

• Subtraction of estimated cash costs for group level R&D, G&A and financing from the sum of the above-derived present values of each separate development project to arrive at a company-level NPV estimate.

FINANCIAL ANALYSIS

As mentioned above, our valuation model is linked to our financial forecasts on Sirona Biochem. Key performance indicators of our modelling and valuation approach are: Profit After Costs and Marketing Expenses (PACME) Sirona Biochem plans to partner its products with regard to sales, marketing and production. We thus pay special attention to an indicator we call Profit After Costs and Marketing Expenses (PACME). Since PACME always equals net revenues less Costs of Goods Sold (COGS), less Sales and Marketing (S&M), it is irrelevant whether PACME is received in the form of pure royalties (only a fraction of gross sales) or operating EBITDA (in-house scenario; higher COGS and S&M expenses), or any combination of the two.

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PACME is thus the top-line in our forecast models for Sirona Biochem. It is often unclear how a development project will proceed in cases when companies are still searching for a partner, negotiations are still ongoing, or non-disclosure clauses make it difficult to get key information on partnership agreements. Moreover, some projects are partnered globally while others are partnered only at a regional level. Trying to predict a company's share of revenues, COGS and S&M for accounting purposes is thus often not practical. Instead, we use our pipeline valuation model estimates for market size, pricing, market share and implied margins for each R&D project to determine PACME - regardless of the mixture of royalty payments and in-house efforts. Since PACME is the determinant with regard to future cash generation of a development project, it is of utmost importance to investors. Milestone payments Milestone payments are shown on a separate line item in our financial forecast model since they differ from recurring post-approval PACME inflows. Milestone payments are non-recurring success-based payments that are due when certain co-development agreements are achieved. In most cases, milestone payments have to be estimated due to the lack of detailed public information on these co-development agreements. Cash inflows following a milestone achievement are dependent on development progress and are estimated in our pipeline valuation model. Group level costs In order to calculate Sirona Biochem’s EV, the present value of R&D, overhead and financing costs is subtracted from the development pipeline’s PV. Development stages of the company’s R&D projects as well as the existence of co-development agreements are of major importance with regard to R&D spending and future royalties/milestone payments. Co-development agreements at an early-stage are beneficial with regard to lower R&D costs and the prospects for valuable milestone payments (high PV due to relative proximity in time). However, early-stage partnering also means that more risk is assumed by the partner. Thus, royalties are likely to be lower in the future. In our pipeline valuation model, we adjust estimated post-approval PACME project margins by considering known information on signed co-development agreements (or expected parameters of future agreements). Since co-development agreements also affect the company’s R&D costs, this circumstance is reflected in the respective line item in our forecast model. G&A and financing costs as well as our estimate of future debt funding requirements (if necessary) are also included in this line item. Funding requirements Funding is of utmost importance since smaller R&D companies are typically development-stage companies. We focus on several issues with regard to funding:

• Existing funding arrangements and their potential dilutive effect (for example due to outstanding convertible bonds or existing standby equity distribution agreements).

• Cash burn rates and the length of time that current liquidity is expected to last. • Based on monthly/quarterly cash burn, the need to raise additional equity or debt

capital. Keeping an eye on liquidity is not only important with regard to potential shareholder dilution, but also because it can be used as leverage in negotiations with potential partners. A high cash position may provide extra bargaining power to the management (especially when expense sharing provisions and royalty rates are being negotiated) and may thus have a great influence on EV.

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PRODUCTS

Our valuation is based on the most important products in Sirona Biochem’s product portfolio, TFC-849 and TFC-723, compounds shown to produce a melanin suppression (and therefore skin lightening) effect as well as SBM-TFC-039, a SGLT2 inhibitor anti-diabetes treatment. The main value driver in the near-term future will be the market approval of TFC-849. An overview of the company’s product portfolio is given in the following “Technology, Pipeline and Products” section of this report.

TECHNOLOGY, PIPELINE AND PRODUCTS

TECHNOLOGY

Carbohydrates, often referred to as sugars, are large biological molecules consisting of carbon, hydrogen and oxygen. They are a vital part of life, operating as a fuel, a component of DNA, and providing cell structure. Consequent to their fundamentality and relevance in almost all bodily processes, they also have potential to be used to specific pharmaceutical and cosmetic ends. This potential is however limited by their sensitivity to enzymes which results in their instability within the body and rapid breakdown. Sirona Biochem’s proprietary technology has enabled the sidestepping of this obstacle. The fluorine chemistry technique, developed by Sirona Biochem’s French subsidiary, TFChem, reinforces the weak bonds within the carbohydrates through the strategic placement of fluorine atoms within the molecule. This strengthens the carbohydrate molecules, improving their bioavailability and subsequently opening up opportunities for practical uses for carbon-based molecules. This comprises both the development of new robust compounds and the improvement of already existing ones from other companies.

Figure 3: Sirona’s Fluorine Chemistry Technique

Unstable compound

Sirona Biochem modified stable compound

Source: Sirona Biochem

The application of this technique in the TFChem research lab in France has resulted in the development of several compounds with specific potential within the therapeutic, cosmetic and biochemical industries. The most promising thereof are SBM-TFC-039, a SGLT2 inhibitor used to treat diabetes, and TFC-723 and TFC-849, innovative depigmenting (skin lightening) compounds.

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PIPELINE

Sirona Biochem is working on developing both pharmaceutical and cosmetic products and as such have two separate pipelines. Of their products, the SGLT2 inhibitor and skin lightening compounds are at the most advanced development stage.

Figure 4: Pharmaceutical Pipeline

R&D Stage

Product Phase I Phase II Phase III

SGLT2 Inhibitor (China) Licensing Status

SGLT2 Inhibitor (RoW*) Pre-Revenue

Anti-Inflammatory In Revenue

Anti-Infective

* RoW - Rest of World

Pharmaceutical Pipeline

Stage Available For Licensing

Chemistry / Patent

Pre-clinicalClinical

Market


Figure 5: Cosmetic Pipeline

R&D Stage

Product

Skin Lightening Licensing Status

TFC-849 Pre-Revenue

TFC-723 In Revenue

TFC-1067

Anti-Aging

Cosmetic Pipeline

Stage Available For Licensing

Chemistry / Patent

MarketTesting & Validation


PRODUCTS

SGLT2 Inhibitor Type 2 Diabetes treatment SBM-TFC-039

Status: Pre-Clinical Trials

DI-CN

CompoundPresent

ValuePatient

PopTreatment

CostMarket

SizeMarket CAGR

Market Share

Peak Sales

PACME Margin

Discount Factor

Patent Life

Parameters $19M 88,560K $254 $22,494M 7% 5% $3,785M 5% 25% 9

Diabetes China

SGLT 2 Inhibitor

DI-RoW

CompoundPresent

ValuePatient

PopTreatment

CostMarket

SizeMarket CAGR

Market Share

Peak Sales

PACME Margin

Discount Factor

Patent Life

Parameters $52M 138,418K $453 $62,703M 7% 5% $10,552M 5% 25% 9

SGLT 2 Inhibitor

Diabetes Rest of World

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Diabetes is a condition characterized by high blood sugar. Type 2 Diabetes implies the body’s inability to manage and control blood sugar levels due to insulin resistance. Insulin is the hormone responsible for the absorbance of glucose out of the blood stream and into muscles and fat tissue. When insulin resistant, the body’s cells fail to respond to the insulin and subsequently do not effectively remove glucose from the bloodstream. This can cause toxic concentrations of glucose in the blood, resulting in a huge range of often fatal health problems including blindness, kidney failure, cardiovascular disease and stroke. There are currently a wide range of both oral and injectable treatment options for type 2 diabetes; their underlying mechanisms, effectiveness and side effects vary significantly from person to person and there is as yet no foolproof treatment for diabetes which remains a global leading cause of premature death. SGLT2 (sodium-glucose co-transporter) inhibitors are a new and promising treatment option for type 2 diabetes, one of eight families of FDA approved oral anti-diabetes medications. Unlike many other existing medications, SLGT2 inhibitors do not attempt to normalise blood glucose levels by influencing the body’s production of/interaction with insulin. There are two SLGT2 inhibitor medications developed by Johnson and Johnson (obtained market approval in the US in 2013) and AstraZeneca and Bristol-Myers Squibb (obtained market approval in Europe in 2012) on the market. The SGLT2 is a specific membrane protein in the kidneys responsible for facilitating glucose’s transit over the plasma membranes in the kidneys and subsequently reabsorption into the bloodstream. The inhibition of the SGLT2 protein would limit glucose reabsorption and subsequently implies the management and control of excessive blood-sugar levels. By inhibiting the SGLT2 glucose is prevented from re-entering the blood stream and is instead passed in the urine.

Figure 6: Mode of Action: Sodium-Glucose Co-Transpo rter Inhibitors


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Current Status SBM-TFC-039 is currently in the pre-clinical trials stage and to date four separate promising study results have been announced.

• 23 February 2012 : A pre-clinical study shows that six hours after treatment, the blood sugar level of obese diabetic rats was reduced to the level of lean rats. There was also a strong correlation observed between the decrease in blood sugar level and the increase of glucose concentration in the urine indicating that SBM-TFC-039 was performing as intended.

• 29 February 2012 : After chronic dosing on obese diabetic rats SBM-TFC-039 reduced blood glucose levels by 48% in comparison to the test group.

• 29 June 2012 : SBM-TFC-039 was administered to monkeys and as hoped, glycosuria (excretion of glucose into the urine) was observed.

• 7 December 2012: Study from the Institut Universitaire de Cardiologie et de Pneumologie de Québec showed that SBM-TFC-039 outperformed one of its main competitors, Canagliflozin, developed by Johnson and Johnson. Six hours after administration SBM-TFC-039 had reduced blood glucose levels in diabetic rats by 44% in comparison to Canagliflozin’s 26%. Furthermore effects from SBM-TFC-039 were still observed at 48 hours post-treatment, whereas Canagliflozin’s effects wore off after 36 hours. Canagliflozin obtained market approval in the US in March 2013.

• 27 January 2014: Sirona signs exclusive licensing agreement with Chinese pharmaceuticals company Wanbang Biopharmaceuticals. In exchange for an exclusive license for Wanbang BioPharma to develop SBM-TFC-039 in the People’s Republic of China, Wanbang will provide upfront and milestone payments of up to USD9.5m in addition to royalty payments for product sales. Since January, three studies have been carried out by Wanbang Pharma on SBM-TFC-039 that have confirmed the positive results already obtained in Sirona Biochem’s pre-clinical studies.

Figure 7: Current status

Milestone Status

Compound synthesis Complete

Efficacy in mice Complete

Pharmacokinetics in rats Complete

Efficacy in normal and diabetic rats Complete

Selectivity for SGLT2 vs. SGLT1 Complete

Pharmacokinetics in monkeys Complete

Tolerability in rodents Complete

Ancillary pharmacology Complete

Licensing with potential partner(s) in Progress


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Skin Lightening Compounds TFC-723 and TFC-849

Current Status: Testing and Validation

SKL-Asia

CompoundPresent

ValuePatient

PopTreatment

CostMarket

SizeMarket CAGR

Market Share

Peak Sales

PACME Margin

Discount Factor

Patent Life

Parameters $86M 509,443K $18 $9,323M 2% 6% $768M 5% 25% 16

TFC-849/-723

Skin Lightening

SKL-US

CompoundPresent

ValuePatient

PopTreatment

CostMarket

SizeMarket CAGR

Market Share

Peak Sales

PACME Margin

Discount Factor

Patent Life

Parameters $13M 16,480K $41 $676M 2% 12% $111M 5% 25% 16

TFC-849/-723

Skin Lightening

There is a large market for skin lightening treatments In Asia Pacific where fairer skin is increasingly considered more attractive. Particularly in India, Japan and China, fair skin is seen as a representation of youth, beauty and affluence as it is considered an indication that one has not been carrying out extensive manual labour in the sun. Furthermore, skin lightening products can also be used to reduce sun damage or minimize the appearance of sun spots, freckles or uneven pigmentation which makes them attractive to Europeans and North Americans. Sirona Biochem have developed two skin depigmenting agents using their proprietary technology which in a number of studies have proved to be safer and more effective than other leading whitening agents; alpha arbutin and beta arbutin.

Current Status TFC-723 and TFC-849 have currently undergone six studies and tests in compliance with the requirements of the European Centre for the Validation of Alternative Methods (ECVAM) and Organization for Economic Co-operation and Development (OECD).

• 15 November 2012 : Study of the TFC-723 compound on human tyrosinase (the enzyme which produces melanin, the pigment that causes the darkening of the skin). It was observed that it inhibited melanin production seven times more effectively than beta arbutin, a leading whitening agent currently on the market.

• 22 November 2012: Study of TFC-849. Proved to be 7 times more effective than

alpha arbutin and 14 times more effective than beta arbutin.

• 29 November 2012: TFC-723 and TFC-849 were tested for stability under various chemical, enzymatic and biological conditions and at no point released the carcinogenic compound hydroquinone by contrast to both alpha and beta arbutin, which did.

• 7 January 2013: Industry standard study showed that neither of Sirona Biochem’s compounds are genotoxic (damaging to DNA) at doses of 0-5%.

• 12 February 2013: TFC-723 and TFC-849 shown to be non-ocular-irritants in industry standard study.

• 20 March 2013: TFC-723 and TFC-849 were tested for phototoxic potential and skin irritation. They both proved to be non-irritant and non-phototoxic.

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• 29 January 2014 : Sirona Biochem secured an exclusive licensing agreement for TFC-849 with global pharmaceutical company Valeant Pharmaceuticals International. In accordance with the extension of this agreement in April 2014 Sirona’s skin lightening compound will be manufactured, commercialised and sold by three of Valeant’s subsidiaries (Obagi Medicare Products, AMBI and Kinerase).


Milestone Status

Development of TFC-723, TFC-849 Complete

Efficacy in vitro Tyrosinase Inhibition of TFC-723/849 Complete

Stability (no hydroquinone) of TFC-723/849 Complete

Patent Complete

Safety: Ocular Tolerability of TFC-723/849 Complete

Safety: Genotoxicity of TFC-723/849 Complete

Safety: Irritability in RHE study of TFC-723/849 Complete

Selection of lead compound(s) Complete

Licensing with potential partner(s) in Progress


Anti-Aging Compound Glycoproteins modelled on ‘antifreeze’ glycoproteins observed in arctic fish are being developed and intended for use as anti-aging treatments. These observed glycoproteins protect cells from damage. It is hoped that this property can be used to prevent cell death which is the leading cause of visual aging.

Current Status As yet only one study has been published, however the preclinical development stage for Sirona Biochem’s anti-aging compound has recently been launched. 23 April 2014: Study comparing the lifetime of skin cells protected by Sirona Biochem’s compound to an unprotected control group. The promising results are presented in the following graph (see next page). 12 August 2014 : Sirona Biochem announced that TFChem received confirmation of CAD1.2m of funding from the French Public Investment Bank for the development of its anti-aging project. 22 September 2014 : With its recent funding Sirona Biochem launched the next stage of development (preclinical trials) for its anti-aging compounds.

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Figure 9: Skin cell viability



Milestone Status

Development of compounds Complete

Effectiveness in skin cell protection against stress conditions Complete

Patent filing for a first family of compounds Complete

Selection of lead compound Complete

Patent for a second family of compounds In Progress

Process Optimization In Progress

Batch synthesis Scheduled

Analytical Qualification and compound stability Scheduled

Innocuity study Scheduled

Anti-aging efficacy on skin explants Scheduled

Safety on skin microbial flora Scheduled

Extrinsic anti-agint efficacy: skin cell protection against oxidative stress Scheduled

Intrinsic anti-aging efficacy on skin cells Scheduled

Compound formulation Scheduled


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Biochemical Ingredients Sirona Biochem is also working using their proprietary technology to develop two different biochemical ingredients. The development of these substances is at an earlier pipeline stage than TFC-723/849 and SBM-TFC-039 and will therefore be less thoroughly examined in this report.

Adjuvants for Biological Preservation

Status: chemistry/patent In order to increase the amount of time that transplant organs remain suitable for transplant and subsequently increase their geographical range, Sirona Biochem are working on developing glycopeptides that should be able to preserve organs for a longer period of time than currently possible. The development process works on the basis of mimicking glycoproteins observed in arctic fish. These proteins have been shown to lower the freezing temperature of the fish and hence inhibit the growth of ice and protect cells from damage, a very useful property for a cell preservation biochemical. The compounds have been patented, but as yet no study results have been reported. Inducers (IPGMim™) Inducers are molecules that start the process of gene expression, a process necessary for creating recombinant proteins. Recombinant proteins are proteins that do not occur naturally, but are developed by bringing together DNA from different sources to various different medical ends, for example the development of insulin for diabetes patients. Sirona Biochem is working on producing inducers using their proprietary fluorination process. The goals for this inducer are that it…

• is more efficient at initiating the gene expression process. • is more stable, particularly at ambient temperatures. • is less toxic for the host organism. • has an Improved duration of gene expression.

Current Status To date, two studies have been carried out comparing Sirona Biochem’s IPGMim™ to IPTG, a leading commercially available inducer. It was demonstrated that IPGMim™ produces more protein compared to IPTG and that the production rate of IPGMim™ decreases slower than that of IPTG. A lot of further experimentation and studies will need to be carried out before the actual effectiveness of this product can be assessed and confirmed. In July 2013 Sirona Biochem signed a Letter of Intent for collaboration with French company Biogalenys with a focus on the collaborative development and study of these preserving technologies.

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MARKET ENVIRONMENT

Due to the broad range of applications of Sirona Biochem’s products, the company has several independent potential markets which are outlined in the following. The focus will lie on the markets relevant to Sirona Biochem’s leading products; skin lightening compounds TFC-723/849 and diabetes treatment SBM-TFC-039.

TYPE 2 DIABETES MARKET

According to the International Diabetes Federation (IDF), diabetes is a chronic condition affecting an estimated 387 million people worldwide of which 90% of the cases classify as type 2. In 2014 diabetes was the cause of 4.9 million deaths, in the same year diabetes expenditures reached USD612bn. RISK FACTORS AND SYMPTOMS Age: Risk of type 2 diabetes increases with age, over 25% of over 65 year-olds

suffer from diabetes Gender: Men and women (men slightly more prone) Risk Factors: Family history of diabetes, high BMI, unhealthy diet, high blood pressure Symptoms: Frequent urination, excessive thirst, increased hunger, weight loss, tiredness, vomiting, blurred vision

PREVALENCE OF DIABETES Diabetes is already a very prevalent disease across the globe, particularly in China, India and the USA.

• In 2013 in the USA there were 24.4 million diabetes sufferers (Source: IDF). • In China and India, these figures are 98.4 million and 65.1 million respectively.

Figure 11: Top 10 diabetes countries

Source: IDF

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MARKET FORECASTS Diabetes is a condition that has been afflicting ever increasing numbers of people. With the increasing world population, obesity trends, easy access to cheap, unhealthy foods and the increasing shift towards a more inactive lifestyle that come with modern technology, the amount of cases of diabetes is consistently growing. This is observed in the changing US diagnosis rates between 1980 and 2009.

Figure 12: Development of new diabetes cases

Source: Centers for Disease Control and Prevention

It is currently estimated that 46% of diabetes sufferers are undiagnosed. The decrease of this number with increasing awareness and improved medical care in developing countries represents another factor that will expand the market. Diabetes Forecast:

• The number of diabetes sufferers is expected to increase by 205 million by 2035 (Source: IDF).

• Diabetes is predicted to be the 7th leading cause of death by 2030 (Source: World Health Organisation).

SECONDARY COMPLICATIONS (ARISE AS A CONSEQUENCE OF DIABETES) (Source: American Diabetes Association (ADA)) Heart disease : Causes the death of 50% of diabetes sufferers Neuropathy 1: Experienced by 70% of diabetic adults, can necessitate

amputation; >60% of non-traumatic amputations of lower limbs are related to diabetes

High Blood Pressure : More than 71% of US adults with diabetes have hypertension

1 Loss of sensation in the extremities

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Blindness: Diabetes is the leading cause of newly diagnosed blindness in the US

Kidney failure: Diabetes was the main cause of kidney failure in 44% of the cases in 2011

Anxiety/depression: Individuals with a diabetes diagnosis have double the chance of

suffering from depression as those without

CURRENTLY AVAILABLE TREATMENTS Currently available treatments come in two main families, injectables and oral medications. Sirona Biochem’s SGLT2 inhibitor is an oral medication. It is common that diabetes is treated with a combination of two or more medications.

Oral Treatments:

There are 8 families of oral diabetes medications (including SGLT2 Inhibitors) that envelope all current FDA approved diabetes pills. As they all act in different ways to lower blood glucose levels they are often used together, although this can increase costs and the risk of side effects. However, for this reason, as nothing is foolproof, there is still room in the market for more medications. SGLT2 Inhibitors: Sirona Biochem is not the first to develop a SGLT2 Inhibitor to the end of anti-diabetes treatment. There are currently two FDA approved SGLT2 Inhibitors already on the market, Canagliflozin (brand name Invokana) and Dapagliflozin (brand name Farxiga/Forxiga). Canagliflozin is effective in reducing blood glucose levels and unlike many other diabetes treatments is not associated with a high risk of hypoglycaemia (low blood sugar). It does however increase the risk of hypotension (low blood pressure) and urinary tract infections (a common hazard associated with SGLT2 inhibitors due to the high sugar concentration in urine that they effect). There has been some concern from the FDA that Canagliflozin carries a small cardiovascular risk and an increased risk of stroke however evidence for these concerns is not statistically significant (Source: http://www.medscape.com). Dapagliflozin can lead to rapid weight loss and tiredness as well as dehydration, urinary tract infections and hypotension, these are not unexpected consequences of SGLT2 inhibition. Sulfonylureas: A group of anti-diabetic drugs of which there are three generations that act by increasing insulin release from the pancreas. The side effects and drug interactions differ between the different sulfonylurea drugs but all increase the risk of hypoglycaemia. Biguanides: Lower blood glucose levels by reducing the quantity of glucose produced by the liver as well as making muscle tissue more sensitive to improve glucose absorption. The most common biguanide is Metformin which is the first line drug choice for type 2 diabetes. It is not associated with any of the normal side effects of diabetes medication such as gastrointestinal problems or weight gain. In rare cases it can cause lactic acidosis, usually in patients with certain medical conditions such as kidney or liver disease. Meglitinides: A group of drugs that stimulate the release of insulin, taken before each of three meals, and which can cause hypoglycaemia. Meglitinides can cause a variety of problems such as vomiting when mixed with alcohol. Thiazolidenedions: A group of drugs that lower insulin resistance in muscle and fat as well as reducing glucose produced by the liver. These drugs are usually prescribed when other medicines are no longer sufficient.

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Side effects include muscle pain, weight gain and flu-like symptoms. Some Thiazolidinediones appear to increase the risk for heart failure in some individuals. DPP-4 Inhibitors: Orally administered drugs that reduces glucagon, a hormone that raises blood sugar levels. Usually used as a second or third line medication for patients already prescribed metformin and sulfonylureas. Can cause gastrointestinal problems, flu-like symptoms and skin reactions. Alpha-Glucosidase Inhibitors: These lower blood sugar levels by blocking the breakdown of starches, slowing the rise of blood glucose levels after a meal and should be taken with the first bite of a meal. Side effects include flatulence and diarrhoea. Bile Acid Sequestrants: A cholesterol-lowering medication that also lowers glucose levels although the mechanism by which it does this is not properly understood. They can cause gastrointestinal problems.

Injectables:

Insulin : Insulin therapy is a common diabetes treatment most often employed when the diabetes has reached a critical stage and other attempts such as lifestyle changes and oral medication are no longer providing sufficient. Insulin is often taken in combination with oral medications as these can help the body make better use of the insulin. Insulin therapy has shown to be effective at controlling blood sugar levels without side effects. It has however a number of associated disadvantages:

• Can result in hypoglycemia (low blood sugar) which in severe cases can be fatal. • Necessitates frequent maintenance and checking of blood sugar. • Requires patients to inject themselves; many people are uncomfortable with this. • Requires patience, practice and learned expertise to be effectively performed. • Up to four injections a day can be required, this can interfere with work and/or a

normal lifestyle. • Expensive.

Exenatide: An injectable (brand name Byetta) that enhances insulin secretion. It can cause various gastrointestinal side effects including nausea, vomiting and diarrhoea. Other side effects include headaches, dizziness. It also increases hypoglycaemia when taken with sulfonylurea (an oral diabetes medication). Liraglutide: A daily injectable (brand name Victoza) that enhances insulin production whilst suppressing the liver’s glucose output. It is to be used in conjunction with a controlled diet and exercise regime and can effectively control blood sugar levels as it only stimulates insulin secretions when blood glucose levels are high, hence removing the risk of hypoglycaemia. It has been shown that Liraglutide is linked to thyroid and pancreatic cancer and pancreatitis, the increased risk however is small (rate of thyroid cancer increased by 0.03%) and usually viable for those whose lives are at high risk due to the diabetes. Pramlintide: An injectable (brand name Symlin) that slows the digestion process so that glucose levels do not get too high as well as reducing glucose production in the liver. It is designed to be used as a compliment to insulin. Side effects include nausea, vomiting, headache, fatigue and weight loss. It can also increase the risk of hypoglycaemia.

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SKIN LIGHTENING TREATMENT MARKET

PRIMARY MARKET: ASIAN WOMEN Across Asia and Asia-Pacific fair skin is a highly praised trait, associated with beauty, social status and cultural refinement. These fairness ideals have deep cultural roots, particularly in China where the glorification of fair skin can be traced back to ancient Chinese poetry and where the saying ‘One white covers up one hundred ugliness’ has been passed through the generations. (Asian Scientist). These ideas and ideals are propagated by advertisers who portray women as happier, more successful and more confident when they obtain fairer skin as well as the predominance of Caucasian women in advertising for beauty products. The widespread and deep-set nature of these trends is demonstrated in Asian consumer behaviour and market trends:

• In China 71% of the USD5.5bn skin care market is made up of whitening products (Asian Scientist).

• Fairness products make up 45% of the skin care market in India (Source: http://www.cosmeticsdesign-asia.com/).

• 2012 sales of skin lightening creams in India totaled 258 tons (Source: Businessweek)

• 40% of women in Hong Kong, Malaysia, The Philippines, South Korea and Taiwan use a skin lightening cream (Source: Synovate Market Research).

• As demonstrated in the chart below, a significant proportion of the population in Africa also uses fairness treatments (Source: WHO).

Figure 13: Percentage of women using skin lightening agents in selected markets

Source: WHO

OTHER/GROWING MARKETS: ASIAN MEN AND EUROPEANS/NORT H AMERICANS The market is not strictly limited to women or the East. There is a developing market of male customers, particularly in India, where more than 80% of the men surveyed in a 2012 consumer insight survey by KuicK Research were shown to be using fairness creams. The fairness products also have some appeal in Europe and the US, where they are marketed

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as anti-aging products (enhancing the appearance of vitality and youthfulness) or as a solution for uneven skin pigmentation or displeasing freckles. The Western market potential is however substantially smaller.

MARKET FORECASTS The fairness treatment market is a fast growing market that is predicted to continue growing at a rapid rate. According to a report by Global Industry Analysts (GIA) the global market for skin lighteners is projected to reach USD10bn by 2015 and USD19.8bn by 2018. There has however also been some observation of a decrease in market growth in India, where the skin whitening cosmetics market experienced a 4.5% decline in sales volume in 2012 (Source: http://www.cosmeticsdesign-asia.com/).

PARTNERSHIPS AND COLLABORATIONS

PARTNERSHIPS/LICENSING AGREEMENTS

Wanbang Biopharmaceuticals: SGLT2 Inhibitor SBM-TFC-039 As of 27 January 2014, Sirona Biochem has an exclusive licensing agreement with Chinese pharmaceuticals company Wanbang Biopharmaceuticals. In exchange for an exclusive license for Wanbang BioPharma to develop and sell SBM-TFC-039 in the People’s Republic of China, Wanbang will provide upfront and milestone payments of up to USD9.5m in addition to royalty payments for product sales. Wanbang Biopharma will take full responsibility for all funding, clinical development, regulatory requirements, manufacturing, sales and marketing of Sirona Biochem’s product SBM-TFC-039. Wanbang Biopharmaceuticals is a leading anti-diabetic pharmaceutical company in China that was established in 1981. It is a subsidiary of Fosun Pharmaceutical Group which is listed on the Shanghai and Hong Kong stock exchanges.

Valeant Pharmaceuticals International: Skin Lightening Compound TFC-849 On 29 January 2014, Sirona Biochem confirmed a global exclusive licensing agreement with global pharmaceutical company Obagi Medicare Products owned by Valeant Pharmaceuticals International for the commercialisation of skin lightening compound TFC-849. This exclusive license is also valid for the entire family of Valeant Pharmaceuticals companies. In exchange for the transfer of the patent and know-how for compound TFC-849, Obagi will be responsible for the manufacture, distribution and global sales of the final commercial products. Sirona will receive a licensing fee and ongoing royalty payments for global product sales from Obagi. In April 2014, this agreement was extended to two other Valeant-owned companies; AMBI (the leading brand of skin products for African Americans) and Kinerase (an award winning skincare brand development by Valeant that produces products aimed at anti-aging skin care concerns).

Cincinnati Children’s Hospital Medical Center On 15 January 2014, Sirona Biochem announced the signing of a licensing agreement with Cincinnati Children’s Hospital Medical Center. The two companies plan to work together to create an anti-aging skin care treatment that combines Sirona’s cell preservation glycoprotein technology with Cincinnati Children’s proprietary technology. The resulting anti-aging product will be patented with the goal of licensing the new technology to a global leader in cosmetics.

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EXISTING COLLABORATIONS

Aegilops Applications On 20 October 2014, Sirona Biochem announced collaboration with innovative French agriculture company, Aegilops Applications, a company that specialises in the design and production of technological agents for seed treatment. The objective of the research collaboration is to develop a compound to improve the germination and growth in plants in order to improve crop production.

Magellan BioScience On 23 April 2014, Sirona Biochem announced collaboration with Magellan BioScience Group Inc. The aim of the collaboration for Sirona is to apply its proprietary stabilisation technology on technologies discovered or identified by Magellan BioScience so that they may be used for safe and effective commercial applications. Magellan BioScience is an innovative discovery company based in Florida that is working on developing new chemical entities from microorganisms to therapeutic ends.

Bloom Burton & Co. On 4 December 2013, Sirona Biochem announced the signing of a joint venture to conduct collaborative research with Bloom Burton & Co. The aim of the collaboration is to develop and commercialize new therapeutics for inflammation and infectious diseases. The joint venture is working towards the development of anti-inflammatory and anti-infective compounds for whose development Sirona will be responsible, whilst Bloom Burton takes care of financing, clinical validation and commercialisation of the compounds. Bloom Burton is a company that combines a team of experienced medical, scientific, pharmaceutical, legal and capital market professionals to work towards accelerating monetisation in healthcare.

LETTERS OF INTENT FOR COLLABORATION

VitamFero: Glycoprotein Cell-Preservation Technology On 25 June 2013, Sirona Biochem announced the signing of a Letter of Intent for the creation of an extended collaboration with privately held biotech company VitamFero that aims to create, develop, register and market anti-infectious vaccines. The aim of the collaboration is to use Sirona Biochem’s glycoprotein technology in order to preserve live attenuated animal vaccines. Biogalenys: Glycoprotein Cell-Preservation Technology On 2 July 2013, Sirona Biochem announced the signing of a Letter of Intent for collaboration with Biogalenys, a French bioscience and analysis company. The proposed three year collaboration focuses on studying application of Sirona Biochem’s cell preservation technology, both as an anti-aging compound, and as a preservative adjuvant for donor organs and tissues. They will also work towards developing preclinical data supporting multiple targeted applications.

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FINANCIAL HISTORY AND OUTLOOK

FINANCIAL HISTORY

Sirona Biochem’s financial history is typical for an early stage R&D company. The only revenues generated came from licensing agreements. In 2013 Sirona Biochem reported EBIT of CAD-2.7m and net income of CAD-2.8m (corresponding to CAD-0.03 per share).

Figure 14: Financial Key Performance Indicators 2009 - 2013

in CAD'000 2009 2010 2011 2012 2013

Sales 0 0 16 4 7

EBIT -1,226 -1,070 -2,515 -3,015 -2,707

Net Income -1,216 -1,070 -2,506 -2,983 -2,785

EPS (diluted, in CAD) -0.06 -0.04 -0.05 -0.04 -0.03


INCOME STATEMENT: Q3 AND 9M 2014

Sirona Biochem generated no revenue in both Q3 2014 and Q3 2013. In Q3 2014 EBIT came in at a loss of CAD0.7m, a y/y loss widening of 8.8% (Q3/13: CAD0.6m). This loss widening is mainly due to increasing consulting fees and research expenses (CAD0.3m; Q3/13: CAD0.1m). The net income after tax amounted to CAD-0.8m (Q3/13: CAD-0.6m) or CAD-0.01 per share (Q3/13: CAD-0.01). In 9M 2014 Sirona Biochem generated total revenues of CAD0.3m from licensing agreements and funding from the French Government (9M/13: CAD0.0m). This was however offset by increasing expenses. EBIT came in at CAD-3.0m (9M/13 CAD-2.0m), corresponding to a y/y loss widening of 47%. This is predominantly due to share-based payments (CAD0.8m; 9M/13: CAD0.2m), consulting fees (CAD0.5m; 9M/13: CAD0.2m) and research expenses (CAD0.6m; 9M/13: CAD0.4m). Net earnings in 9M 2014 were CAD-3.0m (9M/13: CAD-1.9m), a y/y loss widening of 56%. This corresponded to EPS of CAD-0.03 (9M/13: CAD-0.02).

Figure 15: Income Statement Items Q3 2014 and 9M 201 4

in CAD'000 Q3 2014 Q3 2013 y/y 9M 2014 9M 2013 y/y

Revenue 0 0 0 261 0

EBIT -687 -631 -9% -3,021 -2,053 -47%

Net Income -812 -565 -44% -2,999 -1,920 -56%

EPS (in CAD) -0.007 -0.005 -26% -0.026 -0.022 -20%


CASH FLOW STATEMENT

In 9M 2014, cash flow from operating activities came in at CAD-2.1m (9M/13: CAD-2.0m) and cash flow from financing activities at CAD-1.5m (9M/13: CAD-2.4m) with the decrease being due to loan repayments. Thus net cash flow came in at CAD0.3m (9M/13: CAD0.5m).

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Figure 16: Cash Flows 9M 2014

in CAD'000 9M 2014 9M 2013 y/y change

Operating cash flow -2,123 -1,968 8%

Cash flow from investment activities -9 -9 4%

Cash flow from financing activities 1,545 2,356 -34%

Net cash flow 340 510 -33%


BALANCE SHEET

At the end of Q3 2014, Sirona Biochem’s equity position decreased to CAD1.6m from CAD2.2m at the end of FY 2013. The company’s equity ratio reduced to 54% (Q1/13: 64%).

Figure 17: Selected Balance Sheet Items

in CAD'000 end of Q3 2014 end FY 2013 delta

Liquid Funds 340 926 37%

Equity 1,637 2,239 73%

Total Assets 3,163 3,487 91%

Equity ratio 52% 64%


FINANCIAL OUTLOOK

We chose a conservative approach in terms of the company’s R&D timelines and anticipate that Sirona Biochem will receive royalties from late 2015 onwards - following successful approval of the first skin lightening products. We thus forecast a net loss for the current fiscal year in the amount of CAD-3.4m. Since we expect Sirona Biochem to receive upfront payments of CAD0.3m and also model cash inflows through existing financing instruments, we forecast liquidity of CAD0.6m at the end of the current fiscal year. According to our model, next fiscal year’s financial development will be comparable to the current fiscal year’s development. At the bottom-line, we forecast a loss of CAD-3.5m – taking into account milestone payments for the anti-diabetes project of CAD0.3m and slightly increased operating expenditures. Cash and cash equivalents are expected to come in at CAD0.3m at the end of the fiscal year. Following the before mentioned successful market approval of the first product, top- and bottom-line results as well as the company’s cash flows are forecast to improve significantly. A detailed overview of our financial forecasts can be found from page 30.

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NEWSFLOW

KEY EVENTS IN THE LAST 6 MONTHS

Attila Hajdu Named New Chief Business Development O fficer On 27 October 2014 Sirona Biochem announced the naming of Mr. Attila Hajdu as Chief Business Development Officer. Hajdu has 17 years of experience in Sales, Marketing, R&D Finance, Medical Affairs and Business Development within the pharmaceutical industry, having previously held various positions in GlaxoSmithKline and as Senior Manager for Astellas Pharma. In his working life, Attila has played leading roles in facilitating business development opportunities through liaising with research analysts and business managers, strategic communication, collaborative research and intelligence gathering, contributing to, amongst other achievements, the launch of Cervarix for cervical cancer prevention. Research Collaboration with Aegilops Applications A nnounced On 20 October 2014, Sirona Biochem announced collaboration with French agriculture company Aegilops Applications. The objective of the research collaboration is to develop an innovative compound to improve germination and growth in plants. This has the potential of opening up another possible market for Sirona Biochem’s technologies. Sirona Partner Obagi Begin Manufacturing Skin Lighten ing Agent On 7 October 2014, Sirona Biochem announced that partner Obagi Medical Products Inc. have started a manufacturing scale-up of Sirona Biochem’s skin lightening compound TFC-849. Obagi will be responsible for the manufacture and distribution of TFC-849 as part of a line of skin care products. TFChem Receives CAD1.2m for Anti-Aging Project On 12 August 2014, Sirona Biochem announced that its subsidiary, TFChem, received confirmation of CAD1.2m of funding from the French Public Investment Bank which will be disbursed in lump sums and will be used to further develop Sirona Biochem’s anti-aging project. Repayment of this loan will begin at the end of Q3 2018. Sirona Biochem Announces Successful Synthesis of Anti Inflammatory Compound for Bloom Burton & Co. Joint Venture On 31 July Sirona Biochem announced the successful creation of the first compound created for joint venture with Bloom Burton, a company that works to accelerate monetization in healthcare. The compounds to be designed are intended to tackle inflammatory diseases. Sirona is responsible for the chemistry whilst Bloom Burton takes care of the financing, clinical validation and commercialisation of the compounds. CEO Neil Belenkie Resigns On 23 June 2014, Sirona Biochem announced the resignation of CEO Neil Belenkie. Sirona Biochem’s founder, Howard Verrico, will act as interim CEO until a suitable replacement is found. Sirona Biochem Announces Collaboration with Jean-Mic hel Cousteau, Fabien Cousteau, and Explore Green On 13 January 2014, the company announced that Jean-Michel Cousteau and Fabien Cousteau will become Brand Ambassadors for Sirona Biochem and Explore Green will leverage its media, scientific and commercial contacts to broadcast the firm’s partnership’s alliance and goals. Sirona Biochem will contribute its cosmetic, pharmaceutical and scientific expertise and will become a primary scientific resource for the potential commercialisation of new technologies discovered by the Cousteaus, Explore Green and their network.

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MANAGEMENT

CEO Howard J. Verrico, Doctor of Medicine (MD), founder and CEO of Sirona Biochem has a medical history, having obtained his medical degree from the University of Toronto in 1985. He is currently a practicing emergency room physician and a member of the College of Physicians and Surgeons of British Columbia. After former CEO Belenkie reigned from his position as CEO, it was initially planned that Howard Verrico will act only as interim CEO. However, especially after the company was able to hire Attila Hajdu as Chief Business Development Officer, Dr. Verrico will keep the position as CEO of Sirona Biochem. CFO Christopher Hopton has been CFO of Sirona Biochem since February 2009. He is also currently working as CFO of Ziptreck ecotours, a company that designs, develops and operates zipline activities. He has worked as Division Controller at Canadian airlines where he was responsible for an annual operating budget of USD200m. Chief Scientific Officer Dr. Geraldine Deliencourt-Godefroy is the founder of Sirona Biochem’s subsidiary TFChem, where Sirona Biochem’s products are being developed. Her scientific research in carbohydrate chemistry has led to the discovery of new drug families and the development of drug candidates for diabetes and obesity, cosmetic ingredients and biological adjuvants. Dr. Deliencourt-Godefroy is the developer of Sirona Biochem’s proprietary carbohydrate strengthening fluoridation technique. She was formerly a scientific leader at INSA in Toulouse (National Institute of Applied Sciences). Previous roles include a post-doctoral position at the University College London and doctoral research at the Research Institute of Fine Organic Chemistry in Rouen, France. Geraldine received a PhD and Masters in Organic Chemistry as well as a business degree from the University of France. She is the author of several publications and is also the recipient of the acclaimed Francinov Research and Innovation Medal, French Ministry of Research Award and the French Senate Award. Chief Business Development Officer Attila Hajdu is the recently appointed Chief Business Developer for Sirona Biochem. His role includes identification and evaluation of new growth opportunities in line with Sirona’s core competencies and strategy. Mr. Hajdu holds an MBA from Queen’s University and an MSC in Biochemistry from the University of Western Ontario. Prior to joining Sirona Biochem, he held various senior leadership positions within GlaxoSmithKline and Astellas Pharma, accumulating 17 years of experience in Sales, Marketing, R&D Finance, Medical Affairs and Business Development. Most recently, Attila was Senior Manager for Astellas. Director of Finance and Operations Michelle Seltenrich has held this position since November 2009. Previously she worked for Forbes MediTech amongst other roles. She holds a BSc from the University of British Columbia and an MBA in Technology Management from Simon Fraser University.

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Board Of Directors CEO Howard Verrico, CFO Christopher Hopton and Chief Scientific Officer Geraldine Deliencourt-Godefroy all sit on the board of directors. Further board members are: Michael Rogers is a business executive with 25 years of experience in the investment industry. He currently holds the position of President of Palmer Rogers Encore Ventures, a company he cofounded. In the past he had various leadership roles including Vice President at Canaccord Capital. Alex Sandro Marazzi is a family physician and part owner of a walk-in-clinic. He holds a Bachelor of Pharmaceutical Sciences from The University of British Columbia. Nigel Terrett currently works as a Quality Director in a Pharmaceutical Packaging firm. During his career he has worked in various leadership roles in Excelleris Technologies, LifeLabs, MDS Inc. and MDC Diagnostics. David Moore is currently Chief Commercial Officer of Cempra, a pharmaceutical company developing antibacterials for medical needs. He holds a BSc in Biology from Towson University and an MBA from Lehigh University. He also holds a graduate degree in Health Policy Excellence.

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SHAREHOLDERS & STOCK INFORMATION

Stock Information

ISIN CA82967M1005

WKN A0RM6R

Bloomberg ticker SBM CN

No. of issued shares 128,150,970

Transparency Standard TSX Venture

Country Canada

Source: Börse Frankfurt, First Berlin Equity Research

Shareholder Structure

Géraldine Deliencourt-Godefroy 8.1%

Gestys 4.9%

Howard J. Verrico 3.4%

Douglas B. Johnson 3.1%

Source: Sirona Biochem Corp

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INCOME STATEMENT

All figures in CAD '000 2011/12A 2012/13A 2013/14E 2014/15E 2015/16E 2016/17E

Milestone & Upfront Payments 0 0 300 300 500 500

PACME (Profit After Costs and Marketing Expenses) 0 0 0 0 7,258 18,509

Operating expenditures 3,020 2,636 3,706 3,799 3,894 3,991

Operating income (EBIT) -3,020 -2,636 -3,406 -3,499 3,865 15,018

Net financial result 5 -71 0 0 0 0

Pre-tax income (EBT) -3,015 -2,707 -3,406 -3,499 3,865 15,018

Income taxes -32 77 0 0 580 2,253

Net income / loss -3,096 -2,567 -3,406 -3,499 3,285 12,765

Diluted EPS -0.04 -0.03 -0.03 -0.02 0.02 0.09

EBITDA -2,901 -2,532 -3,374 -3,479 3,881 15,294

Ratios

EBIT-Margin on PACME 0.0% 0.0% 0.0% 0.0% 53.2% 81.1%

EBITDA margin on PACME 0.0% 0.0% 0.0% 0.0% 53.5% 82.6%

Net Margin on PACME 0.0% 0.0% 0.0% 0.0% 45.3% 69.0%

Expenses as % of Revenues

Operating expenditures n.a. n.a. n.a. n.a. 53.6% 21.6%

Y-Y Growth

Revenues n.a. n.m. n.m. n.m. n.m. 155.0%

Operating income n.a. n.m. n.m. n.m. n.m. 288.6%

Net income/ loss n.a. n.m. n.m. n.m. n.m. 288.6%

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BALANCE SHEET


Assets

Current Assets, Total 714 1,439 1,053 924 2,914 15,855

Cash and Cash Equivalents 125 926 560 307 925 11,799

Receivables 102 186 493 616 1,989 4,057

Other Current Assets 175 32 0 0 0 0

Non-Current Assets, Total 1,962 2,049 2,031 2,027 2,374 3,023

Property, Plant & Equipment 56 43 26 21 368 1,018Goodwill & Other Intangibles 1,906 2,006 2,006 2,006 2,006 2,006

Total Assets 2,676 3,487 3,084 2,951 5,288 18,879

Shareholders' Equity & Debt

Current Liabilities, Total 583 793 670 1,644 696 1,521

Short-Term Debt 74 506 506 1,500 0 0

Accounts Payable 385 280 164 144 696 1,521

Other current liabilities 123 7 0 0 0 0

Longterm Liabilities, Total 390 455 345 345 345 345Long Term Debt 19 9 180 180 180 180

Other Liabilities 371 445 165 165 165 165

Shareholders Equity 1,704 2,239 2,069 962 4,247 17,012

Total Consolidated Equity and Debt 2,676 3,487 3,084 2, 951 5,288 18,879

Ratios

Current ratio 1.23 1.81 1.57 0.56 4.19 10.42

Quick ratio 1.23 1.81 1.57 0.56 4.19 10.42

Financial Leverage 1.57 1.56 1.49 3.07 1.25 1.11

Book Value per Share 0.02 0.02 0.02 0.01 0.03 0.12

Net cash 14 396 -127 -1,373 745 11,618

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CASH FLOW STATEMENT


EBIT -3,020 -2,636 -3,257 -3,499 3,865 15,018

Depreciation and amortization 120 104 32 19 16 276

EBITDA -2,901 -2,532 -3,225 -3,479 3,881 15,294

Changes in Working Capital -60 -169 -104 -144 -820 -1,243

Other Adjustments 817 95 804 150 -580 -2,253

Operating Cashflow -2,144 -2,607 -2,525 -3,473 2,481 11,799

CAPEX -27 -9 -15 -15 -363 -925

Investments in Intangibles -46 0 0 0 0 0

Free cashflow -2,217 -2,615 -2,540 -3,488 2,118 10,873

Debt Financing, net 8 474 171 994 -1,500 0

Equity Financing, net 1,220 2,837 2,002 2,242 0 0

Other Changes in Cash 888 105 0 0 0 0

Net Cash Flows -100 802 -367 -253 618 10,873

Cash, start of the year 227 125 926 560 307 925

Cash, end of the year 126 927 560 307 925 11,799

EBITDA/share -0.04 -0.03 -0.03 -0.02 0.03 0.11

Y-Y Growth

Operating Cashflow n.a. n.m. n.m. n.m. n.m. 375.5%

Free cashflow n.a. n.m. n.m. n.m. n.m. 413.3%

EBITDA/share n.a. n.m. n.m. n.m. n.m. 294.1%

12 January 2015 Sirona Biochem

FIRST BERLIN Equity Research

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FIRST BERLIN RECOMMENDATION & PRICE TARGET HISTORY Report

No.: Date of

publication Previous day closing price Recommendation Price

target

Initial Report 12 January 2015 C$0.14 Buy C$0.90

Jens Hasselmeier First Berlin Equity Research GmbH Mohrenstraße 34 10117 Berlin Tel. +49 (0)30 - 80 93 96 83 Fax +49 (0)30 - 80 93 96 87 [email protected] www.firstberlin.com FIRST BERLIN POLICY In an effort to assure the independence of First Berlin research neither analysts nor the company itself trade or own securities in subject companies. In addition, analysts’ compensation is not directly linked to specific financial transactions, trading revenue or asset management fees. Analysts are compensated on a broad range of benchmarks. Furthermore, First Berlin receives no compensation from subject companies in relation to the costs of producing this report.

ANALYST CERTIFICATION I, Jens Hasselmeier, certify that the views expressed in this report accurately reflect my personal and professional views about the subject company; and I certify that my compensation is not directly linked to any specific financial transaction including trading revenue or asset management fees; neither is it directly or indirectly related to the specific recommendation or views contained in this research. In addition, I possess no shares in the subject company.

INVESTMENT RATING SYSTEM First Berlin’s investment rating system is five tiered and includes an investment recommendation and a risk rating. Our recommendations, which are a function of our expectation of total return (forecast price appreciation and dividend yield) in the year specified, are as follows:

STRONG BUY: Expected return greater than 50% and a high level of confidence in management’s financial guidance BUY: Expected return greater than 25% ADD: Expected return between 0% and 25% REDUCE: Expected negative return between 0% and -15% SELL: Expected negative return greater than -15%

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