Medgenics is entering a pivotal phase with its biopump technology. It expects to complete a phase I/IIa trial for its EPODURE product for treating anemia by the end of 2011. It hopes its pharmaceutical partner will take up an option to develop its Factor VIII product for hemophilia by the end of 2011. Medgenics believes its INFRADURE product for treating hepatitis C could enter clinical trials in early 2012. If successful, these pivotal events have the potential to significantly increase Medgenics' valuation.

1. Nomura Code Securities Limited, London
Life Sciences Research
Medgenics
Entering a pivotal phase
Medgenics is entering a pivotal phase during which events have the potential to further
validate its technology and significantly enhance its valuation towards our risk adjusted, Buy (Unchanged)
end of year fair value of £54m. This includes the completion of its phase I/IIa trial for UK / Equities
EPODURE which is expected this year, with the possible signing of a development Price (MEDG.L) on 20 June 2011 at close
partner and approval to start a more substantial US based phase IIb study. The Factor VIII
pre-clinical programme has progressed well and the company hopes that its partner will 175p
take up an exclusive option later this year to negotiate a definitive clinical development Date
agreement with initial recruitment in the first clinical trial possible at the end of 2012. The
21 June 2011
INFRADURE treatment for hepatitis C could enter the clinic in early 2012 and positive
Market capitalisation
feedback from this open study would help to validate Medgenics’’ technology in a second
application and help to strengthen sentiment further. Having successfully secured a dual £18.5m
listing in the US and raised $10.6m net of expenses, the company has enough funds to Sector
last until mid-2012 without any third party payments. However, the company is in
Biotechnology
discussions with a number of potential partners and the signing of development
agreements could result in milestone payments or sharing of development costs that Reuters Ticker
could fund the company’’s key projects for a much longer period. The company is also MEDG.L / MEDU.L
investigating possible sources of US or EU government funding for clinical development.
Share price performance
Erythropoietin –– The initial 18 patient clinical trial of EPODURE (erythropoietin delivery to 250
treat anaemia) is set to recruit its final patients shortly and the company hopes to report the
230
210
190
results at the American Society of Nephrology meeting in November. Results reported to date 170
150
are very encouraging with a single EPODURE administration raising and maintaining 130
110
90
haemoglobin levels for up to 24 months without injections of erythropoietin. The company is in 70
50
the process of preparing an IND (Investigational New Drug) application for a phase IIb study Jun-09 Se p-09 De c-09 M ar -10 Jun-10 Se p-10 De c-10 M ar -11 Jun-11
MEDG FTALLSH
that could start recruitment in the middle of 2012. Following changes to the reimbursement for
dialysis patients in January 2011 the cost of erythropoietin has become an issue for dialysis Source: DataStream
providers and we believe that some of the majors will have a significant interest in pursuing Analyst
Medgenics’’ EPODURE technology.
Michael King
Factor VIII - Having signed a development agreement in 2009, an undisclosed major +44 20 7776 1243
pharmaceutical partner has paid Medgenics $4m to co-develop a Factor VIII Biopump for mek@nomuracode.com
treating haemophilia. In November 2010, Medgenics took over the pre-clinical development as
part of an extension to the agreement, while yields were improved. The company now
indicates that this work has gone well and the yields improved, so news that its partner has
Institutional sales
signed a definitive agreement would provide significant validation for this project.
Dominic Wilson
Interferon –– The INFRADURE pumps have been shown to produce interferon-alpha in +44 20 7776 1221
sufficient quantities, that if used similarly to EPODURE should be therapeutically effective in drw@nomuracode.com
treating hepatitis C. Medgenics is hopeful that it will be able to get approval to begin clinical Brough Ransom
+44 20 7776 1227
studies by the end of this year, with the studies due to start in early 2012. As an open study, wbr@nomuracode.com
initial feedback should be available as the year progresses, helping to validate this product. Guillermo Serrano
+44 20 7776 1228
Year end December 2010 2011E 2012E 2013E 2014E
gfs@nomuracode.com
Sales and other income($m) 4.4 4.0 47.5 52.5 217.5 Catherine Isted
EBITDA ($m) -3.2 -6.8 31.1 33.8 198.4 +44 20 7776 1223
Net profit ($m) cai@nomuracode.com
-4.1 -6.9 30.9 33.5 198.0
EPS ($) -0.95 -0.81 3.21 2.61 15.00
Source: Company data and Nomura Code estimates
This research is non-independent and is classified as a Marketing Communication under the FSA’’s rules. As such it has not been prepared in accordance
with legal requirements designed to promote the independence of investment research and it is not subject to the prohibition on dealing ahead of the
dissemination of investment research in COBS 12.2.5. However, Nomura Code Securities has adopted internal procedures which prohibit employees from
dealing ahead of the publication of non-independent research, except for legitimate market making and fulfilling clients’’ unsolicited orders.

2. 21 June 2011 Nomura Code Securities Limited
Contents
Share structure .................................................................................................................... 3
Company summary.............................................................................................................. 3
Investment thesis ................................................................................................................. 4
Investment risks ................................................................................................................... 4
Valuation.............................................................................................................................. 5
Initial products...................................................................................................................... 5
EPODURE –– Anaemia ......................................................................................................... 6
Factor VIII –– Haemophilia .................................................................................................... 7
INFRADURE –– Hepatitis C .................................................................................................. 8
Niche application.................................................................................................................. 9
New protein therapies .......................................................................................................... 9
Finances ............................................................................................................................ 10
Appendix............................................................................................................................ 13
Breadth of application ........................................................................................................ 13
Erythropoietin..................................................................................................................... 14
Factor VIII .......................................................................................................................... 15
Hepatitis C ......................................................................................................................... 16
2

3. 21 June 2011 Nomura Code Securities Limited
Share structure
There are three lines of stock for Medgenics summarised in the table below, two traded in
London on AIM and one on AMEX following the recent US IPO. With about 5.3m warrants and
1.1m options the fully diluted number shares in issue is currently 16.1m.
Medgenics share structure summary
Shares in Price M cap
Ticker issue (m) (p) £m Details
MEDG.L 2.178 175 £3.8 AIM listed - Reg S restricted, certificated settlement
MEDU.L 1.797 170 £3.1 AIM listed - Depositary Interest, settles in CREST
MDGN.U 5.661 $3.38 £11.67 AMEX listed
Total 9.636 £18.53
Source: Medgenics
Company summary
Medgenics was incorporated in January 2000 and is headquartered in Vienna, Virginia. It has
a wholly owned subsidiary, Medgenics Medical Israel Ltd (formerly Biogenics), based in
Misgav, Northern Israel, which was incorporated in March 2000, where all of its 21 employees
are based. The company has developed a Biopump tissue technology that has the potential to
revolutionise the production and delivery of protein based therapies, removing the need for an
expensive protein production plant and frequent injections, while lowering the cost of treatment
and avoiding infringement of intellectual property. By sustained production and delivery of
large molecules in this way, the technology has the potential to improve on the clinical efficacy
achievable through injections where large boluses of the short-lived therapeutic agent are
delivered that typically cause adverse reactions.
Medgenics potential newsflow
Timing Product Expected News Flow
Q3 2011 EPODURE Completion of phase I/IIa trial enrolment
Q4 2011 EPODURE Publication of phase I/IIa trial data
Q4 2011 Factor VIII Partner could take up exclusivity option
Q4 2011 INFRADURE Regulatory approval for phase I/IIa clinical trial
Q1 2012 EPODURE Approval of IND
Q1 2012 INFRADURE Start of phase I/IIa clinical study
Mid-2012 EPODURE Start of phase IIb trial, once funding is secured
Mid-2012 Niche application Demonstrate lab feasibility
H1 2012 Factor VIII Partner could sign definitive agreement
Q4 2012 Factor VIII Start of Phase I/IIa trial
Source: Company data, Nomura Code estimates
The company’’s technology provides a predictable, sustainable and controllable protein
production and delivery system for therapeutic biological molecules in the body. A thin strip of
live dermal tissue is extracted from the patient with a needle biopsy, usually from under the
skin around the abdomen using a local anaesthetic. The dimensions and architecture of the
tissue is a key subject of Medgenics’’ intellectual property as it allows the tissue to remain
viable for extended periods of time while maximising the surface area through which nutrients
and waste products, as well as expressed proteins, can pass. These strips, which the
company refers to as ““micro-organs””, are then transferred to a processing centre where within
10-14 days the gene that codes for a specific therapeutic protein is introduced into the tissue.
This is done by way of gutless adenoviral vectors which have no genetic material of their own
and are used ex-vivo in preparing the Biopumps, with no virus applied to the patient. The
gutless adenovirus is modified to include the required gene (that codes of Factor VIII,
3

4. 21 June 2011 Nomura Code Securities Limited
erythropoietin, interferon, etc.) and then exposed to the Biopump tissues in a proprietary
protocol. The virus enters the cells in the tissue, introducing its genetic material, converting the
““micro-organ”” into a ““Biopump””.
Once the dose secreted by each Biopump is known, and the required dose for a patient
established, the required number of Biopump units to be re-implanted can be calculated.
Between 1 and 10 Biopumps are typically used at one time, which are injected subcutaneously
in a quick and simple procedure using a single use positioning aid under local anaesthetic,
usually around the abdomen. Once in place, the Biopumps secrete the protein they are
programmed to produce, and a constant stream is released into the body. Being the patient’’s
own dermis, the re-implanted Biopumps heal, forming vascular connections and integrating
back into the patient’’s tissue. Any genetic material is contained within a defined area so that
expression can be terminated if and when required
Medgenics is developing a processing station that would use single-use cassettes. Each
cassette unit would contain samples from one patient that can be controlled and manipulated
independently to bring about the gene transduction through application of the required
solutions and gases. The processing station would also allow fluids to be sampled for testing,
to ensure that the release criteria of sterility, tissue viability and protein production level are
met.
Investment thesis
Medgenics offers a potentially disruptive technology that has the potential to revolutionise the
production and delivery of therapeutic proteins in a broad spectrum of applications which could
be commercialised through multiple partners, providing considerable scope of opportunity.
Data from the first clinical trials look positive with the EPODURE Biopump (erythropoietin)
sustaining haemoglobin levels in anaemic patients within the target range safely for at least 6
months, without the need for additional injections. The company reports that initial discussions
with the FDA indicate that the agency is not concerned with the principle of the technology
given that new genetic material is contained within the Biopump, the dose delivered is
predictable, tightly controlled and easily stopped if required, while the re-implanted tissue used
is autologous (originating from the patient).
The proteins being used in the initial applications (erythropoietin, factor VIII and interferon- )
are well understood and commonly used, so the risk associated with their use should be
limited. Without the need to build expensive facilities and manufacture large amounts of
product, dispense and distribute complex therapeutic proteins, Medgenics’’ technology has the
potential to provide a much more cost effective method of delivering biological molecules. It
also has the additional advantage of not being reliant on patient compliance needed to ensure
injections are taken when required.
Investment risks
Medgenics is still at a relatively early stage in developing its technology with only 1 product
validated in a phase I/IIa clinical trial. Although the initial data looks promising there is no
guarantee that future clinical results will also be positive. While other pre-clinical testing
suggests that the technology will work in other applications, this has yet to be confirmed in
clinical trials.
There are a number of projects that Medgenics could develop, but has been restricted by
limited funds. The company has successfully raised capital over recent years ($8m in 2007,
$1.3m in 2009, $6.6m in 2010 and $13.2m so far this year) and has received $4m from its first
pharmaceutical partner, in addition to government funding from the Israel Office of the Chief
Scientist. The company hopes that the existing deal and further development agreements will
result in additional short-term income, but this will depend on certain milestones being reached
4

5. 21 June 2011 Nomura Code Securities Limited
and the outcome of ongoing negotiations and we expect that the timing of these payments will
mean additional funds will need to be raised.
Although the initial response from the FDA has been encouraging, with a new technology like
this, there is a risk that concerns from regulators will prolong the development process and
increase the investment required.
The company is in the process of designing an automated processing system to produce
Biopumps in high volumes. However, while the company can demonstrate it can currently
produce small volumes, there are risks of technical problems and delays in the scale up
process. When considering the competitive threat, Medgenics knows of no other technology of
this nature being developed, and is confident that its intellectual property will present
significant obstacles to competitors attempting to replicate the product. However, if successful,
Medgenics’’ technology will be sufficiently disruptive that it will attract other players into this
space.
Valuation
In the absence of any details on commercialisation strategy or partnership agreements we
have forecast only potential milestones for each project, based on recently signed deals in the
biotechnology sector, and we have not included any long-term revenue for royalties or sales
based payments. In generating our sum of the parts valuation for Medgenics we have
allocated specific R&D and other costs to each project to calculate the projected cashflow for
each product. We have assumed that Medgenics funds the development work out of the
earlier stage payments, up to phase IIb trials. We assume that later stage work and phase III
trials are funded separately by Medgenics’’ partners. We have applied a tax rate of 25-28%
and calculated the NPV of the net income for each product, using a discount rate of 15%.
On this basis we would value the four forecasted products at about $470m, if not risk adjusted,
but applying a chance of success of 33% for EPODURE and 20% for INFRADURE given that
initial pre-clinical data looks promising. We have applied a 10% chance of success for Factor
VIII and the Niche product, given the absence of data. This lowers our risk adjusted fair value
to $88m (£54m). As projects progress within their clinical programmes, we would anticipate
de-risking individual projects accordingly. Moreover, the signing of commercial agreements
should also increase our confidence in projected milestones, and potentially allow the
forecasting of long-term sales related milestones or royalties.
On the down side, failure to progress clinical programmes or sign any further deals over time,
we might expect the share price to trade at or below cash.
Risk adjusted, sum of the parts valuation of Medgenics
Rate of NPV ($m) Chance of Risk ajd Risk ajd
Product return 2011 - 2019 success NPV ($m) NPV (£m)
EPODURE 15% 151 33% 50 30
Factor VIII 15% 161 10% 16 10
INFRADURE 15% 90 20% 18 11
Niche 15% 65 10% 7 4
Central costs 15% -9 -9 -6
Cash (end 2011) 7 7 4
Total 457 88 54
Source: Nomura Code estimates
Initial products
To date Medgenics has successfully generated and tested over 5,000 Biopumps with few
failures, generated from tissue resulting from ““tummy tuck”” procedures. The company is
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6. 21 June 2011 Nomura Code Securities Limited
confident about the robustness of the technique and has more recently applied the technology
to specific applications. Although this technology could be applied to a wide range of biological
therapies, Medgenics has initially focussed on three products.
EPODURE –– Erythropoietin in the treatment of anaemia. Initial positive feedback from the
initial patients in phase I/IIa clinical trials.
Factor VIII –– In the treatment of haemophilia. In pre-clinical development, partly funded by
an undisclosed pharmaceutical partner.
INFRADURE –– Interferon- in the treatment of hepatitis C.
Niche application –– An undisclosed niche/orphan drug candidate.
EPODURE –– Anaemia
EPODURE delivers erythropoietin, a commonly used glycoprotein that stimulates haemoglobin
synthesis in patients that have anaemia as a result of kidney failure or cancer therapy (see
appendix for further details on erythropoietin). A wide range of doses are available as each
patient requires different amounts of the drug in order to sustain haemoglobin levels between
a target range of 10-12g/dL. The existing erythropoietin injections are administered about
three times a week although newer formulations can be given once weekly.
Initial phase I/IIa clinical trial
In November 2010, data presented at the American Nephrology Society showed that 12
patients had received an implanted EPODURE Biopump including 6 in the low dose arm (20
IU/kg/day) and 6 more dosed using ““mid-dose”” EPODURE (40 IU/kg/day).
The results of the first seven patients in the Medgenics trial showed that five patients were
maintained within the target range, with good responses from the other two. Six of the patients
were treated with the lowest recommended dose of EPO (20iu/kg/day) while the seventh was
treated with a mid-dose (40iu/kg/day). When variable dosing can be used the company
expects that those patients falling short of the desired haemoglobin levels could be treated
again (ie have another Biopump added) in order to reach the target levels. Conversely if
haemoglobin levels are too high, Biopumps can be ablated or removed. Looking at the data for
individual patients, it seems that the Biopump is having the desired effect in sustaining the
haemoglobin in or near the target range for many months from a single administration. One
patient has been successfully treated with an EPODURE Biopump for two years, keeping his
haemoglobin levels within the target range of 10-12 g/dl throughout, without any adverse
events or EPO injections.
Since then the company has announced that the total number of patients recruited has risen to
14 and the company hopes that the final cases in the 18 patient study will be implanted
shortly, with the last patients in the high dose group (80IU/kg/day). Recruitment has taken
longer than anticipated due to the restrictions of the protocol and the novelty of the therapy,
but its completion and presentation of data (the company hopes at the American Nephrology
Society in November 2011) will represent a major milestone for the company.
IND for phase IIb
Medgenics is preparing an Investigational New Drug (IND) application to run a phase IIb trial in
the US and discussions with the FDA are already underway. The company is hopeful that it
will receive approval for its IND in Q1 2012 so that the trial could start in the middle of the year.
We expect that the trial will involve about 100 patients and will take 18 months to complete,
including 6 months follow up, so the study could be complete by the end of 2013.
6

7. 21 June 2011 Nomura Code Securities Limited
Potential development agreement and funding
We believe that Medgenics currently has enough funding to take it through to the middle of
2012 but it does not have enough capital to undertake the EPODURE phase IIb trial on its
own. It is in discussions with potential partners and is hopeful that an agreement will result in
upfront milestones and/or significant contribution to the development costs, allowing this
project to progress without the need to raise additional funds. In the absence of a deal and
with the IND approved, the company is hopeful that it would be able to secure an additional
round specifically to raise cash for this purpose.
Reimbursement issues
The reimbursement of EPO in patients with kidney failure changed significantly in January
2011 in the US. Previously, dialysis clinics generate a substantial part of their revenue from
administering EPO, and much of this is dependent on Medicare reimbursement. However,
following these recent changes, reimbursement has switched from the basis of ““cost plus””
regardless of the amount of EPO used, to a new flat rate with penalties if haemoglobin levels
are not kept in target range. Consequently, renal dialysis clinics are likely to face considerable
margin pressure, given the cost of EPO, if they are to maintain the best of care for their
patients. Therefore, we believe that dialysis clinics will view Medgenics’’ phase I/IIa data with
great interest, given that it presents a possible solution to the reimbursement shortfall.
Projected licensing agreements and milestones
We believe it is likely that Medgenics would sign a number of licensing agreements in different
geographic regions. In our model we have included potential milestone payments that may be
received by Medgenics as EPODURE reaches key stages of its development, but no long term
sales related milestones or royalty payments. For EPODURE we have included two potential
deals, one for the US/Europe and another regional deal although other regional agreements
are also likely. Following a review of recent milestones paid in recent deals we have assumed
payments totalling $20m on licensing, $100m on completion of phase IIb studies and $120m
on submission and $120m on approval.
Estimated timing for EPODURE clinical programme
2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Phase I/IIa
Phase IIb
Phase III
Potential milestones project 1 $10m $30m $40m $40m
Potential milestones project 2 $10m $70m $80m $80m
Total projected milestones $20m $100m $120m $120m
Source: Nomura Code estimates
Factor VIII –– Haemophilia
In 2009, Medgenics signed an agreement with an undisclosed major pharmaceutical company
to develop a Biopump to deliver Factor VIII. Under the terms of the agreement, Medgenics
embarked on the pre-clinical development of a Factor VIII and received $4m to work
exclusively with its partner on the project for a year and to test the feasibility of the Biopump in
this application.
In November 2010, Medgenics announced a change to its collaboration with its partner so that
Medgenics would assume all funding responsibilities for the project while certain issues were
resolved. We believe that yield of the Factor VIII biopumps needed to be improved in order for
the product to be therapeutically viable. The company has indicated that this work has gone
well and has recently announced continuation of collaboration with the partner to perform a
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8. 21 June 2011 Nomura Code Securities Limited
validation study through September to confirm the advances. Through this period the partner
can exercise an option to retain six months exclusivity on payment of a $2.5m fee, while a
longer term agreement is negotiated.
We have assumed that the pre-clinical phase will be concluded by Q4 2011 at which point the
intentions of the partner should become clear. If all goes to plan Medgenics would then aim to
gain approval for a phase I/IIa study in 10-15 patients which we believe could start at the end
of 2012, concluding about a year later. If the development agreement progresses we
anticipate that initiation of this trial would result in a milestone payment of about $20m from the
partner. On the basis that this is a global deal and assuming these trials are satisfactory we
speculate that another $75m could be paid in 2013 before the product enters phase IIb, a
$100m on completion of phase IIb, $100m on phase III completion/regulatory submission and
$120m on approval.
Estimated timing for Factor VIII clinical programme
2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E
Pre-clinical
Phase I/IIa
Phase II
Phase III
Potential milestone $3.6m $2.5m $20m $75m $100m $100m $120m
Source: Nomura Code estimates
INFRADURE –– Hepatitis C
Medgenics has developed INFRADURE, a Biopump that produces interferon alpha for the
treatment of hepatitis C. The product was introduced in April 2010 at EASL (European
Association for the Study of the Liver) conference where two pre-clinical posters were
presented.
Pre-clinical studies
In two posters presented at EASL in April 2010, data confirmed that in-vitro and in pre-clinical
studies, the INFRADURE product behaves as Medgenics had expected. Initial in-vitro studies
confirmed that the INFRADURE Biopumps could produce well in excess of the 1µg per day
targeted interferon- production levels and that the dose generated corresponded to the
amount of virus particles used to treat each micro-organ. The same poster also confirmed that
IFN- production at above target levels could be sustained for at least 129 days.
In a further study in SCID (Severe Combined Immunodeficient) mice Biopumps were
implanted subcutaneously at a low (1,300ng/day) or high dose (4,000 ng/day). The resulting
serum IFN- reflected the high implanted doses and were appropriate for a 70kg human, and
secretion continued for over 100 days from a single INFRADURE implantation. The study
showed no signs of toxicity after 123 days continuous treatment.
In a separate study 12 SCID mice were implanted with INFRADURE Biopumps secreting at
least 1µg/day of IFN- . A direct correlation was demonstrated between the IFN- levels and
IFN- bioactivity confirming that the INFRADURE was secreting a potent form of the molecule.
Clinical trial programme
Medgenics is currently working to gain approval to start a clinical trial programme for
INFRADURE. The company is hopeful that they would receive regulatory approval by the end
of 2011 so it would be in a position to start recruitment in early 2012 and could take 12-18
months to complete. The initial study would probably involve 10-20 patients and would attempt
to confirm the safety of the product while demonstrating that its use in place of interferon- or
8

9. 21 June 2011 Nomura Code Securities Limited
pegylated interferon- in combination with Ribavirin achieves comparable HCV eradication but
with significantly reduced side effects compared with the standard of care. The company
believes that if such data are obtained, and with the lower cost of economics, that
INFRADURE would represent a much preferred alternative to injected interferons by patients,
physicians and providers.
Although we believe that Medgenics is in discussion with potential partners for this product, at
this stage it is not clear when a development agreement might be struck. We have assumed
that the company funds the initial phase I/IIa studies itself and signs a deal with associated
milestones payable before entering larger phase IIb studies. On this basis, and assuming a
global deal, we have forecast a $20m milestone on signing a licensing deal, $80m on
completion of phase IIb and $100m on submission and $130m on approval.
Estimated timing for INFRADURE clinical programme
2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E
Pre-clinical
Phase I/Iia
Phase II
Phase III
Potential milestone $20m $80m $100m $130m
Source: Nomura Code estimates
Niche application
The company has also attracted interest from players that target small, niche applications and
discussions are currently ongoing. This may provide Medgenics with an opportunity to
establish a more rapid means of establishing initial regulatory approval of the technology. By
targeting a rare indication that would attract orphan drug status, a 25-30 patient study might be
sufficient to file for regulatory approval which could be faster and cheaper than the other
indications being considered and may ultimately smooth the process of subsequent regulatory
filings.
We assume that if an agreement is reached for a project of this nature that an upfront payment
of $5m could be made initially, with $30m payable on completion of Phase I/IIa studies and
$40m on completion of phase IIb/III trials with $50m on approval.
Estimated timing for Niche clinical programme
2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E
Phase I/IIa
Phase IIb
Potential milestones $5m $30m $40m $50m
Source: Nomura Code estimates
New protein therapies
The applications discussed so far involve a new form of production and delivery of proteins
already marketed in an injectable form. A potential source of licensing deals we have not
considered in our model are a range of new protein therapies, including antibody therapy, not
yet on the market but currently being developed. We believe that developers of biological
molecules are likely to consider using Medgenics’’ technology as it provides a novel and
effective means of delivery, but also because it would remove the need for setting up capital
9

10. 21 June 2011 Nomura Code Securities Limited
intensive and expensive production facilities, potentially shortening the time and cost to enter
clinical trials, and lowering the cost of treatment while maintaining profitability.
Finances
Third party payments
The business model of Medgenics’’ technology is still not clear as it will depend on individual
commercialisation deals yet to be agreed. These deals may involve Medgenics in the
manufacturing/processing of the Biopumps or merely as part of a royalty agreement. In the
absence of further details we have only modelled the potential milestones that may be payable
as specific stages are reached in the clinical programmes, significantly undervaluing the full
potential of the business in the long-term. There are clearly a number of permutations in this
respect, given that it is not clear which programmes Medgenics will be able licence out at an
early stage and which trials it will fund itself. In attempting to quantify the potential milestones
that Medgenics may receive, we have used a range of recent biotechnology partnering deals
as a reference.
Although we have no indication about the level of potential milestone payments beyond the
those made for the Factor VIII product, our model assumes that the agreement on the Factor
VIII product results in an additional $415m in milestones if the product is approved with
payments being made on successful completion of clinical trial programmes and approval.
For EPODURE, we have assumed that Medgenics signs development agreements (one for
the US and one regional agreement) before phase IIb studies commence, but that Medgenics
manages the trial itself, using part of the estimated $20m in upfront payments to fund the
development. Our model includes more substantial payments ($100m in total) on successful
completion of phase IIb studies and an additional $120m on phase III completion and $120m
on approval.
We have assumed that the company carries out the initial clinical trials for INFRADURE itself,
and does not sign a licensing deal until it is ready to proceed with phase IIb studies, when we
estimate a $20m payment. Our model factors in milestones of up to $330m if the product is
approved.
Although no details have been released, we have included up to $120m in milestones for a
niche application with initial $5m payment made in 2012.
R&D expenses and government grant
Our R&D expenses forecasts assume that Medgenics funds or part-funds clinical trials up to
phase IIb. Thereafter we expect that the company’’s partner will take over the clinical
development.
Medgenics qualifies for a government grant from the chief scientific officer of Israel who funds
up to 60% of approved R&D spending. Grants of between $0.5m and $1.5m per annum have
been paid to date, but the company expects that this would rise as its R&D spending in Israel
increases.
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11. 21 June 2011 Nomura Code Securities Limited
Medgenics Income statement forecasts ($m)
Year ending December 2010 2011 2011E 2012E 2013E 2014E 2015E
$m Q1
Factor VIII 3.5 2.5 20.0 0.0 75.0 0.0
EPODURE 0.0 20.0 0.0 100.0 0.0
INFRADURE 0.0 0.0 20.0 0.0 80.0
Niche 0.0 5.0 30.0 40.0 50.0
Total third party payments 3.5 0.0 2.5 45.0 50.0 215.0 130.0
Government grants 0.9 0.0 1.5 2.5 2.5 2.5 2.0
Total income 4.4 0.0 4.0 47.5 52.5 217.5 132.0
R&D expenses -3.4 -1.2 -6.5 -12.0 -14.0 -14.0 -12.0
General admin expenses -4.4 -0.8 -4.4 -4.6 -5.0 -5.5 -5.5
Operating loss/profit -3.4 -2.0 -6.9 30.9 33.5 198.0 114.5
Financial expenses -0.8 1.6
Pre-tax profit -4.1 -0.3 -6.9 30.9 33.5 198.0 114.5
Tax -0.0 0.0 0.0 0.0 -8.4 -53.5 -32.1
Net loss/profit -4.1 -0.3 -6.9 30.9 25.1 144.5 82.4
Weighted average number of shares (000) 4,374 5,370 8,551 9,636 9,636 9,636 9,636
EPS ($) -0.95 -0.06 -0.81 3.21 2.61 15.00 8.56
Fully diluted no. of shares (m) 11,122 12,118 14,430 16,085 16,085 16,085 16,085
EPS ($) fully diluted -0.37 -0.03 -0.48 1.92 1.56 8.99 5.13
Tax rate 25.0% 27.0% 28.0%
Source: Company and Nomura Code estimates
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12. 21 June 2011 Nomura Code Securities Limited
Medgenics cashflow forecasts ($m)
Year ending December 2010 2011 2011E 2012E 2013E 2014E 2015E 2016
$m Q1
Net loss/profit -4.1 -0.3 -6.9 30.9 25.1 144.5 82.4 150
Depreciation 0.1 0.0 0.1 0.2 0.3 0.4 0.4 0
Loss, disposal of property and equipment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0
Stock based compensation 1.8 0.1 0.6 0.6 0.6 0.6 0.6 0
Change in fair value of convertibles 0.6 -1.7 0.0 0.0 0.0 0.0 0.0 0
Accrued severance pay 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0
Exchange 0.0 -0.0 0.0 0.0 0.0 0.0 0.0 0
Increase in payables -0.2 0.3 0.1 0.1 0.1 0.1 0.1 0
Decrease in receivables -1.6 -0.0 0.1 0.1 0.1 0.1 0.1 0
Increase in other accounts payable -0.8 0.1 0.0 0.0 0.0 0.0 0.0 0
Cash used in operating activities -4.2 -1.5 -5.9 32.0 26.3 145.8 83.7 152
Decrease in prepaid lease payments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0
Increase in restricted lease deposit
Purchase of PP and E -0.1 0.0 -0.5 -1.0 -1.0 -1.0 -1.0 -1
-4.3 -1.6 -6.4 31.0 25.3 144.8 82.7 151
Proceeds from issuance of shares 2.1 0.0 10.6 0.0 0.0 0.0 0.0 0
Proceeds from exercise of warrants 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0
Issue of debenture and warrants 4.0
Proceeds from a convertible Note 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0
Increase/(Decrease) in short-term bank credit 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0
Decrease in cash and equivalents 2.4 -1.6 4.2 31.0 25.3 144.8 82.7 151
Cash and equivalents at start 0.5 2.8 2.9 7.1 38.1 63.3 208.2 336
Cash and equivalents at end 2.9 1.3 7.1 38.1 63.3 208.2 290.9 487
Source: Company and Nomura Code estimates
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13. 21 June 2011 Nomura Code Securities Limited
Appendix
Intellectual Property
Medgenics has a range of intellectual property, summarised in the table below that covers the
principle and method of producing and processing of micro-organs, but also includes patents
surrounding the design of the processing system. The specific techniques used in harvesting
and processing the micro-organs are critical to the success of this technology and the
company believes that the aspects covered by its intellectual property would present
significant barriers to entry for any competitors.
Summary of Medgenics’’ intellectual property
Patent US Filing
Family Title date Status Claims
P-5884 Dermal micro-organs, methods and Apr-04 Granted in US, Use of a genetically modified micro-organ of
apparatus for production pending in Europe specific shape that allows nutrients and gases to
and elsewhere diffuse into and out of structure.
P6687 Closed automated system for May-04 Granted Australia, Processing system that allows the containment of
processing tissue based therapy India, China, micro-organs with fluidic and gas control to sustain
Pending elsewhere tissue, allow transduction to be performed and
measure quantity of agent being produced.
P-8571 In vitro micro-organs and uses. Dec-02 Pending A genetically modified micro-organ that expresses
at least one recombinant gene products
P-8574 Efficient methods for assessing Jul-02 Pending Method for assessing the presence of a
and validating candidate protein pharmaceutical/therapeutic agents from micro-
based therapeutic molecules organs
encoded by nucleic acids
Source: Medgenics
Breadth of application
Medgenics’’ technology is designed to provide a more effective and safer means of producing
and delivering protein based therapies without the need for frequent injections or a protein
production plant. In principle, this technique can be used in therapy currently requiring regular
injections of a biological molecule, the most common of which are summarised in the table
below.
Medgenics development pipeline summary
Disease Protein Medgenics' development phase Est market size ($bn)
Anaemia Erythropoietin Phase I/II 11.5
Hepatitis C Interferon- Pre-clinical 3.5
Haemophilia Factor VIII Pre-clinical co-development 3.6
Growth Failure Growth 2.8
Future candidate target
Hormone
Multiple Sclerosis Interferon-ß Future candidate target 5.2
Diabetes Insulin Future candidate target 11.2
Arthritis IL-1 Ra Future candidate target 12.9
Wound Healing PDGF-BB Future candidate target NA
Obesity Peptide YYS-
Future candidate target
36 NA
Chronic Pain IL-10 Future candidate target NA
Cancer recovery G-CSF Future candidate target 4.8
Source: Medgenics
Potentially more effective and safer than injected therapies
Injections deliver a bolus of the therapeutic agent resulting in a spike of serum levels of the
protein, after which the concentration tails off as the molecule is distributed and metabolised.
Most agents of this nature have a short half-life but need to be sustained within a therapeutic
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window in the blood. Below this range the product is not effective and above it there is a risk of
adverse events. Most injectable therapies involve a compromise between dose and frequency
of injection in order to achieve this. The need for frequent injections is clearly undesirable, but
is often an inevitable consequence of needing to maintain serum levels within the optimum
range in view of the short half-life of the agent. Even with frequent administration it is not
always possible to achieve this and the nature of delivering a bolus will result in fluctuations in
blood concentration.
Medgenics’’ Biopumps are designed to release a sustained stream of protein into the body and
so should be able to maintain a steady level in the body, similar to the action of an infusion
pump. If the dosing is calculated correctly, or subsequently adjusted by administration of
additional Biopumps or ablation to reach the desired level, the agent can be sustained within
the therapeutic window, avoiding troughs whereby efficacy is impaired, or peaks which could
cause side effects.
The Medgenics system has the additional advantage of not being reliant on patient compliance
required to ensure injections are taken when needed.
Erythropoietin
Erythropoietin (EPO) is a hormone produced in the kidney that stimulates the production of red
blood cells in the bone marrow. It was first approved as a therapeutic agent in 1989, branded
as Epogen, produced by Amgen and since has been one of the most successful biologically
based drugs currently in use. EPO is administered to patients in end stage renal failure as
their kidneys are unable to produce enough of the hormone in order to sustain adequate levels
of red blood cells. It can also be used in cancer patients prior to radiation and chemotherapy
that affects the bone marrow. Without boosting the red blood cells in this way, patients may
not be able to survive the anaemia caused by the cancer treatment. Most EPO treatments
require patients to be injected three times a week, although more recently developed forms,
such as Amgen’’s Aranesp, only require once weekly dosing.
EPO is associated with a number of adverse events including cardiovascular complications
and a review of clinical data in 2007, resulted in a ‘‘Dear Doctor’’ letter being issued by the FDA
about off-label use and a black box warning on the label of erythropoietin. Medgenics believes
that these adverse events are related to the bolus injections of high doses and haemoglobin
cycling caused by injecting EPO.
Market
Summary of erythropoietin market leaders
Supplier Product 2010 sales ($ billion) Growth
Amgen Aranesp 2.48 -6%
Amgen Epogen 2.52 -2%
J&J Procrit 1.90 -14%
Roche NeoRecormon/Epogin 1.52 -15%
Source: Company reports
The global market for erythropoietin is about $12 billion with Amgen, J&J and Roche the key
branded players, although some biosimilars have already reached the market. The entrance of
other biosimilar competitors has been hampered by regulatory concerns about adverse events
and the requirement to perform long and expensive safety studies.
Reimbursement
Much of the controversy surrounding the use of EPO has been associated with the
reimbursement of its use in kidney dialysis patients. When EPO was first reimbursed for use in
the treatment of end stage renal patient, Medicare paid $40 a dose (wholesale price for 4,000
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units) with an additional payment of $30 for any dose over 10,000 units. This policy resulted in
lower than anticipated use of EPO, so in 1991 the reimbursement rate was changed to $11 per
1,000 units and then again in 1994 to $10. However, over the next ten years the average dose
of EPO used on dialysis patients doubled. By 2005, with about 390,000 patients being treated
at an overall dialysis cost of $7.9 billion, the cost of separately billable drugs was $2.9bn of
which $2 billion was EPO. The drug had become Medicare’’s largest single pharmaceutical
expense. The cost of EPO to the large dialysis providers was about 12% below the
reimbursement rate, partly due to ““overfill”” (overfilling of EPO vials). From 2006, Medicare
reimbursed the average selling price of EPO plus 6%, lowering the margins being generated
by the clinics, but the overall cost of the drug to Medicare remained a concern.
In January 2011, a new US reimbursement rates for dialysis came into force so that each
dialysis patient is now eligible for a single bundled rate, including additional pharmaceutical
treatment such as EPO. This presents a dilemma to the dialysis clinics as they attempt to
balance the new reimbursement rate with the high cost of EPO and the quality of care they
provide for their patients. A consequence of this is likely to be that the dialysis providers will be
looking at alternative means of treating patients with EPO and would expect that they will look
at the outcome of Medgenics’’ EPODURE clinical trial with interest.
Factor VIII
Haemophilia A
Haemophilia is a group of bleeding disorders caused by genetic defects resulting in a lack of
blood clotting factors necessary to stop bleeding. Haemophilia A is a rare genetic condition in
which patients are deficient in Factor VIII, an essential blood clotting factor, which leads to a
significant risk of bleeding. People suffering from haemophilia B are deficient in Factor IX and
people suffering from von Willebrand disease have a part of the Factor VIII molecule (known
as von Willebrand) reduced. Haemophilia A is more common than haemophilia B. Generally,
cuts and grazes are not significant issues (pressure and a plaster are usually enough to stop
the bleeding), the main problem is internal bleeding into joints, muscles and soft tissues.
Haemophilia A affects approximately 18,000 people in the US, mainly males
The incidence of haemophilia A is about 1:7,500 males and 1:25,000,000 females. There are
about 18,000 people living with haemophilia A in the US and approximately 30,000 people in
Europe. Although the disease has an X-linked inheritance pattern, as many as 30% of people
with haemophilia A may have developed it from a spontaneous mutation of the Factor VIII
clotting gene on their X-chromosome. The full blown version of Factor VIII deficiency is very
rare in women, and would only result from having a father that is affected and a mother that is
a carrier, or having two affected parents. Haemophilia A is typically classified as either:
a) Mild - about 25% of the haemophilia population. Usually have problems with bleeding only
after serious injury, trauma, or surgery. In many cases, mild haemophilia is not discovered
until an event (such as injury, surgery, tooth extraction etc.) results in unusual bleeding.
The first episode may not occur until adulthood;
b) Moderate - about 15% of the haemophilia population. Tend to have bleeding episodes
after injuries. They may also experience occasional bleeding episodes without obvious
cause. These are called "spontaneous bleeding episodes";
c) Severe - about 60% of the haemophilia population. Have bleeding following an injury and
may have frequent spontaneous bleeding episodes, often into their joints and muscles.
Replacement therapy is the main treatment option
There is no cure for haemophilia. In mild haemophilia cases treatment typically involves
injection of the hormone desmopressin to stimulate the release of more clotting factor to stop
the bleeding. For moderate to severe haemophilia, replacement clotting factor is typically
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infused and if the internal bleeding is serious, preventative infusions may be given two to three
times a week. The replacement Factor VIII market is currently worth over $3.5 billion globally.
First generation Factor VIII products were plasma-derived
From the 1960s to the beginning of the 1990s, patients with haemophilia A were treated with
plasma-derived Factor VIII. Unfortunately, in the 1980s these plasma-derived products were
discovered to be infecting patients with HIV (50% of haemophiliacs were infected between
1980-1985) and with hepatitis B and C (80% of haemophiliacs were infected with hepatitis C
before 1987). In 1987, the widespread use of heated blood plasma fractions put an end to the
transfer of these infections.
Recombinant products were first sold in the 1990s and have since been improved
Following the sequencing of the Factor VIII gene in 1984, the first recombinant Factor VIII
reached the market at the beginning of the 1990s. While this first generation of recombinant
Factor VIII (Recombinate from Baxter and Kogenate from Bayer) eliminated the risk of
infection, the preparation and formulation still required the use of human albumin and certain
animal products. The second generation recombinant products (ReFacto from
Wyeth/Biovitrum, Kogenate FS from Bayer) replaced human albumin with sucrose, but still
incorporated proteins or raw materials derived from human or animal sources. Of these
Kogenate is the biggest seller, achieving sales of about $1.5 billion (+10%) in 2010.
Xyntha and Advate are the latest generation recombinant products
Third generation recombinant Factor VIII products are now available (Advate from Baxter
which achieved sales of nearly $1.8 billion in 2010 and Refacto/Refacto AF/Xyntha from
Wyeth/Biovitrum with revenues of $379m in 2010). The manufacturing process for these
products excludes proteins or raw materials derived from human or animal sources, thereby
removing the risk of transmitting potentially infectious agents.
High cost per patient
The cost per patient for treatment with Factor VIII varies depending on the severity of the
disease, but for severe cases can exceed $100,000 a year.
Hepatitis C
Hepatitis C is a blood-borne viral infection that mainly causes inflammation and damage to the
liver but can also affect the intestine, lymphatic system, immune system and the brain. The
hepatitis C virus (HCV), which is transmitted by coming into contact with infected blood, was
identified in 1989 and a diagnostic test was available in the early 1990’’s. It is estimated that
about 200m people are infected with HCV worldwide, although prevalence varies between
countries and ranges between 1% of the population (Northern Europe), 2% (US) and 10%
(Egypt).
The progression of disease can vary between patients with symptoms taking many years to
emerge while others experience a rapid onset of problems associated with the virus. As a
result, many of the infected population are unaware they that they have the disease and initial
symptoms (fatigue, pain and intestinal problems) are attributed to other causes. However, in
the more aggressive form of the disease scarring of the liver and ultimately end stage liver
disease can mean that a liver transplant is the only option. Strangely, there is little correlation
between the level of symptoms and the amount of damage to the liver.
Treatment
Treatment of the disease over recent years has proved to be relatively successful with
success rates at about 50% for one form of the virus (genotype 1) and 80% for two other
genotypes (genotypes 2 and 3). The most common form of treatment involves subcutaneous
injection with interferon- and ribavirin, an oral antiviral therapy. Initially, formulations of
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interferon- required injection three times a week, but more recent forms of the drug are
pegylated (made larger through a chemical process) and the longer lasting drug only needs to
be administered once weekly.
Interferon is a protein produced normally by the body as part of its defence against viruses.
However, large bolus injections are associated with a number of side effects including nausea,
anaemia, flu-like symptoms, insomnia, hair loss, and rashes. The recommended duration of
treatment will depend on the genotype of HCV causing the infection and whether combination
or monotherapy is being used. For peginterferon monotherapy, a 48-week course is normally
used regardless of genotype, while the recommended therapy course can last for 24-48 weeks
depending on the genotype. Treatment is normally recommended for patients who have
histological evidence of progressive disease regardless of whether they are symptomatic.
Interferon- market
Roche and Schering-Plough (Merck & Co) dominate the interferon- market for treating
hepatitis C. The first products to be launched, Roferon-A (Roche) and Intron A (Schering-
Plough) required injections three times a week, but these have been superseded by their
Pegylated forms, Pegays (Roche) and Peg intron (Schering-Plough/Merck) that need to be
injected once a week. Over time we believe that this market will be affected by biosimilar
(generic) products.
Summary of market leaders in the hepatitis C interferon- market
Supplier Product 2010 sales ($ billion) Growth
Roche Pegasys 1.96 +2%
Merck & Co Pegintron 0.74 -12.6%
Source: Company reports
New products
Hepatitis C is one of the most active areas of development for the pharmaceutical industry and
there are a number of new classes of oral drugs in the pipeline including protease inhibitors
(including products from Vertex and Merck that have been recently launched), nucleoside
inhibitors of HCV polymerase, non-nucleoside inhibitors of HCV polymerase inhibitors and
NS5A inhibitors. Many of these compounds show impressive reductions in viral load, but only
as part of a triple therapy, including ribavirin and interferon- . Consequently, the need for
interferon is unlikely to be significantly impacted by the approvals these new products, but in
the long-term pharmaceutical companies may attempt to demonstrate the efficacy of the oral
products as a monotherapy in the treatment of some of the HCV genotypes.
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DISCLOSURES
Analyst certifications:
I, Michael King, a research analyst employed by Nomura Code Securities Limited (““Nomura Code””), hereby certify that all of the views expressed in
this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein.
In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views
that I have expressed in this research report, nor is it tied to any specific investment banking transactions performed by Nomura Code or any other
Nomura Group company or affiliates thereof.
Analysts may forward a draft copy of the research, prior to publication, to the subject company in order to verify facts. Where such verification is
sought, the analyst must remove any rating or investment summary from the research prior to forwarding it to the subject company. Any subsequent
amendments to the research are to correct factual inaccuracies only. Any matters of judgement are the author's own and our analysts will not amend
the research on the basis of an issuer's contrary view.
Explanation of Nomura Code Securities Limited’’s rating system:
(a) Valuation:
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price) / Current Price, subject
to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock
using an appropriate valuation methodology such as Discounted Cash Flow or Multiple Analysis etc. However, if the analyst doesn't think the market
will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In
most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair
value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause
the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation
(b) Stocks:
A rating of ““Strong Buy”” indicates that the Analyst expects the stock to outperform the Benchmark by 15% or more over the next six months.
A rating of ““Buy”” indicates that the Analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six
months.
A rating of ““Neutral”” indicates that the Analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next
six months.
A rating of ““Reduce”” indicates that the Analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six
months.
A rating of ““Sell”” indicates that the Analyst expects the stock to underperform the Benchmark by 15% or more over the next six months.
Stocks labelled ““Not Rated”” or shown as ““No Rating”” are not in Nomura Code’’s regular coverage. Investors should note that additional research
reports on this company may not be published by Nomura Code.
(c) Sectors:
A ““Bullish”” stance indicates that the analyst expects the sector to outperform the Benchmark during the next six months.
A ““Neutral”” stance indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months.
A ““Bearish”” stance indicates that the analyst expects the sector to underperform the Benchmark during the next six months.
st
Benchmarks are as follows: Pharmaceuticals: FTSE Euro 1 300 Pharma & Bio Index; Biotechnology: Nomura Code European Biotechnology Index
Price targets
Price targets, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any price target may be impeded by
general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings
fall short of estimate.
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19. 21 June 2011 Nomura Code Securities Limited
Material Interests
Investment Banking services: Nomura Code or its affiliates in the Nomura Group is party to an agreement with Medgenics [MEDG.L] relating to the
provision of investment banking services which has been in effect over the past 12 months or has given rise during the same period to a payment or
to the promise of payment.
Market maker: Nomura Code or its affiliates in the Nomura Group is a market maker or liquidity provider in the securities / related derivatives of
Medgenics [MEDG.L].
Corporate broker: Nomura Code or its affiliates in the Nomura Group has a corporate broking relationship with Medgenics [MEDG.L]
Share price and rating history
Recommendation changes in last year
260
Date Recommendation change price
240
220
200
180
160
140
120
100
80
Jun-09 Se p-09 De c-09 M ar-10 Jun-10 Se p-10 De c-10 M ar-11 Jun-11
MEDG
Source: DataStream and Nomura Code Securities
Distribution of Nomura Code recommendations
% of recommendations published during % for which material investment banking
the quarter to March 2011 services have been provided
Buy 71% 100%
Neutral 20% 0%
Sell or reduce 9% 0%
Source: Nomura Code
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20. 21 June 2011 Nomura Code Securities Limited
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