Phosphagenics Limited

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					D. Paul Cohen, President                                                                   Telephone: 415.454.6985
21 Manzanita Avenue #1000                                                                         Fax: 415.455.0295
San Rafael, CA 94901                                                              E-mail: paul@cohenresearch.com
www.cohenresearch.com                                                                     E-mail: dpaulco@aol.com




                            Phosphagenics Limited
                                        US$0.15 (A$0.20)

                                                  BUY
                                            12-Month Price Targets

                     Based on Forecast Scenario and 35% Long Term Growth
                                Optimistic Case          US$1.25       (A$1.70)
                                Base Case                  $0.72       (A$0.98)
                                Pessimistic Case           $0.46       (A$0.63)




                                         Summary Forecast
                                              12/31/04      12/31/05        12/31/06
                            Sales               0.76          2.95           11.12
                            Pretax Income      -2.91         -4.33            -0.78
                            EPS                -0.01         -0.01            0.00



       Phosphagenics Limited is listed on both the Australian Stock Exchange
       (ASX Code: POH) and the London Stock Exchange’s AIM (Code: PSG).


                  The Phosphagenics Limited website is www.phosphagenics.com.


              All $ figures throughout the report are US $ - unless otherwise indicated.
                       The current exchange rate is $0.7336 US to $1 Australian



                                                Oct 25, 2004

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                                              TABLE OF CONTENTS

THE COMPANY ...........................................................................................................................5
An Exciting Science ......................................................................................................................7
The Nutraceuticals Division ..........................................................................................................8
The Pharmaceuticals Division.......................................................................................................9
An Overview of Funding within the Biotech Industry.....................................................................9
History.........................................................................................................................................10
Recent News...............................................................................................................................11
THE SCIENCE BEHIND THE PRODUCTS................................................................................11
α-TOCOPHEROL (VITAMIN E) ..................................................................................................11
           Figure 1: Chemical structure of the active ingredients comprising the TPM-01 platform
           technology, APA-01, Ester-ETM and Vital ETTM..............................................................................12
DRUG DELIVERY SYSTEMS ....................................................................................................13
Specific Drugs.............................................................................................................................13
           Table 1: Pharmaceutical Focus ....................................................................................................13
           Table 2: Timeframes for Pre-clinical and Phase 1 Clinical Trials .................................................14
Morphine .....................................................................................................................................14
Testosterone ...............................................................................................................................15
Estradiol ......................................................................................................................................15
Atropine.......................................................................................................................................15
Atherosclerosis ...........................................................................................................................15
Statins .........................................................................................................................................16
Routes of Drug Delivery..............................................................................................................16
The Skin......................................................................................................................................18
           Figure 2: Diagram of the layers of the skin. ...................................................................................18
The Phosphagenics Solution ......................................................................................................19
           Figure 3: Dermal Penetration – Vital ETTM vs. Vitamin E...............................................................20
Morphine .....................................................................................................................................22
           Figure 4: Effect of morphine and transdermal carrier (TPM-01), versus carrier alone, on time for a
           pig-tail flinch response after application of a heat probe. ..............................................................22
           Table 3: Incidence, Mortality and Prevalence of All Cancers in 2002 (from www-dep.iarc.fr).......23
Future Transdermal Applications ................................................................................................24
ATHEROSCLEROSIS ................................................................................................................24
What is Atherosclerosis? ............................................................................................................24
           Figure 5: Development of atherosclerosis in an artery and formation of a thrombus...................25
Formation of Arterial Plaques .....................................................................................................25
           Figure 6: Plaque Blocks Interior of Vessel ....................................................................................27
Coronary Artery Disease in the Human Heart ............................................................................27
           Figure 7: Light microscopy slides of coronary artery. Left: healthy artery. Right: profound
           atherosclerosis – note the reduced diameter of the lumen in the lower right area of the artery....28
           Table 4: Annual Incidence and Mortality of Atherosclerotic Conditions in the US (1999) ............28
Stroke..........................................................................................................................................29
Peripheral Arterial Disease (PAD) ..............................................................................................29


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Risk Factors for Atherosclerosis .................................................................................................30
Antioxidants: ...............................................................................................................................31
Treatment of Atherosclerosis ......................................................................................................31
           Table 5: Common statins prescribed to reduce blood LDL...........................................................32
The Phosphagenics Solution: APA-01.......................................................................................32
           Figure 8: Inhibition of platelet-derived growth factor (PDGF)-driven proliferation of rat aortic
           smooth muscle cells (RASMC) by combinations of lovastatin and APA-01. .................................33
           Figure 9: Proliferation of rat aortic smooth muscle cells (RASMC) is inhibited by increasing
           concentrations of APA-01. .............................................................................................................34
THE COMPETITION...................................................................................................................34
Oral Drug Delivery Products .......................................................................................................34
- Atherosclerosis Treatments ......................................................................................................34
AtheroGenics, Inc. ......................................................................................................................35
Transdermal Drug Delivery Products ..........................................................................................35
ALZA Corporation .......................................................................................................................36
Altea Therapeutics ......................................................................................................................37
MARKETS FOR VITAMIN E ......................................................................................................38
Distribution ..................................................................................................................................38
           Table 6: Minimum Contracted Sales of VitalETTM by ISP .............................................................38
           Table 7: Formulation Prototypes...................................................................................................39
           Table 8: Zila Minimum Contracted Royalties ................................................................................39
Manufacturing .............................................................................................................................40
Distribution and Marketing of Pharmaceuticals...........................................................................40
Patents........................................................................................................................................40
Capitalization ..............................................................................................................................40
           Table 9: Phosphagenics Share Count ...........................................................................................40
Cash Flow ...................................................................................................................................41
           Table 10: Forecasting Cash Requirements ..................................................................................41
Liquidity and Leverage................................................................................................................41
           Table 11: Leverage .......................................................................................................................41
           Table 12: Liquidity .........................................................................................................................41
Forecasting Nutraceuticals .........................................................................................................42
           Table 13: Global Vitamin E Market (metric tonnes) ......................................................................42
           Table 14: Bulk Price for Vitamin E ................................................................................................42
           Table 15: Calculation of Projected Revenues Based on Market Share........................................42
           Table 16: Projected Revenues from Vitamin E in Foods Market..................................................43
           Table 17: New Product Introduction Timeframe ...........................................................................43
           Table 18: Revenues from Personal Care Market ($) ....................................................................44
           Table 19: Revenues from Dietary Supplements Market served by Zila ($) ..................................44
           Table 20: Revenues from Dietary Supplements Market not served by Zila .................................44
           Table 21: Revenues from Foods & Beverages ($) .......................................................................45
           Table 22: Cost of Goods Sold for Non-Royalty Forecasts.............................................................45
Forecast for Pharmaceuticals .....................................................................................................45
           Table 23: R&D Expenditures for Pharmaceuticals .......................................................................46
           Table 24: Pharmaceutical Milestone Payments............................................................................47
           Table 25: Potential Pharmaceutical Revenues.............................................................................47
Forecasts – Combined................................................................................................................48
           Table 26: Base Case Forecast ($) .................................................................................................48

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           Table 27: Optimistic Case Forecast ($) ........................................................................................48
           Table 28: Pessimistic Case Forecast ($) ......................................................................................48
Valuation .....................................................................................................................................49
           Table 29: Price Targets for 3 Scenarios vs. Long Term Growth Rate..........................................49
Industry Comparison Valuation – POH Shares are Undervalued ...............................................51
Management ...............................................................................................................................56
Phosphagenics Research and Development Team....................................................................58
Monash University Department of Biochemistry & Molecular Biology ........................................58
Victoria University .......................................................................................................................58
Scientific Advisory Board ............................................................................................................58
CONCLUSION............................................................................................................................59
ANNUAL INCOME STATEMENT WITH FORECAST ...............................................................60
SEMI-ANNUAL INCOME STATEMENT WITH FORECAST......................................................61
ANNUAL BALANCE SHEET .....................................................................................................62
SEMI-ANNUAL BALANCE SHEET ...........................................................................................63
STATEMENT OF CHANGES IN CASH .....................................................................................64
SEMI-ANNUAL STATEMENT OF CHANGES IN CASH ACTUAL SEMI-ANNUAL DATA, NOT
           YTD DATA ....................................................................................................................65
REVENUES BY DIVISION .........................................................................................................66
NUTRACEUTICAL REVENUES ................................................................................................67
OPERATING MARGIN ...............................................................................................................68
REVENUE GROWTH .................................................................................................................69
APPENDIX I: GOAL BLOOD LDL LEVELS, AS RECOMMENDED BY THE AHA .................70
GLOSSARY................................................................................................................................71




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                          Phosphagenics Limited
                                 ASX: POH US$0.15
                                  AIM: PSG £0.08
                                               BUY
                                                                                          Oct. 25, 2004

   Share Data                        Share Data                         Ratios            Values
   Price                 $0.15    EPS TTM               -0.013    PE TTM                       NM
   52 W High             $0.21    Est. EPS 2004         -0.016    Est. PE 2004                 NM
   52W Low               $0.11    Est. EPS 2005         -0.009    Est. PE 2005                 NM
   Mkt. Cap (MM)         69mil    Sales TTM (MM)          0.24    P/Sales TTM                  NM
   Shares Out           476mil    Book Value            $0.081    Current Ratio               3.53
   Float                179mil    Owned by Inst            7%     P/Book                      1.81
   Daily Volume 3 mo    89,000    Insiders Own            37%     LT Debt/Equity              0.00



                                      THE COMPANY
Phosphagenics Limited, formerly known as Vital Capital Ltd., is a biotechnology pharmaceutical and
nutraceutical company based in Melbourne, Australia, listed on the Australian Stock Exchange
(ASX) and the Alternative Investments Market (AIM) in London.

The biological term “phosphagenic” means “creator of phosphates”. The fundamental platform tech-
nology of Phosphagenics Limited is its patented process to add phosphate molecules (“phosphory-
lation”) to poorly bioavailable compounds to improve their absorption and efficacy.

The company has developed a revolutionary understanding of the role that phosphates can play in
the active transport of compounds within the body. The Company’s technology has the potential to
modify chemical entities that can be actively transported into and throughout the body. When ap-
plied to compounds that are not readily soluble in the body, this technology significantly increases
the bioavailability and bio-distribution of the compound, and may dramatically improve efficacy of
the active ingredient.

Adding phosphate molecules to the poorly bioavailable active ingredient makes the active com-
pound more available biologically while utilizing the body’s natural biochemical transport pathways.

This exciting scientific and economic process is protected by 18 patents. The company has 14 full-
time employees, including 6 PhD’s and 2 research assistants in Research & Development. Phos-
phagenics Limited has two divisions: Pharmaceuticals and Nutraceuticals.

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We recommend the purchase of POH common stock for the following reasons:

•   Phosphagenics (POH) has developed patented delivery technologies that improve bioavailabil-
    ity and efficacy of selected vitamins, nutrients and drugs.

•   The Phosphagenics delivery technology, based on phosphorylation, appears to have wide-
    spread use in pharmaceuticals and nutraceuticals (personal care, dietary supplements and food
    fortification).
•   The Company has demonstrated that these technologies improve delivery for a wide range of
    pharmaceuticals. Importantly this should result in extending patent coverage of existing drugs
    and patent-protect new products.
•   One lead compound, APA-01, in trials in Europe and the US has shown initial promise as a
    treatment for atherosclerosis, a leading killer in the Western world.
•   In trials, the Company’s transdermal delivery product, TPM-01, has demonstrated that it im-
    proves absorption of morphine, estradiol, testosterone, and atropine. Phase 1 trials commence
    in Q4 2004 on transdermal morphine.

•   The Company is investigating the use of its technology to enhance the delivery of statin (choles-
    terol-lowering) pharmaceuticals, which currently command a $26 billion annual market.
•   The Company has identified an additional 200 pharmaceutical compounds that may benefit
    from its technology.
•   The Company’s first commercial product, Vitamin E phosphate, is already marketed by two of
    the largest global distributors in the Personal Care (Vital ET™) and Dietary Supplement (Ester-
    E™) industries.
•   An increasing number of Personal Care products are being formulated with the Company’s Vital
    ET™.
•   The antioxidant and therapeutic properties of Phosphagenics’ product offer the Food and Bev-
    erage industry for the first time, a patented, scientifically validated, bioactive form of Vitamin E
    with flexible characteristics

•   Other actives are currently under development for the nutraceuticals markets, supported by the
    existing partners.

•   We estimate a near-term target price of US$0.62 to $0.82, a significant premium to the
    current price of US$0.15.




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                                                        The pharmaceutical business focuses on drug
An Exciting Science                                     enhancement and effective transdermal de-
                                                        livery of existing pharmaceuticals.
Phosphagenics was founded on the commer-
cialization of its revolutionary scientific under-      The nutraceutical business provides current
standing of the role of phosphates in the               revenues while the pharmaceutical business
transport of biologically active compounds              has the potential of much higher revenues.
within the body.
                                                        The Phosphagenics technology has been
Their patented and proprietary drug delivery            successfully applied to Vitamin E which is an
technologies are based on three processes:              essential vitamin known to play a key role in
                                                        many of the body’s immune defenses and re-
•   Phosphorylation – the addition of a                 covery processes.
    phosphate molecule to a compound;

•   Complexation – the reaction of the phos-            Vitamin E is known for its healing properties
    phorylated compound with another com-               as an antioxidant, its ability to minimize visible
    pound to form a new molecule;                       scar tissue and enhance the look and feel of
                                                        skin tissue. Vitamin E, however, is poorly ab-
•   Enhancement – improving delivery of an              sorbed in the body.
    active compound through the use of a
    phosphorylated carrier.                             The addition of a phosphate group to Vitamin
                                                        E and complexing has made Vitamin E water
These processes result in drugs, vitamins and
                                                        soluble, increases its bioavailability and im-
nutritional compounds that are more effective
                                                        proves its efficacy.
and more safely delivered than the original
compound, whether taken orally or topically.
                                                        The Company’s first product has demon-
                                                        strated a 9-fold increase in dermal (skin)
Phosphagenics initially focused its technology
                                                        penetration versus a standard Vitamin E.
platform on the phosphorylation of α-
                                                        Several consumer products are now utilizing
tocopherol, commonly known as Vitamin E.
                                                        this enhanced form of Vitamin E.
The company’s patents, including a number in
                                                        The technology can be applied to a range of
the US, are related to its platform technology
                                                        water-insoluble drugs, enhancing their
and products.
                                                        bioavailability.
The Company is organized into two divisions,
                                                        Incorporating this technology into a transder-
Nutraceuticals and Pharmaceuticals.
                                                        mal patch applied to the skin can enhance the
The nutraceutical business has developed                administration of drugs that are typically in-
and commercialized products for the dietary             gested or injected.
supplement and personal care markets and is
                                                        This revolutionary drug delivery methodology
actively pursuing products for the food and
                                                        has been developed and tested for known
beverage additives markets.
                                                        safe drug compounds such as morphine, at-
                                                        ropine, testosterone and estradiol.

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These products may require only limited clini-        Additional Vitamin E phosphate products are
cal testing before USFDA approval, as they            designed to be used in the beverage and food
use preexisting and previously approved for-          fortification markets.
mulations of the drugs.
                                                      One multinational food & beverage company
                                                      has commenced in-house verification testing.
The Nutraceuticals Division
                                                      The Company is applying its technology to
The Nutraceutical Division markets the Com-
                                                      other compounds that benefit from the dra-
pany’s products to the personal care, nutri-
                                                      matically improved solubility achieved by the
tional/dietary supplements and functional
                                                      addition of a phosphate group to the active
foods markets.
                                                      ingredient.
Phosphagenics developed a patented Vitamin
                                                      These include Isoflavones, Sterols and
E phosphate dietary supplement and licensed
                                                      CoQ10.
the production process and other patents to
Zila, Inc. (www.zila.com) for exclusive mar-          Sterols and Isoflavones are both compounds
keting and distribution in the United States,         that are primarily derived from soybeans.
Canada and Indonesia, under their brand
name, Ester-ETM.                                      Sterols naturally reduce cholesterol and are
                                                      added to table spreads and orange juice.
Ester-ETM was launched under several lead-
ing supplement brands (Nature’s Bounty,               Isoflavones are a class of compound that
Spring Valley, etc.) in 2004 and is currently         have mild estrogenic activity and are used as
sold by the Wal-Mart chain amongst others.            an alternative to synthetic hormone therapy.

Phosphagenics also developed a patented               CoenzymeQ10 (CoQ10) is an antioxidant that
Vitamin E phosphate cream, commercially               plays a critical role in the mitochondria of
available through an exclusive global distribu-       cells, the cell’s powerhouses. A shortage of
tion agreement with International Specialty           CoQ10 can cause fatigue and muscle pain.
Products Inc. (ISP), a large global ingredient
supplier to the Personal Care Market, under           A CoQ10 deficiency is typical for patients tak-
the brand name, Vital ETTM.                           ing statins (e.g. Lipitor) for cholesterol reduc-
                                                      tion. Statins are further discussed under
Through ISP (www.ispcorp.com), Vital ETTM             pharmaceuticals.
is currently sold to major cosmetics compa-
nies for use in their cosmetics.

Currently, Phosphagenics’ Vital ETTM is avail-
able in six products including treatment
creams, dermatological cream, sunscreen,
after shave lotions and gels. Future applica-
tions for Vital ETTM include acne lotions.


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                                                       plications including post-operative pain relief,
The Pharmaceuticals Division                           and eventually arthritis and local pain man-
The Pharmaceutical Division focuses on ap-             agement.
plications of the Company’s technology for
                                                       This patented transdermal drug delivery sys-
ethical drugs. Transdermal delivery and en-
                                                       tem can be utilized to deliver a broad range of
hanced formulations of existing oral ethical
                                                       other drugs. Preclinical studies are also in
drugs are exciting technologies.
                                                       progress or nearly completed for several
The Pharmaceuticals division has developed             other well-characterized drugs, including es-
an internationally patented pharmaceutical             tradiol, testosterone and atropine. Atropine is
grade tocopherol mix, APA-01. This unique              used to treat exposure to nerve gas used for
product has been shown in laboratory tests to          chemical warfare. Human trials are expected
be effective in inhibiting the primary pathways        to commence soon.
leading to atherosclerosis.
                                                       We are impressed with the science behind
Animal trials of APA-01, alone and with stat-          Phosphagenics’ products and platform tech-
ins, are in progress to determine its efficacy in      nology. The thoroughness of their studies to
the prevention and treatment of atherosclero-          date and their adherence to sound scientific
sis, the leading cause of heart disease and            protocols are reflected in the company’s solid
stroke.                                                understanding of future applications for their
                                                       products. These practices bode well for
In a second key program, VHS is applying its           bringing outstanding products to market.
platform technology to a non-invasive, trans-
dermal drug delivery system, utilizing TPM-01          An Overview of Funding within
as the active carrier to deliver well-
                                                       the Biotech Industry
established prescription drugs through the
skin without irritation.                               The long-term future for the biotech industry
                                                       is the most promising it has been in the his-
The lead compound for the system is mor-               tory of the industry.
phine. Transdermal delivery of morphine has
been successfully demonstrated in all manda-           Fundraising is the lifeblood of the biotech in-
tory animal studies and is ready to proceed            dustry. The enormous influx of capital into
with human trials.                                     the industry is all the more impressive con-
                                                       sidering a pedestrian, volatile and flat stock
The morphine transdermal formulation pro-              market.
vides a continuous analgesic effect, possibly
avoiding the breakthrough pain and other side          Today’s biotech industry is much more inter-
effects experienced by intravenous, intramus-          national in scope than it was ten years ago.
cular or oral administration.                          During 1999-2000, the genomics revolution
                                                       stimulated considerable investment within the
The morphine transdermal formulation will              industry. Today’s biotech industry, by com-
initially be targeted at the cancer and pallia-        parison, is more mature in product offerings
tive care markets, with widespread future ap-          and promising science in the clinic. Certain

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international companies have filed for listings         History
on the US stock exchanges. Reported bio-                The Company was originally listed on the
tech revenues in 2003 were about $50 billion            Australian Stock Exchange in August 1993
compared with $20 billion in 1998.                      and became Vital Capital Ltd. in March 1999.

As an international company, Phosphagenics              Vital Capital is an Australian entity registered
is ideally positioned within the biotech indus-         under a government program designed to
try.                                                    support venture capital (VC) investment in
                                                        Australia. The Pooled Development Fund
During 2003, Burrill and Company reported
                                                        (PDF) program allows registered VC compa-
that the biotech industry raised almost $8.9
                                                        nies to pay 15% income tax, while sharehold-
billion, $5.4 billion via financings and $3.5 bil-
                                                        ers do not pay income or capital gains taxes.
lion from partnerships.
                                                        However, PDF guidelines limit the investment
During just the first half of 2004, the industry
                                                        type, size and number of holdings.
raised a stunning $14.5 billion, $10.2 billion
from financings and $4.3 billion via partner-           The PDF company, Vital Capital, had invest-
ships.                                                  ments in 5 companies at the time of its listing
                                                        on the ASX. At the end of 2003, Vital Capital
During 2004, 21 IPOs totaled approximately
                                                        was essentially minority investments in two
$1.2+ billion. As of July 7, 2004, there were
                                                        companies.
another 14 IPOs on file. Five (5) or 10 of
these companies could total another $10 bil-            Vital Capital owned 32.8% of a PET recycling
lion.                                                   technology company, Petrecycle Limited, and
                                                        36.7% of Vital Health Sciences Limited
Investment activity in 1H 2004 included ap-
                                                        (VHS), which had developed innovative-
proximately $1.8 billion in PIPEs (Private In-
                                                        patented forms of Vitamin E.
vestment in Public Equities) with Venture
Capital contributing about $1.2 billion in 1H           Vital Capital decided to concentrate its efforts
2004.                                                   on VHS and proposed a tax-free distribution
                                                        of the Petrecycle shares to Vital Capital
More than 20 announced M&A transactions in
                                                        shareholders with a special dividend and the
Q2, 2004 totaled a whopping $67 billion.
                                                        subsequent acquisition of the outstanding
Clearly, enormous capital is flooding into the
                                                        shares of VHS.
industry.
                                                        Shareholders approved the restructuring and
Those companies with unique products, the
                                                        changed the Company’s name to Phospha-
ability to partner, access to funding, and a
                                                        genics Ltd. in February 2004.
business model that includes revenues to
fund science are those companies that have              The Company will likely receive confirmation
the best prospects for success.                         of its departure from the PDF Scheme at a
                                                        forthcoming PDF Licensing Board meeting.
Phosphagenics business model fits this
                                                        We expect this will occur in December 2004.
description.

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Recent News                                                  THE SCIENCE BEHIND THE
12 Oct 2004 - International trials commence examin-          PRODUCTS
ing APA-01 and statins in preventing heart disease

8 Oct 2004 - Phosphagenics meets USFDA to dis-
cuss development program for new morphine product
                                                             α-TOCOPHEROL (VITAMIN E)
9 Sep 2004 - Resignation of Director, Professor              Natural Vitamin E is found in plants and is a
Rebuck                                                       mixture of tocopherols. The most active form
16 Aug 2004 - Half Yearly Report                             is α-tocopherol, a lipophilic (water-insoluble)
                                                             compound that is not easily transported
29 July 2004 - Issue of Shares into London Stock
Exchange's Alternative Investment Market                     across cell membranes and not easily ab-
                                                             sorbed by the body.
26 Jul 2004 - Phosphagenics expands Scientific Ad-
visory Board
                                                             When phosphorylated, Vitamin E becomes
2 Jul 2004 - Notice of Intention to seek admission to        hydrophilic (water-soluble) and can be ac-
AIM
                                                             tively transported across cell membranes,
27 May 2004 - AGM Chairman's Address                         without disrupting the skin, and can be more
27 May 2004 - Results of AGM                                 readily absorbed by the digestive system.

27 May 2004 - AGM Managing Director's Address                Recently, the phosphate derivative of Vitamin
5 Apr 2004 - Phosphagenics targeting $US 880M                E, α-tocopheryl phosphate, has been found
Morphine delivery market                                     to occur naturally in some plant and animal
22 Mar 2004 - Change of Directors Interest                   tissues, as well as in foods such as chocolate
                                                             and cheese.
18 Mar 2004 - New Board Appointments

5 May 2004 - Phosphagenics' World First In Heart             Phosphagenics recently discovered that α-
Treatment                                                    tocopheryl phosphate is synthesized by hu-
5 Mar 2004 - Appointment of Dr Ian Pattison as               man aortic smooth muscle cells and is the
Managing Director                                            active form which exerts its beneficial effects
4 Mar 2004 - Initial Director’s Interest Notice - I.G.       in preventing atherosclerosis or cardiovascu-
Pattison                                                     lar disease.
27 Feb 2004 - Distribution-in-Specie of Petrecycle
shares                                                       The Phosphagenics platform initially focused
                                                             on applying their technologies to the phos-
19 Feb 2004 - Letter to Share and Option Holders
regarding the change of name                                 phorylation of α-tocopherol.

3 Feb 2004 - Commencement of Trading as Phos-                Nutraceutical grade Vitamin E-phosphate has
phagenics
                                                             been commercialized in two forms: Ester-ETM
30 Jan 2004 - Distribution in Specie                         and Vital ETTM.

                                                             Ester-ETM is a patented, oil-based soft cap-
                                                             sule form of Vitamin E, which contains primar-
                                                             ily α-tocopheryl phosphate and di-α-
                                                             tocopheryl phosphate as the active ingredi-

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ents and various excipients. The formulation               phate, and various excipients, acceptable for
process has been licensed to Zila, Inc., for               use in the cosmetics industry.
exclusive marketing and distribution as an
oral dietary supplement in the United States,              Vital ETTM is the first active product launched
Canada and Indonesia.                                      by the distributor ISP and is currently being
                                                           sold to international cosmetics companies as
Vital ETTM is a cream consisting primarily of α-           well as a number of US companies for use in
tocopheryl phosphate, di-α-tocopheryl phos-                a variety of personal care products.

                      Figure 1: Chemical structure of the active ingredients
           comprising the TPM-01 platform technology, APA-01, Ester-ETM and Vital ETTM.

                         O
                      HO P O
                         OH
                                          O


                                     Tocopheryl Phosphate (TP)

                                                     O
                                                   O P O
                                                     OH
                                      O                            O


                                   Di-tocopheryl Phosphate (T2P)

Phosphagenics synthesizes two forms of                     tinuous, stable drug delivery without the side
pharmaceutical grade Vitamin E-phosphate                   effects experienced with intravenous, intra-
by USFDA-approved GMP processes:                           muscular or oral delivery, and without skin
                                                           irritation. This transdermal drug-delivery tech-
•   APA-01, the purest compound consisting                 nology has successfully completed mandatory
    solely of the two active forms, α-                     animal testing and is ready to commence hu-
    tocopheryl phosphate and di-α-tocopheryl               man trials for morphine, estradiol, testoster-
    phosphate.                                             one and atropine.
•   TPM-01, a mixture of α-tocopheryl phos-                APA-01 shows strong potential in laboratory
    phate, di-α-tocopheryl phosphate, and a                in vitro testing as a major new treatment for
    few USFDA-approved excipients.                         atherosclerosis and heart disease, the num-
These products are being utilized in two inno-             ber one killer in the Western world.
vative, patented pharmaceutical platforms                  It is currently in animal trials, alone and in
under development by Phosphagenics:                        combination with statins, to evaluate its effi-
TPM-01 is now used as the active carrier for               cacy in the prevention and treatment of
transdermal drug delivery of well-                         atherosclerosis.
established prescription drugs to provide con-

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DRUG DELIVERY SYSTEMS                                  The Company’s transdermal technology for
                                                       pharmaceuticals (TMP-01) can greatly im-
There are exciting economic opportunities by           prove the feasibility of using a transdermal
applying the Phosphate technology to phar-             delivery mechanism of a poorly bioavailable
maceuticals with difficult solubility profiles.        drug. In other words, drugs that could not be
                                                       delivered topically due to poor solubility may
Several drugs are currently administered               now have an avenue for topical application.
through the use of a transdermal patch on the
skin which allows for continual dosage and             Specific Drugs
sustained blood levels of the active ingredient
                                                       The Company has identified approximately
for many hours or days.           Transdermal
                                                       200 pharmaceuticals that could possibly
patches are currently used to deliver estro-
                                                       benefit from the Phosphagenics technology.
gens, nitroglycerin (for angina), scopolamine
(for motion sickness), and Fentanyl (for pain).        Following an initial assessment of medical
                                                       need, current medical limitations, develop-
The technical difficulties with creating trans-
                                                       ment risk factors and commercial potential,
dermal patches for many drugs stems from
                                                       the Company targeted the following drugs for
either skin irritation or the insolubility of the
                                                       its initial focus.
active ingredient.



                                    Table 1: Pharmaceutical Focus


                                                                     Market
                                                                       Size
                             Drug              Indication           ($ million)
                          Morphine             Pain Relief            $450
                         Testosterone        Steroid Therapy            500
                           Estradiol        Estrogen Therapy           2,500
                           Atropine          Cardiovascular             250
                           APA-01            Atherosclerosis          52,000
                            Statins            Cholesterol            26,000




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                  Table 2: Timeframes for Pre-clinical and Phase 1 Clinical Trials

                            Drug                  Activity            Time Frame
                                                Phase 1(a)               2004
                          Morphine               Phase 1(b)           2004, 2005
                                             Pre-Clinical Trials      2004, 2005
                                                Phase 1(a)               2005
                       Atherosclerosis
                                                Phase 1(b)            2005, 2006
                                             Pre-Clinical Trials      2004, 2005
                        Testosterone            Phase 1(a)               2005
                                                Phase 1(b)               2006
                                             Pre-Clinical Trials      2005, 2006
                                                Phase 1(a)               2006
                           Atropine
                                                Phase 1(b)               2007
                                             Pre-Clinical Trials      2004, 2005
                                                Phase 1(a)               2005
                           Estradiol             Phase 1(b)              2006
                                             Pre-Clinical Trials      2004, 2005
                                                 Phase 1(a)               2005
                            Statins              Phase 1(b)               2006


The following is a brief discussion of Mor-                Phosphagenics has a transdermal delivery of
phine, Testosterone, Estradiol, Atropine, Anti-            morphine that offers significant benefits. Ini-
atherosclerosis and Statins as they relate to              tial animal tests indicate an improved level of
the above pre-clinical timeframes. Greater                 analgesic response for a longer period.
detail on each lies within the science section.
                                                           Current transdermal delivery of drugs for relief
                                                           of chronic pain is dominated by inferior but
                                                           convenient Fentanyl patches, which now-
Morphine
                                                           command a $1.3 billion market. Fentanyl
Morphine is the gold standard in pain man-                 patches take 24 hours for the active ingredi-
agement. However, in the morphine market,                  ent to reach effective plasma levels.
oral administration has significant drawbacks
including poor absorption and erratic blood                Animal tests for the Phosphagenics morphine
levels. Oral morphine is associated with sig-              transdermal formulation indicate effective pain
nificant side effects including constipation and           relief within one hour of application.
drowsiness.
                                                           We believe that if clinical trials of transdermal
Transdermal delivery of morphine offers sig-               morphine patches are successful, the product
nificant potential benefits for relief of severe           will gain market share from Fentanyl; and it
chronic pain, including consistency of dose,               will create its own market due to the ease of
reduction of side effects, ease of administra-             administration, its applicability for pediatrics,
tion and minimizing the risk of addiction.                 the consistency of dosage and possible re-
                                                           duction in side effects relative to oral or intra-
Other attempts to deliver morphine transder-               venous delivery.
mally have all been unsuccessful.

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The transdermal morphine may also increase            due to the ease of administration. With the
bioavailability which would allow for a lower         increasing threat of exposure to nerve gases
dosage. In small doses, the transdermal mor-          through terrorism and war, a transdermal de-
phine patch could also target pain relief prod-       livery system for atropine would not require
ucts such as Tylenol-3 (with codeine) used to         injection by hypodermic needle.
treat acute, short-term pain associated with
localized surgery or sports injuries.                 Initial animal testing indicates that transder-
                                                      mal delivery of atropine is effective in increas-
Testosterone                                          ing heart rate for a sustained period of time.
At present, topical administration of testoster-
one to patients for hormone replacement
therapy has resulted in poor bioavailability.         Atherosclerosis
The dominant product in the market, An-               Atherosclerosis, or hardening of the arteries,
droGel®, also causes skin irritation.                 is caused by plaque formation due to an in-
                                                      flammatory response by the endothelial cells
Phosphagenics has developed a topically               in arteries and excessive proliferation of
administered product that does not irritate the       smooth muscle cells.
skin. The Company plans on pursuing a ge-
neric equivalent to AndroGel which will mini-         APA-01 has been demonstrated to inhibit ex-
mize the time to market.                              cessive proliferation of rat aortic smooth mus-
                                                      cle cells.
Estradiol
Estradiol is the most widely prescribed female        Phosphagenics is working with some of the
hormone.                                              world’s leading minds in the treatment of
                                                      atherosclerosis, using APA-01, alone or in
Phosphagenics has tested its novel delivery           conjunction with statins.
system using estradiol formulated in TPM-01
and applied transdermally. Initial animal tests       Professors Angelo Azzi of the University of
indicate the efficacy of the transdermal appli-       Bern, Ishwarlal Jialal of the University of Cali-
cation. Average plasma concentration of the           fornia, Davis, Frank Ng of Monash University
estradiol was two to four times as high when          and Dr. Simon West of the Scientific Advisory
formulated with TPM-01 as compared to cur-            Board are advising the Company on drug de-
rent formulations.                                    velopment pathways for the treatment of
                                                      atherosclerosis.
Atropine
                                                      Pfizer is about to enter Phase 3 testing of a
Atropine is used to restore or control heart
                                                      new compound that may reduce atheroscle-
function in humans. It is used as an antidote
                                                      rosis, having acquired the developer, Espe-
for cardiovascular collapse in the event of ex-
                                                      rion Therapeutics, Inc. for $1.3 billion in De-
posure to certain pesticides or nerve gases
                                                      cember 2003.
used in chemical warfare, and is typically ad-
ministered via intramuscular injection. There         This compound, ETC 216, has shown a 4%
is interest in a transdermal patch for atropine       reduction in arterial atherosclerotic plaques.

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The advancement of this compound, with its            then cross the necessary cell membranes to
minimal plaque reduction, indicates the high          interact on a molecular level with the appro-
interest level for any therapies that may treat       priate receptors, enzymes or proteins, in or-
this disease state.                                   der to manifest its effects. There are four
                                                      available routes for delivery of medication into
                                                      the body to reach its target site:
Statins
                                                      •   Oral Delivery – This is a simple, easy,
Statins are a class of drug that lowers choles-
                                                          portable and convenient method of drug
terol levels, specifically low-density lipopro-
                                                          delivery that the patient can self-
teins (LDL). Statins play an important role in
                                                          administer and self-regulate.
the treatment of atherosclerosis and preven-
tion of coronary artery disease, stroke, and              A pill, capsule, or liquid is swallowed and
peripheral artery disease.                                absorbed by the gastrointestinal tract.
                                                          The active ingredients must survive the
Phosphagenics’ APA-01 can enhance the ef-                 harsh acidic environment of the stomach,
ficacy of statins, thereby reducing side effects          elude enzymatic digestion in the intestine,
and requiring less of the active ingredient.              and pass through a water layer to pene-
                                                          trate the intestinal wall before being ab-
Current statins on the market include Lipitor®,
                                                          sorbed into the blood to flow to the target
(the largest selling medication), Zocor®,
                                                          tissue.
Pravachol®, Crestor®, Mevacor® and Le-
scol.® Of particular note are Zocor, a $6.5               However, it commonly takes up to 60
billion drug and Pravachol, a $3.5 billion drug           minutes for the medical agent to reach the
that both come off patent in late 2005.                   target tissue and begin to have an effect.
                                                          Oral administration also causes peaks
When a successful drug comes off patent, it is            and troughs of drug concentrations in the
advantageous for the manufacturer to create               body, where the peaks may lead to side
new formulations that can extend patent pro-              effects and the troughs may cause break-
tection. Pravachol is currently marketed by               through symptoms of the condition being
Bristol-Meyers Squibb and Zocor is marketed               treated.
by Merck.
                                                          A further significant factor is the first pass
                                                          extraction of the drug by the liver before it
Phosphagenics is conducting animal trials on
                                                          reaches the systemic circulation. In some
several statins mixed with an APA-01-based
                                                          cases, this can result in liver damage.
enhancer complex to improve the efficacy of
the statins.                                              Other problems with oral medication in-
                                                          clude patient nausea and discomfort,
                                                          cross-reactivity with or neutralization of
Routes of Drug Delivery
                                                          the active ingredient if taken with certain
For a medication to be effective, it must first           foods, and the need for complex formula-
reach its target organ or tissue, usually by              tions that can withstand stomach acids
traveling in the bloodstream. The drug must               while maintaining their efficacy.


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•   Intravenous (IV) injection – The medica-               target organ. This usually occurs within
    tion in solution is injected into an intrave-          several minutes.
    nous tube that supplies fluids directly to             The patient may be trained to measure
    the patient’s blood supply via a stationary            out the correct dose and self-administer
    needle inserted in a vein, usually in the              the medication, depending on the type of
    arm.                                                   drug. (Some medications such as mor-
    Intravenous injection is extremely fast: the           phine are controlled substances and may
    drug can take effect within seconds.                   only be administered by trained health
                                                           professionals.)
    However, this delivery route is generally
    restricted to patients in a hospital, reha-            This delivery route is simpler and more
    bilitation center or long-term care facility,          portable than IV injection but is almost as
    or patients who receive daily nursing care,            rapid in its effect.
    as the intravenous tube must be main-
                                                       •   Transdermal drug delivery – The medi-
    tained and the prescription medication
                                                           cation is in the form of an ointment, lotion,
    can only be administered to the intrave-
                                                           or patch that is applied to the skin. The
    nous fluid by a qualified health profes-
                                                           active ingredients are absorbed through
    sional. This limits the patient’s mobility,
                                                           the skin into the blood stream.
    as he or she must remain connected to
    the IV equipment and medication gener-                 This process is simple, easy, portable and
    ally cannot be self-administered.                      can be administered and regulated by the
                                                           patient.
    The patient is likely to experience some
    discomfort and pain due to the IV needle               It has the potential to deliver drugs that
    inserted in the arm and there is a risk of             require sustained blood levels and elimi-
    infection at the IV site. Patients may ex-             nates the problem of peaks and troughs
    perience the same peaks and troughs of                 of drug concentrations experienced with
    drug concentrations in the body as with                oral administration.
    oral administration.                                   Transdermal delivery of drugs also avoids
•   Intramuscular (IM), intraperitoneal (IP),              “first pass” metabolism in the liver, im-
    or subcutaneous (SC) injection – The                   proving absorption and reducing the risk
    medication is in solution and is injected              of liver toxicity. However, traditional trans-
    using a needle and syringe. It may be in-              dermal drug delivery methods rely on
    jected into the patient’s muscles (intra-              physical disruption of the skin to allow the
    muscular), usually the upper arm, thigh or             drug to pass into the bloodstream. This ir-
    buttocks, or into the patient’s abdomen                ritates the skin, and manufacturers actu-
    (intraperitoneal), or just below the skin              ally recommend that the site of application
    (subcutaneous).                                        be varied in order to avoid development of
                                                           skin irritation. If physical disruption of the
    The medication must diffuse through the                skin is incomplete, absorption of the drug
    muscle, abdominal cavity, or connective                through the skin and into the blood, and
    tissue layers under the skin and into the              hence its efficacy, may be poor.
    blood before it can have an effect on the

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Phosphagenics is using its patented technol-            organs, nerves, and blood vessels of the body
ogy to develop new products for the trans-              together.
dermal delivery of a variety of drugs, including
morphine, atropine, testosterone and estra-             The skin protects us from injury and invasion
diol. This unique active technology will pro-           by bacteria and viruses. It also helps regulate
vide several advantages over the skin                   body temperature and excretes water and
patches currently available on the market,              some waste products in the form of sweat.
such as improved bioavailability of the drug,
                                                        The skin is composed of three layers: the
and no irritation of the skin.
                                                        outermost epidermis, the dermis, and a
To appreciate how the TPM-01 product works              deeper layer of subcutaneous tissue.
in transdermal drug delivery, a review of the
structure of the skin is required.

The Skin
The skin is the largest organ of the human
body. It is a flexible, resilient, durable, sensi-
tive barrier that helps hold all of the muscles,

                              Figure 2: Diagram of the layers of the skin.




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The epidermis is the outermost layer of skin          External substances are absorbed through
and consists of three important layers:               the skin in several ways:

•   The outermost layer, the stratum                  •   Direct interaction with cells of the epider-
    corneum, consists of clear, dead, flat-               mis.
    tened, keratinized cells and provides the         •   Penetrating the skin through the spaces
    major barrier function to skin. If it is re-          between cells.
    moved or damaged or becomes over hy-
    drated, skin permeability is increased.           •   Access the dermis via the openings of the
                                                          sebaceous and sweat glands.
•   The stratum spinosum is several cell
    layers thick and contains the first living        However, the stratum corneum of the epider-
    cells, which become flattened and trans-          mal layer is an effective barrier that is quite
    form into keratinized cells as they move          resistant to interaction with external sub-
    towards the surface.                              stances. It does not readily permit passive
                                                      transfer of substances through the epidermis
•   The stratum germinativum (or stratum              into the dermis and the blood vessels.
    basale) is the basal layer of the epider-
    mis. It consists of a single layer of repro-      Current transdermal drug delivery systems
    ductive cells that give rise to the living        utilize various forms of physical disruption to
    cells in the stratum spinosum. Dendritic          penetrate the natural barrier of the epidermis.
    cells which produce the pigment melanin           These include accelerants, mild electrical cur-
    are also found in this layer.                     rents, or ultrasound to enhance the passive
                                                      transport of drugs across the skin and into the
The epidermis does not have its own blood
                                                      bloodstream.
supply. Nutrition diffuses outward from the
rich blood supply of the dermis below.
                                                      The Phosphagenics Solution
The dermis is much thicker than the epi-              Current theories of transdermal drug delivery
dermis. It contains substantially fewer cells         assume transportation of drugs through the
than the epidermis and is composed of                 skin is passive, through diffusion.
dense, irregular connective tissue, fibro-
                                                      Lipophilic compounds are more readily rec-
blasts and macrophages.
                                                      ognized by cell membranes when they have
The dermis is richly supplied with special-           phosphates attached. Phosphagenics recog-
ized nerve endings, blood vessels, and lym-           nized this phenomenon and developed and
phatic vessels. Sebaceous glands, sweat               patented the proprietary technologies for
glands and hair shafts are all anchored in            phosphorylation and complexation of a num-
the dermis.                                           ber of existing lipophilic drugs to improve their
                                                      solubility and active transportation across cell
Below the dermis lies the subcutaneous tis-           membranes, thus improving their efficacy.
sue, which is composed of fat lobules, colla-
gen bundles, and larger blood vessels, lym-           Modification of drugs using the patented
phatic vessels and nerves.                            phosphorylation technologies and then


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combining either the phosphorylated or               of Vitamin E-acetate (Figure 3).
unphosphorylated drug with a phosphorylated
carrier agent such as TPM-01 permits active         TPM-01 has demonstrated superior penetra-
transport of the drug across cell membranes,        tion to Vital ETTM. Phosphagenics selected a
utilizing the natural biochemical processes         short list of drugs for initial development as
employed by the cells to move substances            phosphate complexes for active transport
through the cells and around the body.              through the skin, including estradiol, testos-
                                                    terone, atropine and morphine, based on
51% of Vital ETTM successfully penetrates the       market size and time to market.
epidermis and dermis, compared to only 9%

                     Figure 3: Dermal Penetration – Vital ETTM vs. Vitamin E.




Phosphorylated estradiol and testosterone           commercial product. Peak blood concentra-
have already been successfully tested in ani-       tions of estradiol occurred between 8 and 12
mals. Estradiol 3-phosphate, using TPM-01           hours following transdermal application.
as the carrier, had better absorption through
                                                    Preclinical studies of phosphorylated estradiol
the skin and transportation into the blood
                                                    and testosterone have begun, and human
when compared to either unphosphorylated
                                                    studies are anticipated to begin in the next 12
estradiol, or estradiol 3-phosphate applied
                                                    - 18 months.
with a non-phosphate carrier.
                                                    These products have the potential to replace
Blood levels of estradiol 3-phosphate were 2-
                                                    existing commercial estrogen creams and tes-
fold to 4-fold higher when applied with TPM-
                                                    tosterone creams; with their increased effi-
01, substantially greater than any known


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                                                                    Cohen Independent Research Group, Inc.


cacy and subsequent lower required dosages,            ness and disaster relief programs in the event
significant penetration of this market is likely.      of a terrorist attack.

In addition, estradiol-phosphate potentially will      It should be noted that all tests conducted to
have a place in the hormone replacement                date and described above have utilized the
therapy market, offering a lower-dose and              described compounds as creams. Phospha-
hence safer alternative to current therapies.          genics is not yet at the patch development
                                                       stage, although the final commercial products
Atropine affects heart rate, arterial pressure,        will ultimately be sold as a patch. The USFDA
pupil reactions, sweating and other autonomic          has permitted Phosphagenics to wait until
systems. It is used to treat poisoning with            Phase II trials to develop the patch itself.
pesticides and herbicides, and it is also used
as an antidote to nerve gas exposure. Cur-             TPM-01 is a patented mixture of α-tocopheryl
rently, atropine requires intravenous or intra-        phosphate, di-α-tocopheryl phosphate and
muscular injection to be effective.                    selected USFDA-approved excipients.

Phosphagenics has already evaluated atro-              Unlike other transdermal delivery systems,
pine-phosphate and atropine-sulfate, formu-            TPM-01 does not cause irritation or disruption
lated in TPM-01, in rats and pigs. Atropine-           of the skin. In fact, TPM-01 is anti-
sulfate applied with TPM-01 caused a rapid             inflammatory and helps maintain healthy skin.
and sustained increase in heart rate over a 6-
hour period, without affecting blood pressure,         This pharmacological grade Vitamin E-
whereas atropine-phosphate only provided a             phosphate will be the carrier of choice for
transient increase in heart rate.                      Phosphagenics’ new transdermal drug deliv-
                                                       ery technology, which has potential applica-
TPM-01 is able to transport atropine across            tion to many existing drugs that currently can-
the skin to the heart and sustain its response         not be delivered across the skin, such as at-
over time.                                             ropine described above.

A USFDA Advisory Notice has indicated that             The platform technology delivers these drugs
atropine will not be required to go through            in the same form currently being sold com-
human clinical studies because of its anti-            mercially but which normally can only be de-
nerve gas properties, which should fast-track          livered orally or by injection.
the process of bringing an atropine-TPM-01
patch to market.                                       In addition, a higher systemic bioavailability is
                                                       achieved by this transdermal delivery route
The immediate potential market for this patch          when compared to the best-in-class currently
will be all armed forces engaged in military           marketed products.
activities which carry a risk of exposure to
chemical weapons, as well as domestic                  The lead compound utilizing the TPM-01
stockpiles of the patch as a part of federal,          transdermal delivery technology is morphine.
state, and medical facility emergency readi-



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Morphine                                                                        gery and to long-term users such as end-
Morphine is a narcotic analgesic, used to con-                                  stage cancer patients, who may have difficulty
trol moderate to severe pain, especially for                                    swallowing and experience substantial pain
palliative care of cancer patients.                                             with each injection.

Morphine, the most powerful analgesic cur-                                      These delivery methods also lead to fluctua-
rently available, has a long history of use and                                 tions in pain relief, as the dose cannot be
is available in many different dosage forms                                     given on a constant basis. The biggest chal-
and strengths. Morphine can be delivered                                        lenge of the current delivery methods is the
orally in the form of immediate release or sus-                                 ability to provide a steady amount of mor-
tained release tablets, or by intravenous, in-                                  phine over a long period of time. Ideally, one
tramuscular, or subcutaneous injection. It can                                  would like to be able to deliver lasting but
also be administered via a pump that periodi-                                   controlled doses of morphine, without the
cally releases a bolus of morphine into an in-                                  need for frequent injections or specially for-
travenous line, which enables limited patient                                   mulated oral derivatives.
self-administration in a hospital or chronic
                                                                                The solution is the Phosphagenics patented
care setting.
                                                                                transdermal drug delivery technology .
Long-term morphine use causes many severe
                                                                                Animal trials of transdermal delivery of mor-
side effects, including nausea, vomiting, con-
                                                                                phine using the patented TPM-01 carrier have
stipation, and drowsiness.
                                                                                been completed in rats and also in pigs, large
Oral or injected morphine delivery can be dis-                                  animals that are physiologically similar and
tressing to patients immediately following sur-                                 have a skin structure similar to humans.


Figure 4: Effect of morphine and transdermal carrier (TPM-01), versus carrier alone, on time for a
                     pig-tail flinch response after application of a heat probe.

                              7
                                                    TPM-01 transdermal carrier + Morphine 10 mg/kg

                              6

                              5
                      Time until flinch (sec)




                              4

                              3
                                                                              TPM-01 alone
                              2

                              1

                              0
                                                0    1          2         3           4        5        6
                                                              Time after application (h)




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                                                                        Cohen Independent Research Group, Inc.


Transdermal delivery of morphine with TPM-                 The initial market for the transdermal mor-
01 provided a rapid and sustained analgesia                phine delivery technology will consist primarily
(Figure 4). An effect was first observed within            of palliative care for cancer patients and post-
one hour of administration of the morphine-                operative pain relief where non-invasive drug
TPM-01 cream and continued to increase                     delivery is preferred or when intravenous or
over time, with the greatest response at 6                 oral delivery is contra-indicated.
hours after treatment, indicating a sustained
                                                           In the year 2002, there were over 1.4 million
effect.
                                                           new cancer cases in the United States alone,
Although mandatory animal studies for mor-                 and over 565,000 deaths due to cancer .
phine transdermal delivery have been com-
                                                           The numbers are staggering on a global
pleted, a final pivotal safety and tolerability
                                                           scale: over 10.8 million new cancer cases and
study in animals has been recommended by
                                                           over 6.7 million deaths due to cancer world-
the USFDA. This study will clear the way for
                                                           wide. If only 25% of new cancer patients and
the first human safety trials, which are critical
                                                           50% of patients who died of cancer require
for “Proof of Concept” for the transdermal
                                                           some morphine for pain relief, this represents
drug delivery technology.
                                                           a potential annual market of over 640,000 pa-
                                                           tients in the United States alone.


    Table 3: Incidence, Mortality and Prevalence of All Cancers in 2002 (from www-dep.iarc.fr)

                                  Incidence         Mortality    Prevalence      Prevalence
                                                                   (1 year)        (5 year)
             USA                   1,432,340          565,735      1,188,411        4,744,698
             Canada                  137,511           65,964        111,493          436,497
             Australia                86,449           36,504          59,468         247,137
             Western Europe          873,672          475,074        681,859        2,577,102
             WORLDWIDE            10,862,496        6,723,887      6,881,502       24,570,115


Fentanyl, a synthetic opioid, is currently the             clude any other disease that causes signifi-
largest selling transdermal drug, with sales               cant pain, such as arthritis. In addition, if the
exceeding US $1.3 billion. When Fentanyl                   dosages are modified, the morphine patch
was first introduced as a patch delivery sys-              may become suitable for local pain manage-
tem, its sales grew 30-fold within 10 years. A             ment.
similar market growth can be expected for the
                                                           Potential eventual commercial partners in-
morphine patch.
                                                           clude Johnson & Johnson, Abbott Laborato-
Once the palliative care and post-operative                ries, Purdue Pharma and Endo Pharmaceuti-
market has been penetrated with the mor-                   cals.
phine patch, additional target markets will in-


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Future Transdermal Applications                       What is Atherosclerosis?
                                                      Atherosclerosis (‘athero’ means paste and
The first goal of the Pharmaceutical Division
                                                      ‘sclerosis’ means hardness) is a slow, pro-
of Phosphagenics is to use existing drugs
                                                      gressive disease of the arteries, especially
such as morphine and atropine to establish
                                                      the coronary arteries, leading to complications
the utility of their platform transdermal drug
                                                      such as angina, heart attack, stroke and de-
delivery technology, the faster and cheaper
                                                      mentia.
route to bring their patented technology to
market.                                               It is the leading cause of illness and death in
                                                      most Western countries. In fact, coronary
Improving the clinical performance of a known
                                                      artery disease and stroke caused by athero-
drug and making it safer will reduce the liabil-
                                                      sclerosis are responsible for more deaths in
ity associated with prescribing the drug. This
                                                      men and women than all other causes com-
presents a clear transition from the original
                                                      bined.
drug delivery protocol and opens up a large,
pre-existing market.                                  Atherosclerosis is a condition characterized
                                                      by the deposition of fatty substances to form
Target drugs for this first phase include mor-
                                                      plaques in the walls of large and medium-
phine, atropine, estradiol and testosterone.
                                                      sized arteries. Arterial walls are composed of
Any of hundreds of additional drugs could
                                                      three layers (Figure 5.1):
then be developed and tested for transdermal
delivery using this patented technology.              •   Tunica Adventitia – the outermost layer of
                                                          loose connective tissue with collagen and
The Pharmaceutical Division can then secon-
                                                          elastic fibers.
darily focus on the development of new, spe-
cific pharmaceuticals based on the phos-              •   Tunica Media – the thick middle layer,
phorylation technology. These outcomes will               composed of a layer of smooth muscle
take longer to achieve than in the drug-                  cells sandwiched between two elastic
delivery work but will provide an opportunity             membranes. The smooth muscle layer is
for new, patent-protected products.                       thickest in the aorta and gradually be-
                                                          comes thinner in arteries that are smaller
                                                          in diameter and further away from the
ATHEROSCLEROSIS
                                                          heart.
Phosphagenics has utilized its patented phos-         •   Tunica Intima – the layer closest to the
phorylation technology to develop a pharma-               lumen, consisting of a single-cell layer of
ceutical grade phosphorylated Vitamin E,                  endothelium, whose primary function is to
APA-01.                                                   absorb oxygen and nutrients from the
                                                          blood, its basement membrane, and a thin
APA-01 is currently in animal trials to evaluate
                                                          layer of connective tissue.
its efficacy in the prevention and treatment of
atherosclerosis.




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       Figure 5: Development of atherosclerosis in an artery and formation of a thrombus.




Formation of Arterial Plaques                         The monocytes adhere to the edges of the
                                                      damaged endothelium, penetrate the tunica
Arterial plaques are hardened bulges that             intima, and are converted to macrophages
form in an artery due to an inappropriate cel-        (Figure 5.3).
lular response to inflammation. As plaques
grow, they gradually occlude the artery, block-       LDL cholesterol leaks into the damaged re-
ing the flow of blood and causing “hardening          gion of the arterial wall, triggering the macro-
of the arteries”, or atherosclerosis.                 phages to express CD-36 scavenger recep-
                                                      tors, which in turn bind and absorb the LDL to
Arterial plaque formation begins when the en-         create stationary foam cells. This cycle con-
dothelial layer of the arterial wall is damaged       tinues as more CD-36 scavenger receptors
by a mechanical event or chemical change,             are expressed to absorb more LDL. A fatty
initiating an inflammatory response (Figure           streak forms in the artery as cholesterol is
5.2).                                                 drawn to the area (Figure 5.4).

The endothelial cells produce adhesion mole-          The foam cells release cytokines and chemo-
cules, chemotactic proteins and growth fac-           tactic factors that trigger the migration of
tors that recruit white blood cells such as           smooth muscle cells from the tunica media
monocytes and leukocytes to the vessel wall.          into the endothelial layer. Dying foam cells


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trigger a cycle of inflammation and macro-            Elevated blood levels of cholesterol and
phage proliferation, leaving behind a growing         triglycerides contribute to the development of
mass of extra-cellular lipids and cellular de-        atherosclerosis. The liver converts digested
bris.                                                 fats and cholesterol to very low-density lipo-
                                                      protein (VLDL) vesicles, which are carried
As the wall bulges into the interior of the ar-       through the blood and unload the fat to those
tery, the smooth muscle cells, fibers and pro-        organs and tissues that require it. Unused fat
teins combine with the accumulated fats to            circulates in the blood as low-density lipo-
form an atherosclerotic plaque with a fibrous         protein (LDL) or high-density lipoprotein
cap (Figure 5.5).                                     (HDL).

Over time, the plaque grows, becomes cov-             LDL is considered the “bad” cholesterol, as it
ered with a thick dome of connective tissue           adheres to damaged endothelial cells and is
and embedded smooth muscle cells, and                 involved in plaque formation. HDL is the
hardens. It may even become calcified. The            “good” cholesterol, as it unclogs the arteries
swollen arterial wall activates platelets in the      by collecting the adherent LDL and returning
blood, which subsequently bind to the plaque          it to the liver, either to be recycled into VLDL
using fibrins (Figure 5.6).                           or to be metabolized and excreted from the
                                                      body. An elevated level of LDL to HDL im-
The platelets may rupture the plaque to form
                                                      parts an increased risk of atherosclerosis.
a thrombus consisting of plaque materials,
platelets and fibrins. The artery becomes             Symptoms of atherosclerosis and thrombosis
completely occluded, blocking the flow of             vary, depending on the arterial bed that is af-
blood (Figure 5.7).                                   fected.
                                                      There are three main arterial beds in the body
As platelets bind to the plaque and the artery
                                                      that supply blood:
becomes obstructed, blood flow is compro-
mised, and the tissues supplied by the artery
                                                      •   coronary arteries (to the heart)
receive insufficient oxygen and nutrients. If
this deficiency approaches critical levels, the       •   cerebral arteries (the brain)
surrounding tissues will die.                         •   peripheral arteries (the rest of the body)




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                           Figure 6: Plaque Blocks Interior of Vessel




Coronary Artery Disease in the                          (iia) Partially blocked artery with an
Human Heart                                             atherosclerotic plaque on the inner wall of
                                                        the artery, likely causing angina pectoris.
The coronary arteries (shown in Figure 6 in
red) provide the blood supply to the heart.             (iib) Cross-section of a real patient’s
                                                        coronary artery. The bulge indicates an
   (i) Unblocked artery with normal blood               atherosclerotic plaque that is partially ob-
   flow.                                                structing blood flow through the artery.

   (iiia) A completely blocked artery, which            (iiib) Cross-section of a coronary artery
   prevents blood from flowing through the              from an autopsy. A fatty atherosclerotic
   vessel; a heart attack is likely to occur.           plaque has completely blocked the interior
                                                        of the vessel.




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   Figure 7: Light microscopy slides of coronary artery. Left: healthy artery. Right: profound
  atherosclerosis – note the reduced diameter of the lumen in the lower right area of the artery.




 Table 4: Annual Incidence and Mortality of          the past 20 years, it is gradually beginning to
 Atherosclerotic Conditions in the US (1999)         increase again as the population ages.

                  Incidence    Deaths                Like any other organ or tissue in the body, the
      Coronary    14,000,000   783,000               heart requires oxygen and nutrients to con-
      Artery
                                                     tinue pumping. The coronary arteries sup-
      Disease
                                                     ply blood rich in oxygen and nutrients to the
      Heart At-   1,300,000    500,000
      tack                                           heart, and the cardiac veins remove the car-
                                                     bon dioxide and waste. There are two main
      Stroke      700,000      283,000
                                                     coronary arteries, which branch into five
In the United States, approximately 14 mil-          smaller arteries.
lion people are currently diagnosed with
coronary artery disease. Nearly 1.5 million          When one or more of these arteries becomes
individuals suffer a heart attack annually,          damaged or blocked due to atherosclerosis,
and one-third of these are fatal (Table 4).          the condition is called coronary artery dis-
                                                     ease (CAD).
Although mortality due to coronary artery dis-
ease and stroke has steadily declined over


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A major early symptom of coronary artery              become completely blocked due to athero-
disease is chest pain (angina pectoris), which        sclerosis, a blood clot (thrombus) may form.
occurs when the myocardial or muscle cells of         Thrombotic stroke accounts for 30% to 50%
the heart do not receive sufficient oxygen and        of all strokes. Alternatively, a blood clot may
nutrients. When a coronary artery becomes             form elsewhere in the body as a consequence
completely blocked, the flow of oxygen-rich           of peripheral arterial disease, and when car-
blood to the surrounding myocardium ceases,           ried to the brain it causes embolic stroke.
resulting in a myocardial infarction (“MI” or
heart attack), as the myocardial cells die. If        Since Phosphagenics’ APA-01 effectively re-
not treated immediately, this results in per-         duces plaque formation, it will consequently
manent damage to the heart tissue.                    also reduce the number of thromboses that
                                                      form, in the brain and throughout the body.
When a large area of heart tissue is deprived         APA-01 presents a therapeutic opportunity for
of oxygen, the remaining healthy myocardium           reducing the risk of thrombotic and embolitic
is unable to maintain a proper rhythm and             stroke.
does not have the strength to pump blood to
the rest of the body, causing heart failure and
                                                      Peripheral Arterial Disease
death.
                                                      (PAD)
The considerable anti-atherosclerotic proper-         When atherosclerosis affects the other major
ties of Phosphagenics’ patented APA-01 on             arteries of the body, the result is peripheral
monocytes/macrophages and smooth mus-                 arterial disease. Any of the arteries outside
cles cells, two key elements in plaque forma-         of the heart may be affected, including the
tion, suggest that it could play an important         renal arteries (which supply the kidney), the
role in the reduction of plaques and possibly         lower extremity arteries (legs and feet), lead-
prevent plaque formation.                             ing to an inability to walk and possibly gan-
                                                      grene and amputation, and the mesenteric
Thus APA-01 has the potential to be an effec-
                                                      arteries (which supply the gastrointestinal
tive therapy in the treatment and prevention of
                                                      tract).
CAD, saving many lives and preventing even
more heart attacks.                                   Over 29% of Americans over age 70, or over
                                                      age 50 but with a history of smoking or diabe-
Stroke                                                tes mellitus, have peripheral arterial disease.
                                                      Patients with PAD have a two to three times
A stroke is a sudden illness caused by an in-         increased risk of stroke and a four times in-
terruption in the blood supply to the brain.          creased risk of a fatal myocardial infarction.
When the cerebral arteries are affected by
atherosclerosis, the blood supply to the brain        Ultimately, about 75% of patients with periph-
may become momentarily interrupted, caus-             eral arterial disease will die from heart dis-
ing a transient ischaemic attack which may            ease, compared with only half of the general
result in dizziness, disorientation, paralysis        population. However, PAD is under-
and/or memory loss. If the cerebral arteries          diagnosed and under-treated and is often as-


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                                                                     Cohen Independent Research Group, Inc.


ymptomatic in its early stages. Nearly one-           Risk Factors for Atherosclero-
half of patients newly diagnosed with PAD are         sis
asymptomatic.
                                                      Atherosclerosis generally starts early in life
The primary symptom of lower-extremity PAD            and remains symptom free until the flow
is cramp-like pain and weakness of the legs           within an artery has become seriously com-
caused by walking or other activity, called in-       promised. Risk factors that contribute to
termittent claudication. The pain disappears          atherosclerosis include:
when the patient ceases the activity. During
exercise, the muscles’ demands for oxygen             •   damage to the inner lining of the artery;
are increased, but the narrowed arteries can-
                                                      •   high blood pressure;
not transport enough oxygen-rich blood.
Claudication usually involves the calves, but         •   a family history of atherosclerosis;
may also involve the buttocks and the upper           •   elevated blood levels of cholesterol (LDL)
legs. During rest, the demand for oxygen de-              and triglycerides;
creases to a level that can be sufficiently sup-
plied and the pain vanishes.                          •   smoking;
                                                      •   diabetes mellitus;
In later stages of PAD, leg circulation may be
so poor that pain is constant, occurring in the       •   obesity;
toes and feet even during periods of inactivity,      •   age – men older than 45 and women
and especially at night. PAD-associated rest              older than 55.
pain usually becomes worse when the legs
are elevated and abates when the legs are             Other factors that may increase the risk of
lowered, when gravity helps to increase the           atherosclerosis include a sedentary lifestyle,
circulation of blood.                                 stress, and oxidative stress. Oxidative
                                                      stress refers to the increased production of
APA-01 inhibits expression of CD36 receptors          oxygen free radicals in the blood. Free radi-
in smooth muscle cells and monocytes and              cals are continuously formed in the body as a
also inhibits binding and uptake of oxidized          product of many biochemical reactions. They
LDL, two key steps in plaque development.             are also produced by environmental factors
These anti-atherosclerotic properties indicate        such as ionizing radiation from the sun, ozone
that APA-01 may play an important role in the         and nitrous oxide from car exhausts, heavy
treatment and prevention of atherosclerosis           metals such as mercury, cadmium and lead,
and therefore PAD.                                    cigarette smoke, alcohol consumption, and
                                                      emotional stress. Free radicals stimulate
This potential therapeutic agent could then           prostaglandin production, which causes vaso-
reduce the severity and incidence of PAD-             constriction of arteries and aggregation of
associated symptoms such as intermittent              platelets, thereby exacerbating plaque and
claudication, as well as reduce the increased         thrombus formation.
risk of stroke and fatal heart attack associated
with PAD.                                             When LDL reacts with free radicals, it be-
                                                      comes oxidized. Oxidized LDL stimulates the

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                                                                     Cohen Independent Research Group, Inc.


arterial endothelial cells to initiate the inflam-      phages and smooth muscle cells, such that
mation response and dramatically increases              fewer receptors are available to attract and
the expression of CD36 receptors by macro-              absorb LDL.
phages, thereby mediating plaque develop-
ment.                                                   APA-01 also significantly decreases the up-
                                                        take and accumulation of oxidized LDL by
Although high levels of native LDL are asso-            macrophages and smooth muscle cells.
ciated with atherosclerosis, free radical oxida-
tion of LDL is crucial to the initiation and pro-       These two distinct properties make APA-01 a
gression of plaque development.                         potentially powerful anti-atherosclerotic agent.

Thus, if one can reduce the levels of oxidized          This formulation is readily absorbed by the
LDL in the blood, one also reduces the rate of          digestive tract, resulting in high concentra-
plaque development.                                     tions available in the blood to seek out and
                                                        neutralize free radicals and to decrease CD36
                                                        receptor expression, LDL uptake and foam
Antioxidants:                                           cell development at sites of arterial plaque
Antioxidants are the human body’s natural               development.
protection against oxidative stress. The body
produces a number of antioxidant enzymes to             Treatment of Atherosclerosis
neutralize free radicals. In addition, many vi-
tamins and minerals act as antioxidants, in-            Current treatment strategies for atherosclero-
cluding Vitamins A, C, E, and selenium.                 sis consist primarily of efforts to reduce or
                                                        eliminate risk factors through lifestyle
Vitamin C, a water-soluble vitamin; is readily          changes and medication. Patients are en-
absorbed by the digestive tract, travels easily         couraged to quit smoking, lose weight, switch
through the blood, and any unused Vitamin C             to a low salt/low fat diet, reduce stress and
is cleared from the blood by the kidneys.               become more active through regular exercise.

In contrast, Vitamins A and E are lipid-soluble         If a patient has high blood pressure or diabe-
and being hydrophobic vitamins, are not read-           tes that cannot be controlled through lifestyle
ily digested or absorbed across cell mem-               modification, an appropriate hypertension
branes and do not travel well in the blood.             medication or insulin is prescribed.

Vitamin E, in the form of α-tocopherol, works           Patients with atherosclerosis are carefully
to reduce plaque formation in two ways: de-             monitored for their blood LDL:HDL ratio to
creasing expression of CD36 receptors, and              regulate the level of LDL in the blood, in order
decreasing uptake of oxidized LDL.                      to minimize the growth of existing plaques
                                                        and concomitant narrowing of arteries, and to
The Phosphagenics patented formulation of               prevent the development of new plaques. The
APA-01 is significantly more effective than             American Heart Associations’ recommenda-
unphosphorylated α-tocopherol in decreasing             tions for goal blood levels of LDL are provided
the expression of CD36 receptors by macro-              in Appendix I.

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If a person’s blood LDL level is less than 30          The Phosphagenics Solution:
mg/dL above the goal, the recommended                  APA-01
therapy is lifestyle changes – switching to a
low-fat diet and increasing physical activity. If      APA-01 effectively inhibited expression of
the patient’s blood LDL is more than 30                CD36 receptors on both rat aortic smooth
mg/dL above the goal, then pharmacotherapy             muscle cells and human monocytes in labora-
is initiated in addition to lifestyle changes, to      tory studies. APA-01 also inhibited binding
reduce LDL by at least 30%.                            and update of oxidized LDL, suggesting that
                                                       APA-01 alone can play a significant role in the
Statins are the medication of choice to reduce         prevention and treatment of atherosclerosis in
blood LDL to recommended levels.                       patients with elevated blood levels of LDL.

Combined with appropriate diet and lifestyle           A recent study evaluated the effect of APA-01
changes, they are effective in reducing LDL            in combination with statin treatments.
blood levels to the recommended levels in
approximately 50% of patients.                         The migration and proliferation of smooth
                                                       muscle cells in the endothelial layer is a key
Unfortunately, nearly half of atherosclerosis          step in the development of atherosclerotic
patients with elevated blood LDL levels are            plaques.
not successfully treated.
                                                       APA-01 alone was shown to inhibit rat aortic
These drugs are expensive and can have                 smooth muscle cell proliferation in a dose-
significant adverse effects for some patients.         dependent manner. Lovastatin alone also
                                                       inhibited smooth muscle cell proliferation in a
Several types of statins have been developed           dose-dependent manner.
and are currently available by prescription.
Atorvastatin (Lipitor) and simvastatin (Zocor)         Combining varying concentrations of lovas-
are the most commonly prescribed statins.              tatin with a low concentration of APA-01, the
                                                       anti-proliferative effect was greater than for
 Table 5: Common statins prescribed to re-
                                                       either of these compounds alone.
             duce blood LDL

   Generic        Brand        Manufacturer
                                                       This synergistic effect was especially pro-
   Name           Name                                 nounced for sub-maximal concentrations of
   Atorvastatin   Lipitor      Pfizer                  lovastatin (Figure 8).

   Lovastatin     Mevacor      Merck
   Simvastatin    Zocor        Merck
   Pravastatin    Pravachol    Bristol-Myers
                               Squibb
   Fluvastatin    Lescol       Novartis
   Rosuvastatin   Crestor      AstraZeneca




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                                                                                           Cohen Independent Research Group, Inc.



   Figure 8: Inhibition of platelet-derived growth factor (PDGF)-driven proliferation of rat aortic
            smooth muscle cells (RASMC) by combinations of lovastatin and APA-01.


                         Percentage difference comparisons between Lovastatin Lov Alone
                                alone and lovastatin mixed with APA-01        Lov + TP(m) 5uM

                                    100
                                     90
                Percentage RASMC




                                     80
                   inhibiiton (%)




                                     70
                                     60
                                     50
                                     40
                                     30
                                     20
                                     10
                                      0
                                          TP 5uM      0.2    0.5      1       2        5        10      20


                                                                   Lovastatin concentration (µM)



These results have potentially far-reaching                               Rodent tests are being conducted at Monash
implications, such that when it is combined                               University in Melbourne, Australia. Rabbit
with a low concentration of APA-01, the lovas-                            tests are being conducted by two international
tatin dosage prescribed to patients could ulti-                           experts in Vitamin E metabolism and mecha-
mately be significantly reduced and still                                 nisms in cardiovascular disease, Professors
achieve the same effective reduction of                                   Angelo Azzi at the University of Bern in Swit-
plaque formation.                                                         zerland, and Ishwarlal Jialal at the University
                                                                          of California (Davis) in Sacramento.
Reducing statin dosages would benefit the
patient, as prolonged use of statins may                                  The above discussion has been limited to ap-
cause liver and kidney damage.                                            plications of APA-01 pharmacotherapy in pa-
                                                                          tients with atherosclerosis who have elevated
                                                                          blood LDL levels, which in itself is a very large
This represents a unique and huge future
                                                                          market. However, about 50% of patients with
market opportunity for Phosphagenics,
                                                                          atherosclerosis do not have elevated blood
whereby their patented APA-01 could poten-
                                                                          LDL levels and hence would not be treated
tially be combined with a number of different
                                                                          with statins.
statins to produce new compounds that are
much more potent anti-atherosclerotic agents                              On its own, APA-01 reduces proliferation of
than any of the statins alone. Large-scale                                rat aortic smooth muscle cells by up to 90%
animal trials are currently underway in three                             (Figure 9) and inhibits THP-1 human mono-
international locations to evaluate the efficacy                          cyte proliferation by more than 90% in labora-
of APA-01 alone, lovastatin alone, and APA-                               tory studies.
01-lovastatin combination, for both the pre-
vention and the treatment of atherosclerosis.



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                           Figure 9: Proliferation of rat aortic smooth
            muscle cells (RASMC) is inhibited by increasing concentrations of APA-01.


                                                 The effect of TP on RASMC proliferation
                                               900000
                      Number of Viable Cells   800000
                                               700000
                                               600000
                                               500000
                                               400000
                                               300000
                                               200000
                                               100000
                                                    0
                                                        Control 0.25uM   0.5uM   1uM   5uM   10uM   20uM   50uM   100uM
                                                        Vehicle

                                                                            Concentration of APA-01




In addition, APA-01 inhibits expression of                                              THE COMPETITION
CD36 scavenger receptors, thereby reducing
uptake of oxidized LDL and inhibiting plaque
                                                                                        Oral Drug Delivery Products
formation, suggesting both prevention and
treatment actions for APA-01.                                                           - Atherosclerosis Treatments
                                                                                        Current treatments for atherosclerosis consist
These results indicate that APA-01 alone                                                of lifestyle changes to reduce risk factors, and
plays a significant role in protection against                                          statins to reduce blood LDL levels.
atherosclerosis and heart disease, which will
be further evaluated in the current animal tri-                                         Atorvastatin (Lipitor, by Pfizer) and simvas-
als (described above).                                                                  tatin (Zocor, by Merck) together capture ap-
                                                                                        proximately 75% of the statin market.
This opens up a much larger potential market
for APA-01 as a prophylactic therapy for                                                Statin manufacturers are not direct competi-
atherosclerosis in the future. There are cur-                                           tors, instead presenting an opportunity for
rently no effective options to directly treat ex-                                       strategic collaborative relationships.
cessive cellular proliferation in atherosclero-
sis, except for anti-cancer and anti-tumor                                              Using Phosphagenics’ patented APA-01 car-
agents which cause severe side effects.                                                 rier to deliver statins to the body, the bioavail-
                                                                                        ability and efficacy of the statins can be in-
The potential future market includes all pa-                                            creased, improving their effectiveness in low-
tients with or at risk for atherosclerosis, cur-                                        ering blood LDL levels.
rently numbering more than 16 million people
in the United States alone and will increase                                            This represents a huge market opportunity for
as the population ages.                                                                 Phosphagenics.


                                                           (This report may not be reproduced.)
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                                                                     Cohen Independent Research Group, Inc.


However, treatment with statins represents              However, these are interim results only, which
only a portion of the atherosclerosis preven-           had to be re-evaluated by a second laboratory
tion and treatment market. About 50% of pa-             before they were reported. It remains to be
tients with atherosclerosis do not have ele-            seen whether the final results for the full study
vated blood LDL levels and thus are not can-            will measure up to the interim results.
didates for statin therapy.
                                                        The target of AtheroGenics’ v-protectant™
APA-01 is shown to have anti-inflammatory               therapeutic technology is suppression of a
properties and anti-proliferation properties,           receptor involved in the early stages of the
two key elements required to attack plaque              inflammation response. In contrast APA-01’s
formation in atherosclerosis.                           mechanism of action reduces expression of
                                                        the receptor at the molecular level.
There are currently no effective options to di-
rectly treat excessive cellular proliferation in        Suppression or blocking of a receptor is gen-
atherosclerosis, except for anti-cancer and             erally considered to be a less effective means
anti-tumor agents with severe side effects.             of treatment for a cellular or disease process.
                                                        The body has an amazing, innate ability to
This product, currently being evaluated in              find ways to compensate for the blocked re-
animal trials, has a potentially huge market as         ceptor: for example, by increasing expression
a safe and effective means of preventing                of the receptor.
atherosclerosis.
                                                        Thus, based on the differences in mecha-
                                                        nisms of action of the two products, and
AtheroGenics, Inc.                                      the very modest results reported to date
The only potential competitor in direct treat-          by AtheroGenics, it appears that Phos-
ment of atherosclerosis is AtheroGenics,                phagenics may be much better positioned
Inc., based in Atlanta, Georgia.                        to capture the atherosclerosis prevention
                                                        and treatment market.
Their proprietary drug platform, called vascu-
lar protectant, or v-protectant™, treats dis-           Transdermal Drug Delivery
eases of chronic inflammation, such as
                                                        Products
atherosclerosis. V-protectants™ block oxida-
tive signals in the endothelial cells lining blood      Transdermal drug delivery comprises less
vessels, preventing inflammation and the col-           than 10% of the pharmaceutical market, an
lection of oxidized LDL.                                annual global market of approximately US
                                                        $1.7 billion.
Recently reported interim results of a 12-
month phase IIb study indicate that V-                  There are several skin patch designs cur-
protectants™ reduced plaque volume by                   rently on the market that deliver a variety of
3.8%, modest but statistically significant. In          drugs through the skin, encompassing six
arteries where plaque was particularly con-             therapeutic areas:
centrated, the volume was reduced by 7.1%.


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     nitroglycerin (Deponit, Nitrodisc, Nitro-        Another form of transdermal drug delivery in-
     Dur, Minitran - for angina pectoris),            volves a spray drug dispenser held against
                                                      the skin. This device utilizes a laser to remove
     nicotine (Habitrol, NicoDerm, Nicotrol,
                                                      the full stratum corneum of the epidermis.
     ProStep - for smoking cessation),
     lidocaine (Lidoderm, a topical anes-             Each of these technologies disrupt the layers
     thetic),                                         of the skin and damage the natural structure
                                                      of the skin’s cells, causing an inflammation
     scopolamine (Transderm-Scop, for
                                                      response and possible cell death, and symp-
     motion sickness),
                                                      toms of skin irritation, redness, swelling, itch-
     hormone replacement therapy and                  ing and rash.
     birth control (Ortho Evra).
                                                      In contrast, the TPM-01 carrier in the Phos-
                                                      phagenics product utilizes a natural active
However, the transport mechanisms of all
                                                      transport mechanism and promotes mainte-
these products mechanically disrupt the skin.
                                                      nance of healthy skin cells with its’ anti-
Many skin patches rely on solvents such as            inflammatory properties. It is a non-disruptive,
alcohols, glycols and urea to introduce the           effective delivery system that maintains the
drug into the patient’s blood. These solvents         integrity of the skin.
disrupt the cell membranes of the stratum
                                                      Phosphagenics has two main competitors for
spinosum and stratum germinativum, to allow
                                                      the morphine skin patch:
the drug molecules to pass through these cell
layers, penetrate the dermis and enter the
                                                            the Duragesic® Fentanyl skin patch,
bloodstream.
                                                            developed by ALZA Corporation, and
Other skin patches rely on iontophoresis, i.e.
                                                            a hydromorphone skin patch currently in
passing an electrical current between two
                                                            development by Altea Therapeutics.
electrodes on the skin’s surface. The current
acts like micro-needles to penetrate and me-
chanically disrupt the barrier of the stratum
                                                      ALZA Corporation
corneum and epidermis, literally pushing the
drug through the skin to passively diffuse into       ALZA Corporation is based in California,
the bloodstream.                                      was founded in 1968 and became a Johnson
                                                      & Johnson company in 2001.
Some patches utilize phonophoresis, i.e.
low-frequency ultrasound. The ultrasound              ALZA developed the first Fentanyl transder-
causes gases dissolved in the lipid regions           mal patch, Duragesic®, which was introduced
between skin cells to bubble up and move,             to the market by Janssen Pharmaceutica in
creating pathways between cells for the drug          1991 and has seen sales increase every year
to penetrate through the skin. However, these         since.
patches are rather large and cosmetically un-
                                                      Duragesic® relieves moderate to severe
appealing.
                                                      chronic pain associated with cancer and lasts

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                                                                   Cohen Independent Research Group, Inc.


for several days. However, additional pain            energy to create microscopic channels in the
relievers may be needed for the first 24-36           epidermis, allowing a water-soluble drug to
hours until the patch imparts its full effects,       passively flow into the dermis and the blood-
and occasional periods of breakthrough pain           stream.
may occur.
                                                      Altea Therapeutics is currently conducting
The Duragesic® patch has all of the limita-           phase 1 clinical trials of the PassPort™ patch
tions described above, and hence Phospha-             with hydromorphone, a hydrophilic formula-
genics is expected to make a strong impact            tion of morphine. The patch is designed to
on the chronic pain / palliative care market          provide rapid onset of pain relief and can be
with its proprietary transdermal delivery             kept in place for up to one day. Since this
method that has a more rapid onset, without           product also relies on mechanical disruption
the breakthrough pain or skin irritation side         of the skin and passive transport of the drug
effects of Duragesic®.                                to the blood, it is expected to have limitations
                                                      similar to those seen for other skin patches
Furthermore, Phosphagenics will provide the           described above.
first transdermal morphine, the original, natu-
ral opioid, which will immediately capture            Only slightly ahead of the Phosphagenics
market interest.                                      product in clinical testing, both products can
                                                      expect to be introduced into the market
ALZA has three proprietary transdermal de-            around the same time.
livery systems: D-TRANS®, a skin patch util-
izing solvents and enhancers to permeate the          The Phosphagenics product utilizes the skin
skin; Macroflux®, a thin titanium screen with         cells’ own biochemical reactions to actively
precision micro projections that mechanically         transport morphine through the skin and into
penetrate and disrupt the epidermis to trans-         the blood. It is expected to provide a better
port molecules into the dermis; and E-                alternative and capture a much greater mar-
TRANS®, which uses low-level electrical en-           ket interest.
ergy to actively drive drugs through the skin.

An E-TRANS® Fentanyl product is in devel-
opment, and phase III clinical trial results
were to have been reported in October 2003.
However, there have been no further an-
nouncements regarding this product



Altea Therapeutics
Altea Therapeutics was founded in 1998 and
has its headquarters in Atlanta, Georgia. The
company developed the PassPort™ patch,
which uses short bursts of focused thermal


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                                             Page 37 of 74
                                                                   Cohen Independent Research Group, Inc.


MARKETS FOR VITAMIN E                                 The Company has conducted clinical tests in
                                                      the use of Vital ET™ (topical formulation of
There are several formulations of the Com-            Vitamin E phosphate) for the treatment of
pany’s Vitamin E phosphate to address the             acne. It has been shown that Vital ETTM is
diverse markets within dietary supplement,            effective in assisting with the treatment of in-
personal care, and food industries. These             flammatory acne lesions. Vital ETTM has been
formulations of Vitamin E are marketed as             shown to improve skin elasticity, and reduce
Vital ET™ for personal products and Ester-            UVA/B induced erythema. Erythema is the
ETM for dietary supplements (Zila territories).       abnormal redness of the skin due to conges-
                                                      tion of capillary action or inflammation.
The health benefits of Vitamin E are primarily
related to the vitamin’s antioxidant activity.
Environmental and internal factors constantly
                                                      Distribution
damage human cells. Antioxidants can pre-             In April 2003, the Company signed an agree-
vent cellular damage, which leads to prema-           ment with International Specialty Products
ture aging and various disease conditions.            (ISP) for the global distribution of Vitamin E.
                                                      ISP is a large global ingredient supplier to the
Vitamin E is an antioxidant that assists in
                                                      Personal Care market, with revenues in the
healing wounds, minimizing scars, and is
                                                      $1 billion range. ISP is marketing Vital ET™
widely purchased as a supplement. In the
                                                      as an additive to manufacturers of branded
US, Vitamin E sales as a dietary supplement
                                                      personal care products.
are approximately $1billion at the retail level.
                                                      The Company received $100,000 at the time
Additional markets for a water-soluble Vitamin
                                                      of the agreement. ISP markets and distrib-
E include the Nutritional Drinks and Energy
                                                      utes the product. The profit on sale of the
Food markets. Phosphagenics’ patented
                                                      products is split between ISP and Phospha-
product can provide differentiation.
                                                      genics. The ten-year agreement has minimal
Since standard Vitamin E is fat soluble, a nu-        sales levels of Vitamin E, identified in the ta-
tritional drink or food manufacturer would            ble below. We believe ISP will easily surpass
need to increase the fat content of the prod-         these minimum levels.
uct. In addition to technical problems, in-
                                                          Table 6: Minimum Contracted Sales of
creasing fat content in a nutritional drink cre-                     VitalETTM by ISP
ates marketing problems.
                                                                               Minimum
Phosphagenics’ Vitamin E is the solution.                                        Sales
                                                                        Year   ($ million)
The unique properties and pleasant taste of
                                                                         1        none
Phosphagenics’ Vitamin E make it easy to                                 2       $0.50
formulate into beverages and foods.                                      3         2.0
                                                                         8         4.0
We believe the Nutritional Drinks and Energy
Food markets offer the largest potential for
Phosphagenics’ Vitamin E.

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                                                                     Cohen Independent Research Group, Inc.


The product was launched in May 2003 and                the companion animal market in return for a
ISP has now sold Vital ETTM for use in five             further upfront licence fee of $150,000.
products that have already been launched.
                                                        Royalties start at 10% of sales and increase
Over 500 samples have been sent to ISP cus-             based on level of sales with a ceiling of 17%.
tomers around the world. ISP is in contact              The agreement imposes minimum royalties.
with several hundred companies who have
expressed interest in incorporating the en-             Table 8: Zila Minimum Contracted Royalties
hanced Vitamin E into their personal care
                                                                                 Minimum
products such as shampoos, skin creams and                                        Royalty
sun blocks.                                                                      Payments
                                                                          Year   ($ million)
A sample of the formulations prototypes sent                               1       $0.35
                                                                           2        0.9
to ISP customers is identified in this table:
                                                                           3        1.4
                                                                           4        1.75
      Table 7: Formulation Prototypes                                      5        2.1
     Vital ET™ Facial Rejuvenating Complex
  Sebum Control Nourishing Lotion with Vital ET™        In August 2004, Zila launched Ester-ETM in
           Tan Accelerator with Vital ET™               the US with a $6 million marketing campaign
          After Shave Balm with Vital ET™
                                                        that highlights Larry King.
          Anti-Acne Lotion with Vital ET™
      Refreshing Hand Cream with Vital ET™
      Helathy Skin Glow Color with Vital ET™            Ester-ETM is currently sold in 3,400 Wal-Mart
   Skin Therapy with Optiphen™ and Vital ET™            stores and other major retail chains.
  Velvet Restorative Night Cream with Vital ET™
          Nourishing Lotion with Vital ET™              Zila expects that by year four of the agree-
        Anti-Perspirant Stick with Vital ET™
                                                        ment (2007), sales of Ester-ETM will be over
                                                        $30 million.

In November 2003, the Company licensed its              Zila has expressed an interest in more prod-
Vitamin E phosphate product and related pat-            ucts from Phosphagenics. We currently ex-
ents and process technology to Zila, Inc. for           pect the Company to license other products
the US, Canada and Indonesia.                           through Zila in the next few years. Additional
                                                        dietary supplement products that use the
Zila is currently the leading supplier of formu-
                                                        Phosphagenics technology to improve effi-
lated Vitamin C to the Dietary Supplement
                                                        cacy include substances that are not naturally
market under the brand name Ester-CTM.
                                                        water-soluble.
The five-year agreement with Zila called for a
                                                        Phosphagenics is in discussion with other en-
$250,000 up front fee to the Company plus
                                                        tities to distribute products outside of the US,
$100,000 as an advance against royalties.
                                                        Canada and Indonesia.
The agreement was subsequently extended
to include a non-exclusive licence for Zila in



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                                                                  Cohen Independent Research Group, Inc.


Manufacturing                                        Capitalization
The Company currently subcontracts the               Subject to final departure from the PDF Pro-
manufacturing of Vital ETTM to Stirling Chemi-       gram (in December 2004) and the re-
cal in Toronto.                                      capitalization already approved by sharehold-
                                                     ers, Phosphagenics remains an investment
Zila manufacturers it’s Ester-ETM under li-          firm with one investment.
cense from Phosphagenics at their Arizona
facility.                                            Previously, as a minority investor in several
                                                     companies, the Company’s financial state-
For Food additives, the Company has a num-           ments used the equity method in reporting the
ber of alternatives including possibly using         effects of the operating entity on the parent
spare manufacturing capacity at Zila.                (investment) company.        Future financial
                                                     statements will be for the operations of Phos-
For Pharmaceuticals, the Company has
                                                     phagenics only.
minimal production requirements currently.
Phosphagenics uses a Melbourne, Australia            The Company has 178.8 million shares out-
facility to manufacture product to meet pre-         standing. The purchase of the remaining
clinical and Phase 1 product requirements.           shares of Vital Health Sciences will involve
                                                     the issuance of 297.3 million shares.

                                                     New shares issued are subject to escrows
Distribution and Marketing of                        finally ending in January 2006.
Pharmaceuticals
                                                     The following table outlines how the shares
The Company does not intend to market and            outstanding will increase with the transaction.
distribute drugs directly. Phosphagenics plans
on licensing the technology for others to
manufacture and market.
                                                          Table 9: Phosphagenics Share Count

                                                                                           Shares
The Company has successfully                             Share Category                     (mil)
used this approach in the                                Current shares Outstanding          178.8
nutraceutical market.                                    New Shares Issue, 12/04             297.3
                                                         Current Options Outstanding          59.8
                                                         New Fully Diluted Shares            535.9


Patents
Eighteen patents cover use of phosphate
groups to improve water solubility and drug
delivery. Seven patents cover TPM-01.



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                                            Page 40 of 74
                                                                          Cohen Independent Research Group, Inc.


                                                           We add Nutraceutical R&D and total corpo-
Cash Flow                                                  rate expenses to determine cash outflow.
Derived net cash flow from operations for
                                                           Corporate expenses include general and ad-
each of the past two half-years has been ap-
                                                           ministrative expense, COGS when revenues
proximately -$0.55 million.
                                                           are recorded and distribution and marketing
To determine Company cash requirements,                    expense when revenues from a yet unidenti-
we begin with the R&D expenses that include                fied distributor are factored in.
the pre-clinical tests and Phase 1 clinical trials
                                                           We then net the cash outflow against pro-
of pharmaceuticals that we expect the com-
                                                           jected revenues to determine the net cash
pany will develop in the next several years.
                                                           requirement.

                                Table 10: Forecasting Cash Requirements

                                            2004        2005        2006            2007          2008
    Total Pharmaceutical R&D              1,300,000   4,500,000     5,500,000       3,500,000
    Additional Pharmaceutical R&D                                     500,000         200,000    3,000,000
    Nutraceutical R&D                       400,000     300,000       300,000         300,000      300,000
    Total R&D                             1,700,000   4,800,000     6,300,000       4,000,000    3,300,000

    Corporate Expenses                    1,950,000   2,455,000     5,590,000      11,435,000   22,595,000
    Total Expenses = Total Cash Outflow   3,650,000   7,255,000    11,890,000      15,435,000   25,895,000

    Revenues                               756,000    2,950,000   11,121,500       27,803,750   60,334,138

    Net Cash Requirements (-)             -2,894,000 -4,305,000       -768,500     12,368,750   34,439,138



Liquidity and Leverage                                     year. We expect the Company will raise cash
                                                           in early FY05 as described above.
The table above indicates that the Company
will require cash to fund operations through               The following tables illustrate the lack of debt
FY06. Total cash required is $8 million ac-                and adequate liquidity.
cording to our forecasts. The Company cur-
                                                                          Table 11: Leverage
rently had $1.8 million on hand on 6/30/04.
                                                                                           12/31/03     6/30/04
We believe the Company will need to raise                  LTD / Common Equity              0.00%       0.00%
                                                           Total Debt / Total Capital       0.00%       0.00%
additional funds through an equity offering in
                                                           Cash / Shareholders Equity       7.87%       9.13%
the first half of FY05. We expect the Com-                 Total Assets / Total Equity     100.09%     103.59%
pany may raise the required funds in one or
                                                                           Table 12: Liquidity
two equity offerings that will increase shares
outstanding by 40 million to 50 million shares.                                            12/31/03     6/30/04
                                                           Current Ratio                     96.96        3.53
                                                           Cash / Total Assets                7.9%       8.8%
The Company has no debt outstanding and
                                                           Cash / Current Assets             95.4%       72.1%
adequate cash to complete the current fiscal               Working Capital                 2,399,000   1,798,000




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                                                                          Cohen Independent Research Group, Inc.




 Forecasting Nutraceuticals
 We begin by looking at the current size of              The following table describes the worldwide
 the Vitamin E market, and then project what             market for Vitamin E, by industry usage in
 market share the new formulations of Vita-              2003, according to industry sources. The
 min E from Phosphagenics will command.                  Company has no plans to address Animal
                                                         Feed, the largest user of bulk Vitamin E.


                           Table 13: Global Vitamin E Market (metric tonnes)

                                                                      Personal
                    Vitamin E       Animal Feed      Supplements        Care            Food
                  Synthetic           24,000             8,000          2,000           1,000
                  Natural               0               4,000             0             1,000
                   Total              24,000            12,000          2,000           2,000


 The table below identifies the price differential       The increased efficacy has allowed the Phos-
 for the Company’s Vitamin E formulations                phagenics formulations to gain a small initial
 with that quoted in the industry breakout.              market share at a premium price. Due to the
                                                         price differential, a small market share is very
       Table 14: Bulk Price for Vitamin E                meaningful to Phosphagenics.
                          Price per Kilogram (kg)
Synthetic                           $18                  The following table identifies our market share
Natural                          $35 - $40               assumptions for Vitamin E in the Supple-
Vital ET (Personal                 $225
C ) (Supplements)
                                                         ments and Personal Care markets five years
Ester-E                            $190
Foods                              $213                  after product introduction.

                                                         Table 15: Calculation of Projected Revenues
 The prices quoted are for a notional 100%                         Based on Market Share
 pure formulation.                                                                                        Personal
                                                                                            Supplements     Care
                                                         2003 Market Size (metric tonnes)      12,000       2,000
 In the Supplements market, 33% of the de-               Phophagenics Share in 5 Yrs.           5.0%        2.5%
 mand is for a natural form of Vitamin E, indi-          Metric Tonnes                          600           50
                                                         Price per kg                          $190         $225
 cating that Supplement consumers are willing            Market Size ($mil)                   $114.0       $11.3

 to pay a higher price for a form of Vitamin E
 they deem is better.                                    For the Dietary Supplement market we be-
                                                         lieve our forecasts are very conservative.
 The differential in price between current forms
 of Vitamin E and the Company’s formulation              The revenues for the Dietary Supplement
 is supported by the scientific research and             market are gross revenues for Zila, for which
 promotion.                                              the Company will receive a 10% + royalty.




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                                                                       Cohen Independent Research Group, Inc.


Potential market size in the Foods Market is              The current market for sterols is primarily in
based on equivalent sales of Vitamin C to the             foods, while the market for isoflavones is pri-
Foods and Beverages market.                               marily in supplements.

We use Vitamin C shipment volumes as a                    The CoQ10 product will be introduced in the
benchmark since Vitamin C is water-soluble                Dietary Supplement market and the Personal
and consequently is more widely used.                     Care market.

Table 16: Projected Revenues from Vitamin                 The Personal Care market is addressed by
            E in Foods Market                             ISP. Many personal care companies are
                                        Food              evaluating inclusion of Vitamin E phosphate,
 Potential Market Size (tonnes)         3,500             but this process can be time consuming due
 Phophagenics Share in 5 Yrs.            5.0%
 Metric Tonnes                            175
                                                          to the inherent commercial risks of changing a
 Price per kg                           $213              formulation.
 Market Size ($mil)                     $37.3

                                                          We expect a relatively slow ramp up of new
Vitamin E is a lipid, which is not soluble in wa-         products in the next year, followed by faster
ter, and thus is not easily formulated into               adoption as consumers become aware of
health or energy beverages.                               benefits of the Vitamin E phosphate formula-
                                                          tion. Although Vital ETTM was launched in
As it can be water-soluble, the Phosphagen-               2003, we delay the achievement of the 2.5%
ics formulation of Vitamin E will open up new             market share until 2009, due to the slower
markets in the Food and Beverage markets.                 ramp in the early years of the forecast.
We believe our estimates are conservative.
                                                          The following table summarizes our projec-
We expect the Company will introduce addi-                tions for the Personal Care market including
tional products in each of the next three years           the ISP marketing costs and profit share
as identified in the table below. Market size             agreement.
refers to the bulk material.
                                                          Although the agreement with ISP calls for an
 Table 17: New Product Introduction Time-
                  frame
                                                          8% marketing and distribution fee, we use
                                                          12% to account for any volume discounts.
                                     Market Size
    Product           Introduction     ($ mil)            We forecast for the next five fiscal years that
     CoQ10                 2005          $80              have not yet reported.
   Phytosterol             2006         $120
   Isoflavone              2007         $100
                                                          When computing a valuation for the Com-
                                                          pany, we will take into consideration the
Phytosterol and Isoflavone products will be
                                                          growth beyond the five-year forecast.
introduced into both the Dietary Supplement
and Personal Care markets.




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                                                                  Cohen Independent Research Group, Inc.


                        Table 18: Revenues from Personal Care Market ($)

         Personal Care              2004      2005      2006      2007       2008
         Vitamin E (Vital ET)       190,000 1,500,000 3,000,000 5,000,000 7,500,000
         Phytosterols                                   400,000 1,500,000 2,500,000
         Isoflavones                                              600,000 2,500,000
         Total Revenues             190,000 1,500,000 3,400,000 7,100,000 12,500,000

         Production Costs            53,200      420,000    952,000 1,988,000      3,500,000
         ISP Marketing Costs         22,800      180,000    408,000   852,000      1,500,000

         Total Profits              114,000      900,000 2,040,000 4,260,000       7,500,000
         Phosphagenics Share         57,000      450,000 1,020,000 2,130,000       3,750,000


The Dietary Supplements market is ad-                The following table describes our forecasts for
dressed currently by Zila in the US, Canada          royalty revenues received as a result of the
and Indonesia. We expect the Company will            agreement with Zila.
form agreements for other geographic mar-
kets.



             Table 19: Revenues from Dietary Supplements Market served by Zila ($)

       Dietary Supplements           2004      2005      2006           2007           2008
       Ester-E                       700,000 1,300,000 2,500,000       3,500,000     5,000,000
       CoQ10                                   500,000 1,000,000       2,000,000     3,000,000
       Phytosterol                                       300,000         500,000       800,000
       Isoflavone                                                        300,000       500,000
       Total                         700,000 1,800,000 3,800,000       6,300,000     9,300,000



The Dietary Supplement market served by               ment. This would include Australia, Asia out-
other distributors is indicated here. The             side of Indonesia, Europe, Africa and South
Company plans on manufacturing product                America. We expect initial Dietary Supple-
and supplying regional distributors throughout        ment revenues from other distributors to be-
geographies not covered by the Zila agree-            gin in 2005 as outlined in the table here.


            Table 20: Revenues from Dietary Supplements Market not served by Zila

       Dietary Supplements           2004        2005        2006       2007           2008
       Ester-E                                   200,000     600,000   1,500,000     3,000,000
       CoQ10                                               1,000,000   2,500,000     4,000,000
       Phytosterol                                                       400,000       900,000
       Isoflavone                                                                      400,000
       Total                                     200,000   1,600,000   4,400,000     8,300,000


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                                                                    Cohen Independent Research Group, Inc.




Total revenues for Ester-ETM in the Dietary            The following table identifies forecasted reve-
Supplements market in 2009 for Zila and in             nues from the food and beverage industry.
markets not served by Zila is expected to
                                                       To remain conservative in our forecasting, we
reach the five-year forecast of $11.4 million.
                                                       project a slow initial ramp up to the 5% mar-
                                                       ket share ($35 million revenues) during the
                                                       forecast time frame.



                         Table 21: Revenues from Foods & Beverages ($)

   Functional Foods & Beverages             2004       2005        2006         2007       2008
   Vitamin E                                           500,000   4,000,000   10,000,000 20,000,000
   Phytosterol                                                                1,000,000 5,000,000
   Isoflavone                                                                            1,000,000
   Total                                               500,000   4,000,000   11,000,000 26,000,000



The ISP revenue analysis contains net reve-            The following table outlines the assumptions
nues after expenses and the Zila revenues              on COGS for the Vitamin E and TP based
are net royalty revenues.                              products.

For non-Zila Dietary Supplement and Food &             The cost to produce CoQ10 is higher than the
Beverage revenues, our forecasts also factor           other compounds primarily due to the higher
in the costs of producing the product along            cost of raw materials.
with additional marketing and distribution ex-
penses.

                     Table 22: Cost of Goods Sold for Non-Royalty Forecasts

                         Non-Zila Sales                             COGS
                         Ester-E                                     25%
                         CoQ10                                       60%
                         Phytosterol                                 40%
                         Isoflavone                                  40%
                         Functional Foods & Beverages
                         Vitamin E                                   26%
                         Phytosterol                                 35%
                         Isoflavone                                  50%



Forecast for Pharmaceuticals                           received. The Company plans on performing
                                                       pre-clinical animal tests and Phase 1 studies
The Pharmaceutical products require more               before finalizing a relationship with a large
R&D expenditures before any revenues are


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                                                                     Cohen Independent Research Group, Inc.


pharmaceutical company that will market                  The primary question, we believe, is how
each product.                                            much will efficacy improve with the new for-
                                                         mulations.
Once safety is proven for humans in Phase 1
clinical trials, it is highly likely that Phase 2        The following table outlines the timing for
and Phase 3 will be successful. The phos-                R&D expenditures for the pre-clinical animal
phate group that is attached to the active in-           tests and the Phase 1 clinical studies for each
gredient has already been proven to be safe              of the five pharmaceutical compounds.
for humans with Vitamin E. It is highly
unlikely that the phosphate group would
cause a known safe drug to become unsafe.



                          Table 23: R&D Expenditures for Pharmaceuticals

                                               2004        2005          2006       2007
            Morphine Transdermal
            Pre-Clinicals                      500,000
            Phase 1                            500,000 1,500,000
            Testosterone Transdermal
            Pre-Clinicals                      100,000     500,000
            Phase 1                                        500,000   1,500,000
            Estradiol Transdermal
            Pre-Clinicals                                  100,000       500,000
            Phase 1                                                      500,000   1,500,000
            TP for Atherosclerosis
            Pre-Clinicals                      100,000     500,000       500,000
            Phase 1                                                      500,000   2,000,000
            Statin Enhancer
            Pre-Clinicals                      100,000   900,000
            Phase 1                                      500,000     2,000,000
            Total Pharmaceutical R&D         1,300,000 4,500,000     5,500,000     3,500,000



Agreements between the inventor company                  We project relatively small milestone pay-
and the large pharmaceutical company that                ments due to Phosphagenics small size as
eventually markets the compound typically                they enter the pharmaceutical market. Over
include a series of milestone payments pro-              time, as the company matures, milestone
vided to the inventor company upon comple-               payments should increase.
tion of clinical trials and upon USFDA ap-
                                                         For each compound except for APA-01, we
proval.
                                                         expect the Company will receive $1 million
Additional milestone payments are also typi-             upon successful completion of Phase 2 stud-
cally received when the new compound re-                 ies, $2 million upon successful completion of
ceives approval in other geographies such as             Phase 3 studies, and $5 million upon USFDA
Europe, Asia or Australia.                               approval. For the first compound, we project

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                                                                   Cohen Independent Research Group, Inc.


the Company will receive a discount for the          million dollars due to the large potential mar-
first milestone payment. For APA-01, we ex-          ket. The table below outlines the milestone
pect the initial milestone payment will be $2        payments during the forecast timeframe.

                          Table 24: Pharmaceutical Milestone Payments

                                          2004 2005      2006      2007              2008
                                                        Phase 2  Phase 3            Approval
          Morphine Transdermal                           700,000 2,000,000          5,000,000

                                                                       Phase 2      Phase 3
          Testosterone Transdermal                                     1,000,000    2,000,000

                                                                                    Phase 2
          Estradiol Transdermal                                                     1,000,000

                                                                                    Phase 2
          TP for Atherosclerosis                                                    2,000,000

                                                                  Phase 2    Phase 3
          Statin Enhancer                                         1,000,000 2,000,000
          Total Pharmaceutical Revenues                   700,000 4,000,000 12,000,000

We believe payments for new formulations             For all pharmaceutical products, we are con-
that enhance the efficacy of existing drugs          servatively assuming a 10% royalty on sales.
could be considerably higher than forecast.
                                                     The table below indicates possible revenues
Milestone payments are a function of many            within five years after each TP version of the
variables including the end-product market           drug is introduced.
size, the difficulty in implementing the tech-
                                                           Table 25: Potential Pharmaceutical
nology on a commercial scale and the experi-                           Revenues
ence of the “inventor company.”
                                                                     Market        Market        Royalty
                                                                       Size        Share        Revenues
By the time the Statin Enhancer and Athero-                Drug     ($ million)     (%)         ($ million)
sclerosis (APA-01) drugs reach Phase 2 and              Morphine      $450          10%            $4.5
                                                       Testosterone     500         10%            $5.0
Phase 3, the Company will be in a position to
                                                         Estradiol     2,500        10%           $25.0
receive higher milestone payments. The po-               Atropine       250         10%            $2.5
tential size of the Statin and atherosclerosis            Statins     26,000         3%           $78.0
                                                         APA-01       52,000         4%          $208.0
markets alone justifies higher payments.
                                                           Total                                 $323.0

Higher overall milestone payments may be             We believe revenues for pharmaceutical
weighted towards the Phase 3 and NDA ap-             products will have tremendous growth af-
proval stage. However, low milestone pay-            ter the forecast time frame.
ments can justify higher royalties from sales.




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                                                                   Cohen Independent Research Group, Inc.



Forecasts – Combined
The following table outlines the revenue and
                                                      (2) operating and corporate expenses in FY04
projected cash flows for the forecast period.
                                                      of $1.95 million grow to $2.9 million in 2008,
Combining the above forecasts, we assume:             and
                                                      (3) Nutraceutical R&D at $400,000 in FY04
(1) distribution expense (non-Zila Supplement         and $300,000 from FY05 through FY08.
sales) equal to 25% of respective revenues,


                                  Table 26: Base Case Forecast ($)

                                12/31/04    12/31/05   12/31/06    12/31/07   12/31/08
        Revenues                  756,000   2,950,000 11,121,500 27,803,750 60,334,138
        Operating Income       (2,914,000) (4,325,000)  (778,505) 10,565,425 36,200,483
        Capital Expenditures      (10,000)     (8,000)    (8,000)    (15,000)   (25,000)
        Free Cash Flow         (1,896,005) (4,315,000)  (771,505) 10,562,425 25,325,338


We also create two additional forecasts, the          case. The base and pessimistic cases do not
optimistic case and pessimistic case.                 incur a tax obligation until FY08.

Revenues grow faster in the optimistic sce-           Capital expenditures for all three scenarios
nario, causing free cash flow to turn positive        are the same. The Company’s business
in FY06. The higher operating income incurs           model does not require much capital expense
a tax obligation in FY07 for the optimistic           relative to sales growth.


                               Table 27: Optimistic Case Forecast ($)

                                12/31/04    12/31/05   12/31/06   12/31/07   12/31/08
        Revenues                  756,639   3,594,037 15,274,659 42,005,312 94,511,952
        Operating Income       (2,913,062) (3,773,739) 1,832,959 16,802,125 43,664,522
        Capital Expenditures      (10,000)     (8,000)    (8,000)   (15,000)   (25,000)
        Free Cash Flow         (2,903,062) (3,763,739) 1,839,959 16,799,125 43,649,522




                               Table 28: Pessimistic Case Forecast ($)

                                12/31/04    12/31/05    12/31/06   12/31/07   12/31/08
        Revenues                  720,609   2,594,192 9,598,512 21,596,652 43,193,303
        Operating Income       (2,954,497) (3,813,463) (1,439,777) 5,399,163 16,629,422
        Capital Expenditures      (10,000)     (8,000)     (8,000)   (15,000)   (25,000)
        Free Cash Flow         (2,944,497) (3,803,463) (1,432,777) 5,396,163 16,614,422




                                 (This report may not be reproduced.)
                                             Page 48 of 74
                                                                             Cohen Independent Research Group


                                                            In present value analyses the company value
Valuation                                                   at the end of the forecast period must be de-
We value the stock of Phosphagenics using                   termined. This value is based on the per-
our forecasts for cash flow and discounting                 ceived growth of the company at the end of
these cash flows to the present.                            the forecast time frame.

The forecast time period does not include any               Our revenue forecast for Pharmaceuticals,
market based revenues from the pharmaceu-                   given only the limited drug categories dis-
tical compounds, but it does include costs in-              cussed, describes a 56% annual compound
curred for the pre-clinical tests, Phase I clini-           growth rate for the five years after the fore-
cal trials, and the projected revenues from                 cast time frame.
milestone payments. As mentioned above, we
                                                            We expect that growth in Nutraceuticals will
believe milestone payments may be larger
                                                            be in the 50% range for the first year after our
than we forecast.
                                                            forecast time frame, tapering down to a 15%
An important component of discounting cash                  growth rate.
flows is the discount rate used in calculations.
                                                            We believe a blended growth rate for the
We determine an appropriate discount rate by
                                                            whole company for the first several years af-
using the long-term treasury rate after adjust-
                                                            ter the forecast time period is in the 50%
ing it for the equity premium, and the volatility
                                                            range, gradually declining to a 30% annual
of the stock.
                                                            rate over the five years after our forecast time
We assign a volatility of three times that of the           frame. For this reason we prefer to focus on
market, and we compute a discount rate of                   a long-term growth rate of 30% to 50%.
16.2%, which we believe to be conservative.

                   Table 29: Price Targets for 3 Scenarios vs. Long Term Growth Rate

                           12-Month Price Targets
3 Scenarios vs. Long Term Growth Rate (Selected Discount Rate)
        $2.0


        $1.5


        $1.0


        $0.5

                                    Long Term Growth Rate
        $0.0
                    20       25      30      35      40       45      50

     Optimistic    $0.73    $0.90   $1.08   $1.25   $1.42    $1.59   $1.76
     Base          $0.42    $0.52   $0.62   $0.72   $0.82    $0.92   $1.02
     Pessimistic   $0.27    $0.33   $0.40   $0.46   $0.53    $0.59   $0.66



                                     (This report may not be reproduced.)
                                                 Page 49 of 74
                                                                           Cohen Independent Research Group


In focusing on a 30% to 50% long-term
growth rate, we see the stock has a fair value
range of $0.62 to $1.02.

Consistent with our conservative forecasts,
we choose to focus on the 30% to 40% long-
term growth rate and a target price of $0.62
to $0.82. This target value is for the next
year based on our current projections.

As time progresses and these projections of
future cash flow become closer in time and
consequently more certain, the fair value of
the stock will increase without any change in
the forecast.

As the company displays a few years of good
operating history, the volatility of the stock will
most likely decline and justify a lower discount
rate. A lower discount rate causes target
prices to increase.




                                    (This report may not be reproduced.)
                                                Page 50 of 74
                                                                         Cohen Independent Research Group


Industry Comparison Valuation                          •   POH reports 476 million shares out-
– POH Shares are Undervalued                               standing, the most in the group. We be-
                                                           lieve the company will consider a stock
We have compared 149 biotech public com-
                                                           split as the business matures.
panies against Phosphagenics.
                                                       •   Only 57 companies in the sort have Wall
Sector groups within the biotech industry are              Street analyst coverage. We believe our
comprised of Drugs and Generic Drugs.                      ongoing analyst research coverage will in-
Most, but not all of these companies are US                troduce excitement and investor interest
based. Some have international exposure.                   of POH within the investment community.

We have not used the entire public biotech             •   Average institutional ownership is 27%.
market, comprising approximately 472 public                Only 7% of POH shares are held by insti-
companies, the larger companies having in-                 tutions. We expect institutional ownership
ternational segments. Our sampling includes                to increase as the company builds on its
market capitalization of $500 million or less.             revenue producing opportunities.
                                                       •   Group share prices indicate a -41% de-
•   POH common shares are grossly under-
                                                           crease from their 52-week high prices.
    valued. POH common trades at $0.15 vs.
                                                           POH share price is off -30%, less than the
    the average group price of $5.10. Of 149
                                                           group’ average.     No company in our
    companies, only 5 report market prices
                                                           sample traded at their 52 week high.
    less than POH.
                                                           These statistics point to a very difficult
•   POH reports approximately $2 million in                small cap biotech drug market.
    cash, yet ranks number #87 in Cash less
                                                       •   We did not value POH’s science com-
    Debt. Twenty-five companies (25) report
                                                           pared with the industry group. However,
    zero or negative cash less than debt.
                                                           it is our belief that the company’s science
•   POH market capitalization is $69 million,              would probably be in the upper 25% of
    compared with the average of $116.6 mil-               the group. Thus POH should be ac-
    lion. POH is ranked number #72 in the                  corded a premium in share price to the
    sort, an outstanding statistic given that the          group’s average.
    company is relatively unknown in the US.
                                                       •   On a comparative basis, POH common
•   Average daily shares traded by the group               shares are significantly undervalued.
    are 139,779, vs. POH 82,312 shares. As
                                                           As company sales increase, so should
    POH becomes better known, we believe
                                                           share prices rise in relation to the group.
    shares traded will increase.
                                                           It is apparent that the investment commu-
•   Ninety-six (96) companies report sales.                nity does not understand the mispriced
    POH will report sales this financial year              values we have identified in our sort.
    (2004) under the Zila agreement. As                    Hence, this subset of the biotech drug re-
    POH reports revenues, the company                      lated industry is not recognized nor un-
    should move up in this ranking category.               derstood by the investment community,
                                                           and is by definition, an inefficient market.

                                  (This report may not be reproduced.)
                                              Page 51 of 74
                                                                                                                                          Cohen Independent Research Group

                                                                                                                                                                             %
                                                               Cash & Total LT            Net Incm                            % Diff                               % Held Held
                           No Shares        Market    Sales Markt Secs Debt Qtr Net Cash      Rept Current 52 Week 52 Week High and EBITDA     Avg Daily Shares Insider     by
Ticker   Company           Anl Out (mil) Cap ($mil)   ($mil) Qtr ($mil)  ($mil) less Debt    ($mil)  Price     High    Low     Low    ($mil) Vol 20 days Out (mil)      s Instit
                                10/1/04    10/1/04 12/31/03    6/30/04 6/30/04 6/30/04 12/31/03 10/1/04 10/1/04 10/1/04 10/4/01 12/31/03         10/1/04 10/1/04 Recent Recent

POH.AX   Phosphagenics             476        69        0           2        0        2       -2     0.15     0.21     0.11     -0.30       -1     82,312     476      35     7
AAII     Aaipharma Inc      5       29        45      225           8      309     -301      -33     1.58    31.50     1.27     -0.95        4    882,077      29      38    47
ACCL     Accelrys Inc       1       25       163      115          84        1       83       -3     6.48    22.24     5.65     -0.71       10    132,714      25       7    67
ACUS     Acusphere Inc      1       17       111        0          39        0       39      -22     6.46    13.05     5.73     -0.50      -18     34,944      17      45    27
AKC      Access Pharma              15        87        1           7       14       -7       -7     5.64     7.95     2.53     -0.29       -5     32,210      15      11    31
ALRG     Allergy Rsrch              15        13       14           2        0        2        2     0.89     1.47     0.71     -0.39        2      8,633      15      65
ALTH     Allos Therapeut    1       31        67        0          34        0       34      -23     2.15     5.67     1.61     -0.62      -23    194,936      31       7    24
AMRN     Amarin Corp Plc            18        21       18                                    -19     1.15     3.50     0.53     -0.67      -26     98,162      18             7
ANII     Adv Nutraceutcl             5        11       25           1        2       -1       -4     2.15     5.25     0.42     -0.59       -2      3,809       5      41     1
ANX      Adventrx Pharma            54        64                                                     1.19     2.30     0.99     -0.48             107,385      54             5
AOLS     Aeolus Pharmact            14        21        0           0        1       -1       -3     1.50    10.00     0.95     -0.85       -4     17,268      14      20     0
APNS     Applied Neurosl            48         7        0           5        0        5       -3     0.16     0.52     0.16     -0.70       -3    226,464      48      14    13
APPA     Ap Pharma Inc      1       25        33        5          17        0       17       -4     1.31     4.32     1.20     -0.70       -6     60,692      25      10    39
ARIA     Ariad Pharma       2       52       341        1          95        6       89      -20     6.50    13.50     3.81     -0.52      -18    856,469      52       7    47
ARQL     Arqule Inc         2       29       134       66          76        1       75      -35     4.65     7.79     3.88     -0.40      -25     94,720      29       4    41
AVN      Avanir Pharm               94       271        2          32        0       32      -23     2.88     3.15     1.33     -0.09      -22    946,050      94       6    28
AVNC     Advancis Pharma    3       23       189        4          41        2       39      -21     8.29    10.05     6.73     -0.18      -20     32,806      23      59    25
AXJ      Axm Pharma Inc             16        34                                                     2.16     7.00     2.05     -0.69              70,865      16      39     2
BCII     Bone Care Intl     5       19       479       44         114        0      114       -2    24.67    25.11    12.00     -0.02       -1     90,906      19      24    69
BCRX     Biocryst Pharma    1       22       110        2          24        0       24      -13     5.06    11.15     4.52     -0.55      -12     73,066      22      24    38
BDY      Bradley Pharm-A    3       15       314       75         176       37      139       17    20.56    31.05    20.31     -0.34       30    412,460      15      14    96
BLSI     Boston Life Sci            34        19        0           5        0        5       -8     0.55     1.77     0.47     -0.69       -7     52,550      34      23     4
BMRA     Biomerica Inc               6         2        9           0        0        0        0     0.40     0.65     0.38     -0.38        0      1,958       6      36     1
BNRX     Bionutrics Inc              4         2        0                                     -3     0.35     1.00     0.00     -0.65       -3      5,713       4      52
BNT      Bentley Pharma     1       21       216       65          36        0       36        6    10.37    17.08     9.70     -0.39       14     33,205      21      26    41
BSTC     Biospecifics Te             5        11        4                                     -3     2.15     2.89     1.12     -0.26       -3      2,163       5      53     3
CADKF    Cade Struktur               9         0        4                                      3     0.00     0.00     0.00      0.00        4          0       9
CARN     Carrington Labs            11        43       29           2        1        1       -2     4.07     5.30     3.11     -0.23        0     15,122      11      15    14
CBRX     Columbia Labs      1       42       133       22          30       18       12      -21     3.18    11.35     1.85     -0.72      -19    132,737      42      16    47
CBST     Cubist Pharm       7       40       421        4          59      194     -135     -115    10.45    15.74     7.87     -0.34      -93    384,928      40       4    88
CGPI     Collagenex Phar    1       14        89       53          31        0       31        6     6.17    14.16     6.09     -0.56        7     87,688      14      22    65
CHTL     Chantal Pharma             41         0                                                     0.00     0.00     0.00     -0.50              28,442      41       8     0
CLGY     Cellegy Pharma             23        97         2          6        0        6      -14     4.18     6.74     2.45     -0.38      -13     26,228      23      15    12
CLSCV    Cobalis Corp               22        61         0          0        0        0       -6     2.80     4.25     0.30     -0.34       -4     12,836      22      81
CNTBY    Cantab Pharma                                                                               0.00     0.00            #DIV/0!                   0                     0
COR      Cortex Pharma              28        69         7         22        0       22        -6    2.44     4.20     1.46     -0.42       -6     74,605      28       9     9
CORT     Corcept Therapt    3       23       169                   52        1       51              7.45    12.23     0.01     -0.39              16,404      23            23
CRME     Cardiome Pharma    1       40       191                                                     4.83     5.70     4.00     -0.15               9,759      40             0
CRXA     Corixa Corp        2       56       259       51         168      121       47      -84     4.64     8.90     3.38     -0.48     -69     187,718      56       9    53
CTIC     Cell Therapeut     5       51       352       25          89      190     -101     -130     6.95    12.37     4.55     -0.44    -112     614,563      51       7    50
CVTX     Cv Therapeutics    6       32       421       11         422      330       92     -111    13.34    23.46    11.43     -0.43     -85     458,130      32       5    87
CYAN     Cyanotech Corp             21        26       12           2        2        0        0     1.24     2.15     0.45     -0.42       2      23,847      21      18    12




                                                                (This report may not be reproduced.)
                                                                            Page 52 of 74
                                                                                                                                        Cohen Independent Research Group


                                                                                                                                                                             %
                                                               Cash & Total LT            Net Incm                            % Diff                               % Held Held
                           No Shares        Market    Sales Markt Secs Debt Qtr Net Cash      Rept Current 52 Week 52 Week High and EBITDA     Avg Daily Shares Insider     by
Ticker   Company           Anl Out (mil) Cap ($mil)   ($mil) Qtr ($mil)  ($mil) less Debt    ($mil)  Price     High    Low     Low    ($mil) Vol 20 days Out (mil)      s Instit
                                10/1/04    10/1/04 12/31/03    6/30/04 6/30/04 6/30/04 12/31/03 10/1/04 10/1/04 10/1/04 10/4/01 12/31/03         10/1/04 10/1/04 Recent Recent

POH.AX   Phosphagenics             476        69         0          2        0         2       -2     0.15     0.21    0.11    -0.30        -1       82,312    476     35     7
DEPO     Depomed Inc        2       35       178         1         30       10        20      -30     5.14     8.87    3.87     -0.42      -28      111,418      35     27    66
DOR      Dor Biopharma              42        21         0          5        0         5       -5     0.50     1.43    0.40     -0.65        -5     217,325      42     12     6
DPII     Discovery Ptnrs    1       26       130        50         78        0        78         1    4.99     6.56    4.09     -0.24         6       54,280     26      9    81
DRAX     Draxis Health      1       41       196        49          8        5         3       13     4.80     5.80    1.84     -0.17         3      86,308      41      1    38
DRRX     Durect Corp        2       52        77        12         52       62       -10      -23     1.50     4.23    1.26     -0.65      -15      557,230      52     27    70
DUSA     Dusa Pharm Inc             17       187         1         56        0        56      -15    11.12    13.90    4.50     -0.20      -13      118,159      17     10    58
ELI      Elite Pharma -A            12        15         0          1        2        -1        -7    1.25     4.24    1.15     -0.71        -6      20,375      12     25     0
EMIS     Emisphere Tech     2       18        55         0         26       42       -16      -45     3.00     8.44    2.91     -0.64      -34      127,422      18     14    39
EPMN     Epimmune Inc               16        22         7         10        0        10       -7     1.39     2.85    1.16     -0.51        -6      34,924      16     26    10
ERGO     Ergo Science Cp             6        12         0         26        0        26         5    2.05     2.80    1.50     -0.27         5        2,965      6     29     2
ETOP     Entropin Inc               31         4         0          3        0         3        -3    0.13     0.45    0.10     -0.71        -3       81,348     31     18     0
ETRXQ    Essential Thera            19         0         9                                    -41     0.00     0.03    0.00     -0.83      -39             0     19      8     0
FLML     Flamel Tech        2       16       249        25        105        2      103         -3   15.38    37.99   14.67     -0.60        -2   1,047,337      16           47
FMTI     Forbes Medi-Tec            34        77        10         13        1       12         -1    2.28     8.35    1.63     -0.73         1     251,803      34           11
GGEN     Galagen Inc                12         0                                                      0.00     0.01    0.00     -1.00                  2,070     12    18      8
GLGS     Glycogenesys       1       61        27         0          2        0        2        -8     0.44     1.83    0.38     -0.76       -7      136,518      61    12      3
GNBT     Generex Biotech            32        34         0          7        1        6       -13     1.07     2.24    0.92     -0.52       60      197,785      32    28      1
GORX     Geopharma Inc               8        33        23         13        3       10         1     4.22     7.43    2.61     -0.43        1       15,659       8    58     16
GSAC     Gelstat Corp               11        68         0          1        0        1        -1     5.91     6.90    0.77     -0.14       -1       43,945      11    21      2
HESG     Health Sci Grp             14        12        18          0        0        0        -7     0.90     1.76    0.50     -0.49       -5        76,098     14    15
IBPI     Intrabiotics Ph    2        9        34         0         58        0       58       -13     3.88    18.00    3.38     -0.78      -13        34,406      9    28     45
IDEV     Indevus Pharma             47       339         5        189       72      117       -32     7.27     8.68    5.24     -0.16      -31      505,717      47    13     36
IG       Igi Inc                    12        14         4          2        0        2         0     1.22     2.54    1.22     -0.52       -1         4,820     12    36      4
IMGN     Immunogen Inc      3       41       206        26         95        0       95        -6     5.04    10.88    4.15     -0.54       -5       92,450      41     7     38
INB      Integr Biopharm            12       106        25         10        0       10        -5     8.49    15.12    4.78     -0.44       -4       21,855      12    86      3
INIS     Intl Isotopes             159        24         2          1        2       -1        -1     0.15     0.24    0.03     -0.37        0         8,257    159    16      0
INKP     Inkine Pharm Co            49       243        14         11        0       11        -2     4.99     6.56    3.52     -0.24       -1      126,736      49     8     39
IOX      Iomed Inc                   7        12        12          7        1        6         1     1.84     3.55    1.39     -0.48        2        12,000      7    12      4
ISTA     Ista Pharma Inc    3       19       231         0         36        0       36       -25    11.98    15.05    7.65     -0.20      -25        54,110     19    82     78
KV.B     K-V Pharmac B              16       299       284        219      210        9        46    18.87    29.60   16.35     -0.36       89         2,970     16    51     28
LCI      Lannett Inc                24       252        64          9        8        1        13    10.47    19.00    9.70     -0.45       23        23,705     24    71      5
LJPC     La Jolla Pharma    1       61       211         0         44        1       43       -39     3.44     4.26    1.72     -0.19      -37      625,413      61     7     50
MBTG     Millenium Biot             40        10                                                      0.25     1.15    0.17     -0.78               178,089      40     9      0
MCHM     Macrochem -Del             39        31         0                                     -8     0.81     1.79    0.74     -0.55                 45,972     39    14     21
MCU      Medicure Inc               67        53                                                      0.79     1.94    0.79     -0.59                  6,275     67    13      7
MHTT     Manhattan Pharm            27        24         0          9        0        9        -6     0.89     2.10    0.75     -0.58       -6        26,796     27     9      1
MRVT     Miravant Medl              35        60         0          8        9       -1        -7     1.71     4.10    0.99     -0.58       -1      332,974      35    17      4
MSHL     Marshall Edwrds    1       57       487         0         25        0       25        -9     8.55    12.77    5.98     -0.33       -9         9,308     57            1
MTEX     Mannatech Inc              26       430       191         29        0       29         9    16.30    16.30    5.95      0.00       16      154,099      26           10
MTXX     Matrixx Inititv    1        9       101        43          4        0        4         3    10.63    19.45    7.50     -0.45        6        60,065      9     4     21
NAII     Natural Alt Int             6        67        79          7        4        3         3    11.24    13.80    4.70     -0.19        6        33,145      6    27     16



                                                                (This report may not be reproduced.)
                                                                            Page 53 of 74
                                                                                                                                          Cohen Independent Research Group


                                                                                                                                                                             %
                                                               Cash & Total LT            Net Incm                            % Diff                               % Held Held
                           No Shares        Market    Sales Markt Secs Debt Qtr Net Cash      Rept Current 52 Week 52 Week High and EBITDA     Avg Daily Shares Insider     by
Ticker   Company           Anl Out (mil) Cap ($mil)   ($mil) Qtr ($mil)  ($mil) less Debt    ($mil)  Price     High    Low     Low    ($mil) Vol 20 days Out (mil)      s Instit
                                10/1/04    10/1/04 12/31/03    6/30/04 6/30/04 6/30/04 12/31/03 10/1/04 10/1/04 10/1/04 10/4/01 12/31/03         10/1/04 10/1/04 Recent Recent

POH.AX   Phosphagenics             476        69        0           2        0        2       -2     0.15     0.21     0.11    -0.30        -1      82,312    476      35     7
NATR     Natures Sun Prd            15       226      297          34        0       34        5    14.99    15.98     7.76    -0.06        14      37,011     15      31    48
NEOL     Neopharm Inc       3       23       206        0          89        0       89      -53     8.86    22.19     4.89    -0.60       -51     319,730     23      26    77
NEXM     Nexmed Inc                 46        69        0          11        7        4      -17     1.50     5.43     1.30    -0.72       -13      69,011     46      13    26
NRPH     New River Pharm    1       13       138                    2        0        2             11.00    11.00     0.01     0.00                71,868     13
NSTK     Nastech Pharma     1       13       180       19          26        2       24       -2    13.50    14.70     7.43    -0.08         0   1,817,422     13      22    22
NTEC     Neose Tech Inc     2       25       200        1          65       14       51      -38     8.10    13.74     6.52    -0.41       -32      28,743     25      17    62
NTII     Neurobio Tech              26        97        3          14        0       14       -2     3.68     7.00     2.48    -0.47        -2      28,426     26      16    20
NTOL     Natrol Inc                 13        40       73           3        7       -4       -1     3.00     4.10     2.40    -0.27         2      14,027     13      52    35
NUTR     Nutraceutical      1       12       167      125           3       10       -7       13    14.33    26.76    10.36    -0.46        25      70,712     12      31    66
NVD      Novadel Pharma             33        62                                                     1.89     2.17     1.28    -0.13                68,670     33      13     4
NVGN     Novogen Ltd-Adr            19       344       19                                      -7   18.00    31.25    15.10    -0.42        -7      21,855     19       1     2
NXXI     Nutrition 21       1       38        34       10                                      -6    0.89     1.20     0.35    -0.26               386,003     38       6     3
ORPH     Orphan Medical     3       11       115       16          15        0       15        11   10.16    12.17     8.00    -0.17        12      17,286     11      10    41
OXGN     Oxigene Inc                17       102        0          36        0       36        -8    6.11    11.65     4.28    -0.48        -8     492,777     17       7    19
OXIS     Oxis Intl Inc              27        17        3           1        0        1        -1    0.64     0.86     0.20    -0.26         0      47,188     27      58     0
PAIIE    Patch Intl Inc             20         1        0           0        0        0         0    0.07     0.21     0.06    -0.66         0      91,256     20      13
PARS     Pharmos Corp               88       247        0          55        0       55       -18    2.80     4.78     2.45    -0.41       -15     544,733     88       3    15
PCOP     Pharmacopeia Dd            12        61                   42        0       42              4.99     8.18     4.72    -0.39                27,987     12            71
PCYC     Pharmacyclics      1       20       219        0         101        0      101       -29   11.15    14.50     5.14    -0.23       -28      83,906     20      11    64
PHFR     Pharmac Formula            86        30       18           0       22      -22        -1    0.35     0.71     0.35    -0.51         0      19,124     86       3
PHLI     Pacifichealth              10         7        5           1        0        1        -1    0.70     1.32     0.58    -0.47        -1      23,290     10      38     0
POLXF    Polydex Pharmac             3        15       14           4        0        4         0    5.00     8.62     3.82    -0.42         0       2,344      3      29     1
POZN     Pozen Inc          3       29       267        4          68        0       68       -15    9.28    18.30     5.35    -0.49       -14     105,380     29      17    52
PPCO     Penwest Pharm      3       19       205        5          53        0       53       -16   11.04    23.94     9.14    -0.54       -25      99,902     19      10    76
PPRT     Pharmaprint Inc            21         0                                                     0.00     0.02     0.00    -0.90                11,292     21       6     0
PRCS     Praecis Pharm      1       52       115        0         111       32       79       -56    2.20     7.73     2.03    -0.72       -50     277,742     52      10    70
PRCY     Procyte Corp               16        16       12           6        0        6         7    0.99     1.33     0.90    -0.26         1      33,392     16      11     1
PRW      Pro-Pharmaceut             27        58        0           9        0        9        -5    2.13     5.51     2.08    -0.61        -5      60,045     27      24     1
PTIE     Pain Therapeut     2       36       253        0          61        0       61       -22    7.10     9.18     4.61    -0.23       -21     129,954     36      27    43
PVLS     Provalis Plc                                  22                                      -6    4.02     6.37     2.72    -0.37         2       2,357              1     0
QGLY     Quigley Corp       1       12        99       41          14        0       14         1    8.57    11.15     7.26    -0.23         1       8,429     12      53     2
QSC      Questcor Pharma            51        24       14           6        0        6        -4    0.46     1.09     0.38    -0.58        -2      74,780     51       6     9
RIGL     Rigel Pharmctcl    3       18       462       11          82        1       81       -41   25.00    25.36    11.15    -0.01       -37     259,311     18      49    40
SCLN     Sciclone Pharma    2       45       173       33          55        6       49        -5    3.88     8.95     3.34    -0.57        -5     139,873     45       8    25
SFCC     Sfbc Intl Inc      2       16       404      104          58       13       45        12   26.04    35.00    15.82    -0.26        20     166,526     16      47    56
SHPH     Shaman Pharma             103         0                                                     0.00     0.00     0.00    -0.80                46,329    103       6    10
SIGA     Siga Tech Inc              23        32         1          5        0        5        -5    1.36     2.64     1.23    -0.48        -5      53,539     23      32     5
SNTS     Santarus Inc       3                                                                        9.13    15.83     9.07    -0.42               216,140             25
SNUS     Sonus Pharmaceu            21        78        0          29        0       29       -10    3.68     8.25     3.10    -0.55       -10      94,905     21       7    24
SPPI     Spectrum Pharma            14        86        1           5        0        5       -10    6.05     9.97     4.21    -0.39       -10     229,667     14       9    25
SUPG     Supergen Inc       1       45       279       11          33        0       33       -53    6.17    13.53     4.60    -0.54       -31     940,850     45      10    46




                                                                 (This report may not be reproduced.)
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                                                                                                                                           Cohen Independent Research Group

                                                                                                                                                                            %
                                                              Cash & Total LT            Net Incm                            % Diff                               % Held Held
                          No Shares        Market    Sales Markt Secs Debt Qtr Net Cash      Rept Current 52 Week 52 Week High and EBITDA     Avg Daily Shares Insider     by
Ticker   Company          Anl Out (mil) Cap ($mil)   ($mil) Qtr ($mil)  ($mil) less Debt    ($mil)  Price     High    Low     Low    ($mil) Vol 20 days Out (mil)      s Instit
                               10/1/04    10/1/04 12/31/03    6/30/04 6/30/04 6/30/04 12/31/03 10/1/04 10/1/04 10/1/04 10/4/01 12/31/03         10/1/04 10/1/04 Recent Recent

POH.AX Phosphagenics               476        69        0          2        0         2       -2     0.15     0.21     0.11    -0.30         -1      82,312      476      35      7
SYMBA  Symbollon Pharm               5       10         0          0        0         0       -1     1.78     2.60     0.17    -0.32         -1       3,776        5      26
TGX    Theragenics Cp               30      108        36         63        0        63        0     3.61     6.20     3.53    -0.42          6      97,580       30       4     61
TLADQ  Tl Admin Corp                29         1      147                                    -32     0.02     0.06     0.01    -0.67        -25       8,222       29      47      0
TPPH   Tapestry Pharma              33       39         0         37        6        31       38     1.17     3.19     0.80    -0.63        -18      55,648       33      16     12
VITK   Futurebiotics                 1         0                                                     0.15     0.45     0.15    -0.67                    158        1       0
VNLS   Vernalis Plc                 17       50        15         43        0        43      -61     3.01     4.14     1.64    -0.27        -31       7,224       17             19
VPHM   Viropharma                   27       51         2        102      128       -26      -37     1.90     3.70     1.45    -0.49        -26      83,461       27       7     30
VRXL   Verex Labs Inc                2         0                                                     0.02     0.02     0.01     0.00                      0        2      53
VXGN   Vaxgen Inc           1       25      332        14                                    -26    13.20    17.30     6.67    -0.24        -26     368,923       25      31     51
WFHCQ  Women First Hlt              27         0        1                                    -71     0.00     1.67     0.00    -1.00        -52       4,939       27      36      1
WNI    Weider Nutrtion              26      124       258          7        0         7        9     4.74     5.24     2.93    -0.10         20      26,045       26      13     21
XNVA   Xenova Grp-Ads               14       23        14                                    -27     1.67     2.79     1.53    -0.40        -29     131,200       14              0
ZILA   Zila Inc             2       46      203        47         12        4         8        7     4.45     5.38     3.16    -0.17         14     109,695       46       1     23
ZKEM   Xechem Intl Inc            166          0        0          1        5        -4       -5     0.00     0.31     0.00    -1.00          1           0      166              0
ZONE   Omni Nutraceut               36         0                                                     0.00     0.00     0.00    -0.60                  1,394       36       1      0
ABRX   Able Labs            1       17      343        78          8        3         5        8    19.75    22.03    15.65    -0.10         17     125,388       17     11      65
ACUR   Acura Pharmact               22       12         6          7       47       -40      -48     0.54     1.05     0.26    -0.49        -17      12,044       22     16       1
AKRN   Akorn Inc                    21       64        45          0       13       -13      -12     3.10     3.76     1.50    -0.18         -5      11,158       21      72      3
BGMR   Bigmar                       10         1                                                     0.05     0.27     0.02    -0.81                  3,790       10      67      3
CPD    Caraco Pharm                 25      193        45          2        3        -1       11     7.83    13.39     6.84    -0.42        13       37,450       25      25     10
HITK   Hi Tech Pharma       1        8      127        56         41        0        41        7    15.90    27.15    13.76    -0.41        12       82,957        8      32     36
IPA    Interpharm Hldg              19       63        41          3        7        -4        3     3.40     5.87     2.30    -0.42         6       41,200       19     58       5
DMAX   Drugmax Inc                   8       33       214          2        0         2       -7     3.98     5.87     1.85    -0.32        -4        5,319        8     36       4
INFU   Infu-Tech Inc                 3         0                                                     0.00     0.05     0.00    -1.00                    125        3     14
MDRX   Allscripts Hlth      4       40      375        86          24        0       24       -5     9.47    11.05     3.94    -0.14          0     330,510       40      39    54
NHLC   Natural Hlth Tr      1        5       69        63          10        0      10         5    12.70    25.80     4.80    -0.51          7      15,253        5     26      6
       Average            2.1     31.3     116.6     29.8        36.2     16.6     19.5    -12.3      5.1      8.6      3.5    -0.41       -8.1   139,779.4     31.3    23.1  25.2
POH.AX Phosphagenics              476        69         0           2        0        2       -2     0.15     0.21     0.11    -0.30         -1      82,312      476     35      7
                                                                                                                                                                                 %
                          #No                                  Cash & Total LT            Net Incm                            % Diff                                   % Held Held
                         Anla Shares        Market    Sales Markt Secs Debt Qtr Net Cash      Rept Current 52 Week 52 Week High and     EBITDA     Avg Daily Shares Insider     by
Ticker   Company             t Out (mil) Cap ($mil)   ($mil) Qtr ($mil)  ($mil) less Debt    ($mil)  Price     High    Low     Low        ($mil) Vol 20 days Out (mil)      s Instit
                         #### 10/1/04      10/1/04 12/31/03    6/30/04 6/30/04 6/30/04 12/31/03 10/1/04 10/1/04 10/1/04 10/4/01        12/31/03      10/1/04 10/1/04 Recent Recent




                                                                (This report may not be reproduced.)
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                                                                        Cohen Independent Research Group


                                                      Harry Rosen BA, LLB,
Management
                                                      President and C.E.O.
Assoc Professor Andrew Vizard BVSC                    Harry Rosen is currently a non-practicing at-
(Hons), MVPM, Chairman                                torney. He is one of the founders of Betatene
With a background in research and agricul-            Ltd and Denehurst Ltd, two formerly ASX
tural consultancy, Professor Vizard is the sen-       listed companies which commercialized sig-
ior consultant with, and former Director of, the      nificant research and development. Betatene
Mackinnon Project at the University of Mel-           is the world's largest producer of natural beta-
bourne. This enterprise is recognized as a            carotene. After the purchase of Betatene Ltd
world leader in delivering practical advice to        by Henkel Corporation, Mr. Rosen served as
farmer and agribusiness on a wide range of            Vice President, Corporate Development for
agricultural and economic issues. He is the           Henkel. As a Vice President of Henkel Corpo-
author of over 50 scientific papers.                  ration, he worked for a number of years in the
                                                      USA in the nutrition and health care indus-
Professor Vizard is an Associate Professor in         tries. Mr. Rosen holds no directorships of
the Faculty of Veterinary Science at the Uni-         other public entities.
versity of Melbourne.
                                                      Mr. Rosen is presently consulting to other
Professor Vizard is currently a non-executive         technology companies and assisting them
Director of Ridley Corporation Ltd, the Austra-       with the commercialization of new technolo-
lian Sheep Industry CRC and the Zoological            gies. He has had significant experience in the
Parks and Gardens Board of Victoria. He also          areas of seed capital raising and stock ex-
sits on the Scientific Advisory Board for the         change listings. Mr. Rosen graduated from
Herman Slade Foundation.                              the Australian National University (B.A.- Psy-
                                                      chology) in 1970 and Melbourne University
Dr. Ian Pattison BSc (Hons), PhD.,
                                                      (LLB) in 1973.
Managing Director
Prior to joining Phosphagenics, Dr Pattison           Dr. Simon West Dip App Chem, BSc, D
was the Asia/Pacific Director in charge of the        App Sci (Honorary), Chief Scientist, Chair
Nutrition & Health Division of Cognis, a large        of Scientific Advisory Board
German-based specialty chemical company.
                                                      Dr West is one of Australia's leading inven-
Previously he was Managing Director of Be-            tors, with a strong background in industrial
tatene, an innovative Australian company,             chemistry and inventions covering processes
which has led the world in the production and         in mineral extraction, plastics recycling and
sale of natural beta-carotene from algae.             production, food technology and natural
                                                      health care products.
Dr. Pattison’s earlier career was in the Austra-
lian mining industry in various research, oper-       Over a 30-year career as an inventor of proc-
ating, engineering, marketing and manage-             esses involving physical sciences, Dr Simon
ment positions. He graduated from University          West has had broad experience in the devel-
of Melbourne, with a BSc (Hons) and PhD.              opment of original solutions and the technical


                                 (This report may not be reproduced.)
                                             Page 56 of 74
                                                                        Cohen Independent Research Group


management of the resulting intellectual              He was responsible for the commercial de-
property for public companies. Dr West                velopment of Betatene including appointment
worked for 17 years with Kraft Foods Ltd on           of Henkel as a distributor and worked closely
projects such as the modification of curd,            with them to develop the market and the rela-
'magnetic carbon', automation of jar arrange-         tionship which eventually led to Henkel (now
ment and a calcium ion sensor transistor.             Cognis) acquiring the Betatene business.

His novel production methods for extracting           Mr. Butler went to the US in 1994 to assist in
beta-carotene from algae were successfully            the Betatene IPO but following the Henkel
commercialized in Australia and the US, hav-          acquisition, he became a Henkel employee
ing been acquired by Henkel Corporation. Dr           responsible for new business development in
West invented the zinc tailings recovery proc-        the nutritional supplement industry. Mr. Butler
ess that was the basis for the public listing of      joined the VHS and Phosphagenics Group in
Denehurst Ltd.                                        May 2001.

It is this varied background that led him to de-      He has a Bachelor of Economics from the
velop novel methods of producing natural vi-          University of Sydney.
tamin E and in the process also create a
novel method to produce water-soluble com-            Dr. Esra Ogru BSc (Hons), PhD,
pounds. Further research led to the discovery         Vice President Research & Development
of Phosphagenics' technologies.                       Dr. Esra Ogru received her PhD in Biochem-
                                                      istry from Monash University in 2001 and
Dr West holds a Dip. App. Chem and B.Sc.
                                                      conducted postdoctoral research at Metabolic
degree with a double major in chemistry and
                                                      Pharmaceuticals Ltd (Monash University, De-
received a Doctor of Applied Science Honoris
                                                      partment of Biochemistry & Molecular Biol-
Causa from RMIT University.
                                                      ogy), where she was involved in the discovery
                                                      and development of novel anti-obesity pep-
Dr West is Chair of the Phosphagenics’ Sci-
                                                      tides.
entific Advisory Board.
                                                      Dr Ogru is experienced in many aspects of
Bruce Butler BEcon,
                                                      academic and commercial research, collabo-
Vice President, Nutraceuticals
                                                      rations and has many publications in peer-
Mr Butler was the former Business Develop-            reviewed journals.
ment Manager of the Cognis Corp - Nutrition
& Health Group in Chicago. Cognis is a lead-          Her role is in the coordination and manage-
ing supplier of bulk active ingredients such as       ment of pre-clinical & clinical research for
natural Vitamin E and beta-carotene to the            Phosphagenics.
global nutritional supplement market.

Previously he was the General Manager and
Marketing Manager of Betatene Limited, the
world's largest producer of natural beta-
carotene.

                                 (This report may not be reproduced.)
                                             Page 57 of 74
                                                                        Cohen Independent Research Group


Professor John Mills BS, MD, FACP,                    Mr Addison is a Director of African Enter-
FRACP,                                                prises Limited, Ceramic Funds Limited,
Non-Executive Director                                Hawksbridge Limited and Technology Devel-
                                                      opment Limited.
Professor Mills recently stepped down after
10 years as Director of the Macfarlane Burnet
Institute for Medical Research, Australia's           Phosphagenics Research and
premier communicable disease and public               Development Team
health research institute.
                                                      Monash University
He currently holds Professorial appointments          Department of Biochemistry & Molecular
                                                      Biology
at Monash University and at RMIT. Professor
Mills is also Managing Director of Advanced           •   Dr Robert Gianello
Diagnostic Concepts Ltd, a consulting physi-          •   Dr. Roksan Libinaki
cian at the Alfred and Austin Hospitals in Mel-       •   Dr Paul Gavin
bourne and a non-executive Director of GBS
                                                      •   Dr Hong Keah
Venture Partners Ltd.
                                                      •   Ms. Annike Griffey
He has published over 200 scientific articles
                                                      Victoria University
and has served as a consultant to industry
and governments, the World Health Organiza-           •   Associate Professor Andrew Smallridge
tion and the United Nations.                          •   Mr. Steve Geytenbeek

Jonathan Addison BEc (Tas), ASIC, FTA
(Snr), Non-Executive Director
                                                      Scientific Advisory Board
                                                      •   Dr Simon West Dip App Chem, BSc, D
Mr Addison has over 26 years in the invest-
                                                          App Sci (Honorary) - Chairman
ment management and superannuation in-
dustries. Currently he is the Fund Manger of          •   Professor Angelo Azzi MD, PhD, Direc-
the Meat Industry Employee Superannuation                 tor, Institute of Biochemistry and Molecu-
Fund ("MIESF"), a self-administered industry              lar Biology, University of Bern, Switzer-
superannuation fund established in 1981.                  land
MIESF is currently the largest institutional
                                                      •   Professor Ishwarlal Jialal MD, PhD,
shareholder in Phosphagenics Limited
                                                          Professor of Pathology & Laboratory
                                                          Medicine, and Internal Medicine (Endocri-
Previously, Mr Addison was a Director and
                                                          nology, Clinical Nutrition and Vascular
Asset Consultant within the Corporate Fi-
                                                          Medicine), UC Davis Medical Center,
nance section of PricewaterhouseCoopers
                                                          Sacramento
and established a broad-based investment
consulting practice. Prior to that, he was            •   Professor Frank Ng PhD, Honorary
Manager Investment Consultant at Sedgwick                 Member Department of Biochemistry &
Noble Lowndes.                                            Molecular Biology, Monash University



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                                             Page 58 of 74
                                                                        Cohen Independent Research Group


           CONCLUSION                                 We believe the Food and Beverage market
                                                      will eventually be the largest market served
We believe the initial success of the Phos-           by the Nutraceutical Division.
phagenics formulation of Vitamin E indicates
the Company has developed a delivery sys-             The Pharmaceutical Division has several
tem that can be applied to many consumer              promising products under study. The benefit
and ethical pharmaceutical products.                  of higher efficacy has the potential of extend-
                                                      ing the patent protection of several block-
Phosphagenics has formed distribution                 buster drugs.
agreements to address two key distribution
channels. ISP is marketing Vital ET™ as an            We believe there will be many pharmaceu-
additive to many personal care products. We           tical compounds that will come to market
expect initial adoption of Vital ET™ will be in       with the Phosphagenics technology either
products where the risk is low for the manu-          for an oral or transdermal delivery.
facturer. Once consumers are educated on
                                                      We believe the Company’s growth will
the benefits of Phosphagenics’ highly effica-
                                                      continue at a high rate for many years.
cious Vitamin E, demand for Vital ET™ will
grow rapidly.
                                                      We recommend purchasing shares of
                                                      Phosphagenics for investors seeking
In the Dietary Supplements market, Zila has
                                                      long-term growth.
performed well with the Phosphagenics prod-
uct and is seeking additional products from
the Company in the next several years.




GG/Cohen Independent Research Group
Tel: 415 454 6985
Fax: 415 455 0295
Email: dpaulco@aol.com:
paul@cohenresearch.com
Web: www.cohenresearch.com




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                                             Page 59 of 74
                                                                        Cohen Independent Research Group




          ANNUAL INCOME STATEMENT WITH FORECAST

                                                     Reported                      Estimated
                                          Dec 01      Dec 02      Dec 03      Dec 04       Dec 05
Net Sales                                   191,287     144,098     179,907     756,915    2,950,000
COGS                                              0           0           0           0      180,000
Depreciation                                 17,843      15,829      17,933      16,898       20,000
Gross Profit                                173,445     128,269     161,974     740,017    2,750,000
S,G&A                                       622,322     642,326     783,439   1,726,036    2,275,000
Research & Development                            0           0           0   1,700,000    4,800,000
EBITDA                                     -431,034    -498,227    -603,532  -2,669,121   -4,305,000
Interest Expense (-)                              0           0           0           0            0
Operating Income                           -431,034    -498,227    -603,532  -2,686,019   -4,325,000
Non-Operating Income (Expense) (+)                0           0           0           0            0
Pretax Income                              -431,034    -498,227    -603,532  -2,686,019   -4,325,000
Provision for Income Taxes (-)                    0           0           0           0            0
Minority Interest (-)                      -808,601  -1,367,527  -1,406,223    -695,318            0
Investment Gains/Losses (+)              -1,503,014    -589,645      16,269           3            0
Other Income (+)                                  0           0           0           0            0
Income from Continuing Operations        -2,742,649  -2,455,399  -1,993,486  -1,990,704   -4,325,000
Extras & Discontinued Operations (+)      1,548,850           0   9,201,573  -5,547,372            0
Net Income                               -1,193,799  -2,455,399   7,208,087  -7,538,075   -4,325,000
Basic Earnings Per Share                      -0.01       -0.02        0.05       -0.02        -0.01
Diluted Net EPS                               -0.01       -0.02        0.05       -0.02        -0.01
Diluted EPS (Before Non-recur items)          -0.02       -0.02       -0.01       -0.01        -0.01
Common Dividend                                   0           0           0           0            0
Dividend per Share                                0           0           0           0            0
Average Basic Shares                    147,181,506 147,483,414 152,927,990 324,291,648 525,000,000
Average Diluted Shares                  147,181,506 147,483,414 152,927,990 324,291,648 525,000,000




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                                             Page 60 of 74
                                                                                                                Cohen Independent Research Group




        SEMI-ANNUAL INCOME STATEMENT WITH FORECAST
                                          6/30/02    12/31/02     6/30/03    12/31/03     6/30/04    12/31/04     6/30/05    12/31/05     6/30/06    12/31/06
Net Sales                                    77,763      66,181      74,683      96,021      86,915     670,000   1,475,000   1,475,000   5,560,000   5,560,000
COGS                                               0          0            0          0            0          0      90,000      90,000     895,000     895,000
Depreciation                                       0     49,653      17,996      15,946      14,497      10,000      10,000      10,000      10,000      10,000
Gross Profit                                 77,763      50,352            0     74,941      80,017     660,000   1,375,000   1,375,000   4,655,000   4,655,000
S,G&A                                       818,202    -177,502     336,739     405,204     498,036   1,228,000   1,137,500   1,137,500   1,900,000   1,900,000
Research & Development                             0          0            0          0            0  1,700,000   2,400,000   2,400,000   3,150,000   3,150,000
EBITDA                                     -740,439     277,507    -318,743    -314,318    -403,522  -2,248,000  -2,142,500  -2,142,500    -375,000    -375,000
Interest Expense                                   0          0            0          0            0          0            0          0            0          0
Operating Income                           -740,439     277,507    -318,743    -314,318    -403,522  -2,268,000  -2,162,500  -2,162,500    -395,000    -395,000
Non-Operating Income (Expense)                     0          0            0          0            0          0            0          0            0          0
Pretax Income                              -740,439     277,507    -318,743    -314,318    -403,522  -2,268,000  -2,162,500  -2,162,500    -395,000    -395,000
Provision for Income Taxes                         0          0            0          0            0          0            0          0            0          0
Minority Interest                          -897,656    -468,087    -448,096    -902,909    -695,318           0            0          0            0          0
Investment Gains/Losses                            0   -589,645            0     16,269            3          0            0          0            0          0
Other Income                                       0          0            0          0            0          0            0          0            0          0
Income from Continuing Operations        -1,638,095    -780,225    -766,839  -1,200,957  -1,098,837  -2,268,000  -2,162,500  -2,162,500    -395,000    -395,000
Extras & Discontinued Operations                   0          0            0  9,201,573  -5,547,372           0            0          0            0          0
Net Income                               -1,638,095    -780,225    -766,839   8,000,615  -6,646,208  -2,268,000  -2,162,500  -2,162,500    -395,000    -395,000
Basic Earnings Per Share                       -0.01      -0.01        -0.01       0.05        -0.04       0.00         0.00       0.00         0.00       0.00
Diluted Net EPS                                -0.01      -0.01        -0.01       0.05        -0.04       0.00         0.00       0.00         0.00       0.00
Diluted EPS (Before Non-recurr items)          -0.01      -0.01        -0.01      -0.01        -0.01       0.00         0.00       0.00         0.00       0.00
Common Dividend                                    0          0            0          0            0          0            0          0            0          0
Dividend per Share                                 0          0            0          0            0          0            0          0            0          0
Average Basic Shares                    147,189,187 151,148,349 151,148,349 172,100,867 172,483,296 476,100,000 520,000,000 530,000,000 530,000,000 540,000,000
Average Diluted Shares                  147,189,187 151,148,349 151,148,349 172,100,867 172,483,296 476,100,000 520,000,000 530,000,000 530,000,000 540,000,000




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                                                            Cohen Independent Research Group




                ANNUAL BALANCE SHEET
Assets                                  12/31/01      12/31/02      12/31/03
Cash & Marketable Securities             1,678,575     1,239,919     1,731,457
Receivables                                 18,135        17,762        49,214
Inventories                                      0             0             0
Other Financial Assets                     122,808             0        10,322
Other Current Assets                             0        12,447        24,175
Total Current Assets                     1,819,518     1,270,128     1,815,168
Gross Property/Plant/Equipment                   0             0             0
Accumulated Depreciation                         0             0             0
Net Property/Plant/Equipment                72,848        67,594        71,732
Investments & Advances                   7,512,386     7,040,569    20,139,333
Deferred Charges                                 0             0             0
Intangibles                                      0             0             0
Other Non-Current Assets                         0             0             0
Other Assets                                     0             0             0
Total Assets                             9,404,752     8,378,291    22,026,233
Liabilities & Shareholders Equity
Accounts Payable                            28,841        17,136        18,813
Notes Payable                                    0             0             0
Current Long-Term Debt                           0             0             0
Current Capital Leases                           0             0             0
Accrued Expenses                                 0             0             0
Income Taxes Payable                             0             0             0
Other Current Liabilities                        0             0             0
Total Current Liabilities                   28,841        17,136        18,813
Mortgages                                        0             0             0
Deferred Charges                                 0             0             0
Non-Current Capital Leases                       0             0             0
Minority Interest                                0             0             0
Convertible Debt                                 0             0             0
Total Long-Term Debt                             0             0             0
Other Long-Term Liabilities                      0             0             0
  Total Long Term Liabilities                    0             0             0
Total Liabilities                           28,841        17,136        18,813
Preferred Stock                                  0             0             0
Net Common Stock                                 0             0             0
Capital Surplus                         17,346,915    19,620,522    29,735,115
Retained Earnings                       -9,519,855   -12,970,071   -19,198,551
Reserves                                 1,548,850     1,710,704    11,470,856
Common Equity                            9,375,911     8,361,155    22,007,420
Treasury Stock                                   0             0             0
Shareholders' Equity                     9,375,911     8,361,155    22,007,420
Total Liabilities and Equity             9,404,752     8,378,291    22,026,233




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                                                                                          Cohen Independent Research Group




                             SEMI-ANNUAL BALANCE SHEET
Assets                              6/30/01      12/31/01      6/30/02      12/31/02       6/30/03     12/31/03      6/30/04
Cash & Marketable Securities         1,856,400    1,678,575    1,565,967     1,239,919     1,178,253    1,731,642    1,247,158
Receivables                             28,050       18,135       38,882        17,762        32,674       49,433       23,453
Inventories                                  0            0            0             0             0            0            0
Other Financial Assets                       0      469,941            0             0             0       18,692       27,544
Other Current Assets                    96,390            0       28,739        12,447        44,009       23,967      446,990
Total Current Assets                 1,980,840    1,819,518    1,633,587     1,270,128     1,254,936    1,815,528    1,730,708
Gross Property/Plant/Equipment               0            0            0             0             0            0            0
Accumulated Depreciation                     0            0            0             0             0            0            0
Net Property/Plant/Equipment            81,600       72,848       74,946        67,594        72,015       71,902       67,600
Investments & Advances               7,757,100    7,512,386    7,008,813     7,040,569     7,867,024   20,139,323   12,356,387
Deferred Charges                             0            0            0             0             0            0            0
Intangibles                                  0            0            0             0             0            0            0
Other Non-Current Assets                     0            0            0             0             0            0            0
Other Assets                                 0            0            0             0             0            0            0
Total Assets                         9,819,540    9,404,752    8,717,345     8,378,291     9,193,976   22,026,753   14,154,696
Liabilities & Shareholders Equity
Accounts Payable                        38,250       28,841        19,723        17,136        37,341      18,725     490,448
Notes Payable                                0            0             0             0             0           0           0
Current Long-Term Debt                       0            0             0             0             0           0           0
Current Capital Leases                       0            0             0             0             0           0           0
Accrued Expenses                             0            0             0             0             0           0           0
Income Taxes Payable                         0            0             0             0             0           0           0
Other Current Liabilities                    0            0             0             0             0           0           0
Total Current Liabilities               38,250       28,841        19,723        17,136        37,341      18,725     490,448
Mortgages                                    0            0             0             0             0           0           0
Deferred Charges                             0            0             0             0             0           0           0
Non-Current Capital Leases                   0            0             0             0             0           0           0
Minority Interest                            0            0             0             0             0           0           0
Convertible Debt                             0            0             0             0             0           0           0
Total Long-Term Debt                         0            0             0             0             0           0           0
Other Long-Term Liabilities                  0            0             0             0             0           0           0
 Total Long Term Liabilities                 0            0             0             0             0           0           0
Total Liabilities                       38,250       28,841        19,723        17,136        37,341      18,725     490,448
Preferred Stock                              0            0             0             0             0           0           0
Net Common Stock                             0            0             0             0             0           0           0
Capital Surplus                     17,305,830   17,346,915    19,121,246    19,620,522    23,171,648 29,735,255 27,438,864
Retained Earnings                   -7,514,340   -9,519,855   -12,131,028   -12,970,071   -16,035,447 -19,197,855 -18,791,532
Reserves                                     0    1,548,850     1,707,405     1,710,704     2,020,434 11,470,629    5,016,915
Common Equity                        9,791,490    9,375,911     8,697,623     8,361,155     9,156,635 22,008,028 13,664,248
Treasury Stock                               0            0             0             0             0           0           0
Shareholders' Equity                 9,791,490    9,375,911     8,697,623     8,361,155     9,156,635 22,008,028 13,664,248
Total Liabilities and Equity         9,829,740    9,404,752     8,717,345     8,378,291     9,193,976 22,026,753 14,154,696




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                                                                        Cohen Independent Research Group




                    STATEMENT OF CHANGES IN CASH
                                                          12/31/01      12/31/02     12/31/03
        Payments to Suppliers and Employees                 -783,975     -715,057     -862,339
        Interest Received                                     97,208       72,110       71,958
        Other Receipts from Non-Operating Activities         148,803       93,423      114,923
        Net GST Movement                                      57,743       42,177       52,604
        Other                                                      0             0            0
        Net Cash from Oper Activities $mil                  -480,221     -507,347     -622,854

        Property/Plant/Equipment ($mil)                       -5,190       -2,963          0
        Subsidiaries ($mil)                                        0            0          0
        Investments ($mil)                                         0     -564,625 -3,050,985
        Cash Inflow from Invest Activites $mil                     0            0     52,429
        Net Cash by Invest Activities $mil                    -5,190     -567,588 -2,998,556

        Issuance of Equity Shares ($mil)                         784     460,868     3,708,090
        Issuance of Debt Securities ($mil)                         0           0             0
        Bank and Other Borrowings ($mil)                           0           0             0
        Dividends and Distributions ($mil)                         0           0             0
        Other Cash from Finan Activities $mil                      0           0             0
        Net Cash by Finan Activities ($mil)                      784     460,868     3,708,090

        Exchange Rate Effect ($mil)                               0             0            0
        Net Change in Cash ($mil)                          -484,626      -614,067       86,679
        Beginning Cash ($mil)                             2,163,202     1,853,985    1,644,777
        Ending Cash ($mil)                                1,678,575     1,239,919    1,731,457


Beginning cash balances differ to prior period ending cash due to the exchange rate differential be-
tween the respective reporting times.




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                                             Page 64 of 74
                                                                                              Cohen Independent Research Group




           SEMI-ANNUAL STATEMENT OF CHANGES IN CASH
                              ACTUAL SEMI-ANNUAL DATA, NOT YTD DATA

Payments to Suppliers and Employees                -411,060   -371,948    -360,640    -353,701    -394,085     -419,692    -475,272
Interest Received                                    55,590     41,487      34,937      37,104      30,006       38,254      33,800
Other Receipts from Non-Operating Activities              0    148,803           0      93,423      60,680       46,766      60,702
Net GST Movement                                          0     57,743           0      42,177      17,337       33,130      37,249
Other                                                58,140    -58,277      42,826     -42,911           0            0           0
Net Cash from Oper Activities $mil                 -297,330   -182,191    -282,877    -223,908    -286,061     -301,542    -343,520

Property/Plant/Equipment ($mil)                      -5,100         -78      -2,818        -140          0             0      -6,898
Subsidiaries ($mil)                                       0           0           0           0          0             0           0
Investments ($mil)                                        0           0           0    -564,625          0    -3,050,985     -51,045
Cash Inflow from Invest Activites $mil                    0           0           0           0          0        52,429           0
Net Cash by Invest Activities $mil                   -5,100         -78      -2,818    -564,765          0    -2,998,556     -57,943

Issuance of Equity Shares ($mil)                       510         273       1,127     459,739            0   3,708,090      53,115
Issuance of Debt Securities ($mil)                       0           0           0           0            0           0           0
Bank and Other Borrowings ($mil)                         0           0           0           0            0           0           0
Dividends and Distributions ($mil)                       0           0           0           0            0           0         690
Other Cash from Finan Activities $mil                    0           0           0           0            0           0           0
Net Cash by Finan Activities ($mil)                    510         273         564     459,739       -1,334   3,708,090      53,804

Exchange Rate Effect ($mil)                               0           0           0           0           0           0            0
Net Change in Cash ($mil)                          -301,920    -181,996    -285,131    -328,933    -287,395     407,992     -347,659
Beginning Cash ($mil)                             2,158,320   1,860,768   1,850,307   1,568,287   1,464,330   1,321,967    1,594,647
Ending Cash ($mil)                                1,856,400   1,678,575   1,565,176   1,239,919   1,176,935   1,731,457    1,246,988


Beginning cash balances differ to prior period ending cash due to the exchange rate differential
between the respective reporting times.




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                                                                 Cohen Independent Research Group




                    REVENUES BY DIVISION

                              Revenues by Division

      50,000,000
      45,000,000
      40,000,000
      35,000,000
      30,000,000
      25,000,000
($)




      20,000,000
      15,000,000
      10,000,000
       5,000,000
              0
                   2004            2005           2006           2007          2008

                                     Nutraceutical       Pharmaceutical




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                                                               Cohen Independent Research Group




                    NUTRACEUTICAL REVENUES

                            Nutraceutical Revenues
       30,000,000


       25,000,000


       20,000,000
(A$)




       15,000,000


       10,000,000


        5,000,000


               0
                     2004         2005          2006           2007          2008

                            ISP     Zila     Non-Zila Supplements        Foods




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                                    Page 67 of 74
                                                          Cohen Independent Research Group




                   OPERATING MARGIN

                              Operating Margin


100.0%

 50.0%                                                                   60.0%
                                                          38.0%
  0.0%                                    -7.0%
          2004         2005            2006           2007           2008
 -50.0%
-100.0%

-150.0%                    -146.6%

-200.0%

-250.0%
-300.0%

-350.0%
-400.0%      -385.4%

-450.0%




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                                                            Cohen Independent Research Group




                   REVENUE GROWTH

                          Revenue Growth

500.0%
450.0%
400.0%
350.0%
300.0%
250.0%
200.0%
150.0%
100.0%
50.0%
 0.0%
         2005                   2006                2007               2008

                Nutraceutical          Pharmaceutical      Total Revenues




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                                                                       Cohen Independent Research Group




     APPENDIX I: GOAL BLOOD LDL LEVELS, AS RECOM-
                  MENDED BY THE AHA


The goal blood LDL level varies, depending on how many risk factors for atherosclerosis the indi-
vidual has. The American Heart Association and the National Heart, Lung, and Blood Institute have
published the following recommendations for goal blood LDL levels (Grundy et al., Circulation.
2004;110:227-39):

•   For high-risk persons (have CAD; or have PAD or a stroke or diabetes and two or more other
    risk factors), the recommended blood LDL goal is less than 100 mg/dL But if the patient has a
    baseline LDL of less than 100 mg/dL, or the risk is very high, a reasonable clinical goal is a
    blood LDL of less than 70 mg/dL.

•   For moderately high-risk persons (have two or more risk factors, with a 10% to 20% 10-year risk
    of death due to CAD), the recommended blood LDL goal is less than 130 mg/dL. The goal is re-
    duced to 100 mg/dL if the patient’s baseline blood LDL is between 100 and 129 mg/dL.
•   For moderate-risk persons (have two or more risk factors, but with a less than 10% 10-year risk
    of death due to CAD), the recommended blood LDL goal is less than 130 mg/dL.



For lower-risk persons (with 0 or one risk factor), blood LDL levels should be maintained below 160
mg/dL.




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                                            Page 70 of 74
                                                                       Cohen Independent Research Group




             GLOSSARY                                Clinical trial: an internationally recognized
                                                     research protocol designed to evaluate the
Analgesia: Absence of sensibility to pain.           efficacy and/or safety of therapeutic agents in
                                                     human subjects.
Analgesic: A medication that relieves pain
without affecting consciousness.                     Complex: A chemical association between
                                                     two compounds.
Antioxidant: A compound that neutralizes
oxygen free radicals, such as Vitamin A, Vi-         Cytokines: Natural protein products pro-
tamin C, Vitamin E and selenium                      duced by immune cells (and some normal
                                                     tissues) during the course of infection. There
Aorta: The largest blood vessel in the body,         are over 50 known cytokines that are grouped
which leaves the heart to supply oxygenated          into different categories. Interleukins, colony
blood to the body.                                   stimulating factors, chemokines, and pro-
                                                     inflammatory agents are all examples of cyto-
Autonomic system: Independent, self-
                                                     kines.
controlling system; a system that does not
require conscious thought to function, such as       Efficacy: the extent to which a specific inter-
the digestive system.                                vention or product produces a beneficial re-
                                                     sult under ideal conditions, such as a well-
Bioavailability: the proportion of a given
                                                     controlled clinical trial; not identical to “effec-
drug dose that is absorbed into the blood-
                                                     tiveness”, which indicates the benefits in real-
stream. Drugs with poor oral bioavailability
                                                     life settings. The effectiveness of a product is
must be given by another route (e.g., trans-
                                                     generally lower than the efficacy.
dermal, intravenous, intramuscular)
                                                     Endothelium: A thin layer of cells lining blood
Chemotactic factor/protein: A natural pro-
                                                     vessels.
tein or chemical product that attracts cells,
commonly produced by immune cells (and               Estradiol: the synthetic form of estrogen, a
some normal tissues) during the course of an         hormone produced by the ovaries, placenta,
inflammatory response.                               and testes to stimulate feminine secondary
                                                     sexual characteristics, growth, and maturation
Cholesterol: the most abundant steroid fat in
                                                     of long bones.
animal tissues and present in food, particu-
larly those that are high in animal fats. Cho-       Excipient: A more or less inert substance
lesterol circulates in the blood, complexed to       used to dilute or transport a drug.
proteins.
                                                     Fibroblast: An elongated, flattened cell com-
Claudication: cramp-like pain and weakness           monly found in connective tissue.
of the leg muscles which causes limping, as
in intermittent claudication, a symptom of pe-       Foam cell: A macrophage that has bound
ripheral arterial disease.                           and absorbed LDL fat; a key cell in the devel-
                                                     opment of an atherosclerotic plaque.

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                                            Page 71 of 74
                                                                           Cohen Independent Research Group


Formulation: in pharmaceuticals, formula-                Intramuscular: Within a muscle.
tion means the totality of the commercially
available drug: its dosage form (tablet, solu-           In vitro: Literally, “in glass”: In an environ-
tion, patch) and the relative concentrations of          ment outside the body, usually in a test tube
all its active and inert ingredients.                    or culture dish, in a laboratory setting.

Free radical: A highly reactive, positively              Invasive: A procedure that requires penetra-
charged, oxygen molecule fragment missing                tion of the body and exposes internal organs
an electron.                                             or structures to the external environment,
                                                         such as surgery.
HDL: High-density lipoprotein. Lipoproteins
are lipids complexed with proteins; the higher           Ischaemia: Deprivation or lack of oxygen,
the density, the lower the fat content. HDL is           usually resulting in tissue damage.
considered the “good” cholesterol.
                                                         Keratinized: Consisting of keratin, a protein
Hydrophilic: readily mixes with and dissolves            present in and forming the main components
in water.                                                of hair, nails, and horns.

Hydrophobic: does not mix with or dissolve               LDL: Low Density Lipoprotein. Lipoproteins
in water.                                                are lipids complexed with proteins; the higher
                                                         the density, the lower the fat content. LDL is
Hypertension: Sustained abnormally high                  considered the “bad” cholesterol.
blood pressure, defined clinically as greater
than 160 mm Hg systolic or 95 mm Hg dia-                 Leukocyte: A white blood cell.
stolic.
                                                         Lidocaine: A topical anesthetic that numbs
Incidence: The number of new cases of a                  the skin before injections or other procedures,
disease or condition for a selected population           also used to relieve pain from shingles.
in one year.
                                                         Lipid-soluble: readily dissolves in lipids, i.e.
Inflammatory response: A tissue reaction to              fats.
irritation, infection or injury, initiated by a se-
                                                         Lipophilic: readily mixes with lipids, i.e. fats.
ries of cellular events that occur in a specific
“cascade” sequence.
                                                         Macrophage: A large white blood cell that
                                                         engulfs bacteria and viruses at the first stage
Insulin: A hormone secreted by pancreatic
                                                         in the development of an immune response.
beta cells that promotes the utilization of glu-
cose, protein synthesis, and storage of fats.
                                                         Monocyte: A specialized white blood cell.
Intermittent: Recurrent, not continuous.
                                                         Mortality: The number of deaths in one year,
                                                         for a defined population, for a specified cause
Intracellular: Within or inside the cell.
                                                         or disease.
Intravenous: Within a vein.


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                                                Page 72 of 74
                                                                        Cohen Independent Research Group


Myocardial infarction: Death of heart mus-            Prevalence: The total number of cases of a
cle cells due to inadequate blood supply;             specific disease during a given time period,
heart attack.                                         including newly diagnosed cases and those
                                                      diagnosed prior to the start of the time period
Myocardium: Heart muscle cells.                       but still being treated during that time.

Neurological: Pertaining to the nervous sys-          Prophylactic: Relating to the prevention of
tem, composed of the brain, spinal cord, and          disease.
nerves.
                                                      Prostaglandin: A lipid-soluble hormone oc-
Non-invasive: A procedure that does not re-           curring in nearly all tissues and possessing a
quire penetration of the body and does not            variety of physiological actions, including in-
expose any internal organs or structures to           creasing blood flow, dilation of blood vessels,
the external environment.                             and in the inflammatory response.

Obesity: Serious overweight, defined clini-           Renal: of the kidney.
cally as a body mass index (BMI – ratio calcu-
lated by dividing the weight in kilograms by          Sebaceous gland: A gland which secretes
the height in meters squared [kg/(m)2]) of 30         fatty material (sebum).
or over.
                                                      Testosterone: a hormone produced by the
Oxidation: A chemical reaction combining a            ovaries, placenta, and testes to stimulate
substance with oxygen, as in free radical oxi-        masculine secondary sexual characteristics,
dation of LDL                                         growth, and maturation of long bones.

Oxidative stress: The increased production            Thrombosis: The presence or formation of a
of oxygen free radicals in the blood.                 blood clot.

Palliative: A treatment or medicine that pro-         Thrombus: A blood clot, located at the point
vides temporary relieve but does not effect a         of its formation, either in a blood vessel or in a
cure.                                                 chamber of the heart.

Phosphate: A salt or ester of phosphoric              Transdermal: Passing through the dermis,
acid; a molecule containing one atom of               the second layer of the skin.
phosphorus and up to four atoms of oxygen.
                                                      USFDA: United States Food and Drug Ad-
Platelet: A small, disk-shaped, colorless             ministration
blood component which plays an important
role in the process of coagulation.                   Vasoconstriction: Narrowing of the lumen of
                                                      blood vessels.
Preclinical: A term used to describe studies
conducted in the laboratory, either in vitro or
in animal models.



                                 (This report may not be reproduced.)
                                             Page 73 of 74
                                                                                         Cohen Independent Research Group


                                                       Disclaimer:


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the particular need of any specific person who may receive this report/release. Investors should seek financial advice re-
garding the appropriateness of investing in any securities or investment strategies discussed or recommended in this re-
port/release and should understand that statements regarding future prospects may not be realized. Investors should note
that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall substantially.
Accordingly, investors may receive back less than originally invested. Past performance is not indicative of future per-
formance. The Cohen Independent Research Group has not entered into a soft dollar agreement with the referred to
company. CIRG does not currently have an investment banking relationship with the company. This report/release has
been prepared in accordance with the Securities and Exchange Commission's rules and amendments, Oct 23, 2000, re-
garding 17 CFR Parts, 240, 243 and 249, (Selective Disclosure and Insider Trading), Regulation FD (Fair Disclosure),
10b5-1, 10b5-2, and NASD Rules 2250, 2420, 2710 and 2711. Phosphagenics has paid a $24,500 fee to CIRG for ana-
lyst research coverage and distribution of research material for a one-year period. This document shall not be copied nor
reproduced in any form without the expressed written and authorized consent of CIRG. Copyright: CIRG and D. Paul
Cohen
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