medgenics (nyse amex: mdgn) - maxim group research report

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EQUITY RESEARCH COMPANY REPORT

Biotechnology

Closing Price (8/22/11): $4.0012-Month Target Price: $8.0052-Week Range: $2.85 - $5.50Market Cap (MM): $38Shares O/S (MM): 9.6 Float (MM): 2.6Avg. Vol. (000) 17Book Value/Share: $0.81Dividend/Yield: NARisk Profile:

FYE: December EPS P/E2010A GAAP ($0.95) N.A.2011E GAAP ($0.71) N.A.2012E GAAP ($0.57) N.A.

LT Earnings Growth N.A.

INSERT PRICE CHART

Source: bigcharts.com

Yale Jen, Ph.D. (212) [email protected]

August 23, 2011

Speculative

Initiation Buy Medgenics, Inc. (MDGN �– AMEX �– $4.00)

Potential game-changing novel platform technology for protein-based therapeutics; Initiating coverage with a Buy rating and a 12-month price target of $8 Medgenics, Inc. (MDGN) is an emerging bio-therapeutic company focusing on the development of its Biopump Platform Technology, which provides sustained released therapeutic protein. The company�’s lead developing products treat anemia, hemophilia, and HCV infection. Based on the company�’s substantial commercial potential, a potential novel game-changing technology, significant near-term milestone events, and what we believe to be underexposed and undervalued shares, we are recommending MDGN with a Buy rating and a 12-month target price of $8.00 for long-term investors that can tolerate speculative risk. Investment Thesis:

Biopump: Potential game-changing technology with substantial commercial potential. Based on encouraging pre-clinical and clinical results, mainly from EPODURE, we believe the Biopump has the potential to be a cost-effective and game-changing technology that delivers biologics in a continuous and autologous manner, revolutionizing the way patients receive drugs (currently, it�’s via repeated injections).

Promising EPODURE clinical results a major proof-of-concept. As a treatment for anemia, EPODURE continuously delivers erythropoietin (EPO) to end-stage renal disease (ESRD) patients, as well as to advanced stage chronic kidney disease (CKD) patients. Robust interim results presented at the 2010 ASN meeting were encouraging; full results should be reported in 4Q11. We believe these results could be an important catalyst for MDGN�’s share value. The potential cost-effectiveness of EPODURE should align well with the interests of patients and payers.

Biopump pipeline has the potential to address a large market and partnership prospects. Other Biopumps under development include one for the treatment of HCV (INFRADURE for INF- ) and another for hemophilia A [HEMODURE for factor VIII in collaboration with Baxter (BAX �– NR)]. The HCV Biopump Phase I/II trial should initiate in 1H12, and Baxter�’s decision is expected in late 3Q11. Biopumps may also be used in many biologic therapeutics, with a multi-billion dollar market potential.

Undervalued and underexposed. Based on our probability-adjusted sum-of-the-parts and comparable analyses (and the fact that the company just went public in the U.S.), we believe that MDGN shares are undervalued and underexposed. We believe MDGN is a potentially high-growth biotech story with speculative risk, but has a possible inflection point in 2011 or 2012.

MEDGENICS, INC. (MDGN)

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CORPORATE PROFILE Medgenics, Inc. (MDGN) 8000 Towers Crescent Drive, Suite 1300 Vienna, VA 22182 (212) 838-3777 http://www.medgenics.com Senior Management Andrew Leonard Pearlman, Ph.D. Founder and CEO Clarence L. Dellio, Chief Operating Officer Baruch Stern, Ph.D. Chief Scientific Officer Phyllis Bellin, Director of Finance and Administration Incorporated: January 27, 2000 Initial Public Offering: April 2011 Employees: 28 full-time employees Company Description. Medgenics, Inc. (MDGN) is an emerging bio-therapeutic company developing its novel Biopump platform technology, which is a continued, autologous delivering system for supplying biologics (and could be a cost-effective alternative for treating multiple diseases). Its lead product EPODURE, which delivers erythropoietin (EPO), is completing a Phase I/II trial as an anemia treatment in advanced stage chronic kidney disease (CKD) patients and end-stage renal disease (ESRD) patients. The company is scheduled to commence a Phase I/II trial for its second product, INFRADURE (which delivers interferon-alpha or INF- as a potential treatment for hepatitis C infection), in 1H12. Investment Risks. Aside from general market and economic risks, key investment risks for MDGN include: 1) the Biopump platform is a novel but nascent-stage technology with very limited clinical validation; 2) Clinical studies might not reach their anticipated outcomes; 3) Sales potential for any in-development products could be significantly different than expected; 4) Biopump being the only product offering could potentially increase risk due to a less diversified portfolio; 5) With major operations outside of the U.S., country-specific activities could affect share value; 6) Lack of cash could impede corporate development; and 7) Thinly traded stock limits shareholder options.

Institutional Ownership: 20% Insider Ownership: 40% Shares Short (000): 2.27

Balance Sheet Summary: $MM (As of June 30, 2011) Equity: $7.31 Assets: $11.92 Long-term Debt: $0 Quarterly EPS 2010 2010E 2012E 1Q $0.28 ($0.06)A -- 2Q ($0.42) ($0.26)A -- 3Q ($0.79) ($0.02) -- 4Q $0.00 ($0.32) -- FY ($0.95) ($0.71) ($0.57)

Quarterly Revenue ($MM) 2010 2011E 2012E 1Q $0 $0A -- 2Q $0 $0A -- 3Q $0 $2.5 -- 4Q $0 $0 -- FY $0 $2.5 $10 Fiscal Year Ends December 31

Analysts Following the Co.: 0 (excluding Maxim Group) Consensus Estimates (GAAP): Current Year: ($0.71) Next Year: ($0.57)

Investor Relations Contact: Anne Marie Fields Lippert/Heilshorn & Associates, Inc. (212) 838-3777 [email protected]


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TABLE OF CONTENTS

CORPORATE PROFILE �…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…...2 SUMMARY AND INVESTMENT CONCLUSION�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�….�….4 COMPANY OVERVIEW�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…6 VALUATION�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…7 ANTICIPATED MILESTONES FOR 2011 AND BEYOND �…�…�…�…�…�…�…�…�…�…�…�…�…�…...�…�…�…�…8 PIPELINE OVERVIEW �…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�….�…�…�…�…9 DISCUSSIONS ON BIOPUMP TECHNOLOGY�…�…�…...�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…....10 DISCUSSIONS ON EPODURE�…�…�…�…�…�…�…�…�…�….�…�…�…�…�…�…�…�…�…�…�…�…�…�…..�…..�…�…...�…12 DISCUSSIONS ON INFRADURE�…�…�…�…�…�…�…�…�…�….�…�…�…�…�…�…�…�…�…�…�…�…�…..�…..�…�…...�…18 DISCUSSIONS ON HEMODURE AND OTHER PIPELINE DEVELOPMENTS�…�…�…�…�…�…�…....�….21 RISKS�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…..24 MANAGEMENT �…�…�…�…�…�…�…�…�…�…�…�…�…�…�…...�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…25 FINANCIAL MODELS�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…..26


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SUMMARY AND INVESTMENT CONCLUSION

We are initiating coverage of Medgenics, Inc. (MDGN) with a Buy rating and a 12-month price target of $8.00 Medgenics, Inc. is emerging bio-therapeutic company that leverages its proprietary Biopump platform technology to deliver therapeutic protein continuously as a new treatment modality. The company�’s lead products are EPODURE (erythropoietin or EPO), HEMODURE (Factor VIII), and INFRADURE (interferon-alpha or INF- ) �– potential treatments for anemia, hemophilia, and hepatitis C, respectively. Biopump is a novel platform technology with substantial commercial potential. Biopump is a proprietary and unconventional gene therapy platform that genetically manipulates patients�’ own excised dermal tissues via an ex vivo process; the modified tissue, or so-called micro-organ (MO), is subsequently implanted back to patient to continuously produce and deliver therapeutic protein. The company developed a proprietary device called the DermaVac to facilitate a more reliable and straightforward removal of MOs and implantation of Biopumps. The procedure is quick (it takes 10 to 14 days to generate therapeutic proteins) and only requires local anesthesia. Patient dosing can be flexible and can be customized with potential additions or ablation of the number of MOs in order to achieve desired therapeutic effect. The major advantage of the Biopump is avoiding the shortcomings of the current protein bolus injection methods, which include 1) frequent injections; 2) higher costs; and 3) varying adverse effects and sub-optimal effectiveness due to the changing peak and trough drug levels in plasma. Further, the Biopump�’s potential personalized therapeutic benefits and cost advantages would appeal not only to the patient and physician, but also to the payers. The Biopump platform could also potentially be used for a broad range of therapeutic proteins and, therefore, possibly be a game-changer in the current treatment paradigm, in our opinion.

Promising EPODURE clinical results demonstrated first proof-of-concept, boding well for a potential positive upcoming data release. The lead Biopump product, EPODURE, continuously delivers erythropoietin (EPO) to treat or prevent anemia in patients suffering from advanced stage (III and IV) chronic kidney disease (CKD). The global sales of erythropoiesis-stimulating agents (ESAs) used in nephrology (which include EPO) was approximately $5.4+ billions in 2010, but the dollar value of this market is expected to decline over the next few years, due to several negative developments in the U.S. These developments include: a) the implementation of reimbursement bundling by Medicare and Medicaid Services (CMS), which started on January 1, 2011; and b) FDA�’s tightening of the hemoglobin (Hb) range allowed in patients with end-stage renal disease (ESRD) and in advanced CKD patients (to 10-11g/dL, from the prior 10-12 g/dL); hence, a potential reduction of ESAs uses. Given that the number of ESRD and advanced CKD patients is expected to increase going forward due to aging demographics across the globe, we believe that a better and cost-effective hemoglobin management approach could gain market share, potentially at the cost of the bolus-delivered ESA market. Medgenics has demonstrated encouraging interim results from an ongoing Phase I/II trial evaluating EPODURE in anemia prevention in anemic CKD patients. In 12 treated patients, hemoglobin levels were controlled within the 10-12 g/dL range for varying lengths of time. We believe the company will present top-line results for all patients in 4Q11. If positive, these results could be a substantial catalyst for MDGN shareholders, in our opinion. The company could also commence a Phase IIb trial in ESRD patients in 2012.

The Biopump pipeline has the potential to address a large market and spark partnership interest. In addition to EPODURE, two Biopumps in development include INFRADURE (interferon or IFN for hepatitis C infection) and HEMODURE (factor VIII for hemophilia A). Preclinical results of INFRADURE are encouraging and show clinical validity for the modality of continuously delivered IFN as Medtronic (NTD �– NR) conducts a Phase II study for delivering Intron A via its insulin pump as a treatment for HCV infection. INFRADURE could potentially be even more cost-effective. Medgenics is planning to initiate a Phase I/II trial in 1H12 to evaluate INFRADURE as a potential HCV treatment. Baxter (BAX �– NR) is in collaboration with Medgenics for a development of HEMODURE as a potential treatment or prophylactic for hemophilia A. We believe Baxter will make a go/no-go decision in late 3Q11, and if positive, will continue negotiations with Medgenics to possibly advance the program into human clinical studies. Based on the continued delivery, self supply, and possible lower cost nature of the Biopump platform, many protein-based (biologics) therapies


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could benefit from this novel alternative delivery system. Together, they potentially represent multiple billion dollar markets, and we believe the company is actively seeking additional opportunities going forward.

Undervalued and underexposed shares provide upside, and timing is favorable. Based on our probability-adjusted sum-of-the-parts and comparable analyses (and the fact that the company just went public in the U.S.), we believe that MDGN shares are currently undervalued and underexposed. As such, we believe that MDGN is a potentially high-growth biotech story with speculative risk, but has a possible inflection point in 2011 or 2012.


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COMPANY OVERVIEW

Medgenics was incorporated as a Delaware corporation on January 27, 2000. The company�’s principal executive offices are located at 8000 Towers Crescent Drive, Suite 1300, Vienna, Virginia 22182; however, the company conducts research and development activities primarily at its Israeli location in Misgav Business Park, Misgav, Israel. Medgenics is a developmental-stage, bio-therapeutic company initially listed and traded on the AIM Market in the U.K. in December 2007, and the volumes and trading of its common stock has been relatively sporadic. In April 2011, the company issued an initial public offering in the U.S with net proceeds of approximately $10.6MM. The company is developing a novel platform technology, Biopump, as a continuous and autologous delivering system for supplying therapeutic biologics as a potentially cost effective alternative treatment modality. Its lead product, EPODURE, delivers erythropoietin (EPO) and is completing a Phase I/II trial as an anemia treatment in advanced stage chronic kidney disease (CKD) or in end-stage renal disease (ESRD) patients. The second product, INFRADURE, delivers interferon-alpha or INF- and is scheduled to commence a Phase I/II trial, possibly in 1H12 as a potential treatment in hepatitis C (HCV) infection. The company is also in collaboration with Baxter (BAX �– NR) for the evaluation of a pre-clinical stage HEMODURE, which should deliver factor VIII continuously as a potential treatment for hemophilia A (with a decision potentially in late September 2011).


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VALUATION

We have elected to use sum-of-the-parts and comparable analyses as the two major valuation metrics to derive our valuation for Medgenics. Together, we are recommending MDGN shares with a Buy rating and a 12-month target price of $8 for long-term-oriented investors that can tolerate speculative risk.

Based on our probability-adjusted sum-of-the-parts analyses, our 12-month fair value for MDGN shares is $7.89 (Figure 1). Without insight as to whether the company will establish its own marketing and sales teams, we assume the company will partner out all current in-development programs with milestone payments and royalties as its major method for generating revenue. Figure 1: Sum-of-the-parts analysis

EPODURE AnemiaTotal NPV = 194.4

Probability = 37%Prob. Adj. NPV = 72.7

Value per share = $5.68 72%

INFRADURE HCVTotal NPV = 57.9



HEMODURE hemophilia ATotal NPV = 34.4


Value per share = $0.56 7%Other Biopump pipeline


Debt-free cashValue in Mid-2012 = 0.0


Total = $7.89 100%

Source: Maxim Group LLC research For our comparable analysis, we have used a peer group comprised of mid-stage cell therapy and anemia product development companies, especially given that Medgenics remains in a relatively early stage of development. Judged from an on par enterprise value (technology value), MDGN could trade at $8.20 as a fair value. Figure 2: Comparable peer analysis

Pluristem Therapeutics PSTI 3.34 42 140 45 0 95 Phase III Stem cell in cardio and orthopediatric

Affymax AFFY 6.59 35 233 142 0 91 Filed NDA Anemia in ESRD patients

Athersys ATHX 2.60 24 61 25 0 36 Phase II Stem cells in cardiovascular, CNS and inflammation

Neostem NBS 0.81 80 65 32 0 33 Phase II Stem cells in cardiovascular and orthopedatric in China

Aastrom ASTM 2.62 39 101 15 0 87 Phase II Stem cells in cardiovascular

Average 165 47 0 68

Medgenics MDGN 4.80 10 46 10 0 36 Phase II Anemia

MDGN per share fair value matching its cell therapy and anemia peers = $8

Potential upside = 71%

Tech Value ($ MM)

Stage of Most Advanced Product

Major Indication of Advanced Products

Shares Outstanding

(MM)

Market Cap ($ MM)

Cash ($ MM)

Debt ($ MM)Company Ticker Share Price

($) (8/2/11)

Source: Bloomberg, Thomson Analytics and Maxim Group LLC research


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ANTICIPATED MILESTONES FOR 2011 AND BEYOND

Program Indication Event Timing

Possible release Phase I/II trial top-line results Nov. '11

Potential partnership 2011 / 2012

Potential commence Phase IIb trial on ESRD patients 2012

HEMODURE Hemophilia Potential Baxter decision on option for 6-month negotiation with MDGN Sep. 30, 2011

INFRADURE HCV infection Potential commence Phase I/II trial 1H12

Chronic kidney disease (CKD) with anemia

EPODURE

Source: Company reports and Maxim Group LLC research


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PIPELINE OVERVIEW

MDGN has a broad Biopump product pipeline, covering several disease indications. These products are lead by EPODURE for anemia in patients suffering from advanced stages of chronic kidney disease (CKD), as well as INFRADURE for hepatitis C infection and HEMODURE for hemophilia A. Figure 5 details the development pipeline. Figure 5: MDGN Pipeline Overview

Product Indication Preclinical Phase I Phase II Phase III Filing Launched Partnered

EPODURE CKD patients with anemia

INFRADURE Hepatitis C infection

HEMODURE Hemophilia A Baxter

Source: Company data and Maxim Group LLC


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DISCUSSIONS ON BIOPUMP TECHNOLOGY

Biopump could be a paradigm-changing technology for biologics-relevant therapeutics Biopump technology is a novel and unconventional gene therapy that utilizes toothpick-size slivers of the patient�’s dermal tissue, transfected with an engineered gene to produce and secrete a therapeutic protein continuously. The transfected tissue is called the micro-organ (MO), since it acts as a basis of the biological pump to supply therapeutic protein. Medgenics has developed a proprietary device called DermaVac to facilitate removal of MOs and the implantation of Biopumps. The process starts with harvesting a patient�’s dermis tissues under local anesthesia and is followed by transfection of the Adenoviral gutless vector-carrying gene for the desired protein ex vivo for 10 to 14 days. After determining the level of protein expressed in each Biopump, each MO will be washed for several days to remove excess viral vector. Based on each patient�’s particular dosage need, the company would determine the number of Biopumps needed to be inserted under the patient�’s skin (Figure 1 and 2). After the initial implant, the protein dosages can be further adjusted by adding or ablating Biopumps to provide personalized dosing requirements for each patient. The expected life of a Biopump may exceed six months, with sustained local delivery of protein. Further, Medgenics has demonstrated that Biopumps can be transported over long distances with maintained viability, and the company is developing devices to automate and scale up the cost-effective production of Biopumps in local or regional processing centers. Figure 1: The process of generating Biopump

ab

cd

ef

g

hi

a – Harvest dermis tissue

(“micro-organs”) from patient.

b – Transfer to processing station.

c – Adenoviral gutless vector carrying

gene for desired protein.

d – Process each micro-organ into

Biopump.

e – Biopump producing protein.

f – Measure daily protein production per Biopump for dosing.

g – Wash several days to remove

vector.

h – Re-implant Biopumps

subcutaneously per dosing.

i – Sustained local delivery of protein for

life of cells in Biopump (> 6 months).BioCryo

ab

cd

ef

g

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Biopump.




vector.




life of cells in Biopump (> 6 months).

ab

cd

ef

g

hi

ab

cd

ef

g

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Biopump.




vector.




life of cells in Biopump (> 6 months).BioCryo

Source: Company reports Figure 2: The size of a Biopump (left) and example of the sites of tissue harvest and implantation (right)

Source: Company reports


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Well protected intellectual property estate for Biopump technology. Medgenics owns and licenses the Biopump Platform Technology patent portfolio, which contains 10 issued patents and 53 pending U.S. and international patent applications. With a continuous, autonomously produced therapeutic protein, Biopump�’s value proposition could be realized on several fronts (Figure 3):

Lower treatment costs �— Given the autonomous and continuous nature of Biopumps, the system could incur lower costs for developers (and could potentially be transferred to patients and payers) compared to the conventional cost structure of biologics production, which incurs fixed (such as capital manufacture equipments) and variable (production and operational) expenses. Per-patient cost of the Biopump could be even further reduced if the company scales up and automates the manufacturing of Biopumps in regional centers.

Reduced side effects and improved safety �— The Biopump can potentially deliver therapeutic

protein within a pre-determined, narrow, and relatively steady dose range. Compared to repeated bolus delivery, this could potentially reduce adverse effects due to the transient peak level of the conventional injection administration (Figure 3). Therapeutic protein from the Biopump would be similar to the patient�’s endogenous counterpart, since it is produced by the patient�’s own protein production machinery and therefore, would be potentially safer and trigger less of an adverse immune response.

Figure 3: Major benefits of Biopump vs. repeated bolus injections

Protein concentration in serum

Injection overshoot – Adverse side effects EPO: Cardiovascular RiskIFN-a: Severe flu symptoms

# of Days

Injection undershoot

(No Effect)

Therapeutic window

Biopump Sustained Clinical Dose

Injected dose in range

..

Missed injection

Protein concentration in serum

Injection overshoot – Adverse side effects EPO: Cardiovascular RiskIFN-a: Severe flu symptoms

# of Days

Injection undershoot

(No Effect)

Therapeutic window

Biopump Sustained Clinical Dose

Injected dose in range

..

Missed injection


Improved patient compliance and increased chronic disease management efficacy �— With only two visits to the clinic typically needed for Biopump procedure (one for MO harvesting and the second for Biopump implantation), we believe that patient treatment compliance would be better than having frequent injections over an extended period. In addition, with a more consistent and sustained production and delivery of therapeutic protein (over six months via a single administration), Biopump could potentially reduce a shortcoming of the bolus injection as the serum protein concentration at the trough level could exhibit insufficient therapeutic impact. As such, Biopump could potentially be a more efficacious treatment than the current method of repeated bolus injections.

Flexible dosing and the personalization of medicine �— One major differences between conventional

gene therapy and the Biopump is that Biopump treatment is reversible; it can be ablated by a laser, radiofrequency needle, or local surgical removal to reduce or halt protein production and secretion. With such versatility, it is possible that Biopump would be customized as �“personalized medicine.�”


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DISCUSSIONS ON EPODURE

MDGN�’s lead product, EPODURE, has exhibited promising (though still early) clinical results Medgenics�’ lead product, the EPODURE Biopump, is designed to deliver erythropoietin (Epoetin alfa, or EPO) to prevent anemia in both end-stage renal disease (ESRD) patients and advanced stage (III and IV) chronic kidney disease (CKD) patients. EPO belongs to a class called erythropoiesis-stimulating agents (or ESAs), which interact directly with the EPO receptor on the red blood cell (RBC) surface, triggering activation of several signal transduction pathways, resulting in the proliferation and terminal differentiation of erythroid precursor cells. Advanced CKD and ESRD patients suffer from anemia since they have experienced endogenous erythropoietin production insufficiency, caused by a decrease in red blood cells production in the bone marrow �– one of results from their damaged kidney. The United States�’ current standard of therapy for anemia management in ESRD patients is to inject Epogen three times per week or once a week with Aranesp to maintain hemoglobin (Hb) levels exceeding 10 g/dL. Both products are developed by Amgen (AMGN �– NR); and Epogen has a half-life of approximately eight hours, while Aranesp has a half-life of 25 hours. In Israel, Medgenics is conducting a Phase I/II proof-of-concept, dose-ranging trial to evaluate EPODURE for the management of anemia in anemic CKD patients. The study should enroll 18 anemia CKD stage III and IV patients with estimated GFR of 15-60 ml/min, assigning patients to one of the three dose cohorts: low (18-25 IU/kg/day), intermediate (35-45 IU/kg/day), or high (55-65 IU/kg/day). EPODURE is produced by ex vivo transduction of MOs, with helper dependent Adenoviral EPO vectors (HDAd-EPO) that express and secret EPO. Patients will undergo six months of treatment, followed by a six-month observation and possibly non-trial extension. The trial�’s primary endpoint is safety (including adverse events, immune response determined by the presence of anti-EPO antibodies, and dermal safety outcomes). Secondary endpoints include elevation of serum EPO levels: at least 10 mU/ml above the baseline for a duration of at least six weeks following implantation. At the annual American Society of Nephrology (ASN) meeting in November 2010, Medgenics reported encouraging interim results, suggesting that EPODURE is safe and doseable �– and that it doesn�’t generate an antigenic response. Further, clinical feasibility has been demonstrated with a single EPODURE administration; it raised and maintained hemoglobin levels for up to 24 months (29 months after the most recent update) without further ESA injection. Figure 4 illustrates the results in 12 patients (six receiving low doses and six receiving intermediate doses), with Hb reaching and maintaining the pre-determined 10-12 mg/dL range. The observation period of sustained hemoglobin elevation in most patients (10 out of 12) exceeded three months; five exceeded five months. Patients were both injected-EPO naïve and experienced (Figure 5) and have retained a stabilized Hb levels within the accepted range. Figure 6 illustrates the patient demographic presented at the 2010 ASN meeting. Figure 4: Interim results from the low (left) and intermediate (right) dose groups of the EPODURE Phase I/II study in anemic CKD



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Figure 5: Interim results from individual patients in the EPODURE Phase I/II study in anemic CKD

EPO Injections EPODURE

Estimated baseline 100 days after last injection

EPO Injections EPODURE

Estimated baseline 100 days after last injection

EPO Injections EPODUREEPO Injections EPODURE

EPODUREEPODURE EPODUREEPODURE

Source: Company reports It should be noted that these encouraging interim results were based on a sub-optimal trial protocol, as patients could only be assigned a fixed dose of EPODURE (low or intermediate), instead of customized and subsequently adjustable doses (which could potentially better meet the needs of each patient). A recent update indicated that the study has recruited 14 patients �– six to receive low doses, seven to receive mid-range doses, and one to receive high doses of EPODURE. Recruitment is ongoing. Figure 6: Patient demographics of the Phase I/II trial

Source: Besarab, A., et.al., ASN 2010 presentation We anticipate the company to provide additional updates on the Phase I/II trial in 2H11, possibly at the annual meeting of American Society of Nephrology in November 2011. We believe the company will provide results from all patients, as well as treatment effect durations reported last year. Should the outcome be robust, we would view it as a pivotal event for MDGN�’s share value appreciation. We also believe that positive Phase I/II trial results could lead to a commencement of a Phase IIb trial (potentially in 2012) to evaluate EPODURE�’s ability to manage anemia in ESRD patients by maintaining Hb


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levels. We believe the company is currently preparing for an Investigational New Drug (IND) discussion with the FDA to launch a Phase IIb trial in the U.S. Several modifications might be in place:

Based on recently issued guidance by the FDA (in June 2011), the target Hb range would likely be between slightly lower than 10 gm/dL to up to 11 gm/dL, instead of the prior 10 gm/dL to 12 gm/dL.

EPODURE dosing may be more flexible, allowing optimization for each patient�’s needs, instead of a fixed dose regimen.

Patients may mainly be ESRD (stage V CKD), instead of stage III or IV CKD. Major benefits of EPODURE compare to the current standard of care in anemia management Compared to the current standard of care, we believe the EPODURE Biopump could exhibit the following advantages:

Better safety and efficacy: With the potential for Hb levels to be stabilized at a more narrow range over a longer period, patients could potentially avoid hemoglobin cycling (which is often experienced in patients with periodic injections of EPO). Further, more consistent and durable delivered Epogen could also prevent potential adverse effects, such as hypertension or emboli (which can occur from overshooting EPO during repeated injections). In addition, a more reliable and sustained EPO could potentially prevent trough EPO levels, with sub-par efficacy and better compliance compared to repeat visits to clinics for injections.

Cost savings: With a continuous, self-supplied EPO potentially exceeding six months, the costs of

EPODURE could be lower than repeated injections of ESAs (based on high-fixed and continued variable costs of biologics facility construction and operations). Further, it could potentially reduce the frequent clinic visits needed. Cost savings could become increasingly more important under the current financially challenging healthcare system in the U.S. As such, dialysis service reimbursement offered by the Centers for Medicare & Medicaid Services (CMS) is under a bundling structure, instead of the prior separated billing system, as ESAs has accounted for $2 billion per year as a major drug expense for dialysis payment �– a circumstance that could potentially bode well for the outlook of EPODURE, in our opinion.

Anemia in nephrology market landscape: According to the United States Renal Data System (USRDS), there were approximately 550,000 patients suffering from ESRD (Figure 7) with annual incidences exceed 100,000 (Figure 8) in 2008 in the U.S.,. With an aging demographic in the U.S., USRDS estimates that the prevalence could reach 800,000 by 2020, and annual incidences could reach 143,000 (Figure 9). Figure 7: The U.S. ESRD prevalence and Y/Y growth rate

ESRD prevalence and Y/Y growth rates in the U.S.

0

150,000

300,000

450,000

600,000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Patie

nt S

ize

0%

5%

10%

15%

20%

Sources: USRDS, the U.S. Census and Maxim Group LLC


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Figure 8: The U.S. ESRD annual incidences and Y/Y growth rate

ESRD incidences and Y/Y growth rates in the U.S.

0

20,000

40,000

60,000

80,000

100,000

120,000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Patie

nt S

ize

-2%

1%

4%

7%

10%

13%

16%

Sources: USRDS, the U.S. Census and Maxim Group LLC Figure 9: Projected U.S. ESRD prevalence (left) and annual incidences (right) by 2020

Sources: USRDS and Maxim Group LLC Anemia is a common complication of ESRD patients who undergo dialysis (approximately 70%), mainly due to the fact that their kidneys no longer produce adequate amounts of erythropoietin (EPO) �– a principal factor that stimulates red blood cell production in bone marrow. The major treatment is to supplement patients with ESAs. The same types of agents are also used for anemia resulting from cancer, HIV infection, and other causes. However, some cardiovascular adverse effects from ESAs were recently identified, and reimbursement is increasingly being tightened, so sales of ESAs have been in decline over the last two years �– and we believe this trend could continue near term. The global sales for ESAs were approximately $5 billion in 2010, and we estimate three-quarters of sales might come from nephrology use (Figure 10) �– the majority of which are ESRD (dialysis) patients, while a much smaller portion are advanced CKD (pre-dialysis) patients. Amgen (AMGN �– NR), Johnson and Johnson (JNJ �– NR), and Roche (RHHBY �– NR) are major players in the ESAs market, with biosimilars in Europe accounting for a minor position. Further, an NDA for Hematide from Affymax (AFFY �– NR) and Takeda (4502 �– NR) was recently filed (with a potential FDA decision in 2012). Figure 10: Global anemia in nephrology market in 2010

Company Product Global nephrology sales ($)

EPOGEN 2.5 B

Aranesp ~500 MM

Johnson and Johnson Procrit / Eprex ~400 MM

Roche NeoRecormon /Mircera ~200 MM

Biosimilars < 100 MM

Total global ESAs in nephrology ~3.7 B

Amgen

Sources: Amgen presentation, SEC filings and Maxim Group LLC


Maxim Group LLC 16

Payment bundling and narrowed therapeutically-benefited Hb levels should have near-term impacts Bundling payment. In the United States, it is estimated that the vast majority (about 60% to 65%) of ESRD-related management, particularly dialysis and accompanied treatments, are paid for by the CMS. The initial Medicare payment method includes a flat rate dialysis associated service (which accounted for nearly 60% of expenses, or $4.8 billion, in 2005) and a separate bill for certain Part B drugs (EPO, IV iron, and vitamin D) and lab tests (which accounted for 40%, or approximately $3.2 billion, in 2005 �– and of which ESAs accounted for more than $2 billion). In 2008, the total combined ESRD-related related services (CMS and private health plans), including hospitalization, were $39.5 billion. With continued increases in use of ESAs, the payment method has created an incentive to potentially over-utilize those drugs for many dialysis providers, and Congress has called upon CMS to develop a plan to bundle ESAs and other separately billable drugs into a single case-mix adjusted payment to dialysis facilities. As of January 2011, CMS started to implement a bundled ESRD payment system. The base payment rate per patient is $230 per treatment, compared to the prior dialysis portion rate of approximately $130. The industry (dialysis center) has the option to phase-in the bundling system over a four-year period till January 1, 2014 and for each year, 25% of the total industry needs to adapt. A current survey suggested that the majority of facilities might immediately adapt to the bundling payment system instead of going through a more gradual transition. Overall, the implementation of the bundling payment system is likely to continue to reduce the use of ESAs over the next few years. Further, dialysis providers are likely to seek more cost-effective ESA alternatives to replace the current standard of care. As such, we believe this landscape should bode well for EPODURE, given its potential cost and efficacy advantages. Therapeutically benefited Hb level narrowed. In June 2011, the FDA changed the label for Epogen and Aranesp and narrowed the desired hemoglobin (Hb) range for chronic renal failure patients to 10-11g/dL, from the prior range of 10-12 g/dL, due to clinical studies that demonstrated that patients risked experiencing death or sAE of cardiovascular reaction and stroke if they were administrated ESAs to target Hb levels of greater than 11g/gL. Although the new guidelines also potentially would like to reduce the use of conventional ESAs, we believe this could also potentially provide additional opportunities for EPODURE, given that its preliminary data has demonstrated that it can deliver EPO of a narrowed range over a long period of time. The global market for anemia treatment in nephrology is also substantial, in our opinion. According to a report by Fesenius Medical (FNEG �– NR), the global dialysis population in 2008 was 1.76 million, with the top five countries (the U.S., Japan, China, Brazil, and Germany) accounting for 52% (916,000) and the top 15 countries accounting for 75% (approximately 1.3 million) (Figure 11). The dialysis process also can be divided into two types: hemodialysis (HD) and peritoneal dialysis (PD). HD removes waste from the blood through a hemodialysis machine, usually three times per week for about 3 to 4 hours for each treatment (which typically occurs in dialysis center). More infrequently, HD can be carried out at home (the patient might own the machine and do procedures on a daily basis, typically for 2 hours six days a week). Peritoneal dialysis uses the patient's peritoneum in the abdomen as a membrane to remove waste from the blood. PD is frequently conducted at home as well as other locations, such as the workplace. HD accounts for the dominant majority of dialysis in most countries (Figure 11). Emerging home dialysis trends could bode well for EPODURE. With increased pressure from healthcare cost reductions for renal failure patients, a growing trend is emerging: Patients are seeking ways to get dialysis treatment at home, instead of in the dialysis clinics (or to at least reduce the visits). One of the major challenges for home dialysis practice is for patient to receive needed medications, especially for anemia management given self administration of EPO safely and appropriately is more difficult to accomplish. As such, we believe that EPODURE could potentially overcome some hurdles in home anemia management for ESRD patients, given that patients could potentially maintain sufficient EPO without repeated dosing, either through visiting clinics or by self-administration. Lower costs could be another big advantage.


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Figure 11: Global anemia market in nephrology (2010)

Sources: Fresenius Medical Care 2009 presentation


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DISCUSSION ON INFRADURE

INFRADURE Biopump development INFRADURE is a Biopump that continuously produces interferon as a potential treatment for hepatitis C virus (HCV) infection. Interferon-based therapies have been the mainstay of HSV treatment, and its use is expected to continue going forward. The company presented two posters at the 2010 European Association for the Study of the Liver (EASL) annual meeting, highlighting results from INFRADURE pre-clinical in vitro and SCID animal model studies. Based on the Intron-A package insert, daily need for interferon (IFN ) is 5 g/day; however, the current INFRADURE has demonstrated that it could secrete IFN at approximately 1 g/day. In an in vitro study, researchers could generate adjusted levels of INFRADURE potency based on titration of vector concentration (Figure 12, left) and exhibited sustained IFN production over an eight-month period (Figure 12, right). Figure 12: In vitro INFRADURE expression levels can be adjusted through varying vector concentration (left), and sustained IFN production (right)

1

10

100

1000

10000

6 9 16 27 37 48 62 76 97 118 139 160 181 202 223 244

IFN n

g/Biop

ump/d

ay

Days from harvesting

INFRADURE Long term in-vitro production

TiTime to Implant

in Patient

1

10

100

1000

10000

6 9 16 27 37 48 62 76 97 118 139 160 181 202 223 244

IFN n

g/Biop

ump/d

ay

Days from harvesting

INFRADURE Long term in-vitro production

TiTime to Implant

in Patient

TiTime to Implant

in Patient

Source: Company reports From a SCID mouse animal model study, two different doses that anticipated expressing 1300ng/day and 4000ng/day of human IFN have demonstrated continued expression, with declines exceeding 100 days (Figure 13). Continued decreased protein production over time was also observed in prior EPODURE SCID animal model studies, but appropriate levels of EPO production were accomplished in patients. The reduced and declined production of human protein in the animal models could be due to the mouse�’s ability to reduce the exogenous protein to diminish the negative impact of these proteins on its normal functions. Further, a dose-dependent relationship between expression levels and bio-activities was also demonstrated in the animal model (Figure 14). Figure 13: In animal model, INFRADURE demonstrated sustained expression of human IFN



Maxim Group LLC 19

Figure 14: Dose-dependent relationship between expression level and bio-activities

Source: Company reports The company is planning to commence a Phase I/IIa trial (possibly in 1H12) to evaluate INFRADURE�’s potential as an alternative to the weekly injection of interferon as a HCV treatment. We anticipate that the company will provide more details going forward. Continuously delivered interferon could be more beneficial in HCV treatment The major value proposition for delivering interferon continuously over the treatment period in HCV therapy is to reduce some of the adverse effects, which have been major obstacles for patients taking treatment due to serious intolerability. Two developments have provided validity for this thesis: 1) Research conducted by Dr. Steve Schenker and colleagues 1 demonstrated that patients reported better tolerability via continuous subcutaneous infusion of IFN b compare to three times weekly injection of Intron A and with similar efficacy between the two methods; and 2) Metronic�’s (MDT �– NR) current development for delivered interferon continuously via the company�’s insulin pump. Medtronic�’s COPE-HCV Phase II trial underway Medtronic is conducting a Phase II trial (COPE-HCV or COntinuous Interferon Delivery via the Medtronic Paradigm Pump Infusion System Clinical Evaluation for Chronic HCV) that evaluates interferon delivered via an external pump infusion system to treat patients with hepatitis C virus (HCV) infection. Medtronic commenced the study in September 2009. This trial is a single blind, 250+ patient study designed to evaluate Intron A delivered in one of three doses via continuous subcutaneous infusion through the MiniMe Paradigm Insulin Pump Infusion System for 48 weeks. All patients will also concurrently receive oral ribavirin (Rebetol). The comparator should be patients receiving the standard of care of 1.5 g/kg PegIntron subcutaneous weekly plus oral ribavirin (Rebetol) for 48 weeks. The study is designed as a first line treatment for hepatitis C genotype 1 patients. The primary endpoint is the incidence of sustained virologic response (SVR) at 24 weeks after treatment is completed, as well as safety and tolerability. Secondary endpoints include rapid virologic response (RVR), early virologic response (EVR), end-of-treatment response (EOT), PK, PD and functional health, depression score, and fatigue level. We estimate that the top-line results potentially could be available in late 2011 or early 2012. We believe a positive outcome from the COPE-HCV trial could afford a substantial validation of continuously delivered interferon �– a better modality for HCV treatment, in our opinion. Commencement of the COPE-HCV trial is on the heel of a completed European SCIN-C Phase II study. This is a randomized, open label, and 30-patient study to evaluate three doses (12, 9, or 3 MU) of IFN 2b delivered daily via an insulin pump in hepatitis C genotype 1 patients unresponsive to (peg) interferon/ribavirin therapy. The treatment duration lasts 48 weeks, and patients also take ribavirin (15 mg/kg/day). Primary endpoints are

1 Schenker, S., et. al., J of Interferon and Cytokine Research, 17:665 �– 670 (1997)


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safety and tolerability of high-dose continuously, subcutaneously infused IFN- 2b. Secondary endpoints include 1) HCV RNA negativity at week 48, as well as 24 weeks after end of treatment; 2) biological activity of IFN-a2b; 3) PK; 4) HCV-specific immune responses; and 5) quality of life assessment. Hepatitis C virus (HCV) treatment market landscape: Hepatitis C virus (HCV) is a RNA-based virus that targets liver cells. According to the Centers for Disease Control and Prevention (CDC) analysis, HCV infection incidences were high before early 1990 due to contamination from blood transfusions prior to well established blood screenings. Annual incidences have since been in decline over the subsequent years, with estimated incidences of 18,000 in 2008. The majority of infected patients (>70%) has developed chronic infection with a propensity causing varying levels of scarring of the liver (fibrosis and cirrhosis) (Figure 15). The CDC estimated that the prevalence of chronic HCV infection in the U.S. is 3.1 million. According to World Health Organization (WHO), global prevalence for chronic HCV infection is 130 to 170 million, with an estimated 3 to 4 million annual incidences and 350,000 deaths due to HCV-related liver diseases each year. With an asymptomatic and chronic nature of the disease, HCV infection is substantially under-diagnosed. Figure 15: Natural history of HCV infection

Sources: CDC and Maxim Group LLC The current standard of treatment for HCV is a combination of pegylated interferon and orally administrated ribavirin (PEG/RBV). Treatment duration for patients diagnosed with genotype 1 (approximately >70% of total HCV infections in the U.S.) was up to 48 weeks, with only of 50% success (determined by SVR or sustained virologic response, which is a measure for eradication of the virus at 24 weeks after the completion of treatment). Treatment duration for patients infected with genotypes 2 and 3 HCV was usually 24 weeks, with cure rates of 70-90%. Two newly approved protease inhibitor based medications �– Victelis [boceprevir from Merck (MRK �– NR)] and Incivek [telaprevir from Vertex (VRTX �– NR)] �– will be administrated concurrently with PEG/RBV, with potentially overall shorter treatment duration. HCV infection is under-treated, not only due to modest treatment efficacy and its asymptomatic nature, but mainly due to poor tolerability of the current standard of care (PEG/RBV). Despite current developments of various oral medications and the speculation of future all-oral medication (interferon sparing) HCV treatment, we believe that interferon-containing regimens could remain the backbone for HCV therapy (especially if adverse effects can be improved). As such, we are encouraged by the potential represented by continuously delivered interferon �– and even more interested in INFRADURE Biopump, as it could potentially be more cost effective. The current pegylated interferon market is dominated by two products: Peg-Intron of Merck and Pegasys from Roche �– with total 2010 sales of $2.7 billion (Figure 16). Figure 16: Global interferon sales in 2010

Product Company 2010 Sales ($ MM)Pegasys Roche 2,007PegIntron Merck 737

Total 2,744

Sources: Amgen presentation, SEC filings and Maxim Group LLC


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DISCUSSION ON HEMODURE AND OTHER PROSPECTS

HEMODURE Biopump development HEMODURE is a Biopump that continuously produces factor VIII as a potential treatment for hemophilia A. Baxter (BAX �– NR), the market leader in hemophilia treatments, approached Medgenics in October 2009 to form a collaboration requesting the latter to develop HEMODURE. Medgenics has received $3.9MM in R&D funding and standstill fees as a result of this collaboration. Although MDGN has successfully created HEMODURE over the initial 12-month period, the amounts of protein were below the level necessary to provide effective treatment of hemophilia. Both companies have subsequently extended the collaboration agreement, and with additional inputs from licensing with the University of Michigan in February 2011, Medgenics believes it can overcome this hurdle. Baxter announced in July 2011 that the company will further validate HEMODURE Biopumps through tests in mice, with a potential go/no go decision toward the end of September 2011. Medgenics is eligible for a $2.5MM in option fees, allowing Baxter to gain a six-month period to further negotiate with Medgenics for a deal to advance HEMODURE into clinical development. Although it is unclear which criteria Baxter might employ to determine whether it wants to advance the HEMODURE Biopump program, our analysis suggests that an early report could provide some insight as to the level of factor VIII activities needed for prophylactic use in severe hemophilia A patients2. The report indicated that 1 to 2 percent of normal levels of factor VIII activities would be sufficient to protect severe hemophilia A patients (defined as having >1% of factor VIII activity remaining) from spontaneous bleeding. Hemophilia A market landscape: Hemophilia A is a hereditary disorder (linked to the X chromosome) due to defects in producing functional factor VIII (FVIII) protein. As such, patients have damaging or fatal bleeding episodes because of their diminished clotting ability. Hemophilia A is an orphan disease, with more than 25,000 patients in the U.S. Based on levels of FVIII, hemophilia A can be categorized into three levels: severe, moderate, and mild �– and more than 50% of patients are categorized as severe. Treatment for hemophilia A is mainly through the replacement of FVIII protein via injection. In the 1950s, patients were treated with a frozen blood plasma transfusion to supply FVIII. In the 70s, treatment advanced as plasma derived FVIII (pd-FVIII) were collected from a more complex fractionation process from plasma, which became a major product with substantial improvements in patient life expectancy. In the early 80s, during the first breakout of HIV infections, a significant portion of hemophilia patients were infected by the virus due to pd-FVIII products getting contaminated. A strong push for the development of recombinant FVIII (rFVIII) in order to mitigate viral infection led to the successful development and commercialization of rFVIII in the 90s. The current global hemophilia A treatment market is comprised of both pd-FVIII and rFVIII (Figure 17). Based on its better safety profile and more generous reimbursement systems, rFVIII use has accounted for more than 80% of shares in the developed markets, but accounted for less than 20% in developing markets due to rFVIII�’s higher price tag. The hemophilia A treatment market is relatively mature, with an estimated single digit annual growth going forward. We estimate the global hemophilia A treatment market is approximately $5.5 billion, with rFVIII accounting for $4.45 billion. Approximately half a dozen companies dominate the market, with Baxter accounting for nearly half of the market (Figure 17), followed by Bayer AG (BAYN �– NR), CSL Behring, Pfizer (PFE �– NR), Grifols (GRLS �– NR), and Octapharma. Bexter�’s Advate �– a third generation of rFVIII �– is the market leader, with annual sales of $1.7 billion in 2010. Two major trends for the future development of the hemophilia A treatment market are increased prophylaxis therapy and development of longer-acting rFVIII.

2 Roth, D.A., et. al., NEJM, 344: 1735 �– 1742 (2001)


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In the developed market, particularly in the U.S., patients with severe hemophilia A receive rFVIII prophylatically every two to three days in order to prevent future bleeding episodes (instead of on-demand use after a bleeding incidence). Severe patients are very likely to bleed up to 30-40 times per year. In the U.S., it is estimated that nearly 40% of the severe hemophilia A patients use rFVIII prophylatically. With an improved quality of life and appropriate reimbursement, prophylactic rFVIII use is increasing, especially in children and new patients. Prophylactic rFVIII use outside of the U.S. remains more challenging because reluctant reimbursement by payers due to high costs. Figure 17: Global hemophilia A (Factor VIII) market landscape

Company Product Type 2010 sales ($)

Advate 3rd generation recombinant 1.7 B

Recombinate 1st generation recombinant 400MM

Hemofil M Plasma-derived ~ 315MM

Bayer Kogenate / Kogenate FS 1st and 2nd generation recombinant 1.4 B

Helixate / Helixate FS 1st and 2nd generation recombinant 544MM

Monoclate-P Plasma-derived ~100+MM

ReFacto 1st generation recombinant

Xyntha 4th generation recombinant

Grifols / Talecris Koate DVI / Alphanate Plasma-derived ~ 255MM

Octapharma Plasma-derived ~ 320MM

Total recombinant factor VIII 4.45 B

Total plasma-derived factor VIII ~1.00 B

Total global factor VIII market 5.50 B

404MM

CSL Behring

Pfizer

Baxter

Sources: SEC filings and Maxim Group LLC There are about a half-dozen treatments in development for hemophilia A (Figure 18). Some are more advanced generations of rFVIII (which is third generation), and others are more differentiated, longer-acting rFVIII products. Longer-acting rFVIII products could require less frequent dosing, which would be more user-friendly as a prophylactic, as well as the potential for less inhibitor formation. We also believe that HEMODURE could be even more user friendly and, if successful, could be substantially better than the longer-acting rFVIII products in development. Further, with increased competition of the hemophilia A treatment market (and Baxter having the most to lose), it is no surprise that the company would like to catch the potentially leading technology for FVIII product development. Figure 18: Selected hemophilia A development pipeline

Company Product Development Stage Type Potential Launch

Bayer BAY81-8973 Kogenate PF Phase III 3rd Generation rFVIII 2014

Novo Nordisk NN7008 (N8) Phase III 3rd Generation rFVIII 2013

Octapharma Human-cl rhFVIII Phase II/III 2013

Baxter BAX 513 Phase I Longer Acting rFVIII 2015

Biogen Idec / Biovitrum rFVIIIFc Phase II/III Longer Acting rFVIII 2014

Sources: SEC filings and Maxim Group LLC


Maxim Group LLC 23

Other prospects for the Biopump platform Based on continuous delivery, self supply, and the potentially lower cost nature of the Biopump platform, many protein-(biologics)-based therapies could benefit from this novel alternative delivery system. Figure 19 illustrates some therapeutics that could be replaced by the Biopump. Together, they represent a multi-billion dollar market potential, and we believe the company will actively seek additional opportunities going forward. Figure 19: Selected hemophilia A development pipeline Disease Indication Protein 2009 sales ($B)Growth Retardation Growth hormone 2.9Multiple Sclerosis Interferon Beta 5.2Diabetes Insulin 13.3Arthritis IL-1Ra 18.1Cancer Recovery G-CSF 5.2Wound Healing PDGF-BB NAObesity Peptide YY3-36 NAChronic Pain IL-10 NA

Sources: Company report and Maxim Group LLC


Maxim Group LLC 24

RISKS

The Biopump platform is a novel but nascent-stage technology with limited clinical validation. Despite the Biopump platform exhibiting the potential to express functional proteins of different therapeutic biologics in animal models (with a good safety profile), the actual clinical practice has only been realized experimentally via EPODURE with very limited patient sizes over short periods of time. As such, risks remain as to whether any products developed based on the Biopump platform could have real-world utility and would be approved by regulatory agencies. Clinical studies might not accomplish the anticipated outcome. The company is completing an ongoing EPODURE Phase I/II trial, with the potential to report top-line results in 4Q11. Significant risks exist if the results from the current or any future trials might not be successful, and such outcomes could have significant negative impact on the MDGN share value. Sales potential for any in-development products could be significantly different than expected. Although several in-development disease markets, such as anemia, hemophilia A, and HCV infection, represent substantial unmet medical needs and market potential, it is possible that the future market dynamic and patient needs might not align with current projections. As such, the future market potential could be substantially different than anticipated (despite a successful product development and approval by regulatory agencies in the U.S. and other territories). With Biopump being the only product offering, this could potentially increase risk due to a less diversified portfolio. All products currently offered by Medgenics are based on the Biopump platform. With a more nascent nature of the platform and lack of pipeline products derived from other sources, potential risks exist for MDGN investors: Concentrated portfolios afford less diversity if Biopump products do not realize their commercial value. As a company with major operations outside of the U.S., country-specific activities could affect share value. With most of the key operations outside of the U.S., Medgenics could face greater risks of disrupted operations due to the instability of the Middle East region (with Israel being a constant attack target by Hamas and other Islamist terrorist groups). Further, foreign currency exchange risks could be another factor affecting the non-U.S.-based company. Lack of cash could impede corporate development. If the company cannot generate sufficient financial support to advance its pipeline development from either financial markets or non-dilutive sources, MDGN�’s shareholder value could be impaired. In addition, future equity offerings could dilute the value of existing shareholders. Thinly traded stock limits shareholder options. The stock just started getting traded in the U.S. exchanges and are currently thinly traded, which results in low liquidity. Shareholders could have limited options in changing their positions in a volatile stock market.


Maxim Group LLC 25

MANAGEMENT

Andrew Leonard Pearlman, Ph.D., is the founder and CEO of Medgenics. Prior to Medgenics, Dr. Pearlman served as CEO and chief scientist for TransScan Research & Development Co., Limited, developing the T-scan 2000 breast impedance scanner, which was the first new medical imaging method for cancer detection to receive FDA pre-market approval in over 20 years. Prior, Dr. Pearlman also founded or co-founded several other companies in the fields of diagnosis and patient monitoring. He has more than 25 years experience founding and managing biotechnology and medical device companies and holds a Ph.D. in biophysics from the University of California, Berkley. Clarence L. Dellio rejoined Medgenics as COO in June 2011. Prior, he was a consultant to a variety of emerging biotechnology and medical technology companies since 2008. From 2004 to 2008, Mr. Dellio served as President and Chief Operating Officer of Neosil, Inc., a venture-backed dermatology company that subsequently merged with Peplin, Inc. Prior to Neosil, Mr. Dellio was the Chief Operating Officer and Senior Vice President-Operations for XOMA Ltd., from 1984 to 2004. Previously, Mr. Dellio was VP of manufacturing/new product development manager at Becton-Dickinson & Company for 11 years. Mr. Dellio earned his B.S. in accounting from Bentley College. Baruch Stern, Ph.D. joined Medgenics as Chief Scientific Officer in 2006. Prior to Medgenics, Dr. Stern served as tissue engineering project manager at ProChon Biotech Limited, a company developing cell therapy solutions to damaged cartilage from 2004 to 2006. Prior, he served as a group development leader of the microbiology section at Medgenics, where he spearheaded tissue engineering and development of the Biopump Platform Technology, including viral vector and assay development, implementing GMP production and standard operating procedures for the company�’s phase I clinical trial, as well as assisting the development of its skin harvesting, handling, and implantation devices from 2001 to 2004. He received a Ph.D. in molecular biology and biotechnology from Tel Aviv University in 1994 and completed a postdoctoral fellowship at the NIH. Phyllis Bellin joined Medgenics as Director of Finance and Administration in November 2005. Prior, she was a founder and vice president of Gintec Active Safety Limited and was responsible for finance and administration of its subsidiaries, including RoadEye Limited. She has managed finance and administration for several early stage, high-tech ventures in Israel since 1980. She received an MBA from Columbia University.


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FINANCIAL MODELS

MEDGENICS INC. INCOME STATEMENT

($ MM)1Q11 2Q11 3Q11E 4Q11E

Total Revenue 0.0 0.0 - 0.0 2.5 - 2.5 10.0 10.0Cost of goods sold 0.0 0.0 - - - - 0.0 0.0 0.0Gross profit 0.0 0.0 - 0.0 2.5 - 2.5 10.0 10.0

Research and development expenses 2.3 3.4 1.2 1.5 1.6 1.9 6.2 12.1 18.2Less-Participation by the Office of the Chief Scientist (0.5) (0.7) 0.0 (0.5) 0.0 0.0 (0.5) 0.0 0.0US government grant (0.2) 0.0 0.0 0.0 0.0 0.0 0.0 0.0Participation by third party (0.1) (0.9) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Research and development expenses, net 1.7 1.5 1.2 1.0 1.6 1.9 5.7 12.1 18.2General and administrative expenses 2.5 4.4 0.8 1.1 1.0 1.0 3.8 4.5 5.4Operaing expense 4.2 5.9 2.0 2.1 2.6 2.9 9.5 16.6 23.6Excess amount of participation in research and development fro (0.3) (2.6) 0.0 0.0 0.0 0.0 0.0 0.0 0.0Operating income (3.9) (3.4) (2.0) (2.1) (0.1) (2.9) (7.0) (6.6) (13.6)Financial expenses 3.1 0.8 0.1 0.2 0.1 0.1 0.5 0.6 0.7Financial income (0.0) (0.1) (1.7) (0.0) (0.0) (0.0) (1.7) 0.0 0.0Income (loss) before taxes (6.9) (4.1) (0.3) (2.3) (0.2) (3.0) (5.8) (7.3) (14.3)

Income tax expense (0.0) (0.0) 0.0 (0.0) 0.0 0.0 (0.0) 0.0 0.0Net income (6.9) (4.1) (0.3) (2.3) (0.2) (3.0) (5.8) (7.3) (14.3)

Dividend in respect of reduction in exercise price of certain Warr 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net income attributable to common shareholders ($6.9) ($4.1) ($0.3) ($2.3) ($0.2) ($3.0) ($5.8) ($7.3) ($14.3)

Net Earnings (Losses) Per Share—Basic ($2.06) ($0.95) ($0.06) ($0.26) ($0.02) ($0.32) ($0.71) ($0.57) ($1.07)Net Earnings (Losses) Per Share—Diluted ($2.06) ($0.95) ($0.06) ($0.26) ($0.02) ($0.32) ($0.71) ($0.57) ($1.07)Shares outstanding—basic 3,367 4,375 5,370 9,034 9,134 9,234 8,193 12,805 13,405Shares outstanding—diluted 3,367 4,375 5,370 9,034 9,134 9,234 8,193 12,805 13,405

Margin Analysis (% of Sales/Revenue)COGS NA NA NA NA 0% NA 0 0 0R&D NA NA NA NA 64% NA 229% 121% 182%MG&A NA NA NA NA 39% NA 151% 45% 54%Operating Income (loss) NA NA NA NA -3% NA -279% -66% -136%Pretax NA NA NA NA -7% NA -231% -73% -143%Tax Rate NA NA NA NA NA NA 0% NA NANet Income NA NA NA NA -7% NA -232% -73% -143%

Financial Indicator Growth Analysis (YoY%)Total Revenue NA NA NA NA NA NA 300% 0%Cost of goods sold N.A. N.A. N.A. N.A. N.A. N.A. N.A.R&D expenses 49% 112% 90% 58% 90% 84% 15% 15%Less-Participation by the Office of the Chief Scientist 44% NA 242% -100% -100% -29% 15% 15%US government grant NA N.A. N.A. -100% -100% 15% 15%Participation by third party 902% NA -100% -100% -100% -100% 15% 15%G&A 74% 16% 139% -63% 43% -14% 20% 20%Other income 688% -100% -100% -100% -100% -100% 15% 15%Operating Incomes (Losses) -14% 438% 1281% -97% 449% 108% -5% 105%Financial expenses -72% 194% 225% -92% -119% -36% 15% 15%Financial income 450% -36% -100% -131% -200% 3053% 15% 15%Pretax Income -40% -115% -19% -95% -29738% 40% 26% 96%Net Income -40% -115% -19% -95% -37148% 40% 26% 96%EPS - Basic -54% -110% -63% -98% -20872% -25% -19% 88%EPS - Diluted -54% -123% -38% -98% -20872% -25% -19% 88%

2009 2013E2010 2011E 2012E

Source: Maxim Group LLC research and SEC filing


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MEDGENICS INC. CASH FLOW STATEMENT (in millions)

($ MM)Cash Flows From Operating Activities: 1Q11 2Q11 3Q11E 4Q11E

Net profit (loss) (6.94) (4.15) (0.34) (2.32) (0.16) (2.96) (5.79) (7.29) (14.32)Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation 0.12 0.12 0.02 0.02 0.10 0.10 0.24 0.22 0.19Loss from disposal of property and equipment 0.00 0.00 0.00 0.00 0.00Issuance of shares as consideration for providing security for letter of credit 0.00 0.00 0.00Stock based compensation related to options and warrants granted to employees 0.52 1.83 0.09 0.12 0.05 0.05 0.30 0.55 0.98 Interest and amortization of beneficial conversation feature of Convertible note 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Change in fair value of convertible debentures and warrants 2.95 0.63 (1.69) 0.21 0.21 0.21 (1.07) (1.07) (1.07)Accrued severance pay, net 0.08 0.04 0.05 (0.02) (0.04) 0.06 0.05 0.22 0.15Exchange differences on a restricted lease deposit (0.00) 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00)Exchange differences on a long term loan 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Changes in operating assets and liabilities:Increase (decrease) in trade payables 0.07 (0.20) 0.28 (0.15) 0.62 0.33 1.07 0.72 0.70Decrease (increase) in accounts receivables, prepaid expenses and deferred issu 0.11 (1.64) (0.03) 0.66 0.13 (0.83) (0.07) (0.87) (0.65)Increase (decrease) in other accounts payable, accrued expenses and advance p 1.41 (0.79) 0.09 0.03 (0.12) 0.27 0.27 0.24 0.70Net Cash Used In Operating Activities (1.69) (4.15) (1.53) (1.47) 0.78 (2.78) (4.99) (7.29) (13.33)

Cash Flows From Investing Activities:Proceeds from disposal of property and equipment 0.00 0.000 0.00 0.00 0.00 0.00 0.00Decrease (increase) in restricted lease deposit and prepaid lease payments 0.01 (0.01) - (0.00) (0.00) (0.00) (0.01) (0.01) (0.01) Purchases of property and equipment (0.03) (0.06) (0.05) (0.13) (0.05) (0.05) (0.27) (0.33) (0.39)

Net Cash Used in Investing Activities (0.03) (0.07) (0.05) (0.13) (0.05) (0.05) (0.28) (0.33) (0.40)

Cash Flows From Financing Activities:Proceeds from issuance of shares, net 0.36 2.08 10.39 0.00 0.00 10.39 23.25 0.00Proceeds from exercise of options and warrants, net 0.26 0.53 0.04 0.00 0.00 0.00 0.04 0.04 0.04Repayment of a long - term loan 0.00 0.00 0.00 0.00 0.00Proceeds from long term loan 0.00 0.00 0.00 0.00 0.00Issuance of a convertible debenture and warrants 0.57 4.00 0.00 0.00 0.00 0.00 0.00Increase (decrease) in short-term bank credit (0.05) 0.03 (0.03) 0.10 0.20 0.30 0.20 0.20

Net Cash Provided by Financing Activities 1.15 6.61 0.06 10.36 0.10 0.20 10.73 23.49 0.24

Net increase (decrease) in cash (0.57) 2.39 (1.51) 8.77 0.83 (2.63) 5.46 15.87 (13.49)

Cash at beginning of period 1.04 0.47 2.86 1.35 10.12 10.95 2.86 8.32 24.19Cash at end of period 0.47 2.86 1.35 10.12 10.95 8.32 8.32 24.19 10.70

2009 2010 2013E2011E 2012E

Source: Maxim Group LLC research and SEC filings


Maxim Group LLC 28

MEDGENICS INC. BALANCE SHEET (in millions)

($ 000)1Q11 2Q11 3Q11E 4Q11E

AssetsCash and cash equivalents 0.5 2.9 1.3 10.1 10.9 8.3 8.3 24.2 10.7Accounts receivable and prepaid expenses 0.0 1.0 0.6 1.0 0.9 1.7 1.7 2.6 3.2Total Current Assets 0.5 3.8 1.9 11.1 11.8 10.0 10.0 26.8 13.9Restricted lease deposit and prepaid expen 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1Severance pay fund 0.3 0.3 0.3 0.4 0.3 0.4 0.4 0.6 0.7Property and equipment, net 0.3 0.2 0.3 0.4 0.3 0.3 0.3 0.4 0.6Deferred issuance expenses - 0.7 1.1 0.0 0.0 0.0 0.0 0.0 0.0Total Assets 1.1 5.1 3.7 11.9 12.5 10.8 10.8 27.8 15.3

Liabilities and Stockholders’ EquityShort-term bank credit 0.0 0.9 1.0 1.2 1.2 1.4 1.6Trade payables 0.9 0.7 1.0 0.0 0.6 0.9 0.9 1.7 2.4Advance payment 0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other accounts payable and accrued expe 1.7 1.2 1.3 1.3 1.2 1.4 1.4 1.7 2.4Convertible debentures 5.5 5.5 0.0 0.0 0.0 0.0 0.0 0.0Total Current Liabilities 3.4 7.4 7.9 2.1 2.7 3.5 3.5 4.7 6.3Accrued severance pay 1.0 1.1 1.1 1.1 1.1 1.1 1.1 1.0 1.0Convertible debentures 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Liability in respect of warrants 3.4 3.7 1.2 1.3 1.4 1.6 1.6 1.4 1.4Total long-term Liabilities 5.4 4.8 2.4 2.5 2.5 2.7 2.7 2.4 2.4Total Liabilities 8.8 12.2 10.2 4.6 5.3 6.3 6.3 7.1 8.7

Common stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Additional paid-in capital 29.5 34.3 35.2 51.4 51.5 51.7 51.7 75.2 75.4Receipts on account of shares 0.0 -Deficit accumulated during the developmen (37.3) (41.4) (41.7) (44.1) (44.2) (47.2) (47.2) (54.5) (68.8)Total Stockholders’ Equity (Deficits) (7.7) (7.1) (6.6) 7.3 7.3 4.5 4.5 20.7 6.6

Total Liabilities and Stockholders’ Defic 1.1 5.1 3.7 11.9 12.5 10.8 10.8 27.8 15.3

2009 2013E2010 2011E 2012E

Source: Maxim Group LLC research and SEC filings


Maxim Group LLC 29

DISCLOSURES

As of: 8/23/2011

% of Coverage % of RatingsUniverse for which Firm provided

Expected Performance* with Rating Banking Services in the last 12 months

Buy Expected total return of 15% or more over next 12 months 65.3% 24.5%

Hold Expected total return of plus or minus 14% over next 12 months 28.0% 0.0%

Sell Expected total negative return of at least 15% over next 12 months 6.7% 0.0%* Relative to Nasdaq Composite. An Under Review (UR) rating represents a stock that the Firm has temporarily placed under review due to a material change.

Maxim Group LLC Stock Rating System

Maxim Group makes a market in Medgenics, Inc. Maxim Group has managed or co-managed a public offering of Medgenics, Inc. in the past

12 months Maxim Group has received compensation for investment banking services from Medgenics,

Inc. in the past 12 months Maxim Group expects to receive or intends to seek compensation for investment banking

services from Medgenics, Inc., in the next 3 months.

I, Yale Jen, attest that the views expressed in this research report accurately reflect my personal views about the subject security and issuer. Furthermore, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views expressed in this research report. The research analyst(s) primarily responsible for the preparation of this research report have received compensation based upon various factors, including the firm�’s total revenues, a portion of which is generated by investment banking activities.

Valuation Methods: Our 12-month price target is based on probability-adjusted sum-of-the-parts analysis and is supported using comparable peer analysis.

Price Target And Investment Risks: Aside from general market and other economic risks, risks particular to our MDGN rating include 1) the Biopump platform is a novel but nascent-stage technology with limited clinical validation; 2) Future clinical studies might not accomplish anticipated outcomes; 3) Sales potential for any in-development products could be significantly different than expected; 4) Biopump being the only product offering could potentially increase risk due to the less diversified portfolio; 5) As a company with major operations outside of the U.S., country-specific activities could affect share value; 6) Lack of cash could impede corporate development; and 7) Thinly traded stock limits shareholder options.

RISK RATINGS

RISK RATINGS TAKE INTO ACCOUNT BOTH FUNDAMENTAL CRITERIA AND PRICE VOLATILITY. Speculative �– Fundamental Criteria: This is a risk rating assigned to early-stage companies with minimal to no revenues, lack of earnings, balance sheet concerns, and/or a short operating history. Accordingly, fundamental risk is expected to be significantly above the industry.


Maxim Group LLC 30

Price Volatility: Because of the inherent fundamental criteria of the companies falling within this risk category, the price volatility is expected to be significant with the possibility that the investment could eventually be worthless. Speculative stocks may not be suitable for a significant class of individual investors. High �– Fundamental Criteria: This is a risk rating assigned to companies having below-average revenue and earnings visibility, negative cash flow, and low market cap or public float. Accordingly, fundamental risk is expected to be above the industry. Price volatility: The price volatility of companies falling within this category is expected to be above the industry. High-risk stocks may not be suitable for a significant class of individual investors. Medium �– Fundamental Criteria: This is a risk rating assigned to companies that may have average revenue and earnings visibility, positive cash flow, and is fairly liquid. Accordingly, both price volatility and fundamental risk are expected to approximate the industry average. Low �– Fundamental Criteria: This is a risk rating assigned to companies that may have above-average revenue and earnings visibility, positive cash flow, and is fairly liquid. Accordingly, both price volatility and fundamental risk are expected to be below the industry.

DISCLAIMERS

Some companies that Maxim Group LLC follows are emerging growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. The securities discussed in Maxim Group LLC research reports may not be suitable for some investors. Investors must make their own determination as to the appropriateness of an investment in any securities referred to herein, based on their specific investment objectives, financial status and risk tolerance. This communication is neither an offer to sell nor a solicitation of an offer to buy any securities mentioned herein. This publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or disclosed to another party, without the prior written consent of Maxim Group, LLC (�“Maxim�”). Information and opinions presented in this report have been obtained or derived from sources believed by Maxim to be reliable, but Maxim makes no representation as to their accuracy or completeness. The aforementioned sentence does not apply to the disclosures required by NASD Rule 2711. Maxim accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to Maxim. This report is not to be relied upon in substitution for the exercise of independent judgment. Maxim may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and Maxim is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by Maxim and are subject to change without notice. The price, value of and income from any of the securities mentioned in this report can fall as well as rise. The value of securities is subject to exchange


Maxim Group LLC 31

rate fluctuation that may have a positive or adverse effect on the price or income of such securities. Investors in securities such as ADRs, the values of which are influenced by currency volatility, effectively assume this risk. Securities recommended, offered or sold by Maxim: (1) are not insured by the Federal Deposit Insurance Company; (2) are not deposits or other obligations of any insured depository institution; and 3) are subject to investment risks, including the possible loss of principal invested. Indeed, in the case of some investments, the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support these losses.

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EQUITY RESEARCH DEPARTMENT CAPITAL MARKETS / SYNDICATE

Anthony Vendetti Christopher Fiore 212-895-3743Director of Research 212-895-3802 President & Head of Capital Markets

CHINA Paul LaRosa 212-895-3695Echo Yinghui He Ph.D., M.D. 212-895-3718 Senior Managing Director - Chief Market Technician

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Amanda Nozaki 212-895-3570Research Associates Rodney Plasket 212-895-3615Andrew DeGasperi 212-895-3631 Jason Sardo 212-895-3630Johnny Li 212-895-3805 Jeff Sklar 212-895-3780Nirav Modi 212-895-3595 Cliff Weinstein 212-895-3532

Administrative AssistantNikki Reed 212-895-3736

INSTITUTIONAL SALES TRADING 800-628-4005

Todd Bodine 212 895-3806 Phil Buchanan 212-895-3746Robert Benedickson 732-784-1903George Brown 212-895-3757Stephen Dora 212-895-3868Jon Huzarsky 212-895-3629Tim Kindregan 212 895 -3509Mitch Martin 212-895-3831John Mullins 212 895-3840 Eugene Polt 732-784-1906Alex Povalski 732-784-1904Hany Sabet 650 587 8585Clint Schoen 212-895-3893Kevin Schweitzer 516-396-3012Toni Stabile 212-895-3853Richard Vaughn 212-895-3676Cass Waller 212-895-3740Reed Werbit 212-895-3634

Aerospace & Airline Sector SpecialistRay Neidl 212-895-3571Energy Sector SpecialistEliecer Palacios 212-895-3608

Retail Sector SpecialistRick Snyder 212-895-3674

FIXED INCOME TRADING EQUITY TRADINGJamie Terranova 212-895-3875 Bill Vitale 732-784-1905Jon Good 212 895 3607 Keith Arner 212-895-3891Pierre Grant 212 895 3582 Ricardo Barquero 212-895-3781Jon Kattouf 212-895-3573 Ralph Calabro 212-895-3586Justin Rabinowitz 212-895-3839 Ray Chicoli 212-895-3587David Kamiya 212-895-3641 Charles Ferrera 212-895-3770Anthony Marciano 212-895-3613 Tom Giordano 212 895-3837 Frantisek Kovac 212-895-3606 Robert Lynch 732-784-1910

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INSTITUTIONAL OPTIONS TRADING WEALTH MANAGEMENT

Leonard Greenbaum 212-895-3791 John Garrity Executive Managing Director 212-895-3624

PRIME BROKERAGE

Steve Simmons 212 895-3565

CORPORATE FINANCE

Clifford A. Teller Director of Investment Banking 212-895-3773