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[DewDiligence]

VRA issues Dear Shareholder letter:

[I don’t follow this company closely, but my impression is that they are an extreme case of the “more shots on goal is better” mentality and as a result they haven’t made great strides in any arena. The avian-transgenics program, in particular, seems to be badly lagging the mammalian transgenics programs at Pharming and GTCB.]

http://biz.yahoo.com/prnews/050112/flw006_1.html

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Viragen CEO Provides Business Update and Outlook for 2005

PLANTATION, Fla., Jan. 12 /PRNewswire-FirstCall/ -- The following is a letter from Charles A. Rice, President and CEO of Viragen, Inc. (Amex: VRA - News). In addition to these comments, stockholders and potential investors are referred to: the Company's SEC filings, including Form 10-K and Form 10-Q (Annual and Quarterly Reports); press releases; website; and other publicly disseminated information which is available free of charge upon request by contacting the Company.

Dear Stockholder,

Since joining Viragen nine months ago, I have examined, evaluated and analyzed a myriad of issues related to all of our projects on every level, and we have swiftly moved to start implementing changes, improvements and new strategies designed to efficiently and cost-effectively build a significant business -- and thus reward our stockholders. And while displeased with our present market valuation, we made great strides in 2004 toward achieving the dramatic growth we envision in the coming years. Some of these activities, events and accomplishments included:

• Successfully Completing a Recapitalization and $20 Million Financing
• Managing the Positive Completion of a Multiferon® Malignant Melanoma Study
• Meeting our Goal to Complete and Validate our New Swedish Multiferon® Manufacturing Facility which is Capable of Producing Salable Product
• Being Awarded a Scottish Grant to Fund an Anti-Cancer Project (CD55)
• The Publication of Breakthrough Avian Transgenics Milestones Related to Gene Delivery and Securing the Rights to that Technology
• Extending the Approved Shelf-Life of Multiferon® to 18 Months
• Adding New Patent Protection for Multiferon®
• Marketing Initiatives that Increased Demand for Multiferon® in Mexico
• Preparations to Apply in Sweden and other EU Countries to Seek Approval for Multiferon® as First-Line Adjuvant Treatment of High-Risk Malignant Melanoma
• Gaining Approval for Multiferon® in Bulgaria
• Creating New Sales Initiatives in Sweden
• Accelerating Active Work on Anti-Cancer Peptide IEP 11
• Obtaining Equity Research Analyst Coverage

This list by no means represents all of the successes we realized in 2004 or the basic changes we made in our business moving forward, but I would like to highlight some of these key accomplishments and point to major milestones we expect to report in 2005 and beyond.

Multiferon®

Manufacturing -- In accordance with our commitments to the Swedish regulatory authorities, we met our goal to successfully validate our new manufacturing facility in Sweden for the large-scale production of Multiferon®. We have prepared this new state-of-the-art facility to be capable of fulfilling our mission to make Multiferon® the most widely prescribed natural human alpha interferon in the world.

Marketing -- We have rationalized our agreements for distributing Multiferon® around the world and we have now focused our resources on only those territories and partners where we believe there can be a reasonable financial return. For example, our potential return on investment in Mexico is much more attractive than further allocating resources into a smaller market such as Myanmar.

We anticipate sales growth in Mexico and Sweden for 2005, two valuable markets from which we can extract immediate benefits. We continue to work closely with our partners in Mexico who report that new patients are consistently being treated, and our internal sales staff in Sweden are positioning and promoting Multiferon® with expectations of a potentially expanded approval this year that would further confirm our prospects.

Our partner in Greece has obtained a new approval for Multiferon® in Bulgaria, and we expect this will soon be followed in other Balkan territories. We are anticipating potential new approvals and reimbursement authorizations in Turkey, Chile and Pakistan, all within the first half of 2005 and all representing near-term sales opportunities that will contribute to revenues.

Partnering -- Based on the level of interest and negotiations, I had expected to report successful partnering initiatives in 2004, but with the advent of our highly successful melanoma results, this process became more complex in determining the most appropriate partner(s). Because Multiferon® is approved for multiple indications, including viral diseases and oncology, we are now considering partners that are capable of distributing Multiferon® for all of its many indications, as well as organizations that may be highly specialized in one field. I stress that we continue to be in active discussions and negotiations with potential partners for European, South American and Asian territories for Multiferon® and believe there is a high probability of partnering success in 2005.

Malignant Melanoma Study -- In the fourth quarter of 2004, we released the final data summary from our malignant melanoma study, including patient follow-up over a 7-year period. Following meetings and discussions with the Swedish regulatory authorities, our Swedish subsidiary, ViraNative, is preparing an application for first-line adjuvant use of Multiferon® in high- risk melanoma patients. In order to adequately position the data in the form requested by the authorities and recommended by our regulatory experts, we have now scheduled to submit this application in the first quarter of 2005. Concurrently, we are working on a detailed strategy for broader European approvals for this important indication. We will soon publish the study results in a peer-reviewed journal, and we plan to present the results at appropriate scientific meetings.

U.S. Strategy -- We are considering requesting a meeting with the United States Food and Drug Administration (FDA) to review the malignant melanoma study results and to inquire of FDA recommendations for a U.S. clinical program for high-risk malignant melanoma. However, based on the projected costs of preparing Multiferon® for entry into the U.S. market, including American-based sourcing of leukocytes, Viragen does not currently have the capital necessary to conduct U.S. clinical trials without an appropriate partner to share in these expenses. As part of our ongoing partnering initiatives, we are currently considering potential interested collaborators for this market.

Clinical Programs -- We continue to strengthen the product's clinical dossier in an efficient and economical manner through studies conducted in international clinical trials. Working with our partner in Mexico, we have two clinical trials moving forward. The first is using Multiferon® as a "rescue" therapy for patients who fail to respond to Glivec®* for the treatment of chronic myeloid leukemia (CML). This trial is being conducted in cooperation with the National Cancer Institute of Mexico, one of Latin America's leading oncology centers. A second trial is also about to begin which will use Multiferon® to treat hepatitis C patients who fail or relapse after treatment with recombinant alpha interferon. While Multiferon® is already approved for sale in Mexico, these local studies will be used to support our marketing activities and give respected medical opinion leaders working experience with our product, while adding to our international clinical data. Both studies are expected to be completed in 2005.

Our partner in Greece is initiating a trial that is designed to utilize Multiferon® for the treatment of hepatitis C for those patients that have failed or relapsed to recombinant interferon regimens. This trial is also expected to be completed this year. These clinical programs are not only efficient and cost-effective, but also enable us to increase physician awareness of the utility and value of Multiferon®.

Avian Transgenic Technology

Our transgenics subsidiary, ViraGenics, appears to be realizing startling success in our mission to manufacture therapeutic proteins more efficiently in the eggs of genetically engineered hens. While we are pleased and very optimistic with this apparent success, we must make sure that we can understand and replicate these results consistently. Therefore, we must continue with confirmatory studies before making any formal announcements, as well as ensure that we are securing any potential new intellectual property that arises from this progress.

Previously, we reported that our next significant milestone would be the expression of a targeted protein in the bird's oviduct, known as tissue specific expression (TSE). Upon demonstrating TSE, we must then be able to produce commercially relevant quantities of a target protein drug, such as beta interferon, in the whites of the eggs laid by transgenic hens. Again, while it has been a longer road than originally predicted, our progress with Scotland's Roslin Institute appears to be excellent, and we hope to report significant achievements in the coming months that could be unprecedented in this field.

Anti-Cancer Therapeutics

While in prior years we have elected to focus our research expenditures primarily on Multiferon® and Avian Transgenic Technology, I believe that our anti-cancer product candidates, consisting of two antibodies and a peptide, are capable of creating value for Viragen in the near and intermediate-term and must be progressed in an efficient manner. Therefore, we are moving forward with each compound as follows:

VG104 (Mucin 1 Variant -- IEP 11 Peptide) -- In cooperation with the University of Miami Sylvester Cancer Center, we have moved forward with confirmatory animal studies using IEP 11, a novel peptide drug, using models of lung and breast cancer. It is expected that we will have the results needed to make a decision on the next steps in the first half of 2005. If these studies confirm the merits of the technology, we could be in a position to schedule a pre-Investigational New Drug (IND) meeting with the FDA soon thereafter. With a favorable outcome, we could then plan for an IND filing and begin an intensive licensing program to identify suitable partners who would help take this drug through human clinical development in the U.S. While this promising peptide drug has not been highly publicized by us in recent years, it may represent a more important part of our portfolio than previously envisioned.

VG102 (Anti-CD55 Antibody) -- The therapeutic potential of anti-cancer antibodies can be limited due to the inherent ability of most cancer cells to block activity by the immune system. With our UK partners, we have conducted in vitro studies demonstrating that our anti-CD55 antibody is able to overcome this mechanism, which could translate to improved responses in cancer therapy. We are continuing development of this humanized antibody with the help of an $833,000 grant, which was awarded from the Scottish Government in April 2004, and we aim to have this product ready for a pre-IND meeting and licensure in mid-to-late-2006.

VG101 (AntiGD3/R24 Antibody) -- This specific target is significantly over-expressed on malignant melanoma cancer cells, and our esteemed partners at Memorial Sloan-Kettering Cancer Center have conducted dozens of clinical trials using this antibody for the treatment of malignant melanoma. However, in these previous studies, the antibody was delivered in its murine or mouse form, which caused a deleterious response and thereby masked its utility. We are designing a humanized version of this antibody that is expected to be better tolerated while retaining its anti-cancer properties. We aim to have this product ready for a pre-IND meeting in late 2006/early 2007.

2005 Growth Outlook

It is our expectation that the following events in 2005 could provide sufficient revenues and/or provide working capital to fund our ongoing operations:

* Increasing sales of Multiferon(R) in existing markets

* Initial sales of Multiferon(R) in newly added markets

* Licensing fees for Multiferon(R) in Europe, South America and/or Asia

* Licensing fees for marketing rights to anti-cancer peptide IEP 11

We cannot guarantee that these revenues will be realized or that such revenues will be sufficient to fund ongoing operations, but we do continue to creatively examine and implement new ways of controlling our expenses, as well as determine other possible sources of capital until the products in our pipeline reach their licensure stage.

While we believe that we can achieve key milestones for our Avian Transgenics Technology in the near future, we would not expect to generate license or sales revenues from this technology for at least another year, possibly longer. After we demonstrate "Proof of Principle," we will still need to validate an economic model in support of the technology. Once we begin to add candidate products, we would expect a regular stream of license revenue, as each new protein-based drug or antibody is efficiently produced through this novel technology. Like the CD55 and GD3/R24 antibodies, Avian Transgenics is poised to contribute to our financial growth beyond 2005.

Collectively, we have established a portfolio of products that can provide sequential sources of growing income -- a continuing stream of revenue in the form of license fees, milestone payments, purchases of products and royalties on sales, for many years to come. And we will continue to evaluate potential new technologies that could enhance our products and extend our patent protection.

In Closing

When I issued my first President's Letter in May 2004, I made a commitment that our two foremost priorities were to increase revenues and control our expenses. These priorities have not changed. While I am not satisfied with our current revenues, I believe we have made the correct decisions that are setting the stage for a much improved future. These steps, and additional ones we will take in the coming months, will continue to focus on revenue generation, expense control and building stockholder value.

We have immediate opportunities which we must seize, and I look forward to reporting tangible results throughout 2005, thus positioning Viragen as a widely recognized source of life-saving therapeutics and technology, as well as a compelling investment case.

Our entire Viragen Team is working tirelessly to make these objectives a reality. With a revitalized and renewed focus on delivering results in the form of revenues, I strongly believe that 2005 will be a year of prosperous achievement.

Sincerely yours,
Charles A. Rice
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