BREAKTHROUGH PEPTIDE THERAPEUTICS

In this edition:

• Phylogica launches a new disruptive technology: the Endosome Escape Trap

• Janssen expansion driven by delivery on goals of CPP discovery project

• Appointment of Dr Richard Hopkins as CEO• Management changes extend cash runway while

maintaining focus on delivery• Maintaining focus on Phylogica’s business

development activities• New patents strengthen Phylogica’s IP estate• Grant to fund biosensor development collaboration

with University of Queensland• Recent antimicrobials deal with Cubist

Pharmaceuticals

Dear Shareholder,

We are delighted to have delivered on the first of the key milestones outlined in our previous newsletter ahead of schedule. At the end of June we announced the filing of a patent on the ‘Endosome Escape Trap’ for the discovery of more sophisticated cell penetrating peptides to deliver next generation biological therapeutics into cells. This technology which shall be described in more detail below, enables the efficient screening of a library of billions of naturally occurring peptides and identifies those with the highest potential to target disease proteins inside the cells.

One of the greatest challenges facing the Pharmaceutical industry today is how to overcome the barrier of the cell membrane in order to gain access to the intracellular landscape of drug targets. Indeed the vast majority of potential drug targets are found insides cells, which are beyond the reach of most biologics drugs such as antibody-based therapies. Addressing this problem is considered a ‘holy-grail’ in the pharmaceutical industry.

In partnership with Roche and Janssen, Phylogica has been developing considerable expertise in the field of cell penetrating peptides. In June, we were pleased to announce a patent based on a groundbreaking technology we have developed referred to as the ‘Endosome Escape Trap’. This platform incorporates three unique features:

• Uses a completely novel approach to capture Cell Penetrating Peptides (CPPs) able to cross the cell membrane with exquisite sensitivity.

• Inspired by the fact that nature has already solved the problem of how to gain entry to cells in the evolution of invasive pathogens, Phylogica has further enriched its libraries for the functional motifs used by pathogenic microbes to further improve the hit rate for functional cell penetrating peptides.

• Includes a ‘plug-&-play’ feature that ensures seamless compatibility with a range of biological therapies being developed by the Pharmaceutical industry. This approach has already been validated as part of the Janssen collaboration and opens up enormous opportunities to collaborate with other Pharma partners to enhance delivery of their existing drugs such antibodies, scaffolds and oligonucleotides (eg siRNA).

This breakthrough differentiates Phylogica from other biologics companies, which lack a means of directly isolating those proteins or peptides that can efficiently penetrate cells to deliver therapeutic cargoes to their targets. There is significant demand for technologies that can:

• Penetrate across cell membranes (more than 80% of potential drug targets lie within this barrier)

• Target particular cells or parts of the cell

• Ensure that once delivered into cells, drug cargos are not trapped within minute chambers within cells (called ‘endosomes’), but are instead released to be available to function to affect disease processes

www.phylogica.com

September 2013

For

per

sona

l use

onl

y

The last of these presents a substantial challenge for the industry, since up to 99% of conventional cell penetrating peptides and their cargoes can remain trapped within the endosomal structures where their functionality is retarded. This enormous inefficiency in the delivery of protein drugs translates to very low potencies, unacceptable costs of goods and a greater potential for side effects due to escalating doses.

Phylogica’s Endosome Escape Trap enables the efficient identification of Phylomer cell-penetrating peptide-drug conjugates that not only deliver the therapeutic payload across the cell membrane, but also efficiently escape from the endosome so that the drug can have a therapeutic effect.

Phylogica launches Endosome Escape Trap in June

In late June, Phylogica’s CEO Richard Hopkins, launched the Endosome Escape Trap technology at two prestigious international scientific conferences attended by leading global pharmaceutical licensing executives: the 23rd American Peptide Symposium, Honolulu, Hawaii and the 8th Next Generation Protein Therapeutics Summit, San Diego, California. The response from industry has been very encouraging with several leading pharma expressing interest that is currently being followed-up by Phylogica’s business development team.

Importantly, the Trap has been engineered to work with a range of therapeutic cargoes and cell targeting reagents being developed by the pharmaceutical industry (see Figure 1). One such example is the Janssen collaboration where we have customised the Endosome Escape Trap to deliver their

proprietary payload inside cells. Phylogica is in discussion with other biotechnology and pharmaceutical companies about the delivery of their own scaffolds into cells using this Trap technology.

Janssen expands scope of deal to build on success of CPP partnership

Expansion of Phylogica’s deal with Janssen driven by delivery on goals of CPP discovery project using the Endosome Escape Trap

In July we announced the expansion of our collaboration with Janssen Biotech Inc and its affiliates (Janssen) to discover, develop and commercialise new classes of peptide drug conjugates derived from Phylogica’s Phylomer drug discovery platform. Phylogica is to receive undisclosed payments for funding additional research associated with this expansion.

The partnership with Janssen was established in December 2011 and extended in April 2013 with additional funding. The further expansion of the collaboration in July follows the successful delivery on a major project milestone by the Phylomer team. Phylogica successfully combined Janssen’s proprietary cargo with novel Phylomer peptides that specifically target the tissue-type of interest and internalise the payload within the cell. This screening phase was conducted using Phylogica’s second-generation Phylomer libraries and the Company’s newly developed Endosome Escape Trap technology.

The expansion is testament to the excellent relationship we have with our scientific collaborators at Janssen. It further endorsed our capabilities with the Phylomer platform to discover unique cell-penetrating peptides that can potentially deliver protein cargoes. The core competence of efficient intracellular delivery of biologics differentiates Phylogica and is the source of increasing pharma interest.

Phylogica and Janssen have expanded the partnership to explore the ability of the Phylomer conjugates to function within the cell. This additional step is anticipated to take about six months to complete and will further validate Phylogica’s intracellular delivery capabilities. Successful delivery on this phase of the project should trigger a significant license fee payment by the beginning of next year.

Appointment of Dr Richard Hopkins as CEOThe company has restructured its senior executive team with the appointment of Dr Richard Hopkins as CEO. Dr Hopkins, who previously acted as the Phylogica’s Chief Scientific Officer, as well as its Chief Operating Officer is very intimately involved with the details of Phylogica’s business, management of its budgets and liaison with our pharmaceutical partners. Dr Hopkins has been with the company since 2006 and has excellent communication skills which are a major asset for the company in its relations with Pharmaceutical partners as well as shareholders. The Board is confident that Dr Hopkins will be an outstanding CEO.

Figure 1: Phylomer-enhanced efficiency of protein drug delivery into cells

TOP: Delivery of a protein cargo (stained green) to receptors on the surface of cells (nuclei stained blue).

BOTTOM: Delivery of a protein cargo (stained green) with enhanced penetration through the membrane surface of cells (nuclei stained blue) using a Phylomer CPP.

For

per

sona

l use

onl

y

Management restructure reduces Phylogica’s fixed cost base, while maintaining the focus on core activities of the company To maximise the company’s cash runway, Phylogica has significantly reduced its cost base in this restructure. Phylogica’s Chief Financial Officer (CFO) Nick Woolf has left the company and his responsibilities have been transferred to Graham Boden, the current Company Secretary, who has assumed the CFO role. The company is grateful to Mr Woolf for his contributions. Outsourcing the CFO role reduces costs while maintaining the focus on essential scientific core activities critical for delivery on our existing pharma contracts.

Dr Paul Watt will be assuming the role of Chief Scientific Officer (CSO) and stepping down from Phylogica’s board to make way for the appointment of Dr Hopkins. As the scientific founder of Phylogica and a major investor, Dr Watt will be leading the scientific strategy of the company, having acted previously in this role before as a founding inventor of Phylogica’s technology.

• Phylogica is the only Australian biotechnology company to have closed deals with four of the top 10 pharma companies in the past four years

• Janssen deal expansion underlines continued delivery on outcomes of existing relationship

• Phylogica has delivered on the goals of all of its pharma partnerships which have resulted in more than $5.8 Million in committed revenue for the company in less than four years

Maintaining focus on Phylogica’s business development Dr Watt and Dr Hopkins will also continue to support the business development activities of the company. This will maintain momentum on deal opportunities coming through the pipeline. Since December 2009, the company has closed deals with revenues for Phylogica exceeding $5.8 million in committed funding from four of the 10 largest pharmaceutical companies, accruing downstream value of more than $500 million in potential milestones, as well as royalties. Maintaining our emphasis on business development is increasingly important as interest from the pharmaceutical industry accumulates in areas such as the Endosome Escape Trap, antimicrobial development and in phenotypic screening.

Additional patents further reinforce Phylogica’s dominant IP estateSince the previous newsletter, Phylogica has been active in further strengthening its formidable intellectual property portfolio, which now contains a dozen active patent families most of which contain granted patents; none of which have been challenged or opposed.

Core Phylomer Library Patent: • In March, Phylogica was granted a core Phylomer library

patent in Australia

• This patent relates to a legal term called ‘composition-of-matter’ that protects Phylomer libraries per se, regardless

of how they are constructed or what combinations of compact genomes are used in their construction

• Phylogica already has a similarly broad patent granted in Europe for composition-of-matter of Phylomer libraries

• This is the most powerful type of patent coverage possible as it prevents other parties from making Phylomer libraries by any means whatsoever. To use an analogy, the patent grants Phylogica exclusive control over a rich ‘oil-field’ for drug discovery that it can charge third parties to access.

Patent covering Phylomer peptides targeting the AP-1 Signalling Pathway:• In April, Phylogica was granted a new European patent

covering the Company’s lead Phylomer peptides targeting the AP1 signalling pathway.

• AP-1 is a crucial mediator of inflammation and cell death in multiple diseases.

• This pathway plays a critical role in neuronal cell death caused by stroke and traumatic brain injury, and lung inflammation resulting from acute respiratory distress syndrome (ARDS).

• Phylomer peptides targeting this pathway have demonstrated efficacy in multiple preclinical models for stroke, traumatic brain injury and ARDS.

Grant to fund collaboration for biosensor development with the Institute for Molecular Bioscience (IMB) at The University of QueenslandIn July we announced the awarding of a Linkage Grant from the Australian Research Council (ARC) to collaborate with scientists at the IMB. The grant, which The University of Queensland applied for in conjunction with Phylogica scientists, will provide funding of $402,614 for a project entitled: "A microfluidic array of Phylomers for rapid discovery of peptide probes and biomarkers".

In collaboration with Professor Kirill Alexandrov at the IMB, Phylogica will exploit the unique structural diversity of Phylogica’s Phylomer libraries for biomarker discovery. A biomarker is a measurable parameter that correlates with the presence of disease such as cancer. A classic example is the PSA antigen used to diagnose and monitor prostate cancer.

Professor Alexandrov’s group is a world leader in the design of protein-based machines to diagnose and treat human diseases. The partners will jointly develop a Universal Biosensor, containing thousands of synthetic Phylomers that have evolved for the ability to bind other proteins. The Universal Biosensor will be used to screen biological samples to generate binding ‘signatures’ that could diagnose diseases.

Professor Kirill Alexandrov said: “Phylogica is a highly innovative biotechnological company that accumulated vast expertise in harnessing biodiversity for identification of bioactive peptides. By giving Phylogica access to our novel technologies for recombinant peptide production and analysis we expect to dramatically shorten development time for novel diagnostic applications.”

www.phylogica.com

For

per

sona

l use

onl

y

The ability to generate synthetic Phylomers, which are highly stable and relatively affordable to produce, could allow us to overcome deficiencies in the design of other protein-based sensors, which suffer from stability issues that affect quality, storage and distribution. We believe that a Phylomer-based biosensor could lead to the development of breakthrough low-cost diagnostic tests for profiling patients and their responses to particular treatments.

The global market for biomarkers is predicted be worth $13 billion

Samples from abnormal versus corresponding normal clinical specimens could be used to probe such a chip to identify a disease-specific signature of biomarkers. Similarly, the technology could be applied to detect the emergence of a new signature corresponding to an illegal substance such as in the blood of athletes or to detect a characteristic biomarker profile of relatively common cancers, which are often diagnosed late, such as prostate or colon cancer.

Obtaining such grants enables the pursuit of broader opportunities from the Phylogica platform, while minimising the distraction for our internal scientists focused on our core activities and minimising shareholder dilution.

Recent deal with Cubist Pharmaceuticals around antimicrobialsAt the end of July, we announced a collaboration with Cubist Pharmaceuticals Inc. (Lexington MA, USA) to evaluate several of its antimicrobial Phylomers in models of multi-drug resistant bacterial infections. This leverages Phylogica’s investment in developing an expertise in screening for antimicrobial peptides against multi-resistant infections.

Cubist Pharmaceuticals is one of the world’s largest specialist antimicrobial companies and has grown rapidly having appeared on Fortune 2010’s list of fastest growing companies and was named in the 2010 Deloitte Technology Fast 500. Through this collaboration, we hope that Phylogica’s antimicrobial Phylomers will support Cubist’s ongoing work to discover and develop new antibiotics to address the growing global health threat of antibiotic resistance.

In Phylogica’s own assays, these antimicrobials have shown activity against multi-resistant isolates of Gram-negative organisms, which are a major cause of deaths from hospital acquired infections of burn wounds.

Comparison with Peptidream Inc: the most comparable company to Phylogica, which recently listed on the Tokyo stock exchangePhylogica has proved challenging to value for biotech analysts given there have been no analogous public companies with which it could be compared. For this reason Phylogica has

historically been valued on multiples of revenue, despite a lack of correlation between the revenues and IPO or trade sale exit values of discovery companies leveraging proprietary biologics library assets such as Phylogica.

An alternative valuation strategy for such discovery-focused companies is to rank them against their peers comparing factors such as size, commercial validation etc. The recent IPO of a peptide discovery company with a similar business model and stage of development for the first time provides an opportunity for direct comparison.

Peptidream Inc listed on the Tokyo stock exchange in June 2013 raising $54 million and subsequently soared to a valuation of more than $1.8 billion. Peptidream, like Phylogica, has a business model in which it discovers peptide leads for the pharmaceutical industry, while not itself engaging in clinical development.

At the time of its IPO Peptidream had secured deals with nine large pharma companies (now eight, with the recent termination of its relationship with Pfizer) against Phylogica’s four pharma deals. Both Phylogica and Peptidream share a stake in future value generated from products derived from peptides discovered through (similarly priced) milestones and royalties. Even after a greater than 50% correction of its market capitalisation, Peptidream Inc has a valuation of more than 100 times that of Phylogica, suggesting that the Australian market may not be efficiently valuing Phylogica at this stage (see table below). We are continuing to deliver on our pharma alliances to maximise the chances of this value being recognised for all shareholders.

TABLE: COMPARISON OF PEPTIDREAM INC WITH PHYLOGICA

Phylogica PeptidreamListing ASX (PYC) Tokyo (4587)Founded 2001 2006Number of employees 26

(includes contractors)

60

Number of Pharma partnerships

4(4/4 top 10

Pharma)

9(3/9 top 10

Pharma)Revenue 2012

(calendar year)

$2 million $9 million

Net profit/loss 2012 Loss $4 million Profit $0.1 million

Cash 31/03/2013 $3 million $10 million (pre-IPO)

IPO March 2005 June 2013Pre-money valuation at IPO

$16 million $278 million

Current valuation $7 million* $890 million*(down by 50%)

www.phylogica.com

PHYLOGICA (ASX: PYC) Contact Dr Richard Hopkins, CEO Email richardh@phylogica.com Telephone +61 (0) 405 656 868 Address PO Box 8207 Subiaco East, Western Australia 6008

Please register for electronic communication by emailing your name to farzanak@phylogica.com with REGISTER in the subject line.

For

per

sona

l use

onl

y