Annual Report 09/10

THE YEAR IN BRIEF

- 4-year follow-up of type 1 diabetes patients included in a Phase II study with the drug candidate Diamyd® showed a clear positive trend.

- Diamyd Medical received compensation from Apoteket AB after the execution of a settlement agreement regarding a clinical study in LADA patients, which was invalidated in 2007.

- An oversubscribed preferential rights issue brought in just over MSEK 219 before issue expenses to Diamyd Medical.

- The US Department of Veterans Affairs (VA) awarded a grant of USD 1.84 million to support the development of Diamyd Medical’s Nerve Targeting Drug Delivery System (NTDDS) for Diabetic Neuropathic Pain.

- The last patient was included in the European Phase III study of the Diamyd® drug candidate.

- The Diamyd® treatment was approved for studies in children down to three years of age in the US.

- A 2:1 division of shares (a split) was executed.

- Diamyd® granted Orphan Drug Designation in the US.

- Diamyd Medical signed an agreement with Ortho-McNeil-Janssen Pharmaceuticals, Inc., a Johnson & Johnson company, to develop and commercialize Diamyd®.

- Diamyd Medical received an upfront payment of USD 45 million.

DIAMYD IN BRIEF

BUSINESS CONCEPT AND STRATEGY
Diamyd’s business concept is to license candidate products in the preclinical and clinical phases, and to refine them through development. The products are then to be commercialized, either independently or with a partner. Diamyd aims to build a small pharmaceutical company with its own development operations and sales and marketing organization in the Nordic countries: a Nordic small pharma company.

BUSINESS AREAS
From fiscal year 2010/2011, Diamyd Medical’s operations will be divided into two business areas, Diabetes and Pain. The Diabetes business area consists of the antigen-based Diamyd® drug candidate for the treatment and prevention of autoimmune diabetes. The Pain business area consists of development projects that use the Company’s patented NTDDS platform (Nerve Targeting Drug Delivery System) for the administration of drugs directly to the nervous system for the treatment of chronic pain and comprise the drug candidates NP2 Enkephalin, NG2 GAD and NE2 Endomorphin.

CLINICAL STUDIES
A major Phase III program is ongoing in the US and Europe with the drug candidate Diamyd®. The trials comprise 640 children and adolescents with newly diagnosed type 1 diabetes. The first study results are planned to be reported during spring 2011. In addition to the Company’s own clinical trials, a number of external trials, so called investigator initiated studies, are beeing conducted with Diamyd® by independent researchers and research organizations. The drug candidate NP2 Enkephalin has been evaluated in a Phase I clinical trial for the treatment of chronic cancer pain. Based on the results from the Phase I trial with NP2 Enkephalin, the Company has decided to start a Phase II trial in the US.


CEO COMMENTS

WE ARE NOW DEVELOPING DIAMYD INTO A NEW SWEDISH PHARMACEUTICAL COMPANY

The past year has been one of the most important years in Diamyd Medical’s history. The single most important event took place in June, when we signed a partnership agreement with the US pharmaceutical company Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI), for the global development and marketing rights for our drug candidate Diamyd®. We are very satisfied with both the choice of partner and the terms. The agreement includes an upfront payment of USD 45 million – which was paid when the agreement was signed – future milestone payments of up to USD 580 million and royalties on future sales. In addition to the financial security the upfront payment has provided Diamyd as a company, we also see the agreement as a validation of the entire diabetes platform. This has strengthened my belief that we have an extremely promising drug candidate that may one day change the lives of many future diabetics throughout the world.

Next development step ongoing
The Diamyd® drug candidate constitutes the foundation of our development operations in diabetes and during the year, we announced that the European part of the global Phase III program has been fully enrolled and just recently, we also recruited enough patients for the US trial. Furthermore, Diamyd has obtained orphan drug status in the US, a significant and long-awaited decision that highlights the major medical need for a new treatment for type 1 diabetes that, in the long-term, can speed up the process of making the product available to children and adolescents newly diagnosed with diabetes. The next stage of development, which is already well underway, is to see whether we can also use Diamyd® to treat individuals at high risk of developing type 1 diabetes, and potentially prevent the disease.

Diamyd’s portfolio of pain-relieving drug candidates contains NP2 Enkephalin, NG2 GAD and NE2 Endomorphin. These development projects comprise a broad portfolio with a wide range of applications. Pain management is a therapeutic area with significant medical needs. We are convinced that the pain portfolio, with drug candidates that act locally in the nervous system, has major potential for many diseases where existing pain treatment is inadequate. We recently presented promising results from our first clinical trial with NP2 Enkephalin, our furthest advanced drug candidate in the pain portfolio, and we have well-developed plans for the coming year to further increase development resources in the pain therapy area, where the first step is the start-up of a Phase II trial with NP2 Enkephalin.

Two business areas
Because Diamyd now consists of two separate portfolios with promising development projects, we have decided to divide the operations into two business areas: Diabetes and Pain, from the new fiscal year 2010/2011. This division will above all create greater opportunities to present and highlight the drug candidates in our pain portfolio, which all have promising future prospects but have not received the attention they deserve in the past.

In line with our plans, we are now starting to prepare for our very first product launch. In our agreement with OMJPI we have secured exclusive marketing rights for the Nordic countries, and we intend to build our own market and sales organization for selling Diamyd® in the Nordic market.

As Diamyd develops as a company, we will take new steps toward new projects. With the partnership agreement in place and a healthy bank balance, both interest and opportunities to find new and attractive development projects will grow, through either licensing or acquisitions. In the coming year we hope to be able to expand the portfolio with projects in the early phase of development, and with already approved substances in the field of endocrine diseases in children, in order to steadily increase and strengthen our position in this specialized therapeutic area and to allow us to use our future sales more effectively. Although Diamyd has grown a lot over the past years, and we have clear plans to continue growing, our aim to maintain a flexible and cost-efficient organization remains.

Ambition to change the corporate landscape
Our ambition for the future is that Diamyd will be able to change the corporate landscape and show that building a profitable development company in Sweden is possible. Sweden is mainly characterized today by either small research-intensive biotech companies, or large pharmaceutical companies with head offices outside of Sweden. Mediumsized pharmaceutical companies with both development and sales are clearly underrepresented. The classic biotech model, where a small research-intensive company has a drug development pipeline with projects that are successively refined and out-licensed somewhere between the preclinical phase and clinical Phase II, is slowly disappearing. A new product generally takes ten to fifteen years to develop, and a large pipeline with continuous transactions is needed to finance the operations until the proceeds from large milestone payments and royalties on sales arrive, a timeframe that is usually too long for small companies. Biotech companies must be able to drive the development of their products further and retain parts of the market themselves. The key is strong owners with the desire and means to make financial investments in long-term development projects. Diamyd’s owners have a long-term focus, which is enormously gratifying as we now draw closer to the results of our first Phase III trial with Diamyd® for the treatment of type 1 diabetes. The journey has been long, but our owners have always supported us – in good times and bad. I would like to thank our loyal band of shareholders, and I hope you will continue to follow us on our journey to build a new pharmaceutical company in Sweden.

Stockholm, November 24, 2010

Elisabeth Lindner
CEO and President of Diamyd Medical

*** To read the complete Annual Report, please see attached PDF, or visit www.diamyd.com ***

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