Bone Medical Ltd

Technical Report

15 June 2004

The Directors,
Revenir Limited
Level 2, Troika House
129 Melville Parade
COMO
WA 6152
AUSTRALIA

Dear Sirs,

As requested we have reviewed information on the technologies addressing treatments for musculo-skeletal degeneration and disease that comprise the portfolio of Bone Limited. Bone Limited, a company registered in the British Isles, intends to develop and commercialise these technologies through a restructuring and capital raising in Australia. The purpose of this report is to provide an independent opinion on the technologies for inclusion in an Explanatory Memorandum to shareholders of a target shelf company and/or in a Prospectus issued to new investors.

To complete our analysis we have assessed the technologies licensed in by Bone Limited, the Company’s business strategy, the markets addressed by the technology and the Company’s ability to access and satisfy these markets in a reasonable time.

BONE LIMITED PORTFOLIO

Bone Limited’s portfolio addresses the high volume, chronic markets of treatments for bone and joint diseases. Musculoskeletal disease is the most frequent cause of disability worldwide, and is estimated to cost about US$250 billion to treat in the US alone1. Bone and joint diseases account for 50% of all chronic conditions in people over 50 years and this market will increase with the ageing population and associated increases in osteoporosis and other diseases. There is also increased awareness and demand for health products to support more active lifestyles. The Company’s portfolio is underpinned by three innovative technologies that address the oral delivery of peptides and proteins, vaccination via the oral route and effective discovery of novel drug entities.

The product pipeline is composed of 7 core project areas and is fairly well balanced in terms of time to market and risk profile. It includes two short-term, medium risk projects to develop oral formulations of the existing peptide drugs, calcitonin and parathyroid hormone (PTH). These are the most important projects for Bone Limited at this stage, providing the potential for an income stream to support the rest of the work. If both of these are successful they will be combined in a third product. A lead anti-TNF product has been identified in a fourth project. This is now completing laboratory testing which, if successful, will be followed by pre-clinical testing for safety and efficacy in animals. The risk is still high for this project, as most potential therapeutics fail at the pre-clinical and early clinical stages. However, if successful, this anti-TNF product will generate licensing opportunities in the medium-term and follows the oral calcitonin and PTH therapeutics in the Company’s product pipeline. The remaining projects are still at the early discovery stage, and although the technology platforms on which they are based are sound and potentially powerful, they will be relatively long-term and involve the high level of risk with which therapeutic discovery projects are always associated.

ORAL DELIVERY OF PEPTIDES AND PROTEINS

Axcess Oral Delivery Technology

Bone Limited’s Axcess technology underpins the potential of its oral calcitonin and PTH products. The therapeutic use of peptides and proteins is still limited by the lack of convenient methods for their effective delivery. The central issues for oral delivery of peptides and proteins are breakdown of the drug before it can be absorbed, and the efficiency of absorption. Unless the drug can be efficiently absorbed in an active form, oral administration becomes impractical and expensive, and to date low bioavailability has limited the potential of these products. As a result most therapeutic proteins are currently available only as preparations which require repeated injections because of their extremely short biological half-life. This represents a serious drawback for patients, and a major opportunity for successful oral formulations.

The Axcess oral delivery technology is based on the use of aromatic alcohols as absorption enhancers. Their mode of action is not fully elucidated, but they may enhance transmission across the cell membrane and/or open up the tight junctions between intestinal cells, allowing passage of the drug contained in the delivery vehicle across the cell barrier and into the bloodstream. These compounds have been used clinically for many years as non-toxic formulation aids, but have not previously been recognised to enhance oral absorption. As the compounds involved are already listed in the pharmacopoeia of Western countries and Japan, their use involves minimal regulatory compliance. Importantly, the formulation does not involve the chemical interaction of the delivery vehicle with the active protein, and so does not include a new chemical entity. This is a major advantage both in terms of time and of cost to market, as it is only necessary to demonstrate equivalence with existing formulations to satisfy the regulatory bodies.

However, Bone Limited’s technology platform does face strong competition. Transdermal and respiratory routes can be used for delivery of peptide and protein-based drugs, and the demand for effective delivery of proteins by the oral route has brought a tremendous thrust in recent years both in the scope and complexity of drug delivery technology. Some technologies, such as that developed by Nobex Corporation in which low molecular weight polymers are attached to the active drug, involve the generation of new chemical entities. Such products face a full development and regulatory track, and are at a competitive disadvantage compared with the Bone Limited products. Others, like that of Emisphere Technologies Inc.2 and Unigene3, have attracted considerable interest from major multinational pharmaceutical companies and are involved in development of similar products to those of Bone Limited.

Target markets

Osteoporosis

Bone Limited’s oral calcitonin and PTH products target the large and growing osteoporosis market. Osteoporosis is a degenerative skeletal disorder in which a loss of bone mass and deterioration in the bone microarchitecture lead to an increase in bone fragility and fracture risk. In the seven major pharmaceutical markets there is currently an estimated population of more than 127 million men and postmenopausal women with osteoporosis; about 80% of the patients are women. Treatment is based on the prevention of bone resorption or the stimulation of bone formation and remodelling. Almost all the drugs on the market are biphosphonates, selective oestrogen receptor inhibitors or calcitonins, and inhibit bone resorption. A single parathyroid hormone derivative is available to stimulate bone formation. Combination of these two approaches is not straightforward, and to date no combined therapeutics have been developed.

The osteoporosis market was worth US$5 billion in 2003 and is estimated to increase to US$10.5 billion by 2011, an annual growth rate of 10%. A key factor in market growth is the increasing awareness of osteoporosis among both patients and physicians, and an improvement in the rate of diagnosis. The market has significant clinical unmet needs, including drugs with improved efficacy in the reduction of fractures, delivery regimens that enhance patient compliance, and more drugs with bone forming activity. Several products currently in the late stages of development will be launched between 2004 and 2007. They will address these needs to some extent, and are expected to contribute US$4.7 billion towards market value by 2011.

Paget’s disease

Paget’s disease has a low prevalence under the age of 40 but is the second most common bone disorder after osteoporosis in the geriatric population4. It is an incurable chronic disease characterised by abnormally high rates of bone turnover and resulting in large, deformed bones. It has a strong geographical distribution pattern, with the highest overall prevalence of 2% in the UK, and is estimated to affect 1-3 million people in the US. It is very rare in the Middle East, Africa and Asia. Treatment rates are relatively low, as many patients are asymptomatic. Bisphosphonates and calcitonins are used to treat the symptoms.

Oral calcitonin project

Calcitonin is a peptide hormone that inhibits bone resorption by blocking the activity of specialised bone cells known as osteoclasts. This modifies the natural balance between calcium deposition in the bone, performed by osteoblasts, and bone resorption in favour of the former, resulting in moderate increases in bone density. Salmon calcitonin is much more potent than the human hormone, and is the form most frequently used therapeutically. It is used to reduce vertebral fractures and bone pain in osteoporotic patients as well as for the treatment of Paget’s disease and hypercalcaemia, and has been reported to have some analgesicanalgaesic effect. In this area patient compliance is a major factor impacting on present treatment. It is estimated that 15-30% of patients are non-compliant with their daily injection therapy within 12 months of initiating drug treatment5, and novel drug delivery methods will be an important factor in driving market penetration. Oral delivery is regarded as the safest, most convenient and most economical method of drug administration, and patient acceptance and compliance are typically higher when medicines are delivered orally. Approaches currently being applied to the development of oral calcitonins include the use of enteric coatings, additives that modulate intestinal proteolytic activity, and a caprylic acid derivative which facilitates transport across the membrane of the small intestine. In one product under development, the calcitonin is chemically linked to small polymers.

Calcitonin market

The osteoporotic patient base is highly segmented, and other classes of drugs represent major competition for calcitonins, which despite their excellent safety profile are being recognised to have relatively limited therapeutic potential. In 2003 the biphosphonates, which like oestrogens have been shown to result in a greater increase in bone density than calcitonins, commanded 70% of the market. The leading therapeutic in this group (Fosamax), with indications for postmenopausal, male and glucocorticoid-induced osteoporosis, had sales of US$2.2 billion in 2002. Calcitonins, which are most effective in osteoporosis patients with a high rate of bone turnover, represented only 7.4% of sales, generating US$373 million. According to IMS6, sales are predicted to rise by approximately US$57 million by 2006, largely due to increased sales in the US, but are likely to decline in Europe largely because of cost containment issues. Datamonitor takes a longer term view and predicts a decline to 3.2% of the overall market in 2011, with sales of US$337 million, largely because of the advent of more effective drugs with higher fracture reduction efficacy7. Calcitonins are also used for other indications, including Paget’s disease and hypercalcaemia, and the overall world-wide calcitonin market currently generates US$700 million8 annually.

Calcitonin products face continuing competition from the biphosphonates, one of which is now available in a highly convenient weekly oral dosage form. Most calcitonins are injectables, but a nasal spray marketed by Novartis (Miacalcin) has captured more than 50% of the market because of its easier and more convenient method of administration. An effective oral formulation will not necessarily significantly expand the osteoporosis market for calcitonins, but will encroach on sales of calcitonins currently delivered by injection or nasal spray. Novartis, using technology licensed from Emisphere, has an oral formulation of calcitonin in late-stage development. The Novartis drug successfully completed Phase IIa trials in Europe in February 20039. An Elan Corporation/Nobex joint venture also has an oral calcitonin in Phase I trials10. These are potentially directly competitive with Bone Limited’s product, and Bone’s ability to license its product and penetrate the market will depend crucially on the competitive edge of its technology in terms of time to market and cost.

The cost to the patient of Miacalcin (200 iu once daily) is not significantly different from that of Fosamax, at about $2/day11. However, calcitonin is relatively expensive to produce and cost and profit margins may be an issue for oral delivery if bioavailability by this route proves to be low.

Development status

Validation for Bone Limited’s oral delivery platform has recently been achieved using insulin in human subjects, though acceptable variation in response between patients has yet to be demonstrated. Preclinical studies with salmon calcitonin have been completed in pigs, demonstrating delivery of the peptide into the blood stream and associated falls in plasma calcium levels after introduction directly into the small intestine. Phase I/IIa studies in human subjects to demonstrate bioequivalence with the existing nasal formulation began in March 2004 in the UK. On the basis of the preclinical data Bone Limited believes that its oral delivery vehicle will be clinically effective and commercially viable. As this is composed entirely of registrable components and does not involve a new chemical entity, clinical trials will only require the demonstration of equivalence to formulations already on the market. This is a relatively rapid and cost-effective route to market for a pharmaceutical.

Oral parathyroid hormone (PTH) project

Parathyroid hormone is a protein that increases the number and activity of osteoblasts, the bone forming cells. The full-length hormone and the active peptide 1-34 stimulate bone remodelling, and this is the only therapeutic approach of this type currently available to osteoporosis patients. Clinical trials have shown PTH to be more effective than any other therapy. Daily injection has resulted in a 66-90% decrease in vertebral fractures and about a 50% drop in non-vertebral fractures.

PTH market

PTH is the most novel osteoporosis treatment on the market. In 2003 the market size for PTH was US$95 million, but it represents one of the top five R&D products for osteoporosis in terms of forecast revenue by 2011. By then the market for PTH is expected to be US$1.484 billion, an annual growth rate of 41%12. The first and at present the only product in this class, an injectable formulation of peptide 1-34, was launched in 2002 by Eli Lilly with severe osteoporosis patients at high risk of fracture as the target market. Two further injectable PTH products are currently in Phase III trials. There are some drawbacks to PTH therapy. It is expensive, and is associated with identified side-effects including the risk of hypercalcaemia and orthostatic hypertension. It is also currently subject to a limited recommended treatment duration of 12-24 months, and there is not yet good evidence of retention of the bone gain once therapy has ceased. Moreover, at the moment PTH is only available as an injectable. There is a clear unmet need for bone-building agents for the much larger market of patient populations with less severe disease. Competitive positioning to access this market will require more patient-friendly dosing formulations, such as the oral PTH fragment 1-34 under development by Bone Ltd, and it is considered that oral anabolic drugs would be a valuable development in the treatment of osteoporosis.

Eli Lilly is in partnership with Inhale Therapeutics and Emisphere to develop inhaled and oral formulations of PTH, which are expected to increase patient and physician acceptance and contribute significantly to market growth. A pilot study on the inhaled formulation published in May 2003 gave promising results. GlaxoSmithKline is also developing an oral PTH analogue with Unigene, which is about to enter Phase I trials. These will be directly competitive with Bone Limited’s oral PTH. A potential threat to the predicted growth of the PTH market is presented by a new class of drugs, the calcilytics, also under development by GlaxoSmithKline under a licensing agreement with NPS Pharmaceuticals Inc. However, these are in early stage development with a lead compound still to be identified13.

Development status

Preclinical studies in rhesus monkeys of Bone Limited’s oral PTH in tablet and capsule forms have been completed by a major pharmaceutical company. Plasma PTH and calcium levels increased with both formulations, but higher PTH concentrations were achieved with the tablets. The Company is progressing to Phase I trials in humans, to be conducted in Australia during 2004.

Oral combination project

In theory this represents a very sound approach, combining the activation of osteoblasts with the inhibition of osteoclasts, thus stimulating bone building while reducing its resorption. However, attempts to combine other therapeutics in this way have indicated that it is not a simple matter, and the outcome is not necessarily predictable.

Market for oral combined product

There is no current therapeutic combination that offers stimulation of bone building together with inhibition of resorption. The market for such a combination would depend crucially on its efficacy. An effective combination could attract a significant share of the osteoporosis market, which was worth US$5 billion in 2003 and is estimated to increase to US$10.5 billion by 2011, an annual growth rate of 10%.

Development status

Development of this project will await proof of concept in humans for the oral formulations of the individual components. Development is likely to be much more complex than a simple combination of the components, requiring optimisation of the balance between the drugs. This will be followed by the full development and regulatory pathway for a new therapeutic, involving major clinical trials.

DRUG DISCOVERY

Mozaic drug discovery technology

Bone Limited’s Mozaic drug discovery technology, known as ‘combinatorial proximity’, is used to identify new ligands binding to receptors on the cell surface. Binding activity is displayed on the 2-dimensional surface of a fluid mosaic and, because it does not rely on chemical interaction and the potentially interfering effects of chemical linkers, is reportedly more powerful and more efficient than conventional combinatorial chemistry.

Osteoblast and osteoclast regulator projects

Calcitonin and PTH are osteoclast and osteoblast regulators. This project aims to identify new therapeutics to target the same market.

Market for new bone cell regulators

The osteoporosis market (see above), though large and growing, is strongly segmented, and the market for a new drug will depend on its properties.

Development status

A probe library that affects cell signalling in osteoblasts has been identified, but this is still a very early stage discovery project. Work on osteoclast regulators began at the start of 2004 and further work is due to be conducted in collaboration with a Melbourne group with an international reputation in this field.

TNF regulators project

Tumour necrosis factor-α (TNF) is a major mediator of inflammation, and is known to be key to the pathogenesis of rheumatoid arthritis.

Market for TNF regulators in arthopathies

TNF regulators developed by Bone Limited will target certain inflammatory diseases of bone and joints. The main target market is treatment for rheumatoid arthritis, a severely incapacitating autoimmune disease with a severe and chronic inflammatory component. The prevalence of rheumatoid arthritis varies significantly between different geographic regions14, but in most industrialised countries lies between 0.3% and 1%15. In Japan and China, however, the incidence is low16. Rheumatoid arthritis RA is estimated to affect more than 2-2.5 million patients17, predominantly women, in the US alone, and over 9 million patients worldwide18. In the US, more than 53% of rheumatoid arthritis patients are aged 65 and older19, and this market, like that for osteoporosis treatments, is therefore not only large but also expanding as the population ages. Although inflammation is also involved in osteoarthritis, the other prevalent form of arthritis with a drug market worth 3.5 billion in 200220, the detailed causative mechanism of osteoarthritis is still unknown and anti-TNF treatment is not currently considered an option for this disease. The spondyloarthropathies, however, are targets for anti-TNF therapy. These are chronic inflammatory diseases involving part of the skeleton, with a known genetic component, and usually found in young to middle-aged adults. They are found in 0.1-0.2% of the US population. Incidence of ankylosing spondylitis, the most prevalent of these diseases, increases with distance from the equator; its overall prevalence is 0.1-1% of the general population. Many of these patients are asymptomatic however, and the market is much smaller than for rheumatoid arthritis.

Treatment of rheumatoid arthritis is shifting towards the earlier use of drugs that modify the disease rather than merely reducing the symptoms. These include TNF antagonists, and anti-TNF antibodies and a soluble TNF receptor are currently being used to treat rheumatoid arthritis. These treatments reduce inflammatory swelling and pain, as well as bone damage when used over the longer term, and have been found to be of significant benefit to approximately 70% of rheumatoid arthritis patients21. An important side-effect is that patients receiving such treatment could become more susceptible to infection. Moreover, these drugs are very expensive, treatment costing US$11,000-16,000 per annum22,23. Nevertheless, one of the antibodies (Remicade) achieved sales of US$1,513 million and sales of the soluble receptor (Enbrel) reached US$802 million in 200224, a total of $US2.3 billion and an increase of 53% over the $US1.5 billion sales in 200125. Double-digit annual sales growth is predicted until 2010. These products are administered by injection, and again the market would be subject to major infiltration by an effective oral therapeutic. However, competition is high. An antibody fragment is in late-phase development, with the launch expected in 2005. This product, which is being developed by Pfizer/Celltech, is expected to have an attractive administration regimen of subcutaneous injection of once every 4 weeks, and to be much cheaper to produce than the existing biologics. Over the next 7 years approximately 19 disease-modifying drugs are expected to reach the rheumatoid arthritis market, and this sector of the market is forecast to grow at an annual rate of 12.4% between 2001 and 2010, approaching US$7.3 billion in sales in 201026.

Development status

Use of the Mozaic technology has identified several probes that could up- or down-regulate secretion of TNF. A structure on the surface of the most active micelle has now been converted into a single peptide chain retaining essentially all the activity of the original complex, and has been adopted as a lead compound. The integrity of this compound in biological fluids and its ease of manufacture have now been established. Its effect on blood from patients with rheumatoid arthritis and its oral availability are now being tested, and the product will then enter pre-clinical animal testing for safety and efficacy. If these stages are successful it will then follow the full development and global regulatory pathway for a new chemical entity.

ORAL VACCINE DELIVERY

Vaxcine oral vaccine technology

Most vaccines are injected, and oral delivery of vaccines can generate enhanced immunological responses by eliciting mucosal immunity. Oral vaccine delivery also offers the same advantages as oral formulation of pharmaceuticals in terms of patient acceptance. The technology platform on which Bone Limited’s product development in this area is based involves encapsulating the antigenic protein, which is then dispersed in oil. This generates a vehicle to target Peyer’s patches and generate mucosal immunity, primarily in the intestine. Immunostimulants can be included in the formulation to direct the immune response to humoral or cellular immunity. A range of oils can be used, and all components of the combination chosen are already registered for oral use, which simplifies the regulatory process. The system has been shown to be effective in regulating immune responses against a range of antigens in mouse models. This is an area in which there is strong competition. Emisphere’s delivery system is being applied to the development of an oral anthrax vaccine in association with the US Army27, and several other biotechnology companies are developing oral delivery platforms applicable to vaccines. These include cochleates developed by BioDelivery Sciences International28 and DOR BioPharma’s microencapsulation technology29.

Collagen tolerance project

One of the targets for immunological attack in rheumatoid arthritis is Type II collagen, a major component of cartilage. This program addresses the development of new compounds based on collagen, with the aim of preventing degeneration and possibly regenerating joint linings. However, the development of vaccines for autoimmune disease is in its infancy, and there is no certainty that this approach will achieve the desired outcome.

Market for collagen tolerance

The rheumatoid arthritis market is described above. There has been one attempt to develop a peptide vaccine for rheumatoid arthritis against a different molecular target, but although it completed Phase II trials further development was then terminated.

Development status

This project is at the early discovery stage. It will follow the full development and regulatory pathway for a new chemical entity.

INTELLECTUAL PROPERTY

Bone Limited has licensed in intellectual property protecting the technology platforms on which its product pipeline is based, and any and all improvements to these technology platforms. These patents and patent applications are owned by Axcess Limited, Mozaic Discovery Limited and Vaxcine Limited, which have granted to Bone Limited exclusive global licences in the therapeutic area. However, of the 6 patents and patent applications licensed in to Bone Limited, to date only one has been granted and maintained in the US and only one granted in Europe.

The Axcess patents cover the use of the whole range of non-toxic aromatic alcohols as permeation enhancers for oral delivery of peptides and proteins, and the novel formulations required for them to work. Bone Limited also has considerable technical know-how, particularly in relation to formulation of proteins with the absorption enhancers used in the oral delivery vehicle. This is a significant component of the Company’s intellectual property.

THE BONE LIMITED BUSINESS CAPABILITY

Bone Limited was incorporated in 2002. The Company aims to minimise overheads and outsource non-essential functions, and has entered a management contract with Proxima Concepts Limited on a renewable 3-year term basis. Proxima Concepts is a biopharmaceutical R&D company based at the London BioScience Innovation Centre, and has been closely involved in development of the drug delivery platforms that are licensed to Bone Limited. Proxima Concepts will conduct some of the core activities of Bone Limited, which will therefore exert reduced control over its business. Bone Limited will expand its portfolio by a combination of in-house research and academic collaborations. Products will be out-licensed at Phase II of development to reduce the time and expenditure necessary to generate cash flow. This approach means that if oral calcitonin and PTH, the Company’s lead products, demonstrate bioequivalence with existing products in Phase II trials they will be ready for licensing in the short term.

It is intended that Bone Limited’s Board will comprise Leon Ivory, Michael Perrot, Glen Travers, Chris Bilkey and Jim Phillips, the Company’s Managing Director. The Company intends to expand its Board by the inclusion of a clinician with a strong research record in the field of bone and joint disease. The Board will then encompass a broad range of corporate and operational experience in the financial, biotechnology and pharmaceutical sectors, covering development, regulatory issues and marketing. This will be combined with hands-on expertise in application of the Company’s potential products. Bone Limited’s Chief Operating Officer is John Fitzgerald and its Chief Scientific Officer is Roger New, the inventor of the platform technologies that underpin the Company’s business.

STRENGTHS AND ADVANTAGES

1. The platform technologies on which Bone Limited’s portfolio are based appear to offer potential for the discovery and development of competitive therapeutic products in the field of bone and joint disease.
   
2. Exclusive global licences to these platform technologies in the field of bone and joint disease are in place.
   
3. The Company’s portfolio is well balanced in relation to stage of development and time to market.
   
4. The portfolio targets attractively large, well developed and in most cases growing markets.
   
5. Bone Limited’s two lead products, oral salmon calcitonin and oral PTH 1-34**, are well advanced in relation to the Company’s strategy of licensing out after Phase II trials. Because neither includes a new chemical entity, the regulatory pathway is relatively short and inexpensive compared with most new drugs. Successful licensing of the lead products will generate revenue in the short- to medium-term.
   
6. The Company has existing active links with major pharmaceutical companies that represent an advantage when negotiating licensing on of its products, and increase the likelihood that licensing partners will be found at the most opportune time.
   
7. The Company’s management has a depth of experience in the commercialisation of biotechnology.

RISKS

In addition to the business risks facing this venture and described elsewhere in this prospectus there are risks associated with the technical and the commercial development of the projects.

1. The research and market areas addressed by Bone Limited are competitive and very active, and four of the Company’s seven projects are at the discovery stage. These discovery projects may not yield lead compounds that will be competitive in the marketplace. Competitors may develop novel therapies that better address patient needs.
   
2. The pending patent applications may not be granted or, once granted, may be more restricted than expected. We have not conducted an analysis of competing intellectual property, but the Company will need to be satisfied that its pipeline products do not infringe broader patents in the field.
   
3. Because Bone Limited currently has access to the platform technologies only for use in the field of bone and joint disease, the Company’s opportunity to exploit discoveries in other fields may be restricted unless further rights are negotiated. For example, a novel-anti-inflammatory may have much wider applications than for rheumatoid arthritis, but Bone Limited does not have the rights to such applications.
   
4. The lead products may fail in Phase II trials, or may not demonstrate sufficient advantage over other existing or pipeline products.
   
5. The Company may not be able to attract a licensee or complete a satisfactory licensing deal in an acceptable timeframe.
   
6. If bioavailability by the oral route is low, the need to incorporate relatively large amounts of calcitonin and/or PTH in the formulation will either increase the price to the customer or increase production costs and lower profits relative to competing products. Management will need to carefully assess the optimum balance between market acceptability and profit margin.
   
7. The development and regulatory pathway for any novel drugs generated by the discovery projects is long and expensive.
   
8. Bone Limited outsources much of its core research effort to Proxima Concepts, and its control over one of the fundamentals of its business is thereby reduced.
   
9. The Company’s portfolio is broad, addressing several technologies and at least two complex market areas, and its resources are limited. Decisions will need to be made on the most effective deployment of resources to each project at an early stage and at regular intervals. We believe the Company executives have sufficient experience to make these decisions.

CONCLUSIONS

1. Bone Limited has in-licensed promising platform technologies that underpin a balanced portfolio in the Company’s target area of therapeutics for bone and joint disease. No product of these technologies has yet been commercialised, but we believe that they are well founded and have the potential to generate competitive products. The area is highly competitive but the Company should be in a good position to license on to international companies.
   
2. The Company’s product pipeline is targeted at specific market needs. Although the overall markets are very large, they are fragmented and products under development by Bone Limited address only parts of these markets. Nevertheless, the opportunity remains attractively large and growing if the Company’s products demonstrate advantages over competing drugs. We believe Bone Limited’s products have the potential to do this.
   
3. The technologies are the subject of several patent applications which cover the requisite scope of Bone Limited’s R&D effort; some of these are not yet granted. Early phase clinical trials are being undertaken to complete the Company’s development programme for its two lead products, oral formulations of calcitonin and PTH. The full development and global regulatory pathway will need to be pursued for any lead product generated by the remaining projects, which are at the discovery stage.
   
4. Bone Limited’s two lead products, address oral therapy for osteoporosis. The Company’s strategy is to generate revenue by licensing out its products after phase II trials. The two lead products do not contain new chemical entities and their development and regulatory pathway is therefore likely to be shorter and less costly than for novel drugs. These products are relatively close to licensing out if they succeed in phase II trials. Other discovery stage projects target the identification and development of new compounds for the treatment of osteoporosis and rheumatoid arthritis. We believe that these are appropriate and accessible target areas for the Company.
   
5. The previous experience of Bone Limited’s Board and Management in drug development and commercialisation provides contacts and a breadth of expertise appropriate to the effective functioning of a small biotechnology company.

DISCLAIMER

This report is provided solely for the information of potential investors in Bone Limited. All comments, forecasts and recommendations made in this report are made in good faith on the basis of information available to the consultants at the time including information from Bone Limited. Bone Limited has given permission to include the information as presented. Aoris Nova has prepared this independent report according to the Policy Statements and Practice Notes from the Australian Securities and Investments Commission (ASIC, and the Australian Stock Exchange Listing Rules. Aoris Nova holds an Investment Advisors License from the Australian Securities and Investment Commission (ASIC, No. 256684). This report does not make any recommendations regarding purchase of shares in Bone Limited.

There are risks in bringing the Bone Limited products to market where they can generate revenues. Aoris Nova does not guarantee that the actions noted in this report will actually come to pass because of possible changes in the markets and general business environment, and actions by Bone Limited, which occur over time subsequent to this report and are outside our control to know. Aoris Nova has not audited any financial forecasts of Bone Limited and has not analysed the legal status of agreements Bone Limited has entered into or patents filed. However, in our independent assessment we have not identified anything that would indicate that this is materially misstated. A draft report was issued to Bone Limited to confirm factual accuracy and changes were made in the final report to reflect these.

We have given our written consent to the issue of this report as appearing in the Prospectus in the form and context in which it appears. We have been involved only in the preparation of this Report and not in any other part of this Prospectus, and specifically disclaim liability to any person in respect of any statements included elsewhere in this Prospectus. We have not, other than as set out above, been involved in the preparation, nor authorised or caused the issue of, this Prospectus.

Aoris Nova has acted independently in preparing this report and neither its directors nor staff have any pecuniary or other interest in Bone Limited, or their associates, that could reasonably be regarded as affecting its ability to give an unbiased opinion. Aoris Nova will receive normal professional fees for the preparation of this report. With the exception of these fees, it will not receive any other benefits, either directly or indirectly, from the preparation of the report.

Yours faithfully,

AORIS NOVA PTY LTD

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