?? Positive Phase 1 clinical trial for H5N1 (avian flu) vaccine. No

other novel technologies have ever achieved these clinical

results.

?? Medicago will take advantage of these results to add new

commercial contracts.

?? Buy rating maintained and target price increased from $1.50 to

$2.00.

Medicago Inc. announced very promising clinical results for the first Phase 1 study

for its H5N1 (avian flu) pandemic vaccine candidate. The clinical trial included 48

healthy volunteers between the ages 18-60, who received two doses of either

Medicago’s vaccine at doses of 5, 10 or 20 micrograms (mcg) or a placebo. No

serious adverse effects were reported during the trial and the vaccine was found to

be well tolerated at all three dose levels. This trial was the first ever clinical

evaluation of a plant-based VLP (Virus-Like Particles) vaccine showing Medicago’s

vaccine is safe in humans.

Medicago also reported strong preliminary immune response with 81% of subjects

developing an immune response against the H5N1 virus after the second

immunization. A four-fold increase in HI titers (rate of sero-conversion) from

baseline in 58% of subjects was observed in the 20 mcg group. These numbers

were among the best results we have seen for vaccines at this low dose. HI titers

greater than 1:40 were developed in 50% of subjects in the 20 mcg group. More

importantly, Medicago indicated the vaccine demonstrated cross protection against

two other strains of H5N1 avian influenza. Seasonal and pandemic influenza

events usually have strains that mutate. For years, scientists with egg/cell-based

vaccines have tried without success to develop a broader vaccine applicable to

multiple strains. Results at these lower dosage levels have not been reported for

an H5N1 avian vaccine manufactured with a novel manufacturing technology.

12- target (C$) ?? 2.00

Potential ROR 156%

Sector Health Care

Ticker MDG-V

Shares O/S (m) 181

Free float (m) 178

Mkt cap (C$m) 141

Enterprise Value (C$) 140

Analyst 416.360.1322

[email protected]

Toronto 416.361.1064

Calgary 877.513.1025

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Paradigm Capital Inc, IIROC/TSX member 2

Claude Camiré, Analyst 416.360.1322

December 21, 2009

Medicago is now able to proceed with the three commercial partnerships that were

contingent on the success of this clinical trial. Agreements with Genopole in

France, Ajanta Pharma in India and Tabuk Pharma in Saudi Arabia should now

proceed, leading to the construction of Proficia-based vaccine facilities. Financial

details need to be finalized with partners in India and Saudi Arabia. We believe a

number of countries could follow on the same path, especially those with no

vaccine production facilities in their territories. Medicago also becomes eligible to

receive funding for the development of new technologies from US government

agencies such as HHS and NHI. In the last five years, more than US$2b has been

awarded to accelerate better production methods to ensure a quick response in the

event of pandemic flu.

Medicago expects to unveil the full results in the first part of 2010 in a scientific

journal. The phase 2 clinical trial is now expected to commence during the first half

of 2010. In Europe and the US, clinical development remains a process that can

quickly change, especially if pandemic vaccines are needed. In 2009, the FDA fasttracked

any drugs, vaccines or technologies that would reduce the number of

deaths related to the H1N1 influenza. In Europe, the EMEA guidelines defined a

route for accelerated regulatory approval through the submission of prototype

pandemic vaccine files in advance of a pandemic. A number of countries have

harmonized approval procedures to ensure the optimal availability of vaccines

around the world. We believe Medicago would negotiate with the FDA to obtain a

SPA (Special Protocol Assessment) that may award approval after one more

Phase II. Currently in the US, only one other H5N1 avian vaccine has been

approved (Sanofi-Aventis), based on the clinical trial results of only 500 patients.

Now that the safety point has been made, Medicago is certainly going to

emphasize its other key advantages compared to egg-based or cell-based

technologies. For 40 years egg-based vaccines have been used to produce

vaccines in limited supply because of the yield and time (6 months) required to

produce a final product. Cell-based vaccines are new and have not been used

greatly because they offer a small improvement in terms of cost and production

speed. Plant-based vaccines present a disruptive approach and could provide a

clear improvement in production time (from 6 months for egg-based vaccines to 1

month) at a reduced cost base (assumed to be 50% cheaper).

The Phase 1 clinical trial results offer more than just proof of concept. Traditionally

for vaccines, the biggest hurdle is to achieve safety and immune response at the

lowest dose, which Medicago has now done. However, more testing is required to

demonstrate safety to a wider population group, especially kids and pregnant

women. These results are important because they also demonstrate that VLP

(Virus-Like Particles) plant-based technologies could potentially be used to

produce peptides/proteins and antibodies, a US$15-20b industry. According to the

Bio Industry Organisation, more than 370 therapeutic proteins are currently in

development. Traditional cell culture methods require significant capital and labour

investment; cell culture facilities cost about $250-450m, and take from three to five

years to build. Additionally, animal cells generally require costly and complex

media to sustain the cells and the addition of growth factors and animal-based

Paradigm Capital Inc, IIROC/TSX member 3

Claude Camiré, Analyst 416.360.1322

December 21, 2009

products that may themselves introduce contaminants into culture systems.

Medicago holds tremendous competitive advantages in these regards.

Substantial interest from the larger drug companies will emerge from two different

angles: the need for double digit growth and interest in immunization from generics.

In the last two years, new production facilities have been built by Sanofi-Aventis

(SNY-N), GlaxoSmithKline (GSK-N), Baxter (BAX-N) and Novartis AG (NVS-N) to

meet increasing demand. Johnson & Johnson (JNJ-N) is making a big comeback in

the vaccine field and is paying €301.8 million for an 18% equity stake in Crucell NV

(CRXL-Q) as part of a collaboration related to monocolonal antibodies and

vaccines against influenza and other diseases. Merck has quietly arranged to be a

major player with the licensing of technologies with two companies (Pfenex,

Nobilon) and signed a major distribution agreement with CSL Ltd (CSL-ASX) for

the US market. We believe these results provide a new stardom for Medicago in an

industry that needed a dose of innovation.

We expect the vaccine industry to explode from the US$3.5b market in 2007 to

more than US$10b by 2015. Perhaps even more topical, Medicago has a platform

to address pandemic flu vaccines against H5N1, H1N1 and seasonal influenza that

could generate sales by 2011. Global pandemic vaccine supply has fallen far short

of demand, offering potential upside to our Medicago forecast. We believe the

industry will benefit from external factors for years to come. Contrary to other

sectors in the pharmaceutical industry, more than 80% of the cost for vaccines is

reimbursed by government organizations like Medicare in the US. Government

agencies in the US play a large role in the funding of new technologies for which

Medicago becomes eligible with these new results. We believe Medicago’s vaccine

portfolio plays perfectly in the new reality that is facing our society. The success of

these trials increases our confidence in achieving a commercial product, therefore

allowing us to reduce our discount rate in our NPV calculations. We are increasing

our target price from $1.50 to $2.00 and maintaining our Buy recommendation.

Paradigm Capital Inc, IIROC/TSX member 4

Claude Camiré, Analyst 416.360.1322

December 21, 2009

Cost of product sales 0.0 0.0 0.0 18.0 43.3 93.2 131.0 153.1

Research and development 3.7 6.5 12.0 25.0 30.0 40.0 50.0 60.0

General and administrative 3.3 4.0 5.0 6.0 7.0 9.0 10.0 11.0

Depreciation and amortization (0.6) (0.6) (0.6) (0.6) (0.6) (0.6) (0.6) (0.6)

Interest expenses (1.7) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0)

FX and OTC (0.6) (0.5)

Taxes 0.0 0.0 0.0 0.0 (19.1) (94.1) (134.3) (159.8)

Basic (
.17) (
.11) (
.12)
.17
.51 $1.16 $1.66 $1.98

Fully diluted (
.17) (
.07) (
.08)
.13
.38
.87 $1.24 $1.48

Basic 45.0 97.0 125.0 150.0 150.0 150.0 150.0 150.0

Fully diluted 45.0 157.0 181.0 200.0 200.0 200.0 200.0 200.0

Paradigm Capital Inc, IIROC/TSX member 5

Claude Camiré, Analyst 416.360.1322

December 21, 2009

1. Claude Camiré does not have an ownership position in Medicago Inc (MDG-V)

2. Paradigm Capital Inc. has assumed an underwriting liability for, and/or provided financial advice for

consideration to Medicago Inc (MDG-V) during the past 12 months.

3. Paradigm’s disclosure policies and research distribution procedures can be found on our website at

www.paradigmcap.com.

Paradigm Capital uses the following rating recommendations in its research:

Speculative Buy – Expected returns of 10% or more over the next 6-12 months on high-risk development

or “pre-revenue” companies, such as junior mining and early stage biotech companies. (15% of

Paradigm’s coverage list consists of Speculative Buy recommendations).

Buy – Expected returns of 10% or more over the next 6-12 months. (64% of Paradigm’s coverage list

consists of Buy recommendations).

Hold – Expected returns of +/-10% over the next 6-12 months. (18% of Paradigm’s coverage list consists

of Hold recommendations).

Sell – Expected returns of –10% or more over the next 6-12 months. (2% of Paradigm’s coverage list

consists of Sell recommendations).

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