MedRx : Fair Research Inc. Report (September 14, 2022)

ANALYST NET Company Report

		ＭEDRx Co. Ltd.
（4586	Growth）	Issued: Sept. 14 2022

Major problems overcome by "selective concentration"

Product development stagnates in 1H/2022

MEDRx explained the status of each of its pipeline products at a company briefing in August 2022. While there have been no product failures neither has there yet been great progress. Phase-2 clinical trials for tizanidine tape (MRX-4TZT,CPN-101) are now at the preparatory stage and details of supplementary tests for the lidocaine tape Lydolyte (MRX-5LBT) have not yet been finalised. The next trials for fentanyl tape (MRX-9FLT) and the memantine patch (MRX-7MLL) are due to begin. Going forward, in the context of limited product development funds, the company intends to reduce the number of products it develops at any one time. Instead, it will concentrate on products whose development promises an early payoff. Once a product starts to produce a certain level of returns it will move on to the next product.

"Selective concentration"

Within its "selective concentration" strategy the company's top priority is the Lydolyte lidocaine tape, which is the closest to approval and market launch. The cost of supplementary tests will depend on the reply from the FDA but the tests proposed by MEDRx will cost just under JPY200 million, an amount which is already factored into its 2022 budget. The company's next priority, given its advanced development and marketability, is tizanidine tape. The company has already decided to raise the necessary funds for further development by issuing new share subscription rights (the 24th such issue). The third priority will then be fentanyl tape or memantine patches. While commercial considerations would favour the latter, which uses the company's NCTS®, in development risk terms, the former, which uses ILTS® would be preferred. About JPY200 million is likely to be spent this term on Pivotal BE tests for fentanyl tape, and this amount also has been budgeted.

Two major products after overcoming recent problems

As a result of the company's policy of concentrating on selective goals, the next twelve months should see the approval and launch of the Lydolyte lidocaine tape, the receipt of milestone income of JPY100 million from DWTI, and possibly a licensing-out opportunity. A stabilisation of the company's finances will thereby have been achieved. Subsequently, once funds have been secured to conduct verification tests on fentanyl tape's accident prevention mechanism, and if those tests are successful, a licensing-out becomes a possibility. Tizanidine tape Phase-2 development will be funded by a new round of fund raising and, if successful, could lead to a further licensing-out in or around 2024 at the earliest, with the licensee conducting Phase-3 development. Fair Research believes MEDRx will overcome the "valley of death" syndrome faced by many ventures through "selective concentration" and will continue to see new out-licensing opportunities. Development of two major next-generation development products (Diclofenac Lidocaine tape MRX-6LDT and microneedles) is progressing, which we expect will lead to a further increase in corporate value.

Follow-up report

Fair Research Inc.

Tsuyoshi Suzuki

Company Outline

	Location			Kagawa Pref.
	President			Yonehiro
			Matsumura
	Established			Jan. 2002
	Capital			JPY50 million
	Listed			Feb. 2013
	URL			www.medrx.co.jp
	Industry			Pharma
	Employees			21 (non-consol)
	Key Indicators (Sept. 13, 2022)
	Stock price			JPY114
	52-week low			JPY94
	52-week high			JPY189
	Shares			24,595,100
	outstanding
	Trading unit			100 shares
	Market cap			JPY2,779 mil
	Dividend			0
	Forecast EPS			-40.9
	Forecast PER			na
	Actual BPS			JPY61.72
	Actual PBR			1.85X

Based on shares outstanding excl. treasury shares

Results	Revenue	YoY	Op. Profit	YoY	Rec.Profit	YoY	Net Profit	YoY	EPS	Stock Price (JPY)
JPY mil	％	JPY mil	％	JPY mil	%	JPY mil	％	JPY	High	Low
19/12 Actual	169	1922.9	-1,627	na	-1,633	na	-1,616	na	-134.3	698	301
20/12 Actual	115	-32.2	-1,130	na	-1,152	na	-1,114	na	-68.6	426	160
21/12 Actual	8	-92.7	-1,061	na	-1,066	na	-1,059	na	-49.6	327	126
22/12 Plan	289	nm	-1,002	na	-1,003	na	-1,006	na	-40.9
21/6 H1 Actual	7	-50.4	-471	na	-475	na	-473	na	-23.9	327	199
22/6 H1 Actual	9	26.7	-374	na	-382	na	-381	na	-15.5	134	94

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This report is prepared by Fair Research Inc. (FRI) for the purpose of providing information to investors, and not for solicitation of securities trading. Although this is based on information and materials that FRI judges reliable, there is no guarantee of accuracy, credibility, completeness, suitability or timeliness. FRI shall not take any responsibility whatsoever for any results including direct or indirect damage arising from the use of, or reliance on, this report. Investors should take their own responsibility for securities and other transactions. The intellectual property rights of this report belong to FRI, and any copy, transmission or quote of any contents without permission is legally prohibited

MEDRx Co. Ltd. （4586	Growth）	Issued: Sept. 14 2022

Company Outline & Philosophy

A venture company engaged in developing transdermal absorption drugs

The company has proprietary

technologies, giving its products a higher probability of success than is the case in other new drug discovery businesses

In broad terms, the company is engaged in developing transdermal absorption formulations using the active ingredients of existing oral and injectable drugs. It licenses out these formulations to pharmaceutical companies, collecting milestone payments and, after launching in the market, royalties on sales.

Transdermal absorption formulations make up a growing medium to long-term segment of the pharmaceutical market. Among their attributes are maximisation of pharmaceutical effect, reduced side-effects and better quality of life for the patient. These are achieved by the following:

• Providing a consistent and sustained release of active ingredients: enabling the maintenance of a constant volume of the drug in the bloodstream.

• Little or no first-pass effect: while the efficacy of orally administered drugs can be reduced to 10-20% on passage through the liver, this is not an issue with transdermal absorption formulations.

• Better medication compliance: suitable for patients who find it difficult to take drugs orally due to problems swallowing, and also reduces the problem of forgetting to medicate.

• Unlike drug delivery by injection, transdermal delivery is painless.
  ⑤ Transdermal delivery lends itself to a wide range of conditions.

The MEDRx business model is distinctive in two ways:

1. It is low risk (i.e. high probability of success) because it does not involve the discovery or development of new active ingredients.
2. The company has its own transdermal absorption technology using ionic liquids (ILTS®: Ionic Liquid Transdermal System), which distinguishes it from other companies.

Note: Ionic liquids are salts in liquid form at room temperature composed of ions which are resistant to crystalization. They are non-volatile, non- flammable and electricity conductive. In recent years these properties have led to applications in lithium battery electrolysis and elsewhere. With ILTS®, MEDRx was the first to develop the technology for the transdermal absorption of ionic liquids, thus facilitating the administration of drugs which are normally difficult to administer transdermally. With existing

technology, transdermal absorption was difficult in the case of nucleic acid or macromolecular formulations, but ILTS® has made it much easier.

Source: MEDRx company briefing

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This report is prepared by Fair Research Inc. (FRI) for the purpose of providing information to investors, and not for solicitation of securities trading. Although this is based on information and materials that FRI judges reliable, there is no guarantee of accuracy, credibility, completeness, suitability or timeliness. FRI shall not take any responsibility whatsoever for any results including direct or indirect damage arising from the use of, or reliance on, this report. Investors should take their own responsibility for securities and other transactions. The intellectual property rights of this report belong to FRI, and any copy, transmission or quote of any contents without permission is legally prohibited

MEDRx Co. Ltd. （4586	Growth）	Issued: Sept. 14 2022

There are five product pipelines to which MEDRx has applied its proprietary ILTS® technology

A memantine patch using NCTS® technology has been developed

A notable feature of MEDRx's ILTS® is that it has high built-in barriers to entry. The company has a library of several hundred ionic liquids formed from combinations of compounds with a track record of use on human subjects as pharmaceuticals and additives. The company also has extensive know-how on selecting ionic liquids for particular drug properties, and formulation expertise on maintaining and improving the transdermal properties of ionic liquids.

The company's primary target is the US market for transdermal absorption formulations, mainly because of the size of the potential market.

In addition, winning approval in the US for formulations using existing drugs does not require the pre-clinical testing necessary to submit an application for a new drug (while not true in all cases, after Phase-1 clinical trials, Phase-2 can be omitted and the process moves directly to Phase-3). Also worth bearing in mind is that patch and tape-type drugs tend to command higher prices in the US than in Japan.

Main product pipelines

Source: Company briefing, August 2022

The main products to which the ILTS® technology is applied are tizanidine tape (CPN-101,MRX-4TZT), which has been successfully licensed out to Cipla Corp., lidocaine tape (MRX-5LBT), fentanyl tape (MRX-9FLT), oxycodone tape (MRX- 1OXT) and diclofenac-lidocaine tape (MRX-6LDT).

The company also has a transdermal absorption technology using nanocolloids (NCTS®: Nano-Sized Colloid Transdermal System). As mentioned earlier, the ILTS® technology is used in the transdermal absorption of macromolecular agents such as peptides and nucleic acids. The NCTS® technology, however, enhances transdermal absorption of relatively low molecular-mass agents by reducing pharmacologically active components to nano-sized colloids. Among products now at the development stage for which information has already been disclosed is MRX- 7MLL, a transdermal absorption formulation using memantine (for the treatment of Alzheimer's), which can suppress the skin irritation which memantine usually causes.

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This report is prepared by Fair Research Inc. (FRI) for the purpose of providing information to investors, and not for solicitation of securities trading. Although this is based on information and materials that FRI judges reliable, there is no guarantee of accuracy, credibility, completeness, suitability or timeliness. FRI shall not take any responsibility whatsoever for any results including direct or indirect damage arising from the use of, or reliance on, this report. Investors should take their own responsibility for securities and other transactions. The intellectual property rights of this report belong to FRI, and any copy, transmission or quote of any contents without permission is legally prohibited

MEDRx Co. Ltd. （4586	Growth）	Issued: Sept. 14 2022

The company has developed microneedle technology to provide "vaccination patches"

MEDRx microneedles come with an applicator, allowing easy administration with finger pressure alone

NCTS®： Nano-sized Colloid Transdermal System (image)

Source: Fair Research Inc, using company briefing

The company has also developed a technology using microneedle arrays as a sort of "vaccination patch". The microneedle technique works by using super-fine needles to open apertures in the surface of the skin, thereby allowing access to the drug. The skin not only acts as a physical barrier to foreign substances but also acts immunologically to expel such substances. Langerhans cells in the epidermis below the stratum corneum and dermis dendritic cells in the dermis below, are antigen- presenting cells which play an important role in biological defense. A strong immune response can be elicited by efficiently transmitting the vaccine antigen to these antigen-presenting cells.

However, the stratum corneum presents a barrier, preventing vaccine applied to the skin from penetrating. Microneedles transmit drugs into the skin by opening apertures in the epidermis with superfine needles. They are less than 1mm in length and do not reach the nerve, hence providing vaccination without pain. In other words, this method can be seen as a "vaccination patch".

Microneedle characteristics

Source; MEDRx company briefing

4/17

This report is prepared by Fair Research Inc. (FRI) for the purpose of providing information to investors, and not for solicitation of securities trading. Although this is based on information and materials that FRI judges reliable, there is no guarantee of accuracy, credibility, completeness, suitability or timeliness. FRI shall not take any responsibility whatsoever for any results including direct or indirect damage arising from the use of, or reliance on, this report. Investors should take their own responsibility for securities and other transactions. The intellectual property rights of this report belong to FRI, and any copy, transmission or quote of any contents without permission is legally prohibited

MEDRx Co. Ltd. （4586	Growth）	Issued: Sept. 14 2022

Sluggish progess in product development

Tizanidine tape has been stalled at the Phase-2 preparatory stage for more than two years

MEDRx planning to start Phase-2 under its own steam

Announced financing to cover Phase-2

Supplementary testing required

1. Status of each pipeline

MEDRx explained the status of each of its pipeline products at a company briefing in August 2022. While there have been no product failures neither has there yet been great progress. Phase-2 clinical trials for tizanidine tape (MRX-4TZT,CPN-101) are now at the preparatory stage and details of supplementary tests for the lidocaine tape Lydolyte (MRX-5LBT) have not yet been finalised. The next trials for fentanyl tape (MRX-9FLT) and the memantine patch (MRX-7MLL) are due to begin. Meanwhile, much more time is needed for the realisation of such promising major projects as the MRX-6LDTlidocaine-diclofenac tape and microneedles.

Going forward, in the context of limited product development funds, the company intends to more efficiently deploy its financial and other resources by reducing the number of products it develops at any one time. Instead, it will concentrate on products whose development promises an early payoff. Once a product starts to produce a certain level of returns the company will move on to the next major development. Before considering the order in which selection and concentration are carried out, let's take a look at the current state of the pipelines. (Please refer to our Basic Report released on March 23 2022 for details of each pipeline.)

1. Current status of MRX-4TZT(CPN-101)

Tizanidine tape (MRX-4TZT,CPN-101) was out-licensed to Cipla in 2017, and is currently being prepared for Phase-2 trials. The original idea was that Phase-2 trials would start in mid-2020 but delays caused by the COVID-19 pandemic and Cipla's decision to sub-license in the area of CNS meant that Phase-2 could not get underway.

MEDRx then changed its policy to conduct Phase-2 trials partially or entirely at its own expense and is now in discussions with Cipla on how to proceed. MEDRx is of a mind to start Phase-2 by the end of the year and is considering paying the entire cost itself. If it does cover the entire amount itself, it is highly likely that the number of Phase-2 cases will be whittled down and that Phase-3 will be required before applying for approval. In this case, the probability is that there will be a licensing- out after successfully completing Phase-2.Phase-2 expenditures, after reducing the number of cases, would probably total JPY500-600 million. On August 22, 2022 MEDRx announced it was raising funds through the 24th issue of new stock subscription rights. The amount raised would be JPY737 million, with JPY557 million of that being allocated to Phase-2.

Undertaking Phase-2 at its own expense raises the possibility of a buy-back of rights that were licensed out and it appears that this is part of the discussion with Cipla. Under the present agreement, with the commencement of Phase-2 Cipla is to pay MEDRx a milestone fee of USD2 million. However, it is possible that milestone payments could be partially offset by a rights buyback.

1. MRX-5LBT"Lydolyte"

In August 2020 an NDA was submitted to the FDA for the Lydolyte lidocaine tape (MRX-5LBT), and in October of the same year the application was accepted. However, on July 5 2021 MEDRx received a Complete Response Letter from the FDA in which a number of questions were posed. MEDRx initially thought it could reply to these questions without the need for supplementary tests, and that approval would be granted in 2021. However, it became apparent in discussions with the FDA that a number of supplementary tests would be required in order to secure regulatory approval.

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This report is prepared by Fair Research Inc. (FRI) for the purpose of providing information to investors, and not for solicitation of securities trading. Although this is based on information and materials that FRI judges reliable, there is no guarantee of accuracy, credibility, completeness, suitability or timeliness. FRI shall not take any responsibility whatsoever for any results including direct or indirect damage arising from the use of, or reliance on, this report. Investors should take their own responsibility for securities and other transactions. The intellectual property rights of this report belong to FRI, and any copy, transmission or quote of any contents without permission is legally prohibited