MEMPHASYS LIMITED. — Management Reports 2009

Aug 31, 2009

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NuSep News
September
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Transition to a Profitable Company

Significant sales growth, a full order book, a raft of new products, increasing production efficiencies, higher gross margins and significantly reduced losses.

These are the phrases that now describe NuSep as it moves into the third month of the 2009/10 financial year.

The 2009/10 Profit Forecast

Sales	$4m
Gross Margin	$2.56m
Net Profit	$0.51m
EBITDA	$0.56m

Current Status

NuSep can now say it has passed beyond the difficult R&D phase and is headed from Development to Commercial Success. The numbers speak for themselves. From a loss of $5.5m in the 2007/08 year to an operational loss of $1.9m in the 2008/09 year. In addition, from July 2009 NuSep has reduced its ongoing rent and associated costs by approximately $1.3m pa. This means the Company is within striking distance of a profit before any 2009/10 sales increases and cost reductions are considered.

Redefining BioSeparations through Innovation and Simplification

The projected numbers for the 2009/10 year

2009/10 Sales by Segment

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SpermSep
Instruments SpermSep
Diagnostics Consumables Gels Direct
$270,000
$410,000 $70,000 $630,000
,
MF10
Consumables
$200,000
MF10
Instruments OEM Gels,
$910,000 $1,510,000
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While more detail can be found in the Company’s 18 August 2009 ASX profit projection announcement the critical factors behind this profit are:

Increased sales of the Gels. NuSep’s sales and marketing efforts are leading to increased market share. NuSep estimates that it currently holds 6% of the US Gels market and plans to grow its share of the US market to 10% over the next 18 months through the introduction of new products and continued direct marketing.

Solid distribution network. This distribution network is one of the Company’s key strengths. NuSep sells directly and via some mainstream distributors under the NuSep brand name. As part of this distribution channel NuSep opened a web shopfront. This higher margin web channel now accounts for some 20% of the Company’s direct sales. NuSep has three central distribution centers; these are based in Europe, America and Australia.

NuSep also sells via a number of OEM partners. These partners brand the NuSep product under their own names. This gives NuSep significant additional market reach.

New products. New products are critical to sustain NuSep’s sales and profit growth. NuSep launched the MF10 last year and this instrument is now generating increased sales as researchers come to appreciate the unique capabilities it offers. A second generation instrument will be launched by the end of this calendar year. Further, we expect to start selling the IVF SpermSep instrument once we have completed the next clinical trial later this year.

Manufacturing Efficiency. Higher volume leads to increased quality and reduced costs which in turn boost the gross margin. Over the last six month NuSep has improved its Gel pass rate, which is now consistently above 90%. The Company has also improved the overall manufacturing process, reducing cost and staff levels, while increasing the volume of sellable product.

NuSep - A Company with a bright future

As part of the R&D phase NuSep has created some valuable assets which aren’t included in the Company’s Balance Sheet. These assets are, and will continue to drive the Company’s sales and profit growth for the foreseeable future. Specifically NuSep has created the following assets:

Intellectual Property. NuSep has an extensive intellectual property (IP) estate. This IP protection precludes other parties from operating in our markets. Among other items, NuSep’s Gels IP covers the manufacturing process. NuSep’s MF10 & SpermSep IP covers the instrument and the associated consumables.

Distribution Network. As noted above, NuSep has developed global distribution. NuSep is now a recognised brand in the global BioSeparations market. This is a significant achievement for NuSep and one that most other Australian companies never achieve. NuSep has also seen significant growth in its direct internet sales which can be attributed to the value that our customers place on the NuSep name.

Niche Player. NuSep is seen as providing customers with innovative quality products in the BioSeparations niche of the life science market. This makes NuSep’s products very attractive to the OEM customers who can leverage off our brand and has help the growth of the MF10 sales as customers know and trust the NuSep brand. It is also attracting other organisations to approach us about selling their products through our distribution network.

Solid Board & Management Team. NuSep’s Board and Management team has an extensive history in the life sciences market. This team has achieved many firsts, both at the research and business level in Australia and overseas.

Summary. NuSep has invested heavily in R&D over the last few years and is now reaping the benefits of that investment. The Company’s sales are growing and margins have improved leading to a maiden profit of $500,000 this year. Finally, sales of the SpermSep are expected to start later this year, which will have a significant impact on the Company’s future sales and profit.

ASX Pharmaceutical & Biotechnology Index

NuSep is part of the ASX Pharmaceutical and Biotechnology index. This index covers the majority of life science and biotechnology companies including CSL and Biota. The companies in the Pharmaceutical and Biotechnology index generally trade on a higher Price Earnings (PE) than the All Ordinaries index because of the higher growth rates and margins associated with this sector. The average PE of a profitable company in the Pharmaceutical & Biotechnology index is currently 14.5 times this years earnings. Or to put it another way, the share market value of the company is 14.5 times the company’s profit. By comparison the PE for the All Ordinaries index list of companies is 8.75. NuSep by comparison has a market capitalisation of approximately $600,000 which is approximately 1 times this years projected profit of $500,000.

NuSep Ltd | www.NuSep.com | 324 Burns Bay Rd Lane Cove NSW 2066 | Ph: 02 9420 8384

The new way of preparing healthy sperm FDA Pre IND Application reviewed

The SpermSep CS10

The new way of preparing healthy sperm FDA Pre IND Application reviewed

The first live birth from assisted human fertilization (IVF) was reported in 1978. Over the last 31 years there has not been a more efficient method for the preparation of healthy sperm used in IVF. NuSep’s SpermSep CS10, developed together with Professor John Aitkin from the University of Newcastle, is the first such advancement in the preparation of healthy sperm in over 30 years.

The SpermSep was used in a clinical trial in the Westmead Hospital’s Fertility clinic in 2008. This successful trial culminated in three live births and showed that the instrument was at least as safe as the currently used methodology but provided a number of advantages especially in efficacy and safety.

Post this trial, the company made an application to the US FDA to explore what is required to ensure successful registration and sale in the US. It should be noted that US registration is recognised in many other countries. This submission is known as a pre IND application and enables the FDA to advise of any major regulatory concerns before a company submits an official registration application.

In the meantime scientists at NuSep have designed a completely disposable single use cartridge for the SpermSep following on from

suggestions by Westmead trial clinicians. Production of this second generation SpermSep instrument is expected to commence post the current capital raising.

NuSep will undertake another clinical trial later this year to confirm that the revised disposable cartridge operates as safely and effectively as the original disposable cartridge. This study will be limited to the separation of sperm and not extend to pregnancy as in the original study. Based on this, NuSep expects to complete this study early in the 2010 calendar year with sales to occur soon there after. The SpermSep also has significant applications in the veterinary field. NuSep is working with veterinary clinicians to exploit these applications.

To put the market for the SpermSep into perspective there are approximately 45,000 IVF cycles conduced in Australia each year. Each of these would require the use of a single use cartridge.

Lane Cove Facility and Manufacturing Update

NuSep moved out of the Frenchs Forest site in June 2009. After fitting out the new Lane Cove, Sydney facilities the company was back up to speed with in four weeks. Initial production runs began mid July 2009 and the Gel manufacturing facility was fully operational by the beginning of August 2009.

The total cost of the move and fit out was under $100,000. In part we were able to minimise this cost by relocating the laboratories from the old facility to Lane Cove. In addition the Lane Cove facility has a number of clean rooms in which we are now manufacturing our gels.

The Lane Cove facility now represents a state of the art manufacturing suite for Gels, MF10/CS10 and R&D laboratories. The facility also houses the administrative offices of NuSep and warehouse operations. The total rental of this facility is $190,000pa, compared to $1.3m pa at the previous Frenchs Forest facility. In addition the Company is saving in the order of $200,000pa of ancillary expenses such as electricity as a result of this move.

The relocation saving of $1.3m pa reduces NuSep’s fixed costs to the point where it is at breakeven on the sales achieved in the previous year.

NuSep appoints a new Director William Spee joins the Board

The appointment of, Mr. William Spee to the NuSep Board was an opportunity to enrich the board with some broader real world commercial experience. Mr. Spee is a major investor in NuSep and believes strongly in the future of the company. Mr Spee has a reputation for ethical and sustainable investments, and is committed to reducing the carbon footprint of any organization he is involved with. He is a member of the Townsville Federal Solar Cities Consortium, and can best be described as a strong environmentalist.

Mr Spee has had over 30 years business experience including naval aviation, computers, electronics manufacturing and small scale retail. He currently runs a successful commercial property investment business. Mr Spee has dealt extensively with major banks and financiers. He has a number of investments in the share market, and is particularly interested in the biotech and life science sectors.

“I believe NuSep has a very bright future, particularly in the Proteomic and IVF areas”, said Mr Spee. “NuSep’s products address markets which have enormous potential over the coming years”, he added.

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“I am very exited by NuSep’s technology and the profit potential as these products come to market. I believe the company has enormous potential, and look forward to seeing its evolution into a profitable manufacturer and supplier of some very unique products over the next 12 months.

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Ordering | www.NuSepStore.com | USA Ph: 1 877 592-1060 | Australia Ph:1 800 500 108 | sales@NuSep.com

Our products exceed customer expectations

Gels - New products, improved quality and sal es

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The market for premade polyacrylamide electrophoresis gels is estimated to be worth approximately US$100M. At present two supermarket style companies dominate this market and account for over 80% market share. NuSep is #3 with a mark et share of approximately 6 % and is seen as the market innovator.

In the past production difficulties and unreliable distribution have limited our entry to this market. However in the past 12 months NuSep has not only overcome these manufacturing issues but has also achieved outstanding pass rates and quality control. As a result customer confidence in our gel products surpasses that of our rivals and has not only led to increased direct sales, but an unprecedented demand via our OEM product network.

One example of our innovative nature was the introduction of the NUView gels. This product allows researchers to analyse their gels as soon as they have completed a run. Currently researchers have to wait up to a day to undertake this analysis. This product represents the first true innovation in the gel market during the last few years.

The Company has undertaken customer sampling of the NUView gels and this has lead to a significant lift in NuSep’s direct sales. The Company sees continued sales growth as this product is trialled by an ever increasing group of researchers.

In addition the move to Lane Cove has lead to an improvement in the quality of the gels as they are now manufactured in a clean room environment. Also, the move has allowed the manufacturing process to be laid out in a more efficient manner reducing the total manufacturing cost.

Finally, NuSep continues to receive additional OEM enquiries which is a reflection of the market presence that the NuSep gels now command.

It is these sorts of innovations, expanding distribution and increased quality which have laid the groundwork for our planned growth of market share from the current 6% to 10% of the US market over the next 18 months. Achievement of this market share would lift our gel sales to approximately $3.2m pa from the projected $2.1m for the 2009/10 year.

MF10 - A unique product which is generating significant interest as researchers develop applications

Proteomics is the large-scale study of proteins, particularly their structures and functions. Proteins are vital parts of living organisms, as they are the main components of the physiological metabolic pathways of the cell and have potential significant roles as markers for diseases like cancer, heart disease and diabetes. However unlike Genomics (the study of DNA) protein studies are much more complex and require significant clean up (separation/purification) procedures before further detailed analyses with Mass Spectrometry. The MF10 serves just this purpose with its ability to quickly and efficiently purify proteins for further analysis. Launched in 2008, this separation instrument is being adopted by scientists as the frontline purification tool. A number of unique applications have been developed and flowing from this customer feedback a second generation instrument has been developed. This is due to be launched in the near future.

Pharmaceutical & Biotech companies recognise the importance of proteomics for their diagnostics and drug development pipelines. The proteomics market is anticipated to grow from $6.7 Billion in 2008 to an estimated $7.9 Billion in 2009 and continue on to $19.4 Billion by 2014[1] . The specific proteomics market that the MF10 addresses is the proteomic sample preparation market. Frost & Sullivan state that the US proteomics sample preparation market generated $59 million in revenue in 2007 and is expected to reach $103 million in 2011. This market is expected to grow at a compound rate of 15% across this period[2] .

Over the last six months NuSep’s sales force has been focused on demonstrating the MF10 to potential customers. As with any new technology this has been a multistage sales process. The MF10 has now passed the tipping point with potential customers requesting demonstrations and applications being tendered with relevant granting agencies for capital purchase approvals. Significan t sales growth is expected this year, particularly after the launch of the second generation MF10 in October this year.

1. BCC Research Proteomics: Technologies and Global Markets June 2009. http://www.the-infoshop.com/report/bc92659-proteomics.html

2. Genetic Engineering & Biotechnology News Vol 27, No 16, September 15 2007

Redefining BioSeparations through Innovation and Simplification