Cancer molecular diagnostics provide product opportunities comparable to blockbuster drugs but with a much more favorable risk profile in development and regulatory approval. Based on our unique and proprietary DNA methylation approach, we strive to set a new standard in the industry. With biomarkers identified and confirmed in numerous clinical studies on thousands of patient samples in several cancer indications, our strategy now focuses on turning these into diagnostics products that may reach the market starting in 2008.

Cancer screening: Big markets require big partners. Addressing the huge cancer screening markets needs big diagnostics industry players. Molecular diagnostic tests are performed on specialized instruments, which are very costly to develop. Diagnostics companies place them into diagnostic laboratories using ‘reagent rental’ contracts in exchange for the guaranteed purchase of reagents to perform the diagnostic test over a period of time. As the test can only be run in laboratories that have the instrument for which the test is developed and approved, access to a large installed base of diagnostics platforms is a pre-requisite for the commercial success of any new test. Cancer screening tests need to be mass-marketed to health insurance and doctors. Test sales will be driven by positive reimbursement decisions of health care providers and inclusion into screening guidelines, which needs extensive lobbying by the diagnostics company.

To meet these challenges, we have adopted a nonexclusive licensing strategy for the commercialization of our cancer screening tests. Such nonexclusive strategy is common in the diagnostics industry as it maximizes market penetration on the installed base of instruments of several partners and facilitates quick market uptake and higher peak sales due to the joint marketing efforts. In this model, the diagnostic tests are licensed to three or four diagnostics industry partners per geography. These partners have the responsibility of transferring the tests onto their respective molecular diagnostics platforms, develop test kits that can be shipped to diagnostics laboratories to perform the test, run the necessary clinical trials and seek regulatory approval for the combination of the test kits and the instrument by the authorities responsible. Once approved, the partners can market and distribute the test and lobby for reimbursement and guideline inclusion. In addition to upfront licensing fees and development-related milestone payments, Epigenomics participates in the commercial success of the test through sales-related milestone payments and significant royalties.

In September 2007, as a first partner, Abbott Molecular obtained a nonexclusive worldwide license to Epigenomics’ Septin 9 biomarker for early detection of colorectal cancer in blood and we anticipate closing further licensing agreements for this test in the future.

Early market access through reference laboratories. Through partnerships with reference laboratories in particular in the U.S. we want to provide doctors and patients early access to our screening biomarkers before the launch of FDA-approved IVD test kits and to address niche markets of our specialty diagnostics. These reference laboratories will commercialize laboratory-developed tests (LDT) for our biomarkers to their customers as a centralized testing service. Based on this strategy, we expect to make our colorectal cancer biomarker for screening and monitoring applications as well as our prostate cancer molecular classification biomarker available for the first time in late 2008. In return for the necessary biomarker and technology licenses, we obtain upfront and milestone payments and participate significantly in the success of our commercial partners by royalties on test sales.

With Quest Diagnostics, the leading provider of diagnostic tests, information and services in the U.S., we could win the ideal partner for the execution
of this strategy in February 2008.

Towards an integrated diagnostics provider. As part of the early marketing and launch strategy, we also strive to make available “Research-Use-Only” (RUO) DNA methylation kits and assays for selected biomarkers to customers wishing to build in-house methylation testing expertise. At the same time, we are forward-integrating along the value chain with the goal to eventually develop and commercialize IVD test kits on our own. Throughout 2007, we have continued to build the necessary expertise, organizational structure, and quality systems. We anticipate to commercialize RUO products by a mix of direct marketing and sales as well as working with distributors and partners and expect the first RUO products to reach the market in spring of 2008.

Setting a standard: Licensing and R&D services. As a leader in DNA methylation, we are continuously committed to set a unified technology standard in the industry. To this end, pharmaceutical, diagnostics, and biotechnology partners can access our portfolio of proprietary DNA methylation technologies through biomarker services and licensing. Both, R&D services and licensing, have a positive short-term cash impact, but also upside potential in the mid to long term. Thus we expect to benefit from other companies’ molecular diagnostics success in the form of royalties on their products based on DNA methylation technologies licensed from us.