aols research report

8/6/2019 AOLS Research Report

1/32

May 26, 2011

Healthcare

OTC BB

AOLS.OB

BuyRating

Current Price

$0.48Target Price

$3.30

Market Capitalization

28.70M

Shares Outstanding

59.78M

Float

16.33M

Institutional Holdings

0.90%

12-month Low/High$0.00/$0.00

Average 90-day Volume

169,143

Fiscal Year End

Sep 30Revenues ($ MIL)

Period 2010A 2011E 2012E

Q1 0A 337A N/A

Q2 0A 785A N/A

Q3 0A 1,000E N/A

Q4 0A 1,600E N/A

0A 3,722E 8,000E

EPS ($ MIL)

Period 2010A 2011E 2012E

Q1 (0.33)A (0.13)A N/A

Q2 0.14A (0.06)A N/A

Q3 (0.10)A (0.02)E N/A

Q4 (0.47)A (0.01)E N/A

(0.46)A (0.10)E (0.04)E

Aeolus Pharmaceutica

Biodefense and Cancer; A Unique Protective

Platform Already Demonstrated

Initiating coverage on Aeolus Pharmaceuticals with a buy rating and a $3.30 price targ

biotechnology company that is developing a platform of a new class of broad-spectrum

catalytic antioxidant compounds to treat across a number of indications

Lead compound AEOL 10150 offers potential to treat against irradiation, mustard gas,

chlorine gas, cancer and Lou Gehrig's disease (ALS) due to unique mechanism of act

which could provide protection to healthy tissue and relieve oxidative stress

AEOL 1050 has proven preclinical models effective against mustard gas and chlorine

exposure, irradiation in cancer treatment settings, expected to receive $140 million in

dilutive funding to advance the pipeline

AEOL 10105 could revolutionize cancer therapy for potentially all cancers that require

radiation and chemotherapy therapy, AEOL 10150 is suggestive to reducing cancer

tumors, protecting healthy cells and catalyzing apoptosis of cancer cells

Price target of $3.30; Key catalyst initiation of phase I cancer trial second half 2011,

additional animal data for the treatment of acute radiation syndrome in lung and Gi tra

expected second half 2011

Aeolus Pharmaceuticals is developing a new class of catalytic antioxidant compounds th

protects healthy tissue from the damaging effects of radiation. Its first compound, AEOL

10150, is being developed for oncology indications, where it is used in combination with

radiation therapy. It is also being developed, with up to $140 million in funding by the US

Government, as a medical countermeasure against chemical and radiological weapons,

where its initial target indications are as a protective agent against the effects of acute

radiation syndrome and delayed effects of acute radiation exposure. Aeolus' strategy is t

leverage the substantial investment in toxicology, manufacturing, and preclinical and clin

studies made by US Government agencies in AEOL 10150 to efficiently develop the

compound for use in oncology.

Equity Research

Nathan Cali, Senior Research Analyst, Biotechnology and Specialty Pharmaceuticals

(561) 994-5723 [email protected]

Noble Financial Capital Markets

Trading: (561) 998-5489 Sales: (561) 998-5491

www.nobleresearch.com

Refer to the last two pages of this report for DisclosuresPage: 1 of


2/32

Innvestment Thesis

We are initiating coverage on Aeolus Pharmaceuticals with a buy rating and a $3.30 price target. Aeolus is abiotechnology company that is developing a platform of a new class of broadspectrum catalytic antioxidant

compounds. The Technology was discovered out of Duke University and is intended to reduce oxidative stress

and protect people who have been exposed or are going to be exposed to high doses of radiation caused from

cancer therapy or a nuclear event. The government is currently committed to advancing therapeutics for

Medical Counter Measures (MCM) against potential radiation from nuclear events. The company has demonstrated

90% survival in animal models after irradiation of 15 Gray units (Gy) against ARS in lung, which would be

considered a lethal measure in humans. Any exposure at or above 10 Gy could produce mortality within two

days to two weeks. The firm is currently developing medical counter measure to treat against gastrointestinal

syndrome (GI) and lung syndrome from irradiation. Successful progression in animal models could result in

significant government procurement contract awards estimated between $500 million to $1 billion as early as

2013. Currently there are no other therapeutics in development to treat against ARS Lung irradiation asignificant cause of mortality in irradiation patients. Additionally AEOL 10150 has demonstrated statistical

significance against sulfur mustard gas and chlorine gas exposure and could receive a government

development contract award near $55 million in the second half of 2011. Currently there are no therapeutics to

treat against sulfur mustard gas and chlorine gas exposure. We believe that the US Governments commitment

to Project Biosheild supports significant procurement contracts to stockpile effective Medical Counter Measures

to protect against radiation and gas. Most recently Biomedical Advanced Research and Development Authority

(BARDA) awarded Siga Technologies (SIGA: Buy) a five year stockpiling contract. In May of 2011 BARDA

awarded Siga with a $2.8 billion option contract award based upon the companys technical readiness, animal

antiviral data and safety in humans. We believe that the recent award to Siga and the recent contract award

nearing $118 million to Aeolus, in our view, demonstrate the governments level of commitment towards

stockpiling medical counter measures and the potential for a significant stockpiling contract to treat againstradiation resulting from a nuclear event.

AEOL 10150 has already been tested in humans against Lou Gehrigs disease (ALS), AEOL 10150

demonstrated survival and importantly safety in patients. AEOL 10150 offers the potential to treat across a

number of indications, including cancer. AEO 10150's unique mechanism of action acts as therapeutic to

reduce chemical oxidation while protecting healthy cells. AEOL 1050 has proven in preclinical models to be

effective against mustard gas and chlorine gas exposure, irradiation (Gastrointestinal tissue damage, and Lung

tissue damage), in an animal cancer treatment settings to reduce cancer tumor. Importantly AEOL 10150 is

being developed as an adjunct therapy to radiation and chemotherapy against cancer and has show that AEOL

10150 does not interfere with tumor response in radiation therapy. AEOL 10150's profile offers the potential to

reduce radiation oxidative stress and damage to normal tissue, and act synergistically to increase tumor kill.

AEOL 10150 is suggestive to reducing cancer tumors, protecting healthy cells and catalyzing apoptosis of

cancer cells. By protecting healthy cells AEOL 10150 administered in combination with chemotherapy and

radiation could allow further administration of these therapies, which could allow further elimination of cancer

tumors. AEOL 10105 could revolutionize cancer therapy for potentially all cancers that require radiation and

chemotherapy therapy. We believe upon proof-of-concept that AEOL 10150 could offer treatment therapy in lung

cancer, head and neck cancer, prostate cancer and breast cancer. AEOL 10150's most adventagous in

our view would be to eliminate the dose limiting factors for radiotherapy. We believe that based upon AEOL

10150's unique profile to treat across a number of indication that cause oxidative stress, and tissue damage,

preclinical data presented thus far, already demonstrated safety in humans offers significant value to investors

Page: 2 of

Aeolus Pharmaceuticals AOLS.OB | CURRENT/TARGET PRICE $0.48/$3.30 | Buy | 05/26/2011Nathan [email protected](561) 994-5723


3/32

at this juncture. Aeolus expects to begin Phase I/II nonsmall cell lung cancer (NSCLC) with AEOL 10150 being

used in combination with radiation therapy during second half 2011 with data from this studied expected in thefirst half of 2012. We view this study as a significant value driver for the firm based upon the trial design and

expected clinical outcomes. We expect the compound to be proven safe in Phase I safety trials based upon

already demonstrated safety data from this compound in 2006 and in 2008. Upon positive proof-of-concept data

in tumors and the ability to increase radiation and chemotherapy due to efficacious reductions in radiation

toxicity with the combination of AEOL 10150, AEOL 10150 could become validated with the potential to treat

other cancer tumors. This in our view could be significant value driver for the firm. The firm is expected to

initiate Phase I clinical trials to treat nonsmall cell lung cancer in the second half of 2011 with data expected in

early 2012. We believe that at the current levels that shares are significantly undervalued based upon

comparable companies and that investors should enter the stock.

Investment Positives

Significant NonDilutive Funding for Advancement to Potential Procurement

BARDA had awarded Aeolus a five year; $118 million contract to develop a treatment for Lung Acute Radiation

Syndrome (ARS). Aeolus will partner with HHSBARDA, Duke University, University of Maryland, Johnson

Matthey Pharma Services, Symbion Research International, and Albany Molecular to submit AEOL 10150 to

the FDA as a New Drug Application (NDA). The contract will help develop Aeoluss AEOL 10150 to FDA

approval and cover costs along with significant overhead, however the funding is for R&D only and not for

actual procurement. AEOL 10150 is a medical countermeasure (MCM) which defends against pulmonary

subsyndrome ARS caused from radiation. The company has submitted a technical white paper to protect

against chlorine gas to the government and is expected to receive a development contract award near $55

million for further development in the second half of 2011.

Compound Developed out of Duke University

At Duke, Dr. Fridovich identified the bodys natural antioxidant enzyme, superoxide dismutase or SOD, and his

lab began to develop a portfolio of compounds that would mimic the mechanism of action of SOD, but at more

powerful levels. This work was carried forward by Dr. Brian Day at National Jewish and resulted in the portfolio

of metalloporphyrins being developed by Aeolus.

Unique Mechanism of Action and Platform Technology Potential

AEOL 10150 offer the potential to treat across a number of indications, including cancer. AEO 10150s unique

mechanism of action acts as therapeutic to reduce chemical oxidation while protecting healthy cells. AEOL

1050 has proven in preclinical models to be effective against mustard gas and chlorine gas exposure, irradiation(Gastrointestinal tissue damage, and Lung tissue damage), in cancer treatment settings. AEOL 10150 has

demonstrated in preclinical testing at Duke University to reduce TGFBeta1, oxidative stress, apoptosis, tissue

hypoxia, angiogenesis and inflammation, therefore reducing tissue damage after radiation exposure. AEOL

10150 mediates its protective effect by reducing a number of events in the inflammatory cascade induced by

radiation damage. AEOL 10150 has also demonstrated antitumor activity in preclinical testing through

modulating PI3/Akt signaling, a pro survival signaling pathway, often over expressed in cancer tumors.

Page: 3 of



4/32


5/32

FDA Approval

The possibility that regulatory decisions by the FDA may require additional clinical evidence and delay NDAfiling of drug candidates.

Finance

Biotech companies typically incur significant expenses prior to receiving any revenues. If drug candidates fail to

show positive results in ongoing clinical trials, do not receive regulatory approval, or do not achieve market

acceptance, profitability would be at risk.

Failure in raising additional capital, achieving profit, and in clinical development can prevent the company from

continuing operations.

AEOL 10150 Mechanism of Action

The company has a class of small molecules that catalytically consume reactive oxygen and nitrogen species

(ROS/RNS) and act as protective agents against ROS/RNS induced cellular damage. The companys catayticantioxidant is designed to retain the catalytic mechanism and antioxidant efficacy of the bodys natural

superoxide dismutase (SOD) enzymes without their limitations, i.e. naturally occurring SOD enzymes are

specific to superoxide alone thus reducing their antioxidant capacity where as AEOL10150 can perform both

one and two electron reductions resulting in greater capacity to eliminate multiple types of ROS/RNS. The

companys class of compounds is a group of manganoporphyrins (antioxidants that contain manganese) which

retain the benefits of antioxidant enzymes. Manganese SOD is essential in detoxification of superoxide free

radicals. Manganese is contained in the center of mitochondrial SOD (SOD2). SODs play an important role in

regulating oxidative stress. Oxidative stress occurs when there is an imbalance between the production and

elimination of reactive oxygen and nitrogen species (ROS/RNS). ROS are produced as a byproduct of normal

cellular functions and participate in intra and extracellular signaling. Excessive amounts, however, can cause

damage to DNA and other cellular components thereby disrupting both cell integrity and the normal function ofcell machinery. In addition, ROS/RNS can participate in cell signaling leading to prolonged activation of

inflammatory and fibroproliferative pathways under chronic oxidative stress conditions. ROS can be generated

by exogenous sources such as radiation, which causes a transient increase in oxidative stress that is later

sustained through radiationinduced activation of ROS generating enzymes. Excessive ROS can cause DNA

damage and apoptosis (cell death). The firms manganoporphyrins modulate cellular protection by detoxifying

excessive ROS resulting in less DNA damage and cell death and reduced inflammation and tissue scarring

(fibrosis). AEOL 10150 is intended to mimic and amplify the bodys natural enzymatic system to eliminate

damaging ROS.

The molecular basis of radiation as demonstrated below shows the cascading events that occur from radiation

that enters the lung. From the work done at Duke University the mechanism of action and the effects ofoxidative stress were determined based upon the events that occur. As radiation enters the body, it interacts

with water to form hydroxyl radical. Hydroxyl radical rapidly interacts with nearby cellular components, including

DNA, causing DNA damage which, if severe, leads to either immediate or delayed cell death. In addition,

hydroxyl radical can activate the proinflammatory and profibrogenic cytokine, TGFbeta1. Activation of TGF

beta1 increases oxidative stress and inflammation leading to increased DNA damage and cell death between 1

day and 6 months after exposure. Oxidative stress also causes vascular damage and constriction of the

capillaries, restricting oxygen to the tissue. Low oxygen has been demonstrated to cause tissue damage and

stimulate inflammation within the lungs. Taken together, these events lead to excessive tissue inflammation

Page: 5 of



6/32

and damage leading to respiratory failure or tissue scarring and retraction that greatly reduces pulmonary

function and decreases quality of life. AEOL 10150 has demonstrated in preclinical testing at Duke Universityto reduce TGFBeta1, oxidative stress, apoptosis, tissue hypoxia, angiogenesis and inflammation, therefore

reducing tissue damage after radiation exposure. AEOL 10150 mediates its protective effect by reducing a

number of events in the inflammatory cascade induced by radiation damage.

AEOL 10150 has also demonstrated antitumor activity in preclinical testing through modulating PI3/Akt

signaling, a pro survival signaling pathway often over expressed in tumors. The effectiveness of radiation

therapy is limited by low tumor oxygenation and impaired prodeath signaling. AEOL10150 displays antitumor

activity when combined with radiation by decreasing PI3/Akt signaling and improving tumor oxygenation. In the

majority of tumors, the PTEN gene, which antagonizes PI3/Akt prosurvival signaling, is mutated leading to

persistent activation of PI3/Akt signaling and tumor cell survival. In tumor tissue, however, AEOL10150

decreases activation of Akt signaling independent of PTEN. AEOL 10150 has demonstrated in preclinical

nonsmall cell lung cancer to suppress PI3/Akt pathway resulting in increased apoptosis of cancer cells. In

contrast, in healthy tissue with normal functioning PTEN, AEOL10150 activates PI3/Akt by reducing PTEN

expression, thus modulating normal tissue radioprotection. The full mechanism of AEOL10150 antitumor

activity continues to be investigated.

FIGURE 1: Radiation in Lung

AEOL 10150 catalytic antioxidant (manganoporphyrin)

The companys lead candidate AEOL 10150 is intended to treat across a number of indications. AEOL 10150

has demonstrated in to be effective in preclinical models to be effective and safe in the treatment of acute

Page: 6 of



7/32

radiation syndrome in the lungs, acute radiation syndrome in the gastro intestinal tract, the effects of mustard

gas on the lungs and chlorine gas on the lungs. The company has recently received a five year, $118 millioncontract from The Biomedical Advanced Research and Development Authority (BARDA) to develop a

treatment for Lung Acute Radiation Syndrome (ARS). In addition AEOL 10150 is suggestive to reducing cancer

tumors, protecting healthy cells and catalyzing apoptosis of cancer cells. By protecting healthy cells AEOL

10150 administered in combination with chemotherapy and radiation could allow further administration of these

therapies, which could allow further elimination of cancer tumors. AEOL 10105 could revolutionize cancer

therapy for potentially all cancers that require radiation and chemotherapy therapy. We believe upon

proof-of-concept that AEOL 10150 could offer treatment therapy in lung cancer, head and neck cancer, prostate

cancer, and breast cancer. AEOL 10150s best use in our view would be to eliminate the dose

limiting factors for radiotherapy. The ability to achieve local tumor control and improved overall survival with

radiation therapy has been demonstrated to be limited by the risk of unacceptable toxicity due radiation and

chemotherapy. The probability for normal tissue complications during or after radiotherapy has beendocumented to limit the maximum effective dose that can be delivered to the tumor. The effects of radiation

begin with the transient increase in reactive oxygen species (ROS), such as superoxide (O2), hydrogen

peroxide (H2O2), and hydroxyl radical (HO.) at the time of irradiation. Previous studies against nonsmall cell

lung cancer have determined that the higher radiation exposure to the tumor site is dose respondent, which

show reductions in tumor survival as doses increase. We believe that the already demonstrated safety profile

and preclinical profile of AEOL 10150 in ARS and in cancer mitigate nearterm clinical trial risk. The company is

expected to initiate phase I/II clinical trials in nonsmall cell lung cancer patients whereas in our view

proof-of-concept could be demonstrated due to the uniqueness of the therapeutic indices to extend radiation

therapy and treat cancer tumors simultaneously. A phase I study will likely demonstrate tumor kill data since AEOL

10150 is expected to be administrated in a noninferior setting compared to radiation and chemotherapy. Based

upon the expected study design it will be required to assess images of the lung to determine whether AEOL10150 is deleterious to healthy cells, therefore will also demonstrate potential tumor kill.

Company Overview

Aeolus Pharmaceuticals, Inc. was founded as Intercardia, Inc (later, Incara Pharmaceuticals Corp.) in 1994.

Until 2004, Incara was engaged in the development of nonantioxidant drug platforms. In 2003, the Company

was renamed Aeolus Pharmaceuticals, Inc. and a new board and management was brought in to focus on

developing a new class of metalloporphyrins for use as catalytic antioxidants to treat disease. These

compounds were the result of research at Duke University in the lab of Dr. Irwin Fridovich and at National

Jewish Medical Center in Colorado. At Duke, Dr. Fridovich identified the bodys natural antioxidant enzyme,

superoxide dismutase or SOD, and his lab began to develop a portfolio of compounds that would mimic the

mechanism of action of SOD, but at more powerful levels. This work was carried forward by Dr. Brian Day at

National Jewish and resulted in the portfolio of metalloporphyrins being developed by Aeolus.

In 2003, the Company filed an IND for AEOL10150 as a treatment for amyotrophic lateral sclerosis (ALS or Lou

Gehrigs disease) and completed two Phase I human safety trials. At the completion of the human safety trials,

the firm began to evaluate the use of AEOL10150 in combination with radiation therapy for cancer. Based on

an evaluation of the clinical path to approval, Aeolus elected to pursue oncology in lieu of ALS trials. The IND

for ALS is still open and the Company may elect to begin additional trials in this indication in the future. Aeolus

business plan, however, is focused on the development of AEOL10150 for use in oncology and irradiation.To date AE

10150 has produced animal safety studies and two human clinical trials in which it has demonstrated

Page: 7 of



8/32

statistically significant survival efficacy in induced lung injury models induced from ARS. AEOLS 10150 is

currently only available in a selfinjectable form (subcutaneous), which is used as an adjunct to radiationtherapy, hematopoietic, Gi, and Pulmonary. The drug is currently in an active IND (IND67741) regulatory status

in Phase 1 with 2 studies with 50 patients where 37 are treated and 13 are placebo.

Based on promising data in mustard gas and chlorine gas from the laboratory of Dr. Carl White at National

Jewish, the National Institutes of Health (NIH), through its Countermeasures Against Chemical Threats

(CounterACT) program, began funding research into AEOL10150 as an emergency medical countermeasure

against chemical vesicants. After additional successful trials, Aeolus was invited by the Biomedical Advanced

Research and Development Authority (BARDA), a part of the Department of Health and Human Services, to

submit a proposal for a contract to develop AEOL10150 through FDA approval and commercial scale

manufacture as a medical countermeasure against chlorine gas exposure.

FIGURE 2: Product Pipeline

Acute Radiation Syndrome (ARS)

Acute Radiation Syndrome (ARS) is a sickness caused by high exposure (more than 0.7 Gy) to radiation,

which affects most or all of the body and is commonly called radiation sickness or radiation toxicity. Acute

radiation syndrome in the lung from radiation exposure above 2 Gr is usually a delayed affect of total body

irradiation. Lung injury is a major cause of death 2 to 6 months post exposure. There are three majorr

syndromes following radiation exposure > 2Gy. 1.) Bone marrow/stem cell syndrome occurs within 1 or 2

weeks. Symptoms can last up to six weeks, is treatable with supportive care at up to 7.5 Gy exposures. 2.)

Gastrointestinal (GI) syndrome occurs within the first week and causes a destruction of the lining of the GI

Page: 8 of



9/32

tract; there are no current treatments available to beyond supportive care. 3.) Lung syndrome causing

inflammation of lung tissue followed by scarring of lung tissue, there are no current treatments availablebeyond support care (i.e. antibiotics). The firm is currently developing medical counter measure to treat against

gastrointestinal syndrome (GI) and lung syndrome from irradiation. Successful progression in animal models

could result in significant procurement contract awards as early as 2014 in the US.

Approval under Animal Efficacy Rule

When acute conditions present themselves in the case of serious life threatening disease or Aeoluss case life

threating catastrophic event than cannot be tested in humans due to deadly deleterious affects, the animal rule

is permitted. Under approval and use of the animal a drug or indication must meet FDA standards. The antiviral

drug of therapeutic should meet the parameters of the Animal Efficacy Rule (Animal Rule). The Animal Rule

was designed to permit approval or licensing of drugs and biologics that are intended to reduce or prevent

serious lifethreatening conditions where human efficacy studies are not feasible. Under the FDAs regulation

concerning the approval of new drugs (Animal Rule) the criteria considered are: 1) sufficiently well

characterized animal model for predicting the response in humans; 2) effect is demonstrated in more than one

animal species expected to react with a response predictive for humans; 3) positive results demonstrated in

more than one animal species and enhancement of survival or prevention of death should be exhibited; 4)

allows selection of an effective dose in humans.

AEOL 10150 Acute Radiation Syndrome (ARS) in Lung

AEOL 10150 is being developed to treat lung inflammation and scarring resulting from acute radiation

syndrome (ARS) from irradiation in humans. Research has demonstrated that irradiation is an acute and in

most causes a delayed (delayed effect of acute radiation exposure (DEARE)) onset of inflammation of the lung

tissue followed by fibrosis. In order to effectively treat patients irradiated from a nuclear event, effective

treatment of lung pneumonitis is needed. Based upon previous irradiation events, 90% of patients with

exposure north of 11 Gray showed increased onset of pneumonitis. Currently there are no available

therapeutics and none in development. AEOL 10150 is currently in development to treat against the potential of

lung damage from irradiation and has demonstrated significant efficacy in nonhuman primates. Zeljko

Vujaskovic, M.D. Ph.D. at Duke University Medical Center, designed preclinical test to demonstrate potential

efficacy of AEOL 10150 as a treatment for damage to the lungs due to exposure to radiation.

AEOL 10150 Preclinical Studies in ARS in Lung

AEOL 10150 was tested in several animal safety and efficacy studies and safety human trials. In order to

evaluate AEOL 10150s ability to mitigate acute radiation induced lung injury, mice were exposed to 15 Gy of

irradiation and then treated with AEOL 10150 subcutaneously. Mice in the study were either treated with a low

dose of (10 mg/kg) of AEOL 10150, higher dose of AEOL 10150 (20 mg/kg) or placebo. The mice in the studyreceived three doses per week for four weeks. The results of the study demonstrated robust increased survival,

maintained body weight, protected lung tissue, and a reduction in oxidative stress, which is a major cause of

tissue damage resulting from irradiation. In the AEOL 10150 arms of the study 90% of the mice that received

15 Gy irradiation survived after a six week follow up period. In the control arm 45 % of animals died during the

six week follow up period. AEOL 10150 demonstrated statistically significant (P< 0.05) survival advantage,

statistically significant differences in body weights and wet lung weights over the first six weeks of the study. In

addition AEOL 10150 demonstrated a reduction in oxidative stress over the duration of the study. In our view a

significant measure since oxidative stress is a major cause of inflammation and damage to the lungs (fibrosis).

Page: 9 of



10/32

The figure below depicts survival in days after the onset of radiation.

FIGURE 3: AEOL 10150 Mice Survival Rate Post Radiation Treatment

Duke University has performed a number of other preclinical studies which have demonstrated protection of

normal tissue after irradiation and therapeutic infusions of AEOL 10150 in a rat model. 344 rats were

administered across 4 cohorts of AEOL 10150 at 0 mg/kg/day, 1, 10 and 30 after receiving 28 Gy. After 20

weeks lung damage was shown to significantly decrease in fibrosis, oxidative stress, and hypoxia,

condition at which the body is deprived of oxygen. Based upon the data presented in the study,

AEOL 10150 treatment decreases the severity of damage and increases the percentage of lung tissue withoutdamage (protection of lung tissue). This is an important measure since irradiation of the lung causes lasting

quality of life affects from fibrosis not only nearterm but permanent damage to surviving patients. The Figure

below shows the protection of tissue damage from escalating doses of AEOL 10150.

Page: 10 o



11/32

Nonhuman Primate Study against ARS in Lung

AEOL 10150 has demonstrated in nonhuman primate studies to test the efficacy of AEOL 10150 as atreatment for Lung ARS under development towards an FDA approval utilizing Animal Rule guidelines. The

primary endpoint of the study was to determine if AEOL 10150 could mitigate irradiation lung injury and

increase survival. Two cohorts in the study received 11.5 Gy radiation, 6 macaques in the control group and 7

macaques in the AEOL 10150 treatment group. Monkey were administered AEOL 10150 for 28 days 5mg/kg

per day. After 180 day follow up 6 out of 6 in the control group (no treatment) did not survive and 2 out of 7

(28%) in the treatment group survived. Further data from this study is expected to be presented in 2011 which

will likely include a measure of fibrosis and oxidative damage from the study. In addition to the macaques

research the company will complete additional nonhuman primate studies to determine the best effective

dosing.

AEOL 10150 Treatment for Gastrointestinal Acute Radiation Syndrome (ARS)

The treatment of Gastrointestinal Acute Radiation Syndrome (ARS) is major second line condition post

exposure of radiation. When humans are exposed to high levels of radiation after a catastrophic event the

intestinal epithelium, a layer of cells lining the gastrointestinal tract, vital functioning is affected. The reduction

of cells in the lining and loss or protection in the cell lining which is responsible for nutrient absorption,

maintaining fluid balance, and protection from bacteria. Production of epithelium cells from specialized stem

cells keep the intestinal layer functioning properly. High doses of radiation can result in lethal GI syndrome.

AEOL 10150 was administered 24 hours after radiation exposure to determine survival and crypt cell histology

in mice. Preliminary data presented demonstrated the regeneration of GI stem cells and a reduction of depth

and duration of diarrhea. To date there have been no other noted published studies accomplishing enhanced

stem cell regenerative effect while maintaining GI function and improving survival when administered post

irradiation. We note that the study is funded by the NIH, NIAIDs Radiation Nuclear Medical Countermeasures

development program.

Within the National Institutes of Health (NIH), the National Institute of Allergy and Infectious Diseases (NIAID)

has been tasked with developing a robust research program to identify and develop nuclear/radiation new

medical countermeasures. NIH/NIAID was assigned this role by the Secretary of the U.S. Department of Health

and Human Services (HHS) through the Project BioShield Act of 2004. The commitment by the US government

to fund and develop nuclear counter measure in our view, clearly drives value for Aeolus as the company

continues to develop nuclear counter measures and advancement to licensure for government stockpiling

under nondilutive government funding. Additional studies will examine the effects of radiation doses from 9 to

11 Gy on the GI tract and the efficacy of AEOL 10150 on mitigating radiation effects. Studies examining the

effects of 9 to 11 Gy of radiation on the GI tract in nonhuman primates are expected to begin during the secondquarter of fiscal year 2011 and funded NIH NIAID studies to determine optimize dose and duration of delivery,

and to evaluate the window of opportunity for treatment after exposure.

Competing Therapeutics

Currently there are few drugs approved to treat side effects of radiation therapy and none currently in

development to treat Lung ARS. Cleveland BioLabs, Inc. (CBLI: Not Rated) is a biotechnology company

developing compounds to treat against (GI) ARS. Clevelands pipeline includes products from two primary

families of compounds: Protectans and Curaxins. Protectans are being developed as drug candidates that

protect normal tissues from acute stresses, such as radiation and chemotherapy. Protectan CBLB502 is a

Page: 11 o



12/32

recombinant derivative of the bacterial protein, flagellin, which binds and activates the TLR5 cell surface

receptor. Flagellin potential offers signaling through TLR5 and is known to activate the antiapoptotic NFkappaBpathway. CBLB502, TLR5, is active on the endothelial cells of the small heart disease. We dont believe that

Clevland Biolabs is a direct competitor of Aeolus since Cleveland intends to treat gastrointestinal (GI) acute

radiation syndrome (ARS), while AEOL 10150 has demonstrated effectiveness in both (GI) ARS and Lung

ARS. In our view, there is no other competitors of which has provided data to treat Lung ARS and therefore in

our view positions Aeolus as the leader to receive potential government procurement awards as early as 2013.

There are several other private and public companies developing counter measure to treat bone marrow

suppression from radiation and Gi ARS, however none of which are progressing towards treatments for ARS in

lung. Based upon previous contract awards the government intends to select the best effective therapeutic as a

Medical Counter Measure whether a prophylactic or a therapeutic. In the event that Aeolus is able to

demonstrate efficacy in both GI and Lung ARS, we believe that AEOL 10150 would receive the lion share of a

Medical Counter Measure stockpiling contract. The following below is a list of previous contract awards forBiodefense counter measures.

Table 1: Previous Government Stockpiling Awards

We believe that based upon precedent awards and the selection process in order to receive award point

positive for a potential issuance of a Request for Proposal amounting in the ranges presented above. Most

recently BARDA awarded Siga Technologies (SIGA: Buy) a five year stockpiling contract. Siga submitted to an

RFP in 2009 for a potential award to protect against a smallpox outbreak. In May of 2011 BARDA awarded

Siga with a $2.8 billion option contract award based upon the companys technical readiness, animal antiviral

data and safety in humans. We note that FDA approval for the compound was not required for this award and

expect Aeolus to follow in a similar path by receiving an emergency use authorization award followed by further

clinical development towards an NDA filing.

Acute Radiation Syndrome

Acute Radiation Syndrome (ARS) is a sickness caused by high exposure (more than .7 Gy) to radiation, which

affects most or all of the body and is commonly called radiation sickness or radiation toxicity. The time of the

radiation can vary, but typically it is over a short period of time, as with Hiroshima in the 1940s (nuclear bomb),

Chernobyl in the 1980s (nuclear power plant explosion), and Fukushima on March 11, 2011 (nuclear power

plant fires). The United States Nuclear Regulatory Commission (U.S. NRC) reports there are 104 active

licensed to operate nuclear power reactors in the US alone. The U.S. Nuclear Regulatory Commission (NRC)

was created as an independent agency to enable safe use of radioactive materials.

Page: 12 o



13/32

Hiroshima is the largest island in Japan and was destroyed by an Atomic Bomb from the US on August 6,

1945. The Bomb directly resulted in over 80,000 casualties and within the year the radiation resulted in anadditional 10,000 to 50,000 deaths. Radiation from the drop zone affected a two to three kilometer radius,

which resulted in contamination and casualties.

The Chernobyl disaster occurred on April 26, 1986 in the Chernobyl Nuclear Power Plant in Ukraine. The

accident is classified as a level 7 on the international Nuclear Event Scale and is only one of two accidents to

reach that level, the other being Fukushima. The disaster resulted in 237 people who suffered from ARS in

which 31 died within three months of the accident. The incident directly affected over 500,000 workers in which

Chernobyl concluded deaths caused from radiation contamination and cancer from 1986 to 2004 were in

excess of 985,000.

The recent Japanese, Fukushima Nuclear power plant is the latest accident due to a 9.0 earthquake, which

caused a tsunami, which disabled the Nuclear Power Plant Reactors. Since then it has been research and said

that an individual would most likely only get ARS if the radiation exposure was high, radiation exposure through

penetration reached internal organs, the individuals body was mostly or entirely exposed, and last, if high

radiation exposure was received in a time frame of minutes. However, patients who recover will most likely

suffer long term affects such as Leukemia, cancer and more diseases, which may or may not show up for two

to ten years or even more after the direct radiation contact, and affected fetuses and newborns through

stillborns, microcephaly, and mental retardation.

Radiation and Fallout

One of the primary outputs from a nuclear explosion is radiation. Radiation from a nuclear explosion is

categorized as initial nuclear radiation (prompt radiation and neutron activation), which occurs nearly

instantaneously with the flash, and residual radiation, which occurs after the initial explosion and is largely

associated with radioactive fallout. Initial radiation can be an important contributor to casualties, particularly in

the severe damage SD zone with very few surviving. The intensity of initial nuclear radiation, however,

decreases with distance from ground zero.

Fallout that is immediately hazardous to the public and emergency responders will descend to the ground

within about 24 hours. The most significant fallout hazard area will extend 10 to 20 miles (16 to 32 km) from

ground zero (for a 10 KT explosion), but this will vary with nuclear yield. Within a few miles of ground zero,

exposure rates in excess of 100 R/h, up to 22 miles, during the first four to six hours postdetonation may be

observed. In the unlikely event of a terrorist nuclear blast, most casualties would be caused by radiation,

especially the radioactive cloud carried by winds into surrounding areas. Below is an example of a hypothetical

fall out event from a 10kt Nuke (SOURCE: Homeland Security Council | THE WASHINGTON POST). As

demonstrated several hundred thousand people may be at risk of radiation exposure. According to the 2010

Planning Guidance for Response to a Nuclear Detonation people who are exposed to 2Gy are expected to be

administered drug treatment within 24 hours of injury coming from Medical countermeasures and other

supplies available from the Strategic National Stockpile. We note that there is no ARS drugs stockpile to date

and that AEOLS 10150 could become the first to protect against ARS of the lungs.

Page: 13 o



14/32

FIGURE 4: Hypothetical fall out event from a 10kt Nuke

Three types of radiation syndromes associated with Acute Radiation

Bone marrow syndrome (Hematopoietic syndrome), causes a decrease in blood cells. This syndrome istypically seen with radiation exposure in the 0.7 to 10 Gy range within one to two weeks. With a decrease or

destruction in bone marrow, the primary cause of death is usually associated with hemorrhage/bleeding (loss in

platelets), infections (loss in white blood cells), and anemia (loss in red blood cells). The Hematopoietic

syndrome may be treatable with supportive care and Neupogen up to 7.5 Gy exposures. Neupogen from

Amagen (AMGN: Not Rated) has been created for the Strategic National Stockpile (SNS). This syndrome is the

most survivable type of ARS, however the likely hood of survival decreases with any incremental increase in

radiation exposure. However, patients who do survive Hematopoietic syndrome can develop significant

respiratory failure, which is also known as a delayed effect of acute radiation exposure (DEARE).

Gastrointestinal syndrome (GI) can occur within one to two hours of radiation contact with radiation exposures

typically in the 6 to 10 Gy range. Gastrointestinal syndrome normally causes a deterioration of the GI tractlining which causes vomiting, nausea, loss of appetite, dehydration, and gastric pain. To regenerate the GI

lining the crypt stem cells have to be protected. A person with gastrointestinal syndrome is extremely unlikely to

survive mortality, which occurs normally within two weeks of radiation exposure. However, most patients who

do survive Hematopoietic syndrome died from respiratory failure, which is also known as a delayed effect of

acute radiation exposure (DEARE).

Cardiovascular/Neurovascular Syndrome is the most severe of all three syndromes. This syndrome typically

causes headaches, burning sensation of skin, dizziness, and a decrease or complete loss in consciousness,

typically without vomit. Cardiovascular syndrome can be noticed within eight to ten weeks after radiation

Page: 14 o



15/32

exposure. Neurovascular syndrome can be brought on by radiation exposure at or greater than 20 Gy. Mortality

can happen within 3 days from a failure in the circulatory system, which causes fluid to build up in the lungscausing edema, meningitis, and vasculitis.

Four stages of ARS

1.) Prodromal stage - Patients early symptoms that occur within minutes to days, which consist of bowl stess,

vommitting, and nausea; 2.) Latent stage - Individual feels normal for a few hours to a few weeks;3.) Manifest

illness stage - Patient begins to feel effects of occurring syndrome (above), which lasts a few hours to a several

months; 4.) Recovery or death - Patients will recover, which takes a few months to two years, or the patient will

pass away from ARS

Radiation exposures are typically in ranges of 12 Gy, 26 Gy, 68 Gy, 830 Gy, and greater than 30 Gy, with anyexposure at or above 10 Gy producing certain death within two days to two weeks. Symptoms that come with

each category vary, but normally radiation exposure of 12 Gy will cause vomiting, nausea, fatigue, and

weakness within two to six hours of exposure with almost no cause of death. A radiation exposure of 26 Gy will

typically cause vomiting, nausea, headache, fever, fatigue, and weakness within one to two hours of exposure

with the probability of avoidable death if the patient receives care. A radiation exposure of 68 Gy will typically

cause vomiting, nausea, headache, fever, fatigue, diarrhea, dizziness, disorientation, and weakness within ten

to sixty minutes of exposure with the a very low probability of avoidable death if the patient receives care. A

radiation exposure of 830 Gy will typically cause vomiting, nausea, headache, fever, fatigue, diarrhea,

dizziness, disorientation, incapacitation, weakness, and shock within less than ten minutes of exposure with

certain mortality within two weeks of radiation exposure. A radiation exposure greater than 30 Gy will typically

cause vomiting, nausea, headache, fever, fatigue, diarrhea, dizziness, disorientation, incapacitation, weakness,seizures, tremors, and death within less than ten minutes of exposure with certain mortality within two days of

radiation exposure. However, patients who do receive care can be treatable and typically take anywhere from

two weeks to two years to recover depending upon exposure.

Additional Value Driving Profile to AEOL 10150 as a Medical Counter Measure

Currently AEOL 10150 is being studied in National Institutes of Healths (NIH) National Institute of Allergy and

Infectious Diseases (NIAID) for the possible MCM in the gastrointestinal tract from sulfur mustard gas and

chlorine gas exposure.

AEOL 10150 Treatment as a Countermeasure against Chlorine GasCurrently AEOL 10150 is being developed as a countermeasure after exposure to Chlorine Gas, which has

performed well in animal. Chlorine is a common halogen with that causes injury through secondary

inflammation and oxidative stress. In gas form, chlorine has a yellowgreen tint and is 2.5 times heavier than air.

The gas is also known as Bertholite and is a lethal pulmonary irritant that is extremely soluble in water. The

chlorine vesicant was introduced by the German army in 1915 at the second Battle of Ypres and was there

after commonly used in World War I and is still used today, which make AEOL 10150 even more of a necessity.

Effects on the body are typically seen with a few hours to days. If Chlorine gas is Inhalation even at low

exposures can cause lower and upper respiratory systems along with the eyes, nose, and throat. Inhalation at

Page: 15 o



16/32

high levels can lead to dyspnea, constriction of the chest, bronchospasms, and may even cause pulmonary

edema that would take place a few hours after contact with the gas. Ingesting chlorine gas will cause tissuedamage in the gastrointestinal tract. Direct contact with chlorine at low levels will lead to eye and skin irritation,

while higher exposures can lead to chemical burns and ulcers.

Currently there are no available beneficial therapies to guard again effects from Chlorine exposure. This year

the company hopes to deliver data from confirmatory chlorine gas studies in rats and confirm BARDAs decision

on the Chlorine Proposal from white paper, which is currently estimated at $55 million for the second half of

2011. During 2012, the company hopes the start a pilot study for NHP Chlorine. Recently, McGill university and

National Jewish Health finished preliminary studies, which showed AEOL 10150 protecting mice and rats

respiratory tissue from Chlorine gas exposure. In other Preclinical trials AEOL 10150 was injected into mice at

5 mg/kg at 1 hour after chlorine exposure and every 6 hours thereafter. Lung inflammation was tested after 24

hours of exposure and assessed by changed in the neutropil influx and BAL cellularity. AEOL 10150 showed a

large reduction (p


17/32

systems, bloody nose, sinus pain, and shortness of breath, which would be caused by blisters that developed

in less than a day and could even completely seal the airway. If the gas is Ingested, it will cause tissue damagein the gastrointestinal tract, abdominal pain, fever, nausea, and vomiting. If the gas in direct contact even at low

levels will lead to eye and skin irritation, burns, inflammations, blisters, and possible blindness.

AEOL 10150 NonSmall Cell Lung Cancer

Aeolus expects to begin Phase I/II nonsmall cell lung cancer (NSCLC) with AEOL 10150 being used in

combination with radiation therapy during second half 2011 with data from this studied expected in the first half

of 2012. We view this study as a significant value driver for the firm based upon the trial design and expected

clinical outcomes. We expect the compound to be proven safe in Phase I safety trials based upon already

demonstrated safety data from this compound in 2006 and in 2008. Upon positive proofofconcept data in

tumors and the ability to increase radiation and chemotherapy due to efficacious reductions in radiation toxicity

with the combination of AEOL 10150, AEOL 10150 could become validated with the potential to treat other

cancer tumors. This in our view could be significant value driver for the firm. The company plans to initiate

additional clinical trials to treat head and neck cancer, prostate cancer, breast cancer, and mesothelioma.

AEOL 10150 Proven Safe in Humans

AEOL 10150 has been previously tested in humans for safety, tolerability and pharmacokinetics. In several

phase I clinical trials, AEOL 10150 demonstrated to be safe with no serious or clinically significant adverse

effects reported. In September 2005, the firm completed a multicenter, doubleblind, randomized,

placebocontrolled, Phase I clinical trial. This escalatingdose study was conducted to evaluate the safety,

tolerability and pharmacokinetics of AEOL 10150 administered by twice daily subcutaneous injections in

patients with Amyotrophic Lateral Sclerosis (ALS), also known as Lou Gehrigs disease. In the phase Ia study25 ALS patients received AEOL 10150 at doses ranging from 3 mg to 75 mg. AEOL 10150 was demonstrated

to be safe and well tolerated with no serious adverse events reported in the study. There were no related

cardiovascular abnormalities. The most common adverse events in the trial were injection site reaction,

dizziness and headache. In October of 2006 the firm completed a second phase I study (phase Ib) in ALS

patients over seven days at twice daily doses up to 60 mg with just one 60 mg does on the seventh day. The

safety data presented from this trial was similar to the data presented in 2005. AEOL 10150 continued to

demonstrate positive safety data.

Preclinical Prostate Tumor Data Proves Positive Guides for Potential Success

In a mice study with prostate tumor implants, tumors were grown to substantial size prior to administration of

radiation of 5 Gy daily, over three days. AEOL 10150) was administered subcutaneously at (7.5 mg/kg/bid

(twice daily) starting on the first day of irradiation. Mice were administered AEOL10150 for a total of 20 days. In

other groups of mice received either no irradiation, irradiation only or AEOL 10150 without irradiation. The mice

in the study showed a decrease in tumor size compared from AEOL 10150 monotherapy when compared mice

not receiving radiation treatment. In addition tumor kill at 20 days in the radiation plus AEOL 10150 treatment

group was consistent with mice just receiving radiation, importantly indicating that AEOL 10150 does not

interfere with tumor kill, an important measure to advance AEOL 101050 as an adjunct radioprotectant and the

potential offer tumor reduction.

Page: 17 o



18/32

Results from the study further demonstrate the potential for AEOL 10150 to become and adjunct treatment for

cancer. Studies have also shown that AEOL 10150 does not adversely affect tumor response to radiation

therapy. Treatment with AEOL 10150 does not significantly protect tumors from the cell killing effects of

radiation therapy. This combined with other studies that have shown that AEOL 10150 significantly prevents

radiation induced normal tissue injury suggests that AEOL 10150 could demonstrate successful normal tissue

protection without protection of tumor tissue.

FIGURE 5: Tumor Reduction after AEOL 10150

Page: 18 o



19/32

AEOL 10150 Synergistic With Radiation and Chemotherapy

In order for AEOL 10150 to advance as an effective adjunct therapy to extend radiation and chemotherapy to

more effectively reduce tumors in cancer patients, AEOL 10150 would need to be synergistic with tumor

eliminating treatments. In preclinical testing AEOL 10150

NonSmall Cell Lung Cancer is a disease in which cancer cells form in the tissues of the lung and represents

80% of all lung cancers with an estimated 1.2 million new cases per year worldwide and results in more than 1

million deaths per year. There are two main types of lung cancer, nonsmall cell lung cancer and small cell lungcancer. There are several types of lung cancer with each type conferring different type of cancer cells. Each

cell type grows and spreads in different ways. The different cell types are named after the appearance under a

microscope; squamous cell carcinoma (flat cells, appearance like fish scales), large cell carcinoma (several

types of large cells), adenocarcinoma, (cells that line the alveoli (anatomical structure that forms a cavity, small

balloon like structures) and make mucus like substances).

The American Cancer Society states that cancer is the second leading cause of death by disease in the US,

which equates to about one out of every four deaths or approximately 569,000 deaths due to cancer in 2010.

New cancer patients were predicted to be 1.5 million in 2010 and of those, 5060% will be treated with radiation

during treatment. The national Institute of Health (NIH) estimates that US cancer costs are $228 billion, whiledirect medical costs are $93.2 billion, indirect mortality costs (lost productivity due to death) are $116.1 billion,

and indirect morbidity costs (lost productivity due to illness) are $18.8 billion.

Causes, Diagnosis Lung Cancer

Smoking is the main cause of lung cancer, being exposed to second hand smoke, radiation therapy related to

breast or chest cancer, exposition of damaging chemicals and gases with likes of radon, asbestos, arsenic,

soot and tar. Lung cancer is detectable and test includes; lab tests, physical exam, and xrays. There are

currently no effective cure treatments for lung cancer available and is a leading cause of mortality. In order to

determine the best treatment method available diagnostics are needed to determine the stage of cancer

Page: 19 o



20/32

developed. There are several treatment options available to patients, however not effective in providing a cure.

Wedge resection surgery to remove tumors and some of the normal tissue around the tumor site. Radiationtherapy uses highenergy xrays to other types of radiation to kill cancer cells or keep them from growing.

External and internal radiation methods are used to deliver targeted radiation toward the cancer tumor. Internal

radiation methods use radioactive substance and with the use of needles, wires, or catheters.

Currently Approved Therapies after Cancer Treatment

Amifostine (Ethyol) is cyprotective agent approved by the FDA and marketed by MedImmune, Inc. to reduce

kidney toxicity induced by chemotherapy associated with cisplatin administration in patients who have

advanced ovarian cancer and treat head and neck cancer to post operative patients who have radiation

induced xerostomia (dry mouth). Amifostine is intended to therapeutically reduce the incidence of neutropenia

(low white blood cells, serving as defense against infection bacteria) after chemotherapeutic agents are used in

cancer patients. Amifostine is mainly considered a quality of life drug, with significant side affects that dont

allow enough administration into patients limiting efficacy. Kepivance (palifermin) is a drug used in the

treatment of severe oral mucositis in patients who have hematologic cancers and are in high dose

chemotherapy shortly followed by a bone transplant, which is marketed by Amgen, Inc (AMGN: Not Rated).

Amgen is also currently doing research on Kepivance, which is a antimucositis agent for patients with neck,

head, colon, and nonsmall lung cancer. Salagen Tablets (pilocarpine hydrochloride) is a drug marketed by

Eisai Pharmaceuticals for the cure of xerostomia caused by radiation therapy in patients with neck and head

cancer.

AEOL 10150 Treatment for Amyotrophic Lateral Sclerosis

In 2003 the FDA granted Aeolus a orphan drug status for ALS and in 2008 the company completed a Phase Imultidose study of AEOL 10150, and this year ALS filed a Investigational New Drug Application (IND) with the

FDA. In Preclinical studies the University of Arkansas College of Medicine, Dr. Crow conducted trails to treat

mice only after and on the same day they showed signs of hindlimb muscle degeneration or weakness. The

first AEOL 10150 dose was comprised of 5 mg/kg and ongoing doses of 2.5 mg/kg once time a day until near

death or mortality. The study showed that treatment resulted in a 2.5 time greater survival rate of the rate.

Currently the company is not developing AEOL 10150 to treat ALS until further funding could be provided

through either grants or partnerships.

ALS is commonly caused from slow degeneration of the lower and upper motor neurons. Motor Neuron

Disease (MND) is a common term to describe all the subtypes directly related to motor neuron illnesses and is

the more commonly used term in Europe. The subtypes of MND consist of the following: Primary Lateral

Sclerosis (PLS), Progressive Muscular Atrophy (PMA), ALS (common US term), and Progressive Bulbar Palsy

(PBP). The ALS Association (ALSA) has published reports that ALS effects 2 out of every 100,000 people. The

typical age in which ALS starts to set in is between 40 and 70 years of age, while men have a higher chance

being affected by ALS. The lifespan for people diagnosed with ALS typically ranges from 1 to 10 years with

80% of patients dying within 5 years and less than 10% living more than 10 years. ALS usually results in both

or either muscle or respiratory failure, which is the main cause of death. In the United States alone, more than

5,600 new patients are diagnosed with ALS, according to ALSA. ALS is broken down to being either sporadic,

which is unknown genes in 90% ALS patients or familial, which is a mutated superoxide dismutase gene in

510% ALS patients. There are over 90 identified point mutations, which result in MND in mice; however the

Page: 20 o



21/32

dysfunction in Familial ALS genes is still unclear. In both familial and sporadic mutations, ALSs pathological

manifestations are not distinguishable, which would suggest closely related pathways.

Awarded Contracts and Grants

Aeolus is in line to receive $140 million in nondilutive funding contracts and grants over the next five years. The

most significant award is with BARDA for a five year, $118 million contract to develop a treatment for Lung

Acute Radiation Syndrome (ARS). The contract in detail calls for an upfront first year funding of $10.4 million

for R&D in AEOL 10150 and an additional $107.5 million based on performance and milestones met of AEOL

10150. The contract is a cost plus contract, which pays for the costs and overhead to develop the drug, and in

return BARDA gets future revenues from the drug. The contract also calls for a possible Emergency Use

Authorization (the government can buy the drug) in July 2013 with a FDA hopeful approval in 2016. The

contract will allow Aeolus to receive an upfront first year funding of $10.4 million for R&D in AEOL 10150 and a

possible additional $107.5 million based on performance of AEOL 10150. The development of AEOL 10150

could result in a FDA approval within five years and a possible EUA approval by 2013, which will be targeted

within two and half years.

Additional non dilutive funding is expected from The Infectious Diseases (NIAID) and District Assistance and

Intervention Team (DAIT) contract/grant should amount to the sum of $2 million to help treat both

gastrointestinal subsyndrome of acute radiation syndrome (GIARS) in mice and nonhuman primate studies

(NHP). The National Institutes of Health (NIH) CounerACT grant should amount to the sum of $1 million to help

protect lungs in the event of Chlorine gas exposure. The National Institutes of Health (NIH) CounerACT grant

should amount to the sum of $1 million to help protect against Mustard gas, phosgene, and cyanide in the

possible event of exposure. The National Institutes of Health (NIH)/NIAID grant contract/grant should amount tothe sum of $20 million to help the body defend against radiation exposure. The Michael J. Fox Foundation

grant should amount to the sum of $0.5 million the contract to help treat Parkinsons disease. The Citizens

United for Research in Epilepsy (CURE) grant should amount to the sum of $0.25 million to help treat Epilepsy.

Project BioShield

Project BioShield streamlines the process for procurement and awarding of research grants to bioterrorism

related projects. The project may further expedite the process with the authorization of the Secretary of HHS,

rather than the normal peer review process. The Secretary of HHS, with the concurrence of the Secretary of

DHS, and upon approval from the President are able to purchase unapproved bioterrorism countermeasures.

Within the National Institutes of Health (NIH), the National Institute of Allergy and Infectious Diseases (NIAID)

has been tasked with developing a robust research program to identify and develop new medical

countermeasures for use in case of a radiological or nuclear incident. NIH/NIAID was assigned this role by the

Secretary of the U.S. Department of Health and Human Services (HHS) through the Project BioShield Act of

2004. The commitment by the US government to fund and develop nuclear counter measure in our view,

clearly drives value for Aeolus as the company continues to develop nuclear counter measures under

nondilutive government funding. The research priorities of the program are to develop drugs to treat or mitigate

radiation injury and to develop drugs to remove radioactive materials from the body. For the purchase to qualify

the Secretary of HHS must determine from preclinical and clinical trials that approval or licensing will be met

within eight years. Further, the Secretary of HHS may authorize emergency use of medical products that have

Page: 21 o



22/32

not yet FDA approved. The following conditions must be met in order to circumvent the FDA approval process:

1) the agent for which the countermeasure is designed can cause serious or lifethreatening disease; 2) theproduct may reasonably be believed to be effective in detecting, diagnosing, treating or preventing the disease;

3) the known and potential benefits of the product outweigh its known and potential risks; 4) there is no

adequate alternative to the product that is approved and available.

Market Overview

The biodefense industry is comprised of three segments including: U.S. Civilian, U.S. Military, and NonU.S.

Markets. The U.S. Civilian market is funded primarily by project BioShield (Project BioShield Act of 2004), the

largest biodefense initiative with $5.6 billion of funds for the period of 2004 through 2013. An estimated $2.3

billion remain in the fund after rescissions and transfers of $1.5 billion with up to an additional $0.78 billion

scheduled to be transferred by 2012, for a total of $2.23 billion to be removed from the original amount. The

U.S. Military market is funded by Department of Defense (DoD) and is responsible for protecting military

personnel and civilians on active duty. An estimated budget for 2011 is $776 million. This compares to actual

funding of $717.6 million in 2009 and $679.5 in 2010. NonU.S. Markets will likely procure biodefense products

as they are developed and validated in U.S. Markets. This market is extremely vast covering all military and

nonmilitary personnel of foreign governments and therefore is not estimated.

Table 2: Aeolus Capital Structure

Currently Aeolus has a number of warrants outstanding as is the case in most biotechnology firms with drugs in

development. Currently there are 67.4 million warrants outstanding with Xmark Opportunity Partners, LLC

holding 59.1 million of those warrants. Xmark posses not only the majority of warrants outstanding but also65% of the firms total outstanding common shares of 60.4 million. Xmarks interest in warrant conversion

compared to that of other holders may be viewed as a different strategy when considering warrant conversion.

The warrants outstanding have exercise prices ranging from $0.28 to $2.00. We note that 7. 0 million warrants

at an exercise price of $0.75 will expire on June 5, 2011. We note that Xmark does not hold any of nearterm

expiring warrants, which leaves only 1.2 million warrants exercisable from other parties. Based upon discussion

with Xmark, there is no intention of the form to sell stock or exercise warrants. Xmark intends to participate and

fully develop on the prospects at Aeolus.

Page: 22 o



23/32

Milestones and Catalysts

Aeolus has upcoming milestones that could boost the companys clinical data and filings for current drugs inresearch. This year the largest contract will be for BARDA and making sure that Aeolus stays on track to meet

their delivery contract for advancement in AEOL 10150. Currently the company has a list of already completed,

future 2011, and future 2012 milestones for AEOL 10150, which are listed below and would provide as

catalysts to shareholders and to advance the companys technology towards approval, additional nondilutive

funding, potential procurement and commercialization.

2011 Upcoming Milestones

Complete mouse radiation dose study to developed an effective dose curve in June 2011, (leadingto increased

escalation, dose duration study) for ARS in lung

Data from non human primate study for radiation dose escalation in ARS lung expected 2011

Radiation dose evaluation in nonhuman primates for ARS in Gi tract expected 2011

Publish Mechanism of Action Data for AOEL 10150 for radiation and cancer expected nearterm

Begin NSCLC cancer clinical studies, second half 2011

Initial NonGMP batch production in June 2011, sample of clinical batches to BARDA

File for Orphan Drug Designation in July 2011, could be awarded in late 2011

File IND for Lung ARS Indication and Fast Track with FDA in August 2011, could be awarded late 2011

BARDA Decision on Chlorine Proposal from white paper, estimated at $55 million expected second half 2011

Data from confirmatory mice Lung ARS study expected 2011

Data from confirmatory chlorine gas study in rats expected in 2011

NSCLC cancer clinical studies proofofconcept and efficacy data expected early 2012

Complete NHP radiation dose study and mice 10150 dose escalation Study expected 2012

Valuation

We value Aeolus based on an analysis of comparable developmentalstage companies currently in clinical

development with medical counter measure therapeutics, biodefense candidates and cancer therapeutics. Our

price objective of $3.30 is based on an ascribed enterprise value of $284 million, which is at the peer groups

current mean of $284 million, and within the peer groups enterprise value range of $108 million to $664 million.

Based upon the companys shares outstanding and estimated exercisable warrants we have arrived at a

blended price target to account for the availability of potential dilutive warrant execution. We arrive at our price

objected based upon a blended comparable price evaluation of $3.30 to mitigate warrant execution risk. On a

fully diluted basis we arrive at a price target of $2.30 based upon our estimated fully diluted shares outstanding

Page: 23 o



24/32

of 127 million at the end of the second calendar quarter 2012 and a $4.30 price target based upon estimated

67 million common shares outstanding at the end of the second calendar quarter 2012. We believe that basedupon nature of warrant holdings with roughly an estimated 98% of warrants estimated to be held by Xmark

Holdings at the end of June 2011 that none of the exercisable warrants will be exercised over the next several

years. Xmark Holdings owns roughly 65% percent of the firms common shares outstanding and plans to fully

develop the prospects of the Aeolus pipeline. We believe that our price target is conservatively risk adjusted for

potential warrants execution upon share appreciation. In addition the firm is slated to receive up to $140 million

in nondilutive development funding over the next several years upon milestone execution and pipeline

advancements. We view the company to be significantly undervalued in comparison to other firms in the

biodefense industry will similar pipeline candidates. Risks include; failure to raise additional capital to extend

the operational runway, failure to achieve successful pipeline advancement, available government funding,

increased competitive landscape.

Table 3: Comparison Table

Management

Board of Directors

David Cavalier: Chairman and Director since 2004 and COO of Xmark Opportunity Partners. Mr. Cavalier also

serves as the President of Goodnow. He is also Chairman and Director of Incara Pharmaceuticals Corp. since

early 2004. Mr. Cavalier attended Yale University and Oxford University where he completed his B.A. and a

Masters in Philosophy.

John Farah Jr., Ph.D.: Director since 2005 and an Independent Director of Genspera from 2008 to 2010.Currently, Mr. Farah works at Cephalon in the position of Vice President of Intercontinental Operations where

has been since 1992. He was brought into the company to manage research development organization and

technology requirements. Over his career at Cephalon, he held the position of managing biotech research

partnerships, scientific affairs, academic collaborations, and product licensing. While at GD, he worked for six

years as a research scientist. While at the Uniformed Services University in Bethesda, Dr. Farah received his

Doctorate in physiology. Prior to his Doctorate, he attended the University of Maryland where he received a

Bachelor of Science in Zoology and attended New College of California where he received a Bachelor of

Humanities degree.

Page: 24 o



25/32

Joseph Krivulka: Director and CoFounder of Triax Pharmaceuticals, LLC since 2004. Mr. Krivulka served as

President for Triax Pharmaceuticals where he led many acquisitions and brand products to market from 1999

to 2004. While working for Mylan Laboratories as Corporate VicePresident, Mr. Krivulka added $2 billion in

market, which created Bertek Pharmaceutical, where he also served as President. He has also had prior

experience at Johnson & Johnson working for the Janssen Pharmaceutical division. He currently also serves

as Akrimax Pharmaceuticals Chairman and as a Director of Nektar since 2005 and Director of Ambrilia

Biopharma since 2006. Mr. Krivulka attended West Virginia Wesleyan College and Temple University in

Physiology where he received his Bachelors of Science and Physiology, respectively.

Amit Kumar, Ph.D.: Director since 2004 and served as Chief Executive Officer and Advisor for CombiMatrix

Corporation, which is a Operating group of Acacia Research Corp. from 2001 to 2010. He founded Tacere

Therapeutics in 2006 and Signature Biosciences in 1999. From 1998 to 1999 Dr. Kumar served as VicePresident of Life Sciences of Acacia, in which he also served in Residence at Oak Investment Partners as an

Entrepreneur. He also served as Senior Manager of IDEXX Laboratories Inc. from 1996 to 1998 and served at

Idetek Corp. as Head Research & Development from 1993 to 1996. Dr. Kumar studied semiconductor solar

cells at Stanford University and the California Institute of Technology. During his time at Harvard University

under the direction of Professor George Whitesides, Dr. Kumar worked on, pioneered patens, and coinvented

nanotechnology, which is now known as MicroContact Printing and Soft Lithography. He received his Ph.D. in

1991 from Caltech, while contributing to joint studies at Stanford University and the California Institute of

Technology. He also attended Harvard University where he completed his PostDoctoral.

Michael Lewis, Ph.D.: Director since 2004 and Cofounder of Cara Therapeutics, Inc. He worked at BioDiligencePartners, Inc. as resident since 1994. Dr. Lewis served as Chief Scientific Advisor for Arena Pharmaceuticals,

Inc. from 1997 to 2003, which he also cofounded. Prior to Arena, he worked as Chief Scientific Advisor from

1994 to 1997 at Adolor Corporation, which he also cofounded. He has coinvented 15 issued U.S. patents while

also authoring and coauthoring more than 40 opioid publications. He attended George Washington University

where he received a B.A. with Special Honors in Psychology and attended Clark University in 1977 where he

received a Ph.D. in Psychology. After receiving his Ph.D., Dr. Lewis attended University of Michigan, National

Institutes of Health, and University of Cambridge, where he did his postdoctoral training.

Chris Rallis: Director since 2004 and worked at Triangle Pharmaceuticals, Inc. as President and Chief

Operating Officer, which is now part of Gilead Sciences. While at Triangle Pharmaceuticals, he worked as

Executive Vice President from 1999 to 2000. Prior, Mr. Rallis was employed at Burroughs Wellcome Co, where

he held several positions. He was responsible for working with Vertex Pharmaceuticals Incorporated, Emory

University, and WarnerLambert Company finalizing licensing agreements. In addition, he also had the luxury of

overlooking business development with Abbott laboratories with inlicensing in more than 10 compounds. Mr.

Rallis attended Harvard College where he received his B.A. degree and attended Duke University where he

received his J.D.

Page: 25 o



26/32

Peter Suzdak, Ph.D: Director since 2004 and founder of Cardioxyl Pharmaceuticals and Artesian Therapeutics

Inc. as Chief Executive Officer. Dr. Suzdak worked at Guilford Pharmaceuticals as the Vice President ofResearch and Development from the years of 1995 to 2002 where he integrated Drug Discovery and was

responsible for Preclinical Development and Clinical Development activities and Drug Discovery. During his

time at Guilford, Dr. Suzdak created an accelerated Drug Discovery process (BSB1000) and the Lead Product

Selection (LPS). Before coming onto Guilford, he worked at NovoNordisk A/S in Copenhagen, Demark from

1988 to 1995 where he acted as Director of Neurobiology Research. He was one of the major contributors in

the discovery of novel antiepileptic Gabatril(R). Dr. Suzdak attended the University of Connecticut and St.

Johns University where he received his Ph.D. in Pharmacology and B.S. in Pharmacy.

Key Management

John McManus: President and Chief Executive Officer of Aeolus since June 20, 2005 and March 2007 and

serves as the Officer of Accounting, Treasurer, and Secretary. Mr. McManus has also successfully owned and

operated McManus Financial Consultants, Inc. since 1989. He also was in the position of Chief Financial

Officer for Aeolus from January 2010 to February 2011, while previously holding the position of Chief Operating

Officer from July 2006 to March 2007. Prior to joining Aeolus, Mr. McManus was the Vice President of Strategic

Planning and Finance for Spectrum Pharmaceuticals Inc. along with the Vice President of Finance and Investor

Relations from the time of August 2002 to November 2003 and November 2000 to June 2003, respectfully.

From late August 2002 to late November 2003, Mr. McManus enhanced Spectrums focus and strategy on

financial plans which were later successful. Prior to working at Spectrum, Mr. McManus was employed at Price

Waterhouse where he spent six years as a Audit Manager in financial services and health care. He received a

B.S. from the University of Southern California in 1986 in International Finance and Business Economics,

which later led him to obtain his CPA.

Russell Skibsted: Chief Financial Officer and Senior Vice President of Aeolus Pharmaceuticals Inc. in February

2011, where he holds over 25 years of experience in operations, marketing, partnering, finance, and

acquisitions. From those 25 years, Mr. Skibsted provided expertise to startup companies all the way up to

Fortune 500 companies. Before working at Aeolus, he worked for Talon Therapeutics, Inc as the Chief

Financial Officer and Vice President from mid November 2004 to January 2006. Mr. Skibsted generated over

$62 million for Spectrum in 2008 from nondilutive funding, which came from a completed successful

partnership. Prior, he worked at Asset Management Company as the Chief Financial Officer. Mr. Skibsted was

previously employed at GE Capital Services. When Mr. Skibsted was a member of the Development team at

Pinkertons Inc. he created a corporate partnering and acquisitions department. Mr. Skibsted received a BA in

Economics while at Claremont McKenna College and while at Stanford Graduate School of Business he

received a MBA.

Page: 26 o



27/32

Brian Day, Ph.D: Founder and Chief Scientific Officer since November 2004. Dr. Day has experience in

toxicology and pharmacology for over 14 years, which he also played a vital role in the development anddiscovery of antioxidant mimetics, which is the current and primary drug platform at Aeolus. Dr. Day also

currently works at the Department of National Jewish Medical and Research Center as an Associate Professor.

He has over 70 scientific publications, he also brings over 10 years of consulting experience to biotechnology

companies and is an active member of a number of scientific.

Page: 27 o



28/32

Valuation

We value Aeolus based on an analysis of comparable developmentalstage companies currently in clinical

development with medical counter measure therapeutics, biodefense candidates and cancer therapeutics. Our

price objective of $3.30 is based on an ascribed enterprise value of $284 million, which is at the peer groups

current mean of $284 million, and within the peer groups enterprise value range of $108 million to $664 million.

Based upon the companys shares outstanding and estimated exercisable warrants we have arrived at a

blended price target to account for the availability of potential dilutive warrant execution. We arrive at our price

objected based upon a blended comparable price evaluation of $3.30 to mitigate warrant execution risk. On a

fully diluted basis we arrive at a price target of $2.30 based upon our estimated fully diluted shares outstanding

of 127 million at the end of the second calendar quarter 2012 and a $4.30 price target based upon estimated

67 million common shares outstanding at the end of the second calendar quarter 2012. We believe that based

upon nature of warrant holdings with roughly an estimated 98% of warrants estimated to be held by XmarkHoldings at the end of June 2011 that none of the exercisable warrants will be exercised over the next several

years. Xmark Holdings owns roughly 65% percent of the firms common shares outstanding and plans to fully

develop the prospects of the Aeolus pipeline. We believe that our price target is conservatively risk adjusted for

potential warrants execution upon share appreciation. In addition the firm is slated to receive up to $140 million

in nondilutive development funding over the next several years upon milestone execution and pipeline

advancements. We view the company to be significantly undervalued in comparison to other firms in the

biodefense industry will similar pipeline candidates. Risks include; failure to raise additional capital to extend

the operational runway, failure to achieve successful pipeline advancement, available government funding,

increased competitive landscape.

Page: 28 o



29/32

Page: 29 o



30/32

Page: 30 o



31/32

DISCLAIMER

All statements or opinions contained herein that include the words "we", "us", or "our" are solely the responsibility of Noble Financial and do not necessa

reflect statements or opinions expressed by any person or party affiliated with the company mentioned in this report. Any opinions expressed herein are sub

o change without notice. All information provided herein is based on public and non-public information believed to be accurate and reliable, but is

necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to the suitability of any security described hereinany specific investor or any specific investment portfolio. The decision to undertake any investment regarding the security mentioned herein should be mad

each reader of this publication based on its own appraisal of the implications and risks of such decision.

This publication is intended for information purposes only and shall not constitute an offer to buy/sell or the solicitation of an offer to buy/sell any secu

mentioned in this report, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful

o registration or qualification under the securities laws of any such state or domicile. This publication and all information, comments, statements or opin

contained or expressed herein are applicable only as of the date of this publication and subject to change without prior notice. Past performance is not indica

of future results.

MPORTANT DISCLOSURES

Within the past 30 days, a Noble Financial Company Research employee and/or their immediate supervisors have not effected a transaction for their o

account(s) in the investment(s) referred to in this report, nor will such a transaction take place within 5 days of its publication.

A Noble Financial Company intends to seek investment banking business with this company in the next three months.

A Nob

aols research report

Documents