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Intraoperative Lymphoscintigraphy

for Malignant Melanoma

Marketing Plan

by

Dana E. Thomas Director Business Development

CONFIDENTIALITY STATEMENT

The information, data and drawings embodied in this Marketing

plan are strictly confidential and are supplied on the understanding

that they will be held confidentially and not disclosed to third

parties without the prior written consent of Neoprobe Corporation.

MEMORANDUM OF RISK

The following Marketing plan represents management's best

current estimate of the future market opportunity of Neoprobe

products addressing the melanoma market opportunity. It must be

recognized that no business is free of major risks and few plans are

free of errors of omission or commission. Although this plan

attempts to evaluate all the risks associated with the marketing of

Neoprobe’s instrumentation, the reader should be aware that

inherently there are risks that can not be foreseen or predicted.

FIGURES, TABLES & ATTACHMENTS

FIGURES

FIGURE 1: PROJECTED LIFETIME OF MELANOMA PATIENTS ............................................................................ 5 FIGURE 2: TRADITIONAL TREATMENT FOR MALIGNANT MELANOMA ............................................................. 5 FIGURE 3: INNOVATIVE TREATMENT FOR MALIGNANT MELANOMA ............................................................... 6 FIGURE 4: STAKEHOLDER ANALYSIS I - ILM ................................................................................................. 21 FIGURE 5: STAKEHOLDER ANALYSIS II - ILM WITH BLUE DYE ..................................................................... 22

TABLES TABLE 1: SENTINEL LYMPH NODE MAPPING DATA ........................................................................................ 8 TABLE 2: INCIDENCE RATES MELANOMA & BREAST CANCER ...................................................................... 10 TABLE 3: GEOGRAPHIC CONCENTRATION OF SELECTED CANCER TYPES - US .............................................. 11 TABLE 4: GEOGRAPHIC CONCENTRATION OF SELECTED CANCER TYPES - EUROPE ...................................... 12 TABLE 5: PROJECTED MARKET PENETRATION & MARKET SHARE FOR DEVICES .......................................... 13 TABLE 6: DEVICE PRODUCT COMPARISON .................................................................................................... 16 TABLE 7: PREOPERATIVE LYMPHOSCINTIGRAPHY / NUCLEAR MEDICINE ..................................................... 28 TABLE 8: SURGERY / HOSPITAL FACILITY SERVICES ..................................................................................... 28 TABLE 9: SURGERY / PHYSICIAN SERVICES ................................................................................................... 28 TABLE 10: SURGERY / NUCLEAR MEDICINE SERVICES .................................................................................. 29 TABLE 11: SURGERY / PATHOLOGY SERVICES ............................................................................................... 29 TABLE 12: TRAINING STATUS OF NEOPROBE 1000 CUSTOMERS ................................................................... 31

APPENDIX

RECENT PUBLICATIONS ................................................................................................................................... A ALBERTINI PAPER ........................................................................................................................................... B GEOGRAPHIC DISTRIBUTION OF MELANOMA IN US ........................................................................................ C ILS DETECTOR PROBE SPECIFICATIONS .......................................................................................................... D DEVELOPMENT TIMELINE................................................................................................................................ E INTERFERON ALPHA-2B ADVERTISEMENT ...................................................................................................... F DEVICE PURCHASE PROCESS DIAGRAM .......................................................................................................... G TOP HEALTHCARE SYSTEMS TREATING MELANOMA ...................................................................................... H POTENTIAL DEVICE CUSTOMER LEADS ............................................................................................................ I ILS BIBLIOGRAPHY .......................................................................................................................................... J SOCIETY OF NUCLEAR MEDICINE MEETING PARTICIPATION ........................................................................... K MSLT TRIAL LEADS ....................................................................................................................................... L DR. REINTGEN COURSE BROCHURE ............................................................................................................... M POTENTIAL ILS TRAINING CENTERS ............................................................................................................... N 1996 MARKETING CALENDAR ......................................................................................................................... O CURRENT STATUS OF MAJOR CANCER CENTERS – US .................................................................................... P

ILM Marketing Plan June 1996

CONFIDENTIAL – FOR INTERNAL USE ONLY

Contents I. EXECUTIVE SUMMARY.................................................................................................................. 2

II. RECOMMENDATIONS ..................................................................................................................... 4

III. DISEASE AND TREATMENT .......................................................................................................... 5 TRADITIONAL TREATMENT ............................................................................................................................................ 5 INNOVATIVE TREATMENT .............................................................................................................................................. 6 BLUE DYE DEVELOPMENTS ............................................................................................................................................ 7 INTRAOPERATIVE LYMPHOSCINTIGRAPHY (ILM) ........................................................................................................... 7

IV. MARKET ANALYSIS ...................................................................................................................... 10 MARKET SIZE ............................................................................................................................................................... 10 COMPETITION ............................................................................................................................................................... 12 MARKET SHARE ........................................................................................................................................................... 13

V. PRODUCT .......................................................................................................................................... 14 DESCRIPTION ................................................................................................................................................................ 14 PRODUCT DEVELOPMENT REQUIREMENTS ................................................................................................................... 14 ADDITIONAL PRODUCT DEVELOPMENT ........................................................................................................................ 15 PRODUCT COMPARISON ................................................................................................................................................ 15 REGULATORY ............................................................................................................................................................... 16 MANUFACTURING ........................................................................................................................................................ 17

VI. STAKEHOLDER ANALYSIS.......................................................................................................... 18 VALUE PROPOSITION .................................................................................................................................................... 18 CUSTOMER PROFILE ..................................................................................................................................................... 18 DECISION MAKERS ....................................................................................................................................................... 19 MAJOR BUYING / PROVIDER GROUPS ........................................................................................................................... 19

VII. RELEASE STRATEGY................................................................................................................... 23 PRODUCT POSITIONING ................................................................................................................................................ 23 SALES PROCESS ............................................................................................................................................................ 24 DISTRIBUTION .............................................................................................................................................................. 24 PRODUCT PROMOTION .................................................................................................................................................. 25 PRICING ........................................................................................................................................................................ 26 HOSPITAL REIMBURSEMENT ......................................................................................................................................... 27 HUMAN RESOURCES ..................................................................................................................................................... 29

VIII.TRAINING ........................................................................................................................................ 30 CUSTOMER ................................................................................................................................................................... 30 MARKET DEVELOPMENT MANAGERS ........................................................................................................................... 31

IX. CRITICAL SUCCESS FACTORS ................................................................................................... 33

X. FINANCIALS ..................................................................................................................................... 34 ASSUMPTIONS .............................................................................................................................................................. 34 ROI ANALYSIS ............................................................................................................................................................. 35


Dana E. Thomas Page 2 Director Business Development

I. Executive Summary

Melanoma is the fastest rising form of cancer in the United States, and is second only to leukemia in greatest number of potential life years lost due to cancer. The American Cancer Society reports that for the various types of skin cancer there are 1 million new cases recorded each year, 38,000 of which are diagnosed as malignant melanoma. Of the approximately 9,500 deaths resulting from skin cancer, the majority are attributed to malignant melanoma. Federal databases also indicate that the true number of new malignant melanoma cases may not be 38,000 but actually 80,000 cases. The April 1996 issue of Oncology reports that from 1973 through 1992, the overall percentage increase for melanoma was 47.9%, representing the highest increase for all cancers. Neoprobe Corporation is poised to participate in this emerging market opportunity. By proactively selling our existing instrumentation, we can generate immediate income, establish a market presence, and develop a customer base for future product launches.

Our strategic intent is to create a Sales and Marketing platform that provides Neoprobe with the option of further developing its sales infrastructure to successfully commercialize the RIGS technology. A market presence will also provide substantial leverage with any potential marketing partner.

A controlled, disciplined approach to growing internal Sales and Marketing capability allows for incremental resource additions given sales performance. Intraoperative Lymphoscintigraphy (ILM) for melanoma represents the first opportunity for Neoprobe to establish market leadership in intraoperative gamma detection. Worldwide, this ILM initiative will also reaffirm our commitment to customers and competitors that we will be proactive in developing markets for our technology, and thereby attain a distinct competitive advantage. Neoprobe will continue to appropriately invest and innovate both in radiopharmaceuticals and gamma detection devices.

Half the total incidence of Melanoma, Breast Cancer, and Colorectal Cancer occurs in the U.S. in almost all of the same nine states. There is also a similar geographic concentration in Europe. Approximately half of the new melanoma, breast cancer, and colorectal cancer cases reported each year in Europe occur in just two countries. The size of the European market opportunity for each disease is essentially the same as in the U.S. This affords Neoprobe a worldwide opportunity to develop markets and train the same customers that will progress from ILM to RIGS. Clinical research using our probe is also underway at a number of institutions for ILM Breast Cancer, which represents a procedure market size five times that of melanoma.

Intraoperative Lymphoscintigraphy is a new procedure that employs a radiopharmaceutical and a hand-held gamma detection probe for lymphatic mapping and identification of sentinel lymph nodes. This technique was originally developed for use with blue dye for visual tracing of the lymphatic flow. The use of a currently available radiopharmaceutical and Neoprobe's instrumentation allows the surgeon to perform a less invasive procedure for locating the sentinel lymph node. The sentinel lymph node is the first draining node from the primary tumor, which is highly predictive of the presence or absence of metastatic disease. As a result of this new procedure, a regional lymphadenectomy will only be required in those patients that have metastatic disease confirmed post-operatively by pathology. This will eliminate the need for 80% of the lymphadenectomies currently performed for this disease. The cost-effectiveness of this episode of care is considerable, especially when considering the morbidity and debilitating

June 1996 ILM Marketing Plan

page 3 Dana E. Thomas Director Business Development

effects of a lymphadenectomy. This new procedure also permits the use of local anesthesia in a more cost-effective outpatient setting. A recent study also demonstrated that surgeons were able to identify the sentinel node 69% of the time with the blue dye alone and 96% of the time with the blue dye and intraoperative lymphoscintigraphy.

One major component of this strategy is the development of an 11mm ILM disposable probe handle with a reusable tip. The value to the customer will be a reliable, ergonomic, pre-sterilized handle that will be cost-effective compared to a very expensive reusable probe. The value to Neoprobe is the generation of a recurring income stream from the disposable handle for ILM Melanoma and future procedures. This initiative will reinforce Neoprobe's place in the Operating Room.

The 1996 projected loss is $661,000, primarily a function of the ILM product development and Marketing Development Managers. The 1997 projected net income is $915,000 due to the 221 Neoprobe 1000 installations worldwide. The cumulative 10 year after-tax cash flow is $52 million with a positive 10-year NPV of $12.9 million using a 24% discount rate to reflect the inherent risk associated with this project.



II. Recommendations It is recommended that Neoprobe capitalize on the ILM Melanoma opportunity immediately, in an effort to generate an income stream, establish a market presence, fund further device development, and prepare for future product launches. The following investments are recommended:

• Recruit and train (3) additional Market Development Managers for California, Texas, and New York by the end of second quarter 1996. A Market Development Manager from Florida has been successfully recruited from ValleyLab and is currently located in Tampa. A total of (3) individuals were in the 1996 budget.

• Recruit and hire a Product Manager for ILM specifically to support ILM Melanoma field activities, develop an ILM Breast Cancer marketing plan, and provide the vision, direction, and experience to develop these markets ahead of the competition. This individual should be hired as soon as possible to permit Neoprobe's existing Product Manager to prepare a worldwide marketing plan RIGScan Colorectal.

• Pursue Marketing/Distribution partnerships for Europe with the option of recruiting and training in the first quarter 1997. The financial model reflects these European MDM additions. However, they will not be hired until Neoprobe conducts an assessment of potential Marketing/Distribution partnerships. This activity should begin immediately.

• Recruit and hire a Director of Sales in January 1997 to manage the growth of ILM Melanoma, ILM Breast Cancer, and the introduction of RIGScan for colorectal cancer. This individual could potentially come from the four existing market development manager ranks.

• Recruit and train (4) additional Market Development Managers for Pennsylvania, Illinois, Ohio, and New Jersey by the first quarter 1997.

• Conduct Outcomes Research with McDermott, Will and Emery to validate the reimbursement and cost benefits for ILM melanoma compared to traditional treatment. This should be completed by the third quarter 1996.

• Conduct rapid product development and achieve commercialization of the ILM disposable probe and reusable probe tip by April 1997. If possible, this design could be part of a platform concept to provide a family of products, i.e., a 19mm highly featured single-operator disposable probe.

• Conduct Market Research on pricing for the ILM disposable probe and reusable tip.

• Help establish and support the creation of five additional training Centers of Excellence, beyond the H. Lee Moffitt Cancer Center and Research Institute at the University of South Florida.

• Host a surgeon panel meeting to refine product design criteria for the ILM disposable probe and reusable tip by end of 3Q96.



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LIFETIME RISK

19351:1500

19501:800

19801:250

19851:150

19871:135

20001:90

PAST, CURRENT AND PROJECTED LIFETIME RISK OF APERSON IN THE UNITED STATES DEVELOPING MELANOMA

III. Disease and Treatment The most malignant type of skin cancer is melanoma. Cutaneous melanoma occurs on any skin surface, predominately in areas of the head, neck, trunk and upper and lower extremities. The site of tumor is gender dependent because melanoma occurs more often on the lower extremities in women and on the back in men. The majority of melanomas arise from an unusual skin condition, especially a change in the size or color of a mole or other darkly pigmented growth or spot.

The overall 5-year survival rate is 87%. For disease confined to the primary tumor, the 5-year survival is 94%; and rates for regional nodal and distant disease is 60% and 16%, respectively. This cancer can spread to any other tissue in the body. Greater than 80% of the patients with melanoma will present with disease confined to the primary tumor and without evidence of nodal disease. The early presentation of melanoma is termed clinical stage I (CS-I). (Cancer Facts & Figures - 1996)

Incidence rates are approximately 40 times greater among whites and 3-fold higher among persons living in the sun belt states. During the past decade, the incidence of melanoma has increased at a substantial rate. By the year 2000, 1 in 90 persons living in the United States will develop melanoma (Cancer: Principles and Practice of Oncology). The reasons for the increase are unclear, but factors such as early detection and increased recreational exposure to sunlight may contribute to the higher incidence among young Americans. Recent publications further support these trends (Appendix A).

Traditional Treatment

The traditional, standard of care treatment for melanoma has been a multi-step process beginning with a biopsy of the primary lesion to determine the pathological diagnosis and the histological stage by measuring the maximum tumor thickness. The next step for patients with intermediate and greater thickness melanoma (>0.75 mm) and without clinically suspicious lymph nodes (CS-I) is a wide local excision (WLB) of the primary tumor under general anesthesia. Approximately half of the surgeons performing this procedure will also include a

Source: Cancer: Principles & Practice of Oncology

Biopsy of suspicious skin lesion

Wide local excision (WLE) ofprimary melanoma lesion

Patients with CS-I melanoma

Elective lymph nodedissection (ELND)

Delayed lymphdissection

Traditional treatment for malignant melanoma



Biopsy of suspicious skin lesion

Wide local excision (WLE) ofprimary melanoma lesion

Patients with CS-I melanoma

Lymphoscintigraphy- Identification of regional nodalbasin(s) at risk for metastatic disease- Identification of location and numberof sentinel lymph nodes (SLN)

Intraoperative lymphatic mapping- Vital blue dye- Introperative lymphoscintigraphy

Histologically negative SLN- Follow patient

Histologically positive SLN- Lymph node dissection ofregional nodes

Innovative treatment for malignant melanoma

regional lymphadenectomy (excision of all lymph nodes within a lymphatic basin). Regional lymph nodes are the first drainage pathways from the primary tumor. The surgical management of regional nodes in patients with CS-I melanoma is controversial despite the fact that the most powerful factor in predicting progression of disease is the status of the regional lymph nodes. A regional lymphadenectomy is costly and associated with a high complication rate. Some surgeons prefer to perform a lymph node dissection of the regional nodes as a prophylactic intervention even when the nodes appear normal because of the risk of subclinical or microscopic disease. This procedure is termed an elective lymph node dissection (ELND). Of the patients undergoing an ELND, 20 - 30% have micrometastatic disease in regional lymph nodes, while 70-80% have not developed metastatic disease. The other treatment choice is a "wait and see" approach. Some surgeons prefer to observe the patient and perform the lymph node dissection in only patients who develop palpable or clinically suspicious regional nodes. This procedure is viewed as more therapeutic and selective because only the patients who develop nodal metastases are subject to this costly and highly morbid procedure.

Innovative Treatment Since 1992, the surgical treatment paradigm for patients with CS-I melanoma is undergoing a dramatic change. The change is based on new information about the location and number of regional lymph node basins draining the primary lesion and the nonrandom or orderly progression of nodal metastasis within a regional lymphatic basin (Ann Surg 1994; 6:759-767).

The surgical management or wide local excision of the primary tumor is unchanged except for more emphasis placed on conservative margins (2 cm). The thickness of the primary tumor is still used as a predictor of patients at risk for metastatic disease to regional lymph nodes.

In the patients with CS-I melanoma, the recommended next step is a diagnostic imaging procedure termed lymphoscintigraphy, first reported by Robinson et al. (Surg Forum, 1977: 28:147-148). Lymphoscintigraphy is used to identify the lymph node basins at risk by determining lymphatic flow or drainage from the primary lesion to regional lymph nodes basins. Lymphoscintigraphy involves the injection of technetium-99m sulfur colloid around the primary lesion. Using a scintillation camera, images of lymphatic flow from the primary tumor are obtained to determine the regional lymphatic basins draining the tumor.

The use of lymphoscintigraphy has resulted in a more precise and accurate identification of lymph node basins at risk for metastatic spread of melanoma. Before lymphoscintigraphy, the



decision as to which lymph node basin to dissect was based on anatomical guidelines. Comparative studies using anatomical guidelines and lymphoscintigraphy demonstrated that in more than 50% of the patients, the guidelines underestimated the paths of lymphatic flow from the primary tumor. To eliminate the possibility of misdirected lymph node dissections, lymphoscintigraphy is now being used before surgery to identify the regional lymphatic basins at risk for metastatic disease.

The next step in the management of melanoma was an extension of earlier work with lymphoscintigraphy. Donald Morton, M.D. and his colleagues at the John Wayne Cancer Institute hypothesized that lymphatic drainage pathways from the primary tumor may indicate the node(s) within the regional basin most likely to contain tumor. Morton termed the sentinel lymph node (SLN) and defined it as the first node in the regional lymphatic basin that drains the primary tumor (Arch Surg 1992; 127:392-399). Douglas Reintgen, M.D. and his colleagues at the H. Lee Moffitt Cancer Center and Research Institute confirmed Morton's hypothesis of an orderly progression of melanoma nodal metastases. The researchers concluded that metastases is not a random event, but occurs in a sequential manner with involvement of the SLN initially followed by involvement of the higher level nodes.

Blue Dye Developments Morton and his colleagues developed an intraoperative lymphatic mapping technique for the identification of the SLN. They injected a vital blue dye intradermally around the primary tumor, isolated the afferent lymphatics and followed the lymphatic channels to the blue sentinel lymph node. An excisional biopsy of the SLN node and subsequent lymph dissection was performed to determine if the histology of the node is reflective of the remainder of the regional lymphatic basin. Morton's group studied 223 patients with CS-I melanoma, preformed 237 lymph node dissections and found 194 SLNs. Of the 237 specimens, metastases were found in at least one node in 40 (21%) specimens. Among the patients with nodal metastases, 62.5% had only the SLN involved with tumor. The high predictive value of the SLN as a predictor of the histology of the regional lymphatic basin was confirmed by the finding of 1% of the patients with histologically negative SLNs developed nodal metastasis in the same basin. The results of the study confirmed the researchers' hypothesis that the lymphatic metastatic pathway of melanoma begins with the SLN.

The study demonstrated a relationship between the number of procedures and the incidence of identifying the SLN using the blue dye technique. The success of identifying the SLN increased over time as the surgeon gained more experience with the technique. An acceptable technical skill level was achieved after 60 or more procedures.

Intraoperative Lymphoscintigraphy (ILM) Intraoperative lymphoscintigraphy is a technique using a radiopharmaceutical and a hand-held gamma detector probe for intraoperative lymphatic mapping and identification of sentinel lymph nodes. David Krag, M.D., pioneered intraoperative lymphoscintigraphy from the University of Vermont. Dr. Krag first described the successful use of a hand-held gamma detector probe for the detection of technetium-99m sulfur colloid concentrated in blue sentinel lymph nodes using a



pre-clinical model. Following the pre-clinical investigation, Krag and his colleagues reported the combined use of technitium-99m sulfur colloid with a hand-held gamma detector probe and vital blue dye for intraoperative lymphatic mapping and identification of the SLN (Surg Onc 1993: 2:303-308). Krag cited the surgeon's significant learning curve to achieve technical expertise and the tedious dissection needed when using only the blue dye technique as reasons for gamma probe localization of the SLN. In this initial study of 10 patients, the gamma detector probe was used successfully to identify all blue SLNs.

Since Krag's study, other investigators from major medical centers (University of Texas M.D. Anderson Cancer Center, John Wayne Cancer Institute, and the Sydney Melanoma Unit in Australia) have preformed intraoperative lymphatic mapping for the identification of the SLN and have confirmed its accuracy in predicting patients at risk for metastatic melanoma. Results of clinical trials are represented in the table below. An example of the confirmatory studies is the recent report by Albertini and his colleagues from the Moffitt Cancer Center (Ann Surg 1996: 223:217-224). This report (Appendix B) describes the successful use of vital blue dye and ILM for the identification of the SLN. One hundred six patients with clinical stage-I melanoma underwent a preoperative lymphoscintigraphy and intraoperative lymphatic mapping using vital blue dye and ILM. Of the 200 SLNs biopsied at operation, 69% were identified by blue dye alone compared to 83.5% localized using ILM. Further analysis demonstrated that the combined use of vital blue dye and ILM resulted in the identification of the SLN in 96% of the lymphatic basins.

Sentinel Lymph Node Mapping Data Researcher Indication Patients Blue Dye Preoperative

Lymphoscint Radiocolloid Detector Probe

Localization Rate

Morton 4/94 Melanoma 223 Yes No No No* 82% (78% axilla)

Uren 8/94 Melanoma 190 Yes Yes Antimony Trisulphide No* 99%

Kaptelin 6/95 Melanoma 45 Yes Yes Solco Nanocolloid

Neoprobe 1000 99%

Hill 6/95 Melanoma 14 Yes Yes Filtered Sulfur Colloid

Neoprobe 1000 93%

Reintgen Melanoma 106 Yes Yes Filtered Sulfur Colloid

Neoprobe 1000 96%

Source: Published literature * The Neoprobe 1000 has since been incorporated into their technique.

The authors concluded that intraoperative lymphatic mapping is enhanced by use of ILM and reported the following advantages:

The location of the SLN can be determined prior to the incision.

• Precise identification of the SLN is possible through a small and more conservative incision.

• The learning curve for the technique can be decreased from 30-60 procedures to five (5) procedures.

• Identification of SLN(s) using ILM is more rapid and accurate when compared to the vital blue dye technique.



• The identification and location of SLN(s) is possible using ILM in the presence or absence of the blue dye. The blue dye technique provides confirmatory information.

• More SLNs are identified using ILM.

• ILM is the only reliable method to assess the margins of resection and determine whether all SLNs are identified and removed.

Recent reports of clinical follow-up data among patients with CS-I melanoma and histologically negative SLNs are establishing the long-term accuracy of the intraoperative lymphatic mapping using vital blue dye and ILM. Dr. J. Gershenwald from M.D. Anderson presented at the 1996 Society of Surgical Oncology a prospective study that identified the risk of recurrence among 618 patients with melanoma who underwent intraoperative lymphatic mapping and biopsy of SLN(s) using the combined techniques of vital blue dye and ILM. Patients with histologically positive SLN underwent a lymph node dissection of the regional nodal basin. Patients with histologically negative SLN were followed with intact or unresected regional nodal basins. The median follow-up was 15 months. Of the 518 patients with negative SLN, 32 (6%) developed recurrent disease. Ten of the 518 patients (2%) developed their first recurrence in a previously mapped regional nodal basin.

Of particular significance, a retrospective analysis of SLNs from seven of these same ten patients was done using different and innovative methods to determine the presence of cancer cells. Multiple tissue slides of the SLNs were examined using immunohistochemical staining. A molecular biological technique, RT-PCR was used because of its high degree of sensitivity compared to standard or routine histological procedures. Cancer cells were found in the SLNs among six of the seven patients studied using the more sensitive and innovative techniques. Because of these findings, the six patients were eligible for systemic treatment of their disease. Gershenwald and his colleagues concluded that SLN biopsy is an accurate method to determine the risk of metastatic disease among patients with melanoma.

Patients at risk for metastatic disease are now being treated with Interferon Alfa-2b Recombinant. A recent randomized study sponsored by the Eastern Cooperative Oncology Group has demonstrated a significant increase in overall survival (p=.037) and a relapse-free survival (p=.0023) among stage II-III patients treated with Interferon Alfa-2b compared with patients receiving no treatment. Adjuvant Interferon Alfa-2b significantly increased median overall survival from 2.8 to 3.8 years. A 42% improvement in the 5-year relapse-free survival rate was demonstrated among the treated patients. Most patients receiving Interferon Alfa-2b experienced mild to moderate side effects such as fatigue, headache, fever, chills, nausea, vomiting, depression, alopecia, diarrhea, and thrombocytopenia. (J Clin Oncol, 1996,1:14(1): 7-17)



IV. Market Analysis

Market Size In 1996, there will be an estimated 38,300 newly reported cases of malignant melanoma. Of these 38,300 new cases, 90% (34,500) will present with no clinical evidence of metastasis in the regional lymph nodes (CS-I). Among these 34,500 patients, approximately 80% (27,600) will have a primary melanoma which is of intermediate or greater thickness, making them candidates for the ILM procedure. Due mainly to contributing environmental factors, the incidence of melanoma has been increasing over the last four years at a rate of 4%. However, the most recent increase from 1995 to 1996 was greater than 12%. Federal databases report that the true incidence may be as high as 80,000 new cases annually, which would suggest that the rate of increase will continue to be rapid for a number of years. The table below lists the rates of increase in the incidence of both melanoma and breast cancer over the last five years, and the total number of cases estimated for 1996:

Annual Rates of Increase in Incidence - U.S. Total Cases 1992 1993 1994 1995 1996 1996

Melanoma 4% 4% 4% 6% 12% 38,300

Breast 0% 0% 0% 0% 1% 184,300 Source: 1992-1996 Cancer Facts & Figures, ACS

As illustrated in Appendix C, the geographic distribution in the U.S. of melanoma, breast cancer, and colorectal cancer is dominated by a small number of states. Approximately half of the new melanoma cases reported each year occur in just nine states, in eight states for breast cancer, and in nine states for colorectal cancer. The following table illustrates the high correlation of geographical incidence for melanoma, breast cancer, and colorectal cancer in the U.S. Colorectal cancer has been included for comparative purposes in consideration of the upcoming RIGScan CR49 launch. The concentrations of colorectal cancer populations correlate very closely with breast cancer and melanoma in the U.S. and Europe. This phenomenon will allow Neoprobe to sequentially develop targeted geographic areas. As new Neoprobe products are launched, the incremental resources necessary to support them should be proportionally less.



Geographic Concentration of Selected Cancer Types - U.S.

Melanoma (38,300/yr.) Breast Cancer (184,300/yr.) Colorectal Cancer (133,500/yr.) State Incidence % State Incidence % State Incidence %

California 4,500 11.7 California 17,100 9.3 California 11,800 8.8

Florida 2,700 7.0 New York 14,400 7.8 New York 9,700 7.3

Texas 2,400 6.3 Florida 11,900 6.5 Florida 8,800 6.6

New York 2,200 5.7 Texas 11,500 62 Texas 8,500 6.4

Pennsylvania 2,000 5.2 Pennsylvania 11,400 6.2 Pennsylvania 8,200 6.1

Illinois 1,700 4.4 Illinois 9,500 5.2 Illinois 6,600 4.9

Ohio 1,300 3.4 Ohio 8,900 4.8 Ohio 6,200 4.6

New Jersey 1,200 3.1 Michigan 6,500 3.5 Michigan 5,300 4.0

N Carolina 1,200 3 1 New Jersey 4,800 3.6

TOTAL 19,200 50.1 91,200 49.5 69,900 52.4

Source: 1996 Cancer Facts & Figures, ACS

There are currently 53 National Cancer Institute (NCI) designated cancer centers, 26 of which are comprehensive cancer centers. There are also approximately 430 university/teaching institutions, and 1,600 community hospitals with cancer programs. Another 3,100 hospitals exist which do not have cancer programs, bringing the total number of hospitals in the U.S. potentially treating melanoma patients to approximately 5,200. All accredited hospitals in the U.S. have nuclear medicine departments.

If the Florida market is representative of high incidence melanoma states, there may be one or two large melanoma centers treating a disproportionately high number of the cases, with the balance dispersed among the remaining hospitals in the state. For example, in Florida, the Moffitt Cancer Center last year treated approximately 520 of the state's 2,700 melanoma procedures. California provides another example, where the John Wayne Cancer Institute last year treated over 640 of the state's 4,500 melanoma patients.

The total potential U.S. market in 1997 for control units is estimated to be 4,170 units. This is based on assumed averages of multiple devices in cancer centers and teaching institutions, and fewer devices at community hospitals (detaILM in Financials). At an average selling price of $15,000 per control unit, the market potential for control units is approximately $63 million. This document assumes the development of an ILM reusable probe tip for use with a disposable probe handle. It is estimated that two ILM reusable tips will be purchased with the control unit, and a small volume of additional sales would be anticipated from existing customers purchasing replacements. At an average price of $1,900 per reusable probe tip, the market potential for sales commensurate with control units is approximately $16 million. The disposable probe handle component would be used in conjunction with the reusable tip, and will represent a per-procedure charge. Based on an average selling price of $l50/handle, and 27,600 procedures per year, the annual recurring revenue potential is over $4 million for ILM Melanoma.

The geographic distribution in Europe of melanoma, breast cancer, and colorectal cancer is dominated by a very small number of countries. The top three countries, Germany, France and U.K., are identical for each cancer type.



Geographic Concentration of Selected Cancer Types - Europe Melanoma (33,000/yr.) Breast Cancer (166,700/yr.) Colorectal Cancer (179,800/yr.)

Country Incidence % Country Incidence % Country Incidence % Germany 11,020 33.4 Germany 46,000 27.6 Germany 52,200 29.0 France 6,085 18.5 U.K. 27,800 16.7 France 30,514 17.0 U.K. 4,823 14.6 France 27,700 16.6 U.K. 30,400 16.9 TOTAL 21,928 66.5 101,500 60.9 113,114 62.9 Source: Facts and Figures of Cancer in the European Community, IARC Press, 1990, and Neoprobe Corp.

Competition The lengthy and successful developmental effort by Neoprobe Corporation towards commercialization of RIGS products has resulted in the emergence of a number of competitors offering their version of hand-held gamma detection instruments. Except for CIS-Biointernational, a French company, these competitors have restricted their development to device products only. There are two device companies in the U.S. and at least three in Europe pursuing ILM or RIGS markets.

CareWise Medical Products Corporation is located in Morgan Hill, CA and was established in 1986 by Robert Carroll, MD and Robin Wise. The company is privately owned, and produces one product only, the C-Trak Surgical Guidance System, which was historically rather unsuccessfully marketed for use with OncoScint for intraoperative detection of colorectal cancer. The advent of sentinel node mapping, using the high-energy radionuclide Technetium-99m, has provided a prime opportunity for CareWise to increase their customer base and to more effectively compete with Neoprobe Corporation. Care Wise Medical employs several sales and marketing individuals, and uses manufacturers representatives to promote the C-Trak instrument to surgeons and nuclear medicine physicians. They have sold approximately 30 devices in the U.S. at a price of about $30,000. A second detector probe for a different type of radioactivity is an additional $15,000, totaling $45,000. A newly formed company called Gamma Surgery, directed by Leon De Galley, a physician’s assistant has pursued further promotion of the C-Trak instrument. Gamma Surgery offers fee for service assistance by bringing a C-Trak instrument to the operating room of surgical customers, assisting with its use during surgery, and providing direction towards receipt of reimbursement for the intraoperative detection procedure. Gamma Surgery has been more successful pursuing the market for ILM than in earlier attempts with colorectal and endocrine tumor targeting.

At the recent SSO meeting it was noted that Leon DeGalley, with Gamma Surgery is now promoting use of instrumentation from the second U.S. competitor, RMD, Inc. This company, located in Watertown, Massachusetts, has made portable detectors since at least 1976. RMD has not represented significant competition to Neoprobe, as they have focused primarily on industrial applications for their various detection instruments. With promotion from Gamma Surgery and the popularity of the sentinel node mapping procedure, RMD, Inc. may represent future device competition. At present, only two hospitals are known customers of RMD, Inc.

Three European companies are currently marketing hand-held gamma detection systems. CIS bio-international, a French company, produces radiopharmaceutical products for ILM and RIGS



as well as detector instruments. There are several reports in the literature documenting use of the CIS instrument, but the number of customers is estimated to be small at present, and there is no planned presence in the U.S. The two other companies, Stratec (Germany) and Pol. Hi. Tech. (Italy), are new companies for which little information is currently on hand. For detaILM on comparative specifications of U.S. and European devices, refer to the Competitive Device Comparison Table, page 16.

Market Share It is estimated that Neoprobe currently has a 59% share of the U.S. device market, with CareWise representing the other 41%. CareWise is expected to continue to have a presence as the ILM market develops. CareWise has placed its device in such highly visible institutions as University of Vermont, Massachusetts General, and Memorial Sloan-Kettering. These institutions are advocating use of the CareWise device, and such promotion can potentially escalate their position in the market. It has been assumed that by 1999, CareWise will have developed a new generation of device that will detect Iodine-125 and, using fiber-optic technology, will be comparable in size to the Neoprobe 11mm detector probe. It has also been assumed that by 1998 a European device competitor, such as CIS, Stratec, or pol.hi.tech will have entered the U.S. market.

The following table estimates the projected penetration of the total potential device market by all device companies. Also shown is each company's market share.

Projected Market Penetration and Share of Market for Devices 1996 1997 1998 1999 2000 Total Market 4,170 4,170 4,170 4,170 4,170 Market Penetration - all Companies 3% 11% 19% 33% 50% Total Devices Installed - all Companies 142 460 800 1362 2085 Neoprobe Share of Market 59% 60% 62% 65% 67% CareWise Share of Market 41% 40% 36% 31% 27% Other Share of Market 0% 0% 2% 4% 6%

It is imperative to have a disposable component in Neoprobe's product line to continue to generate revenue as control unit sales decline as a function of market saturation. It is anticipated that Neoprobe will enjoy a highly differentiated and exclusive position with its family of disposable products. This revenue stream will continue to grow as ILM Breast Cancer and RIGS Colorectal emerge.



V. Product

Description The current Neoprobe 1000 Portable Radioisotope Detector is a portable gamma-detecting system (control unit and 19mm reusable probe) designed for a variety of medical and surgical applications. It is used to locate concentrations of injected radiopharmaceuticals by detecting and quantifying radioactive emissions from targeted tissues. The Neoprobe 1000 system consists of a sensitive gamma ray detector probe connected via a cable to a microprocessor-based control unit that displays detected radiation emissions as counts.

Increased counts detected from targeted tissues are compared to non-targeted tissues in order to quickly determine the location and extent of targeted tissues. Comparative counts can be communicated to the surgeon by means of an audible signal allowing for visual attention to be kept on the surgical field. This audible signal, or squelch feature, allows the surgeon to use sound feedback from the control unit to identify and locate areas of activity significantly higher than background. This information assists in determining the location and extent of targeted tissues for possible surgical removal.

The Neoprobe 1000 system includes a number of features. A small, 19mm hand-held detector probe can be ethylene oxide sterilized and can be positioned on or near a radiation source, improving resolution and detection efficiency compared to external radiation detector cameras. A LCD screen displays radiation counts in either a continuous readout mode or for selected time intervals. The audible feedback system, or squelch, enables the user to "listen" for areas of elevated radioactivity. Maximum portability and electrical safety is achieved with continuous battery operation. A fuel gauge displays battery charge status prior to and during use.

Product Development Requirements The first priority for new instrument products will be to develop an ILM detector probe design that incorporates a disposable handle and reusable tip. It is anticipated that this reusable probe tip will house the detector crystal and preamplifier. The disposable handle will be packaged and sold as a sterile component, and will be simple to use and assemble. The first generation of disposable handle will include an integrated cable to connect to the control unit. The customers for whom this product is principally intended are surgeons performing ILM procedures for melanoma and potentially for breast cancer. The estimated sterile, packaged manufacturing cost (COGS) for the ILM disposable handle is $15/handle. The retail price for the product is anticipated to be approximately $150/handle. The estimated nonsterile, packaged COGS for the ILM reusable probe tip is $750. The net sales price at this time is projected to be $1,900. Market research is planned to validate these pricing assumptions. In addition, Neoprobe will host a surgeon and nurse panel discussion to refine the product criteria. The development of this product will merit the highest priority, as worldwide market opportunities exist immediately.

It is intended that the ILM detector probe will be a smaller caliber device to facilitate a more minimally invasive approach (smaller incision) and provide high reliability through an integrated cable with the disposable handle. It is also highly desirable that the reusable portion of this product be designed for steam sterilization to reduce the current EtO sterilization cycle time from 24 hours to approximately 10 minutes. This will also alleviate the need for a sterile sheath. A



detailed product criteria is included in Appendix D. Battelle is currently developing a project proposal for the ILM detector probe. The overall plan and milestone chart is in Appendix E.

Additional Product Development After the ILM detector probe, the priority is the next generation control unit and 19mm single-operator reusable/disposable probe, which will be consistent with the RIGS initiative. The control unit is intended to be a user-friendly, flexible platform from which the Neoprobe family of probes can be launched. Along with the single-operator probe products, this control unit should promote as much independence of the surgeon as possible, thus minimizing the need for Operating Room resources. The estimated COGS is less than $1,100/unit, representing 93% gross profit. The hospital list price for the control unit sold separately will be approximately $15,000/unit. This next generation control unit will also include a variable pitch siren mode, data recording capability, and improved visual display.

Neoprobe Corporation has been requested to participate with Lockheed/Martin, the University of South Florida, and the H. Lee Moffitt Cancer Center to develop a needle size probe that can be used percutaneously. Funds have already been guaranteed by the Department of Energy to begin proof of principle for this concept. Further discussion will be held with all parties in late June to establish specific objectives, milestones, resource needs, expectations of each contributor, deliverables, and ownership of intellectual property.

Product Comparison CareWise and RMD represent the competitors in the U.S. for hand-held gamma detection. Along with CareWise, three additional companies are competing for the European device market. It is important to recognize these potential U.S. competitors in light of the emerging ILM market. The following table provides a competitive device comparison:



Device Product Comparison

Neoprobe 1000 C-Trak RMD CIS Probe ScintiProbe TecProbe 2000

Company Neoprobe Corp. Care Wise Med. RMD, Inc

CIS bio-international pol.hi.tech. Stratec

Location U.S. U.S. U.S. France Italy Germany

Market U.S., Europe, Pacific Rim U.S., Europe U.S., Pacific Rim Europe Europe Europe

Product Type Device and Pharmaceutical Device Device

Device and Pharmaceutical Device Device

Detector Probe CdZnTe NaI CdTe or CsI NaI Scint. Crytstal CsI

Energy Range (KeV) 27-364 80-364 20-500 68-364 30-500 40-500

Iodine-125 Detection Yes No Yes No Yes Yes

Count Duration CPS to 100 sec. 0 to 99 sec. 1-500 sec. CPS Visual graph .1 to 600 sec.

Audio Signal Binary signal Variable Pitch Variable Pitch Ratemeter Beep None Variable Pitch

Display LCD LED LCD LCD LED LED

Count Trend No No No Bar Graph Software Bar Graph

Probe Diameter 19mm (11 mm) 19mm / 25mm 7mm / 16mm 23mm 11mm 20mm

Probe Weight 170 gm 1000 gm 200 gm -- -- 150 gm

Power Battery Shelf battery/DC Battery AC AC / 1 hr battery Battery

Sterility Method ETO ETO / soak ETO -- ETO / soak ETO / soak

Data Record No Yes Yes No Yes No

Computer No Yes Yes Yes Yes / software No

Other features Squelch --- --- Beta Probe Laproscopic ---

Pricing $19,900 $30,000 $8,500 $21,000 $12,500

None of the devices listed, including the Neoprobe 1000, contain features that qualify it as superior to the others. All devices will presumably work for ILM, and several will work for RIGS applications as well. Surgeons doing ILM procedures desire smaller diameter probes. Neoprobe will gain a significant advantage over CareWise by producing the smaller diameter ILM detector probe. RMD already has a small diameter probe, which also detects Iodine-125 (for RIGS), and is therefore in a strong position to compete. In order to achieve superiority, the Neoprobe 1000 needs to include a variable pitch option for audible guidance of detection, and a data recording capability, preferably via a computer compatible link, allowing for various software package designs. These features are planned for the next generation control unit under development.

Regulatory The Neoprobe 1000 system received 510(k) clearance from the FDA in 1986 and is classified as



a Class I device. Subsequent clearances were received in 1992 and 1995 reflecting minor changes in design and addition of accessory components such as the detector probe collimator and shield. The 11mm reusable probe will be submitted for 5l0(k) approval in May 1996. The ILM detector probe with a disposable handle and reusable tip will be submitted consistent with an April 1997 product release.

The regulatory strategy is that our current device labeling includes the ILM applications. Current device labeling describing indications of use of the Neoprobe 1000 is contained in the Operation Manual. In summary, "The Neoprobe 1000 enables the user to detect and localize concentrations of injected radiopharmaceuticals in a variety of external and intraoperative applications. It is the responsibility of the physician to determine the suitability and clinical utility of the radiopharmaceutical to be used, as well as the actual protocol for administering the drug and intraoperative use of the device.”

The following benefits realized by using the Neoprobe 1000 for ILM have been described in various peer-reviewed publications. These benefits will be included in promotional materials, as they represent powerful justifications for ILM. The benefits of using Neoprobe products for ILM Melanoma have been identified as the following:

• Improved success rate of SLN localizations (vs traditional techniques)

• Dramatic reduction in OR time due to more expedient SLN localization

• Reduction in tissue dissection - minimally invasive surgery (MIS)

• Potential for outpatient procedure using local anesthesia, resulting in a significant economic benefit

Manufacturing For the last two years, Neoprobe 1000 Systems have been manufactured at Random Corporation, a contract manufacturer located in Cincinnati, Ohio. Consistent with the ILM Melanoma initiative, the total sales forecast for 1996 is 29 systems. More importantly, the 1997 sales forecast is 204 systems.

A new supplier may manufacture the ILM detector probe. In addition, if Neoprobe participates and a viable product results from the collaboration with Lockheed/Martin and USF, the agreement with the Department of Energy requires Lockheed/Martin to perform the manufacturing. This requirement comes from one of the project objectives, which is to achieve technology transfer and to further diversity Lockheed/Martin's aerospace business.



VI. Stakeholder Analysis

Value Proposition The value proposition for ILM is less invasive surgery, less patient morbidity, less unnecessary lymphadenectomies, local anesthesia in an outpatient setting, and selection for drug regimens. There is, therefore, compelling clinical and economic justification. This procedure is of interest to both the surgeon and the Nuclear Medicine physician.

ILM further defines lymphatic mapping as a minimally invasive procedure. Transcutaneous localization of the SLN allows for precise placement of a small incision. Dissection to locate and remove the node is reduced to a minimum. Information regarding possible additional sentinel nodes is immediately available upon survey of the bed of resection. These attributes make possible the transition of this procedure from an extensive exploration requiring general anesthesia to the outpatient setting under local anesthesia, and reduce elective lymphadenectomies as much as 80%. This information should provide compelling incentives for major health care providers such as Columbia/HCA to rapidly adopt this procedure.

Recent FDA approval of Interferon Alfa-2b (Appendix F) for treatment of high-risk melanoma provides the first available treatment for patients at risk that has demonstrated a significant survival benefit. This therapy is costly and involves significant side effects, requiring proper selection of patients for therapy. Selection rests upon nodal status of patients who present with primary malignant melanoma. The most efficient and cost-beneficial method of determining nodal status is by means of ILM to locate and remove the SLN for pathologic evaluation.

The value proposition of the ILM detector probe is the disposability which provides a sterile, reliable handle and cable available for each case, less initial capital outlay for the hospital, significantly lower replacement cost if the probe is damaged, steam sterilization and squelch capability to precisely set conditions for the audible control unit signal.

Capital expenditures are increasingly difficult for hospitals due to reductions and greater scrutiny of departmental budgets. A control unit priced at $15,000 will be offered in Conjunction with disposable ILM detector probes. A reduction in the system purchase price from $19,900 to $15,000 will address some of their cost concerns.

Customer Profile

The surgeon is the primary customer, who determines the appropriate therapeutic course of action for their patients diagnosed with malignant melanoma. A secondary customer is the nuclear medicine physician.

The surgeon performing the ILM procedure would probably be a Surgical Oncologist, General Surgeon, or Plastic Surgeon. The thought leaders and early adopters have been successfully presenting and publishing their work. Approximately 50% of the attendees at the March SSO meeting said they were using blue dye for melanoma procedures.

Although there is a high concentration of cases in major cancer centers, it is generally believed that the remainder of melanoma surgical treatment is dispersed throughout the balance of the hospitals. Given surgeon and nuclear medicine training and experience, there may be a consolidation of melanoma procedures in fewer hospitals. For example, the H. Lee Moffitt



Cancer Center in the last eight years has gone from treating 50 cases of melanoma annually to 520 cases annually. Another significant factor in adoption is the marketing of this procedure by the hospital.

Nuclear medicine departments have historically experienced only rare requests for lymphoscintigraphic studies. The sentinel node approach provides a source for immediate revenue for this department, and an opportunity to more easily and accurately mark the incision site. At the Moffitt Cancer Center, a preoperative lymphoscintigram is performed one week prior to a planned SLN biopsy procedure and is reimbursed at a rate of approximately $300. On the day of surgery, the patient is again injected and the nuclear medicine technician assists intraoperative lymphoscintigraphy which is reimbursed at the rate of $l,000.

Decision Makers The surgeon must be the primary product champion. The surgeon exerts the most influence regarding the decision to buy, but the nuclear medicine physicians can also have a significant influence in the decision-making process. The factors that contribute to the decision include:

• The impact ILM will have in protecting and enhancing their referral base for patients with malignant melanoma

• The potential revenue for the hospital and the surgeon generated by moving the technique from requiring general anesthesia to an outpatient procedure under local anesthesia

• The potential revenue generated by performing one or two lymphoscintigrams on each patient

Refer to Appendix G for an illustration of the effect the surgeon has on the decision to buy. All critical decision-makers respond to the surgeon. Purchases are made by either the OR department, the Nuclear Medicine department, or both. Additional groups important to the process are finance administrators, OR staff, hospital management, and Standards Committees.

Major Buying / Provider Groups

In 1993, over 46 million Americans were enrolled in a Health Maintenance Organization, representing 18.5% of the total U.S. population. In many of these organizations, especially Staff Model HMO's, physicians do not have complete autonomy regarding treatment options for their patients. Rather, to a large extent, treatment options are dictated to them according to the HMO's approved algorithms for treatment of particular diagnoses. Therefore, in order to most effectively penetrate what represents one-fifth of the total market, Neoprobe will also approach HMO's at the administrative level. A prioritization can be made of the various HMO's based on enrollment populations as well as geographical considerations. Appendix H lists the health care provider systems whose hospitals treat melanoma patients, ranked by the number of Medicare patients treated in 1995.

Presentations will be made to the appropriate administration, which would likely consist of medical directors as well as financial officers. The primary objective would be to demonstrate that ILM is an improvement over traditional clinical paradigms, and therefore represents a viable standard of care for melanoma patients. A secondary objective should be to address the



integrated status of HMO's as both providers and payers. These organizations will evaluate technologies in a comprehensive manner for both clinical and economic outcomes. In addition to the substantial patient benefits derived from the ILM technology, we will be able to demonstrate cost-savings to the HMO with adoption of the technology. John A. Albertini, MD, from the Moffitt Cancer Center presented an abstract at the 1995 SSO meeting which indicated a potential cost-savings of nearly $5,000 per patient when ILM allowed patients to be treated under local anesthesia in an outpatient setting. A formal reimbursement and cost-effectiveness study is being prepared by Paul Radensky, M.D., J.D. of the consulting firm McDermott, Will, & Emery. This study will be instrumental in promoting adoption of the ILM technology to these institutions.

The following two diagrams graphically illustrate the drivers and barriers to adoption for the patient, surgeon, nuclear medicine physician, hospital, and payor. Stakeholder Analysis I is an assessment of the intraoperative lymphatic mapping procedure for the five major stakeholders. The conclusion is that there are clearly compelling benefits to adopting intraoperative lymphatic mapping with either blue dye alone or with ILM.

Stakeholder Analysis II is an assessment of the relative difference between using blue dye alone versus using blue dye with ILM. All of the stakeholders in this analysis are motivated towards adopting blue dye with ILM.



Stakeholder Analysis I Intraoperative Lymphatic Mapping for Melanoma

(-) Negative Neutral (+)Positive Barriers Drivers• Risk of false-negative lymph

node (<2%) • Less invasive procedure. Spare

unnecessary lymphadenectomies and related morbidities.

• More proactive diagnosis than “wait-and-see”

• False negative outcome comparable to “wait-and-see”

• Risk of false-negative lymph node (<2%)

• Additional training required

• Lack of prospective randomized study demonstrating survival benefit

• More accurately select patients who will benefit from lymphadenectomies

• Intensive pathology on a small number of nodes more feasible

• Morton’s MSLT study designed to demonstrate survival benefit

• Additional training required • Additional procedural revenue

• Capital expenditure of $15,000 • Increase patient volume

• Increase revenue with lymphoscintigraphy procedures

• Shorter lengths of stay and fewer expenses

• Decrease the number of expensive lymphadenectomies

• Decreased treatment costs of lymphadema and wound infection complications

Patient

Surgeon

Nuc Med Physician

Hospital

Payor



Stakeholder Analysis I Blue Dye Alone vs Blue Dye with ILM

(-) Negative Neutral (+)Positive Barriers Drivers• Fewer radiation safety concerns • More precise, less invasive

procedures done

• Many procedures can be done under local anesthesia – shorter hospital stays

• Longer experience with blue dye

• Perception of probe detecting too many SLNs

• No additional probe training required

• Faster learning curve

• Can be done in an outpatient setting

• Smaller incisions – more precise SLN localization

• Less time in OR

• Increase revenue with lymphoscintigraphy procedures

• No need to make a capital expenditure of $15,000

• Fewer radiation safety concerns

• Additional procedural revenues in a fee-for-service payment system

• Shorter lengths of stay and fewer expenses incurred in a capitated payment system

• Promotion of new procedure to local markets

• Does not incur additional intraoperative lymphoscintigraphy charges in fee-for-service payment system

• Shorter lengths of stay and fewer expenses in the outpatient setting

Patient

Surgeon

Nuc Med Physician

Hospital

Payor



VII. Release Strategy

Product Positioning In order to set Neoprobe apart from our competitors, representatives need to provide world-class service and support. Programs are underway to provide the training and material support necessary for this level of presence. Only one competitor (CIS-bio international) has both device and radiopharmaceutical products, and they do not seem interested in marketing their device in the U.S. at this time. The remaining companies are focused instrumentation, and are less likely to provide expertise to match the experience Neoprobe has gained as a participant in the development of intraoperative detection applications.

Neoprobe Corporation bases its products on a firm foundation of good clinical science, as evidenced by the bibliography containing nearly 100 articles written by physicians in peer review journals specific to use of the Neoprobe 1000 detector. This foundation should be the basis for all comparison statements prepared for representatives. Below is an example of a comparison of the current Neoprobe 1000 with the competing C-Trak device:

• The Neoprobe 1000 is designed for use with a wide range of nuclides, from Iodine-125 (35 KeV) up to Iodine-131 (364 KeV). The basic C-TRAK probe is used primarily with Technetiurn-99 (140 KeV). For use with other nuclides, an additional C-TRAK probe must be purchased costing $15,000.

• The Neoprobe 1000 uses a cadmium telluride crystal with a solid state design that allows for miniaturization. It can be placed in small incisions and can be operated in confined spaces. The C-TRAK probe uses a sodium iodide crystal with a photo multiplier tube, which requires significant shielding of the entire probe and is therefore cumbersome and difficult to miniaturize.

• The C-TRAK probe currently weighs l000gm, which is six times the weight of the standard Neoprobe 19mm probe. With the release of an ILM detector probe with a disposable handle, the product differentiation will become even more pronounced.

• The Neoprobe 1000 is being used by the participants of Dr. Morton's Multicenter Selective Lymphadenectomy Trial (MSLT), sponsored by the NCI, to evaluate sentinel lymph node mapping in patients with melanoma. All participants of the study using a probe are using a Neoprobe device.

• A wide range of intraoperative applications are being developed by Neoprobe Corporation. Many of these involve detection of intra-abdominal cancers using cancer-specific targeting drugs labeled with Iodine-125. This type of radioactivity vastly improves the sensitivity of detection in the abdomen, allowing for a more sensitive localization of tumors. The C-TRAK device will not detect Iodine-125.

• The Neoprobe 1000 has a unique squelch capability to precisely set the conditions for an audible signal.

The single most obvious potential weakness of Neoprobe's control unit is that it does not offer a variable pitch audio feedback feature that the C-Trak contains.



Sales Process The intent is to recruit highly successful experienced sales people who have a surgical background. This should alleviate the need for extensive training and facilitate a smoother transition to Neoprobe sales. The sales cycle is currently estimated to be four months, but a more accurate assessment can be made from the actual in-field experience.

The initial phase of the sales process is to identify the cancer centers in a specific geographic region as well as identify the institutions performing the greatest number of malignant melanoma procedures. Further prospecting will identify the general surgeons, surgical oncologists, or plastic surgeons who are performing the greatest number and who have influence in the institution. After creating the need, the value proposition and specific benefits to the patient, surgeon, and institution will be discussed. Consultative selling will also take place with the nuclear medicine department, operating room, and administration. Support documentation will include course brochures for training seminars, a literature bibliography, product literature, videos, and pricing information.

The objective is to obtain a commitment to order the product or schedule a trial surgical case during which a Neoprobe representative will provide instrumentation and technical assistance. In preparation for a visit that includes a trial surgical procedure, involvement with the nuclear medicine department must be established. The representative needs to confirm plans for injection of the correct radiopharmaceutical, dosage, and timing interval between lymphoscintigraphy and ILM. During a site visit it is essential to conduct the appropriate in-services with the surgeon, Nuclear Medicine, and OR personnel. As necessary, onsite contacts can also be made with hospital administrators, the standards committee, and pathology personnel.

In addition, the Marketing Department will undertake a specific initiative on a corporate basis with the major providers of health care, i.e., Columbia/FICA and Kaiser Permanente. The goal is to augment the in-field sales initiative by demonstrating value to senior managers of the large providers. Some of their respective hospitals may already be experienced with this procedure using the Neoprobe 1000. For example, Columbia Regional Medical Center/Bayonet Point and Lawnwood Regional Medical Center, both in the Columbia/HCA system in Florida, have purchased our device for malignant melanoma. Three additional Columbia hospitals also in Florida have expressed interest in ILM.

There are currently about 200 leads that have been evaluated, categorized, and prioritized. Additional prospecting can be conducted from contacts at medical meetings, attendees of the Moffitt training seminars, colleagues of current and potential customers, mailings to targeting physicians, referrals, and advertising. (Appendix I)

Distribution It is recommended that a direct sales force be utilized to nurture long-lasting relationships with our device customers, provide technical support, and establish the process for new product introductions. Initial sale of a device for ILM provides an opportunity to educate physicians and their support staff on present device applications and to prepare them for use of RIGScan products when available. Use of indirect or manufacturer's representatives will not be as effective.



Product Promotion The most effective promotion of ILM thus far has resulted from presentations and publications by physicians describing a well-documented experience. A bibliography is provided in Appendix J listing many of these publications. Neoprobe Corporation will continue to facilitate and support thought leaders that promote the ILM procedure and the use of our device.

Advertisements describing benefits of the Neoprobe 1000 are being placed in selected medical journals and abstract publications. For example, Neoprobe has an advertisement in the Journal of Nuclear Medicine and the JNM Annual Meeting Abstract Supplement to bring attention to ILM and our product offering. The expectation is that ILM awareness to this relatively new audience will lead to high booth interest at the SNM Meeting in June of 1996 (Appendix K).

Donald Morton, M.D. (John Wayne Cancer Institute, Santa Monica, CA) is recognized as the leading physician responsible for developing intraoperative lymphatic mapping for malignant melanoma. Dr. Morton received a grant from the NCI and is directing the MSLT study evaluating survival outcomes for selective lymphadenectomy (removal of nodes in positive SLN patients). This trial was the original impetus for physicians to purchase the Neoprobe 1000 for ILM Melanoma. Our participation with this group has led to sales of seven devices, with opportunities for additional sales (see Appendix L). Dr. Morton's colleague, Armando Giuliano, MD, is leading the development of lymphatic mapping for breast cancer. Our close relationship with this preeminent surgical group and their associated multicenter trials is essential for establishing training sites and providing a forum for global visibility of the Neoprobe 1000. This participation with recognized thought leaders and early adopters will position Neoprobe as a leader in this technology.

Douglas Reintgen, M.D., Program Leader for the Cutaneous Oncology Program at the Moffitt Cancer Center in Tampa, FL is one of the strongest advocates for ILM Melanoma and Breast Cancer. Dr. Reintgen and The Moffitt are proponents of this technology, and have been featured on the Internet m association with ILM Melanoma. In addition to several publications and requests for presentations, Dr. Reintgen has implemented a two-day training course for intraoperative lymphatic mapping offered to surgeons, nuclear medicine physicians, and pathologists. Three courses were completed in 1995. Attendees of the course are potential customers for purchase of the Neoprobe 1000. During the course, they observe actual surgical procedures and, using the Neoprobe 1000, participate in an animate practicum. This type of value added program is a key component of the promotional mix. Neoprobe advocates attendance to surgeons interested in learning this technique.

Neoprobe Corporation has re-designed the course brochure (Appendix M) for Dr. Reintgen's ILM training course. Dr. Reintgen is willing to offer the course on a more frequent basis if necessary. Additional locations for training centers are being evaluated in order to provide regional coverage for interested physicians and to expand the number of training centers of excellence promoting ILM (Appendix N).

Dr. Merrick Ross at the MD Anderson Cancer Center has agreed to establish a training course for ILM. Dr. Richard Essner and Dr. Donald Morton at the John Wayne Cancer Institute have also agreed to conduct a training course. Neoprobe has had meetings at both institutions and will help support their activities to launch successful programs. Dr. David Byrd at the University of



Washington has requested that Neoprobe help them establish an ILM course as well. In preliminary discussions with Dr. T.S. Ravikumar at the Cancer Center of New Jersey, he has also expressed interest in such a program.

Neoprobe has been working with a Cincinnati-based Marketing Communications company, Vested Interest, to develop new graphics and an ILM identity. This was accomplished with the medical illustrations of the lymphatic system on the front cover of this marketing plan, at our exhibit booth and as the centerpiece for Dr. Reintgen's course brochure.

Neoprobe will continue to exhibit at major medical conventions related to the sale of our products (Appendix O). Device demonstrations are performed at our exhibit booth using anatomical models containing hidden sources of radioactivity. In addition, Neoprobe has and will continue to sponsor symposia with presentations by well-respected surgeons to advance the understanding of new procedures related to our products. Neoprobe will also continue to enlarge its library of video procedures for the training and education of surgeons.

News services will be interested in the intraoperative lymphatic mapping story with its minimally invasive and economic benefit message. Neoprobe will capitalize on this human interest story with appropriate video news releases. The development of office based patient education videotapes for this procedure would be another value added program. This will assist patients in their understanding of the disease and facilitate their ability to make "life choices."

Several companies with related products represent potential partners for informal co-promotion of ILM and lymphatic mapping. CIS-US is the sole producer of sulfur colloid, the current radiopharmaceutical of choice for preoperative and intraoperative lymphoscintigraphy. Although their capabilities for promotion are limited, they are interested in potential partnering opportunities for ILM Melanoma and ILM Breast Cancer. Syncor, our distribution partner for RIGScan CR49, uses their national radiopharmacy network to provide unit dose preparations of filtered sulfur colloid (purchased in bulk from CIS-US) for lymphoscintigraphy to nuclear medicine departments. At Syncor's February 1996 national sales meeting, their radiopharmacists were updated on recent ILM developments by Neoprobe Corporation. Syncor has been requested to pass on any ILM leads to Neoprobe.

Information is being sought on a new celebrity advocacy group in California for skin cancer patients. Support of these types of organizations may result in an endorsement for ILM as a treatment of choice for melanoma and an increase in patient awareness and activism.

Pricing The Neoprobe 1000 Device currently has a retail price of $19,900 per system. The C-TRAK device retaILM for approximately $30,000 per system, which includes one detector probe useful for either Tc99m or In-111, but not both. If one desires a system that will detect both radionuclides, a price of $15,000 is charged for the additional probe. The C-TRAK is currently priced at a 50% premium ($30,000) to the Neoprobe 1000 ($19,900). Informal market feedback at medical conventions has revealed that most potential customers find the Neoprobe 1000 device to be appropriately priced.

With the introduction of the ILM reusable tip and disposable probe handle, Neoprobe's pricing strategy will change significantly in 1997. At that time, it is anticipated that the detector probe



and control unit (and accessories) will be unbundled. The control unit and accessories will be offered at $15,000, a level that should decrease customers capital expenditure barriers within their respective institutions. The reusable probe tip component will be offered as a separate item for $1,900, which is not a capital equipment purchase. This consideration will decrease the customer's risk associated with probe damage, and will represent a powerful selling point when compared to C-TRAK's pricing ($15,000/probe). Neoprobe's disposable handle will be priced at $150, and will represent a per-patient charge for the institution. Despite some market resistance to disposable expenditures, this pricing structure will provide the customer with a highly attractive alternative to a large capital outlay. Furthermore, the cost of the disposable probe may be passed through by the hospital to third patty payors.

In addition to validating these price points, we are also exploring establishing price ranges for each product with set floor prices, which are reflected in the financials. For example, a Neoprobe 1000 system might list for $24,000, but according to market needs may be discounted to no lower than $19,900. This provides the flexibility to respond to managed care and promote a working relationship with our customers.

The current radiology codes under which the Moffitt Cancer Center bills for intraoperative lymphoscintigraphy are:

CPT Code 78801 Radiopharmaceutical localization of tumor, multiple areas Average Charges: Ave. Hospital Charge $ 958.00 Ave. Radionuclide Charge $ 66.00

Total $1,024.00 Based on this billing structure, a $150 disposable component appears to be a very acceptable charge for hospitals.

The sale price of the Neoprobe 1000 should be actively justified to hospitals as a cost-saving, revenue-generating proposition for the institution. Formal cost-benefit analyses will demonstrate to hospitals that an ILM paradigm for melanoma patients will be substantially less expensive per patient than the traditional standard of care. In fact, hospitals may be able to differentiate themselves from their competition by offering this minimally invasive procedure to patients, thus increasing their referral base and generating additional revenue.

Hospital Reimbursement With the assistance of the H. Lee Moffitt Cancer Center and work commissioned from McDermott, Will, and Emery, Neoprobe has compiled reimbursement codes which are believed to be relevant to lymphatic mapping procedures for melanoma patients. The appropriateness of each of the codes requires validation through interaction with several hospital administrations. The reimbursement codes have been categorized according to five general activities. The categories are:

1) Preoperative Lymphoscintigraphy / Nuclear Medicine Services 2) Surgery / Hospital Facility Services 3) Surgery / Physician Services 4) Surgery / Nuclear Medicine Services 5) Surgery / Pathology Services



Preoperative Lymphoscintigraphy / Nuclear Medicine Services

Code Code Description Activity RVU Payment Global Pd

CPT78800

Radiopharm. localization of tumor, limited area

Sentinel lymph flow study Hosp. $258 Isotope $66

CPT78l95 Lymphatics and lymph gland imaging Lymphoscintigraphy (2 hrs. post injection)

Hosp. $958

CPT78801 Radiopharm. localization of tumor, multiple areas

Intraoperative Lymphoscintigraphy

Hosp. $958 Isotope $68

Payment levels based on estimates from the H. Lee Moffitt Cancer Center.

Surgery / Hospital Facility Services


DRG 269 Other skin, subcutaneous tissue and breast procedures with complications

Sentinel lymph node biopsy $7,095.22

DRG 270 Other skin, subcutaneous tissue and breast procedures with complications

Sentinel lymph node biopsy $2,923.26

Payment levels, based on Medicare allowed payments for FY1996.

Surgery / Physician Services


CPT38500 Biopsy or excision of lymph node(s); superficial (separate procedure)

4.73 $192.98 10

CPT38510 Biopsy or excision of lymph node(s); deep cervical node(s)

6.89 $281.10 90

CPT38520 Biopsy or excision of lymph node(s); deep cervical node(s) with excision scalene fat pad

8.41 $343.12 90

CPT38525 Biopsy or excision of lymph node(s); deep axillary node(s)

7.49 $305.58 90

CPT38530 Biopsy or excision of lymph node(s); internal mammary node(s) (separate procedure)

9.64 $393.30 90

CPT38542 Dissection, deep jugular node(s) 10.26 $418.59 90

CPT38700 Suprahyroid lymphadenectomy 18.51 $755.18 90

CPT38720 Cervical lymphadenectomy (complete) 30.06 $1,226.41 90

CPT38724 Cervical lymphadenectomy (modified radical neck dissection)

29.58 $1,206.82 90

CPT38740 Axillary lymphadenectomy; superficial 12.00 $489.58 90

CPT38745 Axillary lymphadenectomy; complete 18.12 $739.27 90

CPT38760 Inguinofemoral lymphadenectomy, superficial, including Cloquet’s node (separate procedure)

16.17 $659.71 90

CPT38765 Inguinofemoral lymphadenectomy, superficial, in continuity with pelvic lymphadenectomy, including external iliac, hypogastric, and obturator nodes (separate procedure)

30.07 $1,226.81 90



Surgery / Nuclear Medicine Services

Code Code Description Activity RVU Payment Global Paid

CPT38510 Head & Neck Nuclear medicine surgical assistance

CPT38740 Axilla Nuclear medicine surgical assistance

CPT38760 Groin Nuclear medicine surgical assistance

Surgery / Pathology Services

Code Code Description Activity RVU Payment Global Paid

CPT88304-26 Level IV – Surgical pathology, gross and microscopic examination (includes lymph node, biopsy)

0.53 $18.35

CPT88305-26 Level V – Surgical pathology, gross and microscopic examination (includes lymph nodes, regional resection)

1.32 $45.71

CPT88331-26 Pathology consultation during surgery; with frozen section(s), single specimen

1.79 $61.99

CPT88332-26 Pathology consultation during surgery; each additional tissue block with frozen section(s).

.90 $31.17

Human Resources To address the immediate ILM Melanoma opportunity and seed the market for future product releases, a total of four Marketing Development Managers should be hired beginning in 3Q96. These four individuals will be located in California, New York, Florida, and Texas, which corresponds directly to the highest patient populations identified for the ILM Melanoma, ILM Breast Cancer, and RIGS Colorectal indications. These individuals will be responsible for:

• Achieving sales quotas through selective prospecting and by routinely selling in surgery.

• Supporting Neoprobe customers who are not currently being adequately serviced, i.e., surgeons, nuclear medicine physicians, and OR staff.

• Developing and supporting new training sites as centers of excellence for ILM training and future product evaluations, i.e., Moffitt Cancer Center.

• Developing regional programs to increase enrollment at local training centers, targeted to clinicians, and potentially to patients.

• Attending all ILM courses to support the Course Director and staff as well as explain and demonstrate use of the Neoprobe device in the lab.

• Providing inservice support to OR and nuclear medicine personnel, as well as attend the first two cases with the surgeon to ensure proper product utilization.

• Attending and sponsoring appropriate local medical society meetings and conventions.

• Developing rapport and credibility with customers as well as establish a strong positive Neoprobe presence in the marketplace.



VIII. Training

Customer Training of surgeons and other hospital personnel is essential in achieving proper installation of equipment and establishing long-term customer relationships. Because the surgeon, nuclear medicine physicians and technicians, and operating room personnel require certain knowledge and technical skills before the first patient undergoes ILM, the implementation of a comprehensive training plan subsequent to the instrument sale is imperative. Installation of the instrument is not complete until all involved personnel are properly trained and on-site technical support for the first two cases is provided.

Upon receipt of the purchase order for the Neoprobe 1000 the company representative puts the training plan into action. The first step is the training of the surgeon. The company representative facilitates the arrangements for the surgeon to attend a professional lymphatic mapping seminar conducted by the H. Lee Moffitt Cancer Center and Research Institute or other regional centers of excellence. At the seminar, radiologists and surgeons discuss and demonstrate pre- and intraoperative lymphatic mapping techniques. Course participants observe multiple patient demonstrations and participate in a hands-on animal lab. Neoprobe Corporation supports post-seminar training by providing on-site technical assistance, educational brochures, and videos.

A video library of ILM melanoma procedures being performed by leading surgeons is planned. A techniques manual describing the procedure will also be published for the medical community. This manual would have a known surgeon in the field of malignant melanoma as the editor. In addition, a video for patients is planned so that individuals with this disease can learn about sentinel node mapping as the new standard of care for malignant melanoma. This video can be offered for viewing in the physician’s office.

To facilitate adoption of this new procedure, Neoprobe will attempt to work with the Society of Surgical Oncology and the American College of Surgeons to have them publish a recommendation that physicians performing lymphatic mapping attend a training course. Dr. David Ota and Dr. Douglas Reintgen have approached Neoprobe regarding this initiative. If successful, more thoroughly trained and informed surgeons are more likely to use the Neoprobe 1000 as part of their lymphatic mapping procedure.

A regional budget has also been developed to sponsor all or part of a physician's cost to attend a course. These select individuals will attend as key customers of Neoprobe and can have a profound impact on our business. Physician attendance under these circumstances will be the exception and not the rule, at the discretion of the company representative.

If the surgeon does not attend a professional education seminar, the company representative may network with other surgeons in the area and arrange patient demonstrations. Before the first ILM procedure, the company representative schedules an appointment with the surgeon to demonstrate the operation of the Neoprobe 1000 and discuss the ILM procedure. On-site technical assistance and company educational brochures and videos augment training.

The next step is the training of nuclear medicine and operating room personnel. The company representative will conduct in-service programs to demonstrate the assembly, operation, care and maintenance of the Neoprobe 1000 instrument, discuss safety issues, and present the lymphatic



mapping techniques. Ideally, the in-service program would occur the day before the first intraoperative use of the Neoprobe 1000. The Neoprobe 1000 Operation Manual, educational brochures and videos provided by the company representative support the training program.

The company representative attends the first two ILM procedures and provides technical assistance and support. The representative will evaluate the performance of the surgeon, nuclear medicine and operating room personnel to assess the need for additional training. Following the installation program, the company representative will return to the site to observe performance, and evaluate the program.

Following is a gap analysis of in-service and training needs for current Neoprobe 1000 customers:

Training Status of Neoprobe 1000 Customers

Inservice Cases

Attended Institution OR NucMed Surgeon

1 Moffitt Cancer Center No Yes Yes 2+

2 MD Anderson No No Yes 1

3 John Wayne Cancer Institute Yes No Yes 2+

4 Henry Ford Hospital Yes Yes Yes 1

5 Mt. Zion Yes Yes Yes 2+

6 Lawnwood Medical Center Yes Yes Yes 2+

7 Duke University No No No 0

8 Bayonet Point No No No* 0

9 Vanderbilt University No No No* 0

10 University of Groningen (Netherlands) No No No 0

11 Roswell Park No No Yes 0

12 New England Medical Center No No No 0

13 Royal Prince Alfred (Australia) No No No 0

14 University of Washington (loaner) No No No* 0

15 Cancer Institute of New Jersey No No Yes 1 * Indicates Moffitt Training Course.

Market Development Managers Neoprobe's in-field representatives, Market Development Managers (MDM's), will require specific knowledge and technical skills to promote, sell, install, and service the account. Customers expect a high degree of expertise in anatomy, procedures, and technical knowledge of the company's products. As a result, all Neoprobe representatives will participate in a four-week training program.

A two-week comprehensive training program begins with a series of classroom lectures by the company Training Manager, surgeons, nuclear medicine physicians and technicians, and pathologists and on-site visits to the OSU hospitals. The material covered includes anatomy, information about malignant melanoma, pre- and intraoperative lymphatic mapping, operation and care of the Neoprobe 1000, physics of detection, the operating room and nuclear medicine



environments, and radiation safety issues. The representative designs the lectures for maximum interaction and participation. Practical skill sessions are interwoven throughout the training sessions. The representatives will be tested each morning, building on previous instruction. The Product Manager will provide information on product features and benefits, handling objections, competition, customer complaints, pricing, establishing target accounts and quotas, major buying groups, and administrative expense guidelines.

As part of their training, MDMs will attend the Moffitt Cancer Center and Research Institute educational seminar. During the two-day seminar, the MDM's will have an opportunity to observe multiple intraoperative lymphatic mapping and preoperative lymphoscintigraphy procedures, participate in the animate hands-on experience, and interact with the experts in the field. Daily review of material and experiences by MDM's with the training manager helps and enhances their participation in the seminar.

The remaining two weeks will be spent in the field with a sales trainer. The MDM will conduct in-services and provide technical assistance to the surgeon and hospital personnel. At the completion of the training program, the training manager will assess the need for further training of the company representative.



IX. Critical Success Factors Technology

Ability to design a product line consisting of a disposable probe handle and reusable tip component consistent within the targeted COGS, i.e., $500 for 11mm reusable probe tip.

Product Development

Recruit project leader for the development of new instrumentation immediately.

Rapid product development of 11mm disposable probe handle and reusable tip.

Determine appropriate OEM source for 11mm disposable probe handle and reusable tip.

Manufacturing

Adequate product availability of control unit, 19mm reusable probe, and 11mm disposable probe handle and reusable probe tip.

Clinical

Clinical results at community hospitals are consistent with the favorable data from major cancer centers.

Peer review literature continues to support this new procedure.

Adequate surgeon training of ILM to ensure minimal complication rates.

Business / Marketing

Rapid entry into the market to counter ongoing CareWise initiatives.

Realization of adoption rates of the technology.

Rapid recruiting and training of four market development managers by end of 2Q96.



X. Financials

Assumptions 1. Model assumes that sentinel lymph node mapping for melanoma becomes established as the

standard of care for intermediate and greater thickness melanomas.

2. Model assumes that, based on patient volume, major cancer hospitals will require more than one device. Furthermore, introduction of a next generation control unit will also promote multiple-device customers.

3. Annual mid-thickness melanoma surgeries for 1996 are estimated to be 27,600. This was derived from an estimated 38,300 new melanoma cases in 1996 (1996 Cancer Journal for Clinicians, ACS) multiplied by 90% for the number of patients presenting with no clinical evidence of metastasis to the regional lymph nodes (Technical DetaILM of Intraoperative Lymphatic Mapping for Early Stage Melanoma, Morton). This 34,500 was then multiplied by 80% for the number of patients having intermediate (.75mm) or greater thickness melanomas (Investment in New Technology Research Can Save Future Health Care Dollars, Reintgen), for a total of 27,600 candidates for the sentinel lymph node mapping procedure. From 1991 to 1995, the annual increase in the number of new melanoma cases was approximately 4%. From 1995 to 1996 the rate of increase was greater than 12%. This model assumes the more conservative 4% rate of increase.

4. Numbers of the respective hospital types (Comprehensive Cancer, University/Teaching, and Community) based on historical numbers of institutions with cancer treatment programs. More extensive analysis of the number of institutions specifically treating melanoma patients will be done.

5. It is assumed that two ILM reusable tips will be purchased with each control unit.

6. Retail price of a disposable probe component ($150/unit) is an estimate based on demonstrable value added to the customer, including ease of use, sterility assurance, and single-operator capability. This pricing will undergo more extensive market research.

7. Upon release of the 11mm disposable handle in 1Q97, the control unit will be priced at $15,000, offering significant hospital savings.

8. COGS are targeted as follows:

ILM Disposable Handle $35/unit ILM Reusable Tip $750/unit Generation II Control Unit $1,100/unit

All COGS decreasing at a rate of 4% a year, due to economies of scale.

9. Development costs for the ILM disposable handle and reusable tip are estimated to be $800,000, spread $400,000 in 1996, and $400,000 in 1997.

10. The development cost of the Generation II control unit was not included in this analysis due to the fact that its primary intended use is for RIGS colorectal.



11. Human Resources

1996: U.S. (1) MDM productive by 7/1/96. (2) MDM's productive by 8/1/96. (1) MDM productive by 9/1/96. (1) ILM Product Manager by 9/1/96.

1997: U.S. (1) Director of Sales hired by 1/97. (2) MDM's productive by 2/1/97. (2) MDM's productive by 3/1/97.

1996: Europe (1) MDM productive by 9/1/96. (1) MDM productive by 10/1/96. (1) MDM productive by 11/1/96.

Productivity is defined in the U.S. as 1 unit/month for the first 3 months and 2 units/month thereafter.

Productive is defined in Europe as 1 unit/month for the first 3 months and 1.5 units/month thereafter. The European penetration rate reflects slower adoption and longer selling cycle.

12. The Marketing Development Managers are expected to cost $125,000 in 1996 and $132,000 in 1997, including salary, and commissions. The Product Manager is estimated to cost $125,000 in 1996 and $132,000 in 1997. The Director of Sales is estimated to cost $135,000 in 1997

13. The ILM reusable tip is estimated to have useful life of 3 years, after which it will be replaced.

14. By 1998 a European device competitor such as CIS, Stratec, or pol.hi.tech will have entered the U.S. market.

15. The average sales cycle is estimated to be approximately 4 months. The rapid uptake by the MDM's reflect the leads Neoprobe currently has from conventions.

16. There exists an upside potential for Nuclear Medicine Department sales, which have not been accounted for in this model.

17. This sales forecast only considers ILM Melanoma and does not account for RIGS sales. Human resource requirements have only been included through 1997. The impact of ILM Breast Cancer and RIGS will be assessed separately and additional human resources for 1998 and beyond will be included in those plans.

ROI Analysis

5/23/96

Intraoperative Lymphoscintigraphy (ILS) for MelanomaFinancial Summary

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005REVENUEControl Unit/System Revenue $577,100 $3,195,000 $4,555,200 $8,160,672 $8,908,923 $9,002,062 $7,318,167 $6,567,006 $6,474,384 $5,973,804Reusable Tip Revenue $0 $993,700 $1,535,352 $2,805,130 $3,396,077 $3,843,102 $3,784,156 $3,945,138 $4,282,963 $4,511,488Disposable Revenue $0 $351,600 $730,080 $1,412,137 $2,181,336 $2,988,755 $3,693,758 $4,366,869 $5,059,495 $5,739,779TOTAL REVENUE $577,100 $4,540,300 $6,820,632 $12,377,939 $14,486,336 $15,833,919 $14,796,081 $14,879,013 $15,816,842 $16,225,070

COST OF GOODSControl Unit/System COGS $130,500 $383,400 $321,200 $531,168 $535,265 $520,059 $414,648 $364,932 $352,866 $319,322Reusable Tip COGS $0 $392,250 $559,440 $943,488 $1,054,384 $1,147,281 $1,107,959 $1,132,880 $1,206,238 $1,246,164Disposable COGS $0 $82,040 $157,248 $280,756 $400,325 $516,861 $601,928 $684,247 $762,283 $831,517TOTAL COST OF GOODS $130,500 $857,690 $1,037,888 $1,755,412 $1,989,975 $2,184,201 $2,124,535 $2,182,058 $2,321,387 $2,397,003

GROSS MARGIN $446,600 $3,682,610 $5,782,744 $10,622,526 $12,496,361 $13,649,718 $12,671,546 $12,696,954 $13,495,455 $13,828,068Gross Margin % 77.39% 81.11% 84.78% 85.82% 86.26% 86.21% 85.64% 85.33% 85.32% 85.23%

EXPENSESProduct Development $400,000 $400,000 $0 $0 $0 $0 $0 $0 $0 $0Sales Personnel $375,012 $1,640,493 $1,706,113 $1,774,358 $1,845,332 $1,919,145 $1,995,911 $2,075,747 $2,158,777 $2,245,128Marketing Expenses $374,000 $382,200 $319,488 $332,268 $345,558 $359,381 $373,756 $388,706 $404,254 $420,424TOTAL EXPENSES $1,149,012 $2,422,693 $2,025,601 $2,106,625 $2,190,890 $2,278,526 $2,369,667 $2,464,453 $2,563,031 $2,665,553

OPERATING INCOME ($702,412) $1,259,917 $3,757,143 $8,515,901 $10,305,471 $11,371,192 $10,301,879 $10,232,501 $10,932,424 $11,162,515

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Neoprobe Cash Flow1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

REVENUEAnnual Control Unit/System Installations 29 213 292 503 528 513 401 346 328 291Inflation Factor 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04Sale Price $19,900 $19,900 $15,000 $15,600 $16,224 $16,873 $17,548 $18,250 $18,980 $19,739 $20,529Control Unit/System Revenue $577,100 $3,195,000 $4,555,200 $8,160,672 $8,908,923 $9,002,062 $7,318,167 $6,567,006 $6,474,384 $5,973,804

Annual Reusable Tip Sales 0 523 777 1365 1589 1729 1637 1641 1713 1735Inflation Factor 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04Sale Price $1,900 $1,900 $1,900 $1,976 $2,055 $2,137 $2,223 $2,312 $2,404 $2,500 $2,600Reusable Tip Revenue $0 $993,700 $1,535,352 $2,805,130 $3,396,077 $3,843,102 $3,784,156 $3,945,138 $4,282,963 $4,511,488

Annual Disposable Sales 0 2344 4680 8704 12928 17032 20240 23008 25632 27960Inflation Factor 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04Sale Price $150 $150 $150 $156 $162 $169 $175 $182 $190 $197 $205Disposable Revenue $0 $351,600 $730,080 $1,412,137 $2,181,336 $2,988,755 $3,693,758 $4,366,869 $5,059,495 $5,739,779

TOTAL REVENUE $577,100 $4,540,300 $6,820,632 $12,377,939 $14,486,336 $15,833,919 $14,796,081 $14,879,013 $15,816,842 $16,225,070

COST OF GOODSAnnual Control Unit/System Sales 29 213 292 503 528 513 401 346 328 291Economies of Scale Factor 0.96 0.96 0.96 0.96 0.96 0.96 1.00 1.02 1.02 1.02 1.02Control Unit/System Cost/Unit $4,500 $4,500 $1,800 $1,100 $1,056 $1,014 $1,014 $1,034 $1,055 $1,076 $1,097Control Unit/System COGS $130,500 $383,400 $321,200 $531,168 $535,265 $520,059 $414,648 $364,932 $352,866 $319,322

Annual Reusable Tip Sales 0 523 777 1,365 1,589 1,729 1,637 1,641 1,713 1,735 Economies of Scale Factor 0.96 0.96 0.96 0.96 0.96 0.96 1.00 1.02 1.02 1.02 1.02Reusable Tip Cost/Unit $750 $750 $750 $720 $691 $664 $664 $677 $690 $704 $718Reusable Tip COGS $0 $392,250 $559,440 $943,488 $1,054,384 $1,147,281 $1,107,959 $1,132,880 $1,206,238 $1,246,164

Annual Disposable Sales 0 2,344 4,680 8,704 12,928 17,032 20,240 23,008 25,632 27,960 Economies of Scale Factor 0.96 0.96 0.96 0.96 0.96 0.96 0.98 0.98 1 1 1Disposable Cost/Unit $35 $35 $35 $34 $32 $31 $30 $30 $30 $30 $30Disposable COGS $0 $82,040 $157,248 $280,756 $400,325 $516,861 $601,928 $684,247 $762,283 $831,517

TOTAL COST OF GOODS $130,500 $857,690 $1,037,888 $1,755,412 $1,989,975 $2,184,201 $2,124,535 $2,182,058 $2,321,387 $2,397,003

GROSS MARGINControl Unit/System Margin $446,600 $2,811,600 $4,234,000 $7,629,504 $8,373,658 $8,482,003 $6,903,519 $6,202,074 $6,121,519 $5,654,482Reusable Tip Margin $0 $601,450 $975,912 $1,861,642 $2,341,693 $2,695,821 $2,676,196 $2,812,258 $3,076,726 $3,265,324Disposable Margin $0 $269,560 $572,832 $1,131,381 $1,781,011 $2,471,894 $3,091,830 $3,682,622 $4,297,211 $4,908,262GROSS MARGIN $446,600 $3,682,610 $5,782,744 $10,622,526 $12,496,361 $13,649,718 $12,671,546 $12,696,954 $13,495,455 $13,828,068Margin % 77.39% 81.11% 84.78% 85.82% 86.26% 86.21% 85.64% 85.33% 85.32% 85.23%

EXPENSESInflation Factor 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04 1.04Product Development - 11mm Disposable $400,000 $400,000 $0 $0 $0 $0 $0 $0 $0 $0Sales Personnel $375,012 $1,640,493 $1,706,113 $1,774,358 $1,845,332 $1,919,145 $1,995,911 $2,075,747 $2,158,777 $2,245,128MDM Travel $24,000 $48,000 $49,920 $51,917 $53,993 $56,153 $58,399 $60,735 $63,165 $65,691MDM Regional Budget $20,000 $64,000 $66,560 $69,222 $71,991 $74,871 $77,866 $80,980 $84,220 $87,588New Exhibit Booth $14,000 $0 $0 $0 $0 $0 $0 $0 $0 $0Advertising $60,000 $62,400 $64,896 $67,492 $70,192 $72,999 $75,919 $78,956 $82,114 $85,399Techniques Manual $25,000 $25,000 $0 $0 $0 $0 $0 $0 $0 $0Videos - Procedure Library $15,000 $15,600 $16,224 $16,873 $17,548 $18,250 $18,980 $19,739 $20,529 $21,350Surgeon Panel Meetings $35,000 $36,400 $37,856 $39,370 $40,945 $42,583 $44,286 $46,058 $47,900 $49,816Outcomes Research $50,000 $50,000 $0 $0 $0 $0 $0 $0 $0 $0Market Research (Pricing) $65,000 $0 $0 $0 $0 $0 $0 $0 $0 $0Market Research (Hospital Demographics) $6,000 $0 $0 $0 $0 $0 $0 $0 $0 $0Medical Symposia $20,000 $20,800 $21,632 $22,497 $23,397 $24,333 $25,306 $26,319 $27,371 $28,466Training Centers Support (6 sites @ $10,000) $40,000 $60,000 $62,400 $64,896 $67,492 $70,192 $72,999 $75,919 $78,956 $82,114TOTAL EXPENSES $1,149,012 $2,422,693 $2,025,601 $2,106,625 $2,190,890 $2,278,526 $2,369,667 $2,464,453 $2,563,031 $2,665,553

Operating Income ($702,412) $1,259,917 $3,757,143 $8,515,901 $10,305,471 $11,371,192 $10,301,879 $10,232,501 $10,932,424 $11,162,515Tax (34%) $428,372 $1,277,429 $2,895,406 $3,503,860 $3,866,205 $3,502,639 $3,479,050 $3,717,024 $3,795,255AFTER TAX CASH FLOW ($702,412) $831,545 $2,479,714 $5,620,495 $6,801,611 $7,504,987 $6,799,240 $6,753,451 $7,215,400 $7,367,260

Cumulative After-Tax Cash Flow $129,133 $2,608,848 $8,229,342 $15,030,953 $22,535,940 $29,335,180 $36,088,631 $43,304,031 $50,671,291NPV (24% Discount Rate) ($25,654) $1,274,925 $3,652,245 $5,972,328 $8,036,851 $9,545,224 $10,753,461 $11,794,496 $12,651,709IRR 156% 213% 228% 232% 233% 234% 234% 234%

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5/23/96

$12,000,000

$14,000,000

$16,000,000

$18,000,000

Worldwide Revenue ILS Melanoma

page 38

$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Total Revenue Control Unit Revenue Disposable Revenue Reusable Revenue

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Control Unit Market - U.S.

Total Potential Device Market Number Dev/Instit PotentialNCI Designated Cancer Centers 53 2.50 133University/Teaching Hospitals 431 2.00 862Community Hospitals w/ Cancer Programs 1,600 1.50 2,400Community Hospitals w/o Cancer Programs 3,100 0.25 775

5,184 4,170

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Neoprobe Device Forecast - US 29 168 221 382 401 390 305 263 249 221

Annual Share of Device Installations 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Neoprobe 59% 59% 61% 65% 68% 71% 73% 75% 77% 79% 81%Carewise 41% 41% 39% 31% 24% 19% 15% 10% 8% 6% 4%Other 0% 0% 0% 4% 8% 10% 12% 15% 15% 15% 15%TOTAL 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Annual Device Installations 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Neoprobe 29 168 221 382 401 390 305 263 249 221Carewise 20 107 105 135 107 80 41 27 19 11Other 0 0 14 45 56 64 61 51 47 41TOTAL 49 275 340 562 564 534 407 341 315 273

Cumulative Device Installations 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Neoprobe 44 73 241 462 844 1,245 1,635 1,940 2,203 2,452 2,673 Carewise 30 50 158 263 398 505 585 626 653 672 683 Other - - - 14 59 115 179 240 291 339 380 TOTAL 74 123 399 739 1,301 1,865 2,399 2,806 3,147 3,463 3,736

Total Market Penetration (All companies) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Total Market 4,170 4,170 4,170 4,170 4,170 4,170 4,170 4,170 4,170 4,170 4,170 Cumulative Devices Installed 74 123 399 739 1,301 1,865 2,399 2,806 3,147 3,463 3,736 Market Penetration 2% 3% 10% 18% 31% 45% 58% 67% 75% 83% 90%

Control Unit Market - Europe 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Neoprobe Device Forecast - Europe 0 45 71 121 127 123 96 83 79 70

Control Unit Market Worldwide 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Neoprobe Device Forecast Worldwide 29 213 292 503 528 513 401 346 328 291

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300

350

400

450

Unit Sales of Control Units

page 40

0

50

100

150

200

250

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

U.S. Control Unit Sales Europe Control Unit Sales

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Reusable Tip Market US(Release date 1Q97)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Incremental Neoprobe Devices Installed 29 168 221 382 401 390 305 263 249 221Reusable Tip Factor (Tips/Installation) 2 2 2 2 2 2 2 2 2 2 2Annual Reusable Tip Sales 336 442 764 802 780 610 526 498 442

Cumulative Neoprobe Devices Installed 44 73 241 462 844 1245 1635 1940 2203 2452 2673Reusable Tip Factor (Tips/Existing Install) 0.33 0.33 0.33 0.33 0.33 0.33 0.33 0.33 0.33 0.33 0.33Annual Reusable Tip Sales 80 152 279 411 540 640 727 809 882

Total Annual Reusable Tip Sales 0 0 416 594 1043 1213 1320 1250 1253 1307 1324

Reusable Tip Market Europe(Release Date 1Q97)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Incremental Neoprobe Devices Installed 0 45 71 121 127 123 96 83 79 70Reusable Tip Factor (Tips/Installation) 2 2 2 2 2 2 2 2 2 2 2Annual Reusable Tip Sales 90 142 242 254 246 192 166 158 140

Cumulative Neoprobe Devices Installed 7 7 52 123 244 371 494 590 673 752 822Reusable Tip Factor (Tips/Existing Install) 0.33 0.33 0.33 0.33 0.33 0.33 0.33 0.33 0.33 0.33 0.33Annual Reusable Tip Sales 17 41 81 122 163 195 222 248 271

Total Annual Reusable Tip Sales 0 0 107 183 323 376 409 387 388 406 411

Reusable Tip Market Worldwide1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Total Annual Reusable Tip Sales 0 0 523 777 1,365 1,589 1,729 1,637 1,641 1,713 1,735

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Disposable Market US(Release 1Q97)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Cumulative Neoprobe Device Installations 44 73 241 462 844 1,245 1,635 1,940 2,203 2,452 2,673

MelanomaAnnual Melanoma Procedures/Device 8 8 8 8 8 8 8 8 8 8 8Annual Melanoma Disposable Sales 1,928 3,696 6,752 9,960 13,080 15,520 17,624 19,616 21,384

Annual Melanoma Surgeries - Mid-Thickness 27,600 28,704 29,852 31,046 32,288 33,580 34,923 36,320 37,773 39,283Annual Incidence Rate of Increase 4% 4% 4% 4% 4% 4% 4% 4% 4% 4%Annual Melanoma Disposable Sales 0 0 1,928 3,696 6,752 9,960 13,080 15,520 17,624 19,616 21,384Melanoma Disposable Market Penetration 7% 12% 22% 31% 39% 44% 49% 52% 54%

Total Annual Disposable Procedures 0 0 1,928 3,696 6,752 9,960 13,080 15,520 17,624 19,616 21,384

Disposable Market Europe(Release 1Q97)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Cumulative Neoprobe Device Installations 7 7 52 123 244 371 494 590 673 752 822

MelanomaAnnual Melanoma Procedures/Device 8 8 8 8 8 8 8 8 8 8 8Annual Melanoma Disposable Sales 416 984 1,952 2,968 3,952 4,720 5,384 6,016 6,576

Annual Melanoma Surgeries - Mid-Thickness 27,600 28,704 29,852 31,046 32,288 33,580 34,923 36,320 37,773 39,283Annual Incidence Rate of Increase 4% 4% 4% 4% 4% 4% 4% 4% 4% 4%Annual Melanoma Disposable Sales 0 0 416 984 1,952 2,968 3,952 4,720 5,384 6,016 6,576Melanoma Disposable Market Penetration 1% 3% 6% 9% 12% 14% 15% 16% 17%

Total Annual Disposable Procedures 0 0 416 984 1,952 2,968 3,952 4,720 5,384 6,016 6,576

Disposable Market Worldwide1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Total Annual Disposable Procedures 0 0 2,344 4,680 8,704 12,928 17,032 20,240 23,008 25,632 27,960

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