Biotage in 2007

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Biotage Annual Report 2007 1

Annual Report 2007

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Biotage in 2007

– The group’s net sales totaled SEK 496.4 M (519.5).

– Operating income increased by SEK 36.4 M to SEK 42.9 M (6.5).

– Profit/loss after tax totaled SEK 99.4 M (2.8) after capitalization of deferred prepaid tax of SEK 54.1 M (0).

– Earnings per share were SEK 1.12 (0.03)

– Cash flow from current operations was SEK 33.7 M (39.9).

– During the year, Biotage started operations within the new area, Molecular Imaging.

Key ratios 2007 2006

Net sales, SEK M 496.4 519.5

Gross profit/loss, SEK M 305.5 319.7

Gross margin, % 61.5 61.5

Operating profit/loss, SEK M 42.9 6.5

Operating margin, % 8.6 1.2

Profit/loss before tax, SEK M 45.8 6.1

Profit/loss after tax, SEK M 99.4 2.8

Profit/loss per share, SEK 1.12 0.037

Equity ratio, % 80.5 77.7

Average number of employees 336 341

The year in brief

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Business concept

Biotage shall develop, manufacture and sell instruments, reagents and services within the life science area, primarily to the pharmaceutical industry and scientific institutions, with an express ambition to address other customer segments with the company’s product offering.

The Company will achieve long-term and stable profitability by reaching a critical mass in each customer segment, and by having a sufficiently broad product portfolio. This critical mass will be achieved through a combination of organic growth and strategic product acquisitions.

Biotage’s long-term financial goals – organic growth of 10 percent.

– increase in the gross margin by 1-2 percent per year, with a long-term goal of a gross margin of 65 percent.

– an operating margin of at least 15 percent.

Parallel with the above financial goals, Biotage will ensure a positive cash flow.

This includes active management of working capital.

Comments regarding achievement of goals 2007

The group’s net sales decreased in 2007 by 4 percent. Sales have been impacted negatively by the fact that the operation within the product area, Chemical Development, was liquidated according to plan in 2007. Sales have also been negatively impacted by exchange rate effects and a weak third quarter within the Discovery Chemistry business area. At comparative exchange rates and excluding Chemical Development, sales increased by 3 percent.

The gross margin for 2007 was unchanged compared with 2006. Continued productivity improvements have affected the gross margin positively while exchange rates and customer-mix changes have impacted the gross margin negatively.

The operating margin totaled 8.6 percent, compared with 1.2 percent for 2006.

Strategy in brief

In order for Biotage to achieve the financial objectives established for its business, the Company has formulated a number of strategies. Briefly put, these are based on Biotage:

– optimizing its operations, and promoting organic growth.

The strategy’s importance to the operation in 2007: Reorganization of the marketing and sales organizations has been carried out. Resources have been obtained to optimize the operation within production and logistics.

– increasing sales of consumables, which will promote a more stable revenue flow.

The strategy’s importance to the operation in 2007: Consumable’s propor- tion of total sales has increased. Several new products have been launched during the year including SNAP and solutions for SPE (Solid Phase Extrac- tion) for use within the environmental area.

– increasing investments in research and development, to ensure that the Company is a market leader in its customer offering.

The strategy’s importance to the operation in 2007: New employment and substantially increased activity within product development. The results of the work will be illustrated by a number of new launches in 2008.

– having a flexible organization, which can smoothly adapt to changes in the group’s markets and that is focused on capability and productivity.

The strategy’s importance to the operation in 2007: Continuous work is underway in raising the competence levels within the company. In 2007, efforts have been carried out within leadership development to strengthen good leadership within the company.

Biotage is a global company that offers solutions within pharmaceutical chemistry and genetic analysis. The work in the field of pharmaceutical chemistry is conducted in the Discovery Chemistry business area, while the work related to genetic analysis is part of the Biosystems business area. The Company’s shares are listed on the small cap list of the OMX Nordic Exchange.

This is Biotage

Group overview

USA Europe Other markets 45

41 14

Sales per geographic market 2007 %

0 100 200 300 400 500 600

2007 2006 2005 2004 2003

Net sales 2007 SEK M

173.7 366.6

430.4 519.5

496.4

Discovery Chemistry Biosystems

397.6 98.8

Sales per business area 2007 SEK M

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* Total gross expenditures for research and development were 15 percent of net sales.

Group overview

-300 -250 -200 -150 -100 -50 0 50

2007 2006 2005 2004 2003

Operating profit/loss SEK M

-261.2 -61.7

-62.9 6.5

42.9 0

50 100 150 200 250 300 350 400

2007 2006 315.0

265.0 Operating expenses SEK M

0 50 100 150 200

Other operating costs Research and

development costs Administration

expenses Selling costs

183.5 169.7

65.6

50.2 58.8

41.4*

7.1 3.7

Breakdown of operating costs SEK M

0 50 100 150 200 250 300 350 400

2007 2006 2005 2004 2003

166 246

295

341 336

Average number of employees Discovery Chemistry

Sales 2007 SEK 397,6 M

Operating profit/loss 2007 SEK 32,8 M

Products

Systems for microwave synthesis, work-up, purification and evaporation, as well as reagents and consumables Most important markets USA, Western Europe and Asia.

Major competitors CEM in microwave synthesis, and Isco in purification systems.

Biosystems

SEK 98,8 M

SEK 26,2 M

Pyrosequencing^® system and software, and also reagents and consumables.

USA, Western Europe and Asia.

Applied Biosystems and Roche.

The Group’s business areas

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There have been several reasons for rejoicing in the fiscal year 2007, but also several disappointments. We have continued to successfully consolidate and optimize our operation with a focus on increased profitability. The operating profit increased to SEK 42.9 M, as compared with SEK 6.5 M for 2006. An important reason for this is that we improved resource utilization and increased efficiency within the organization. Operating costs in the group totaled SEK 265 M, a reduction of SEK 50 M compared with 2006.

We have also continued the efficiency work in production in order to make possible an improved gross margin. However, this has been negatively impacted by exchange rate effects, which in total have meant an unchanged gross margin compared with 2006. Almost 100 percent of our sales are made in foreign currencies while a large part of system manufacturing is done in Sweden. In 2007 the Swedish krona (SEK) has strengthened considerably in relation to several of the most important currencies such as the American dollar (USD) and British pound (GBP).

Sales have not lived up to our expectations in 2007. At comparable currency rates and excluding the product area, Chemical Development, which was liquidated during the year, sales increased by 3 percent.

Developments within Discovery Chemistry

The fact that sales were worse than expected during the year is primarily due to a weak third quarter within the business area, Discovery Chemistry. The reason was a weakened demand for purification systems from major pharmaceutical companies in the US and Europe. At the same time, competition toughened within the area after our main competitor launched a new system.

We quickly allocated resources to meet the increased competition, which resulted in noticeably improved sales growth during the fourth quarter.

Other product areas have continued to develop well during the year and we can state that the order inflow and order stock at the end of the year were at high levels. Our work with increasing sales of consumables provided good results in 2007. Sales of consumables increased by 23 percent. Among other things, sales of our newly developed series of consumables, SNAP, which was launched during the year, exceeded our expectations.

In total, net sales within Discovery Chemistry totaled SEK 398 M for 2007, compared to SEK 430 M for 2006. At comparable currency rates and excluding the product area, Chemical Development, sales were unchanged compared with 2006.

The operating profit/loss for the business area, Discovery Chemistry, increased by 12 percent to SEK 32.8 M, which corresponds to an operating margin of 8.3 percent. We have continued the work with making the operation more efficient and improving resource utilization, which has resulted in lower operating costs and an improved gross margin.

India and China increasingly important markets

During the year we have been able to see a clear trend towards increased research operations in India and China. The reason is that an increasing number of so-called CROs (Contract Research Organizations) are being established in these countries. These companies carry out parts of pharmaceutical development for the majority of the larger pharmaceutical companies. For us, this has meant that we have strengthened our operations in these countries. We have also initiated preparatory work where we are investigating the possibilities to start local production of consumables in order to further strengthen our competitiveness.

New market for Discovery Chemistry

During the year, we broadened our operation to a new area – Molecular Imaging. Molecular Imaging is an area with strong growth and several different applications within diagnostics, research and development. Within the pharmaceutical industry, it is of great interest to be able to quickly find out what substances being developed have the conditions to succeed in the very expensive development process of pharmaceuticals. Molecular Imaging is assessed to be of great significance in this work as well as in diagnosing and monitoring diseases.

In many applications, work is being carried out with radioactive labeled substances, which have a very short half-life. To be usable, the labeling of these substances must occur quickly and in proximity to where the molecular imaging shall occur. It is here that our solutions within microwave synthesis, purification and evaporation can create major advantages. Together with McMaster Univer- sity in Canada, one of the leading institutions within research in the area, we are now working with developing methods to make the development of these substances more efficient. We believe that the future potential within this area is good, even though it is in an early developmental stage.

Developments within Biosystems

In the Statement from the President from last year, I stated that 2006 had been the best year ever for the business area, Biosystems. I am happy to be

In 2007 we continued with the work to improve profitability in Biotage and I am satisfied with the way our operation developed during the year. This gives us a stable foundation to stand on when we, to an increasing extent, complement our profitability work with measures whose purpose are to create sales growth.

Continued profit improvement in 2007

Statement from the President

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Biotage Annual Report 2007 7 able to say the same thing this year. Sales increased by 10 percent to SEK

98.8 M. Operating profit/loss totaled SEK 26.2 M, an increase of 138 percent compared with last year, which gives an operating margin of 26.5 percent.

Sales of systems and consumables have primarily been driven by our application for CpG-methylation, which continued to be very successful on the market. CpG-methylation, or DNA-methylation as it is also called, is interesting to examine since researchers have shown that this is involved in the occurrence and development of cancer tumors. By analyzing and following the degree of methylation it is possible to better understand how a patient is responding to a treatment.

Biosystems’ customers are found primarily within academic research institutions and universities and university hospitals. During the year, we have experienced an increased demand for our solutions from major pharmaceutical companies, which is positive since this opens up a new customer segment for us.

Increased tempo in product development gives results

One of the most important prerequisites for us being able to reach our growth goals is that we continually renew our offer to customers through innovative product development. In 2007 we expanded our efforts within product development and in 2008 we will be able to show the results of this work.

Several major launches of new system platforms will occur at the end of the first quarter.

The business area, Discovery Chemistry, will launch new systems within both synthesis and purification. We will present new consumables for Solid Phase Extraction (SPE) for use within the environmental area, which is in line with our ambition to broaden the operation to also include areas outside pharmaceutical chemistry.

The business area, Biosystems, will launch a new system, PyroMark^TMQ24, based on Pyrosequencing^® technology for applications within the cancer area. PyroMark^TMQ24 will be simpler and offered at a lower price than existing systems. The idea is that a lower price will broaden the customer base, and through that, create a demand for consumables.

In addition, the ambition is that the system shall be IVD-approved (approved for in vitro diagnostics) on the European market. This would increase our market segment to also include diagnostic applications, an area with very great potential for Biotage. In the future, we will increase our efforts in developing new applications for our systems within the areas, infectious diseases and cancer – work that is often done in cooperation with large research institutions in Europe and the US.

Continual overview of environmental impacts

We constantly review the possibilities to reduce the environmental impact of our operation. In general, Biotage has a low environmental impact in production since we have no chemical treatment processes. Production primarily consists of the compilation and assembly of components and we work in accordance with EU’s RoHS directive. We continually work to reduce energy use by annually establishing clear goals that are followed-up.

A clear ambition for the future is to change the distribution of our products.

Today, airfreight is used to a very large extent. In 2008, we will therefore investigate the possibilities, to a larger extent, to use alternative transport methods for our products.

Strategic evaluation

At the end of 2007 we gave notice that we had decided to unconditionally evaluate different forms of strategic alternatives that may result in the ac- quisition of new companies, the sale of all or parts of the company, and/or

the possibility for a change in ownership. This work is currently continuing according to plan. It is my hope that we will be able to give additional information about the strategic evaluation during the coming year.

Focus for 2008

The consolidation and optimization work that has been carried out over the last two years has provided results. In connection with this, I would like to thank all the employees, who through their great commitment and hard work have made possible the continued growth of the company. We have made progress, but there is still work to be done if we are to meet our long-term financial goals.

We will continue our work with improving the gross margin. Among other things, we have the ambition to increase automation in our production since we currently have sufficient volumes to be able to allow us to generate sub- stantial cost benefits. Another prioritized area for 2008 is the improvement of our purchasing procedures.

Through investments in product development in 2007 we have several interesting launches planned for 2008. We will carry out recruitment in order to strengthen the sales and marketing organizations within both Discovery Chemistry and Biosystems. The ambition is, in the best possible way, to be able to take advantage of the potential that is inherent in both existing products and in the new launches that will be carried out during the year. Our hope is that the profit improvement that can be achieved in 2008 will largely come from increased sales.

In summary, I would like to say that in 2007 we have taken additional steps in our strategic plans. We have continued the optimization work and also increased efforts in product development. This has improved our conditions now that we have combined the continued efficiency work with a clear focus on creating organic growth. The objective of reaching our long-term goals by the end of 2009 remains.

Uppsala, Sweden, March 2008 Torben Jörgensen

President and CEO

Statement from the President

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Discovery Chemistry

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Biotage Annual Report 2007 9 Biotage is a leading, global supplier of systems and consumables within phar-

maceutical chemistry. These solutions are used by chemists in the pharmaceuticals industry, in biotech companies, and in academia, in efforts to develop new substances on which future pharmaceuticals can be based. This work can be described as a process in which a molecular model is taken from an idea to a biologically active substance (see model to the right). Today, Biotage offers the widest selection of solutions for this process. The solutions include areas such as synthesis, work-up, purification and evaporation. With the help of Biotage’s products, the times required for the synthesis and purification of new pharmaceutical substances can be reduced. These are two of the most difficult bottlenecks in the process of developing pharmaceuticals.

Developments in 2007

In 2007, Biotage continued with the optimization work within the business area, Discovery Chemistry. Operating profit/loss totaled SEK 32.8 M, an increase of 12 percent compared with last year. Lower operating costs combined with an improved gross margin are the primary reasons for the profit/loss improvement.

Sales totaled SEK 397.6 M, a decrease of 8 percent compared with last year. Sales growth was worse than expected in 2007 due to weak development within the area for purification products during the third quarter. It was primarily the demand from large pharmaceutical companies in the US and Europe that decreased. At the same time, sales were affected whereby one of Biotage’s main competitors launched a new purification system. Biotage quickly allocated resources to meet the increased competition, which resulted in noticeable improved sales growth during the fourth quarter.

In addition, sales were negatively impacted by fluctuations in exchange rates totaling SEK 21 M.

Sales of consumables increased by 14 percent during the year. In total, consumables accounted for 43 percent of the business area, Discovery Chemistry’s sales during 2007. One of the reasons is that Biotage’s new series of consumables, SNAP, has been very well received in the market. As opposed to the company’s other consumables, SNAP can be used with both Biotage’s own platform as well as the platforms of others, which has increased marketing potential.

During the year, Biotage has continued its development work with the evaporation system V-10 and expanded its functionality. Market interest for the system continues to be great since the V-10 meets a clear need among pharmaceutical chemists.

Focus for 2008

During 2007, Biotage has taken measures to create possibilities for increased growth in 2008. An important part of this work is strengthening efforts within product development. In 2008, Biotage will launch several new products.

These will include the next generation of purification systems for pharma- From molecule model to active substance

Discovery Chemistry’s systems and consumables are used in the process of taking a molecular model from an idea to a biologically active substance.

This work can be described in the following five steps, which are repeated until the chemist has produced the substance desired:

1 2 3 4 5

1. Planning and modeling 2. Synthesis/reaction 3. Work-up

A process that removes various substances that may have been added to speed up or create reactions.

4. Purification/evaporation

The desired compound is isolated from the remaining impurities.

5. Analysis/characterization

The chemist ensures that the sub stance has been synthesized and isolated.

This is generally done through mass-spectrometry and NMR (Nuclear Magnetic Resonance).

In Biotage’s systems for microwave-assisted synthesis, the reagents, catalysts and substrates are heated with the help of controlled microwaves, in order to produce new chemical substances to serve as the basis for future pharmaceuticals. Once a compound has been synthesized, it is processed and purified with the help of systems and consumables from Biotage.

The systems save a great deal of time for the pharmaceutical chemists. This time can be used for the design of additional new medications. For the pharmaceutical companies, this means significantly increased productivity, as many more pharmaceutical substances can be produced and registered within a shorter time.

Discovery Chemistry business area

0 100 200 300 400 500

2007 2006

2005 Net sales SEK M

350.9

430.0

397.6

-10 -5 0 5 10 15 20 25 30 35

2007 2006

2005

-8.1

29.2 USA 32.8

Europe Other markets 45

40 15

Geographic breakdown of sales %

The business area, Discovery Chemistry, develops and manufactures systems and consumables that accelerate the pharmaceutical industry development of new chemical substances. These chemical substances form the foundation for future pharmaceuticals.

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ceutical development, the area that generally generates the greatest sales for the business area, Discovery Chemistry. In addition, Biotage is increasing the number of products within SNAP, the company’s new series of consumables that have already proven to be successful on the market.

Biotage has a very strong offer to customers within pharmaceutical chemistry. The company’s ambition is, using existing technology, to broaden the operation to also include other customer segments. As a link in this work, Biotage will launch a series of new products within Solid Phase Extraction, intended for use within the environmental area.

Molecular Imaging

In 2007, Biotage broadened the operation to the new area, Molecular Imag- ing. Molecular Imaging is an area with strong growth and several different applications within diagnostics, research and development. It is a promising method for diagnosing diseases such as cancer. Molecular Imaging is also assessed to provide good possibilities to follow the development of a disease, for example, how a patient responds to treatment.

Molecular Imaging can also be used within pharmaceutical development in order to identify, at an early stage, whether the potential pharmaceutical is effective in that area of the body it is intended for.

In many applications, work is being carried out with radio labeled substances, which have a very short half-life. To be usable, the labeling of these substances must occur quickly and in proximity to the place where the molecular imaging shall occur. Biotage’s solutions for microwave synthesis, purification and evaporation can create clear benefits in this stage. The reactions are considerably faster than with conventional methods and the yield, in other words, the volume of substances becomes greater.

In 2008, Biotage will increase efforts within Molecular Imaging and has assessed that the future potential within this area is good.

The market

Biotage’s product range is directed primarily at pharmaceutical chemists working in the pharmaceuticals industry, biotech companies, and in academia.

In addition, Biotage sells products within the area, Solid Phase Extraction (SPE), to chemists active within analysis related to pharmaceuticals, the environment and food.

Biotage is a global company where in 2007, the US accounted for 45 percent of sales, Europe for 40 percent and other markets, 15 percent. In 2007, sales in Asia, excluding Japan, increased by 36 percent.

Factors affecting Biotage

The demand for Biotage’s solutions is affected to a large degree by the investments of the pharmaceuticals industry in research and development. The Company’s own product development is a very important tool for Biotage to actively affect market demand. By continuously enhancing existing systems, and developing new ones that create definite added value for its customers, Biotage can generate demand for the Company’s products.

The news flow from the pharmaceutical industry in 2007 was dominated by the fact that the larger pharmaceutical companies have carried out restructures as a result of patents beginning to expire and that the number of pharmaceuticals that are being approved by authorities is decreasing. The pharmaceutical industry is implementing new strategies and technologies to bring new pharmaceuticals to the market faster and achieve greater success in the clinical test phase.

As a result of this, the outsourcing of pharmaceutical development projects to Asia, especially India and China, is increasing. Biotage has been successful with sales to these growth markets, both within synthesis and purification.

Growth in the number of sold systems was 23 percent compared with 2006.

The Asian research companies (CRO, Contract Research Organizations) are expanding substantially and have the need for the same effective tools as the American and European companies are already using.

Biotage has also seen potential for the Company’s products within the fundamental research that is carried out at universities. Biotage has strengthened its work within the academic market and has increased the number of sold systems by 24 percent compared with 2006.

This good development has been negatively impacted whereby the number of sold systems to pharmaceutical companies – of which many have imple- Discovery Chemistry business area

Discovery Chemistry offers

Synthesis Initiator

Microwave synthesis system with room for one reaction chamber.

Initiator Eight

Microwave synthesis system that can handle up to eight consecutive reactions.

Initiator Sixty

Microwave synthesis system that can handle up to 60 consecutive reactions.

Advancer

Microwave system for the synthesis of larger volumes of substances.

Consumables

For use together with the Biotage microwave synthesis system.

Work-up ISOLUTE^®

Products for SPE (Solid Phase Extraction).

EVOLUTE^®

Products for SPE (Solid Phase Extraction).

SLE+

Products for SLE (Solid Liquid Extraction).

Purification SP1

Automated purification system with single purification column.

SP4

Automated purification system with four purification columns.

SP4 EXP

An SP4-system with extended collection volume.

Isolera

The next generation’s platform for automated purification systems (to be launched in 2008).

FlashMaster II

Automated purification system adapted for a multi-user environment.

FlashMaster Personal Plus

Biotage’s simplest purification system.

FLASH 75

Purification system for the purification of up to 40 g of substance.

FLASH 150

Purification system for the purification of up to 320 g.

FLASH 400

Biotage’s largest system, adapted to purification of substances on a larger scale.

Consumables

For use together with Biotage’s purification systems, for example, SNAP.

Evaporation V-10

Rapid Solvent Evaporation System – system for evaporation.

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Biotage Annual Report 2007 11 mented both budget and personnel cutbacks – decreased by 7 percent.

To reduce the dependence on the pharmaceutical industry and to create conditions for increased growth, Biotage’s product development has been complemented with a focus on solutions for the customer segment outside the pharmaceutical industry.

Market potential

Since its start, Biotage has installed more than 1,350 systems for microwave synthesis and more than 2,175 automated purification systems based on flash chromatography. In 2007, the installed base of systems for microwave synthesis increased by 19 percent, and for automated purification systems, by 16 percent.

The number of pharmaceutical chemists around the world is estimated at around 30,000. The possibilities to expand the operation to reach new users is significant, both by increasing the number of facilities that are customers of Bi- otage and by increasing the number of systems that are sold to every facility.

Every sold system is a source of increased sales of consumables. Biotage’s system for microwave synthesis and purification requires specially formulated consumables. At the same rate that the installed base of systems is growing, the demand for consumables also grows.

Customers

Biotage’s system for microwave synthesis and purification is installed at approximately 200 universities and 250 of the pharmaceutical industry’s facilities throughout the world. In 2007, 36 new universities and 46 new facilities within the pharmaceutical industry were added.

Biotage’s installed base of systems is very diversified and no single facility accounts for more than 5 percent of the total number of installed systems.

Biotage’s customers are comprised of all the major multi-national pharmaceutical companies as well as leading biotech companies and universities throughout the world. Merck, GlaxoSmithKline, Pfizer, Novartis, and Astra Zeneca are among the largest customers.

Market position

Biotage has a very strong market position in most of the areas in which the Com- pany is active. Biotage competes with innovative products that make customer’s work flows more efficient and increase productivity, which creates measurable value for them. Biotage’s extremely competent support personnel are placed near customers in order to ensure that they can successfully take full advantage of the Company’s products. Biotage is continuing to invest in production facilities and production processes in order to be able to offer high quality and delivery of consumables on the same day that the order is placed.

Biotage’s competitors do not publish detailed financial data for those product groups where they compete with Biotage. Based on independent market analysis, Biotage is perceived as a market-leading player within microwave synthesis and flash chromatography. Biotage is a new player within the product area, evaporation, and within the product area, Solid Phase Extraction (SPE), Biotage is meeting the competition from large companies.

Competitors

Biotage has no single competitor offering the same broad range of products and services in pharmaceutical chemistry. As a result, the Company has different competitors in the various product areas.

Microwave synthesis

Biotage’s primary competitor in microwave synthesis is the American company CEM Corporation. CEM offers microwave systems for a large range of application areas including the academic sector, the pharmaceuticals, peptides and food industries, and environmental protection.

Biotage’s foremost competitive advantages in microwave synthesis are safety, user-friendliness, productivity, product quality, as well as the Company reaction database (PathFinder^TM) and excellent service and support.

Purification

Isco is the main competitor in the area of automated purification systems. Isco is a part of the American Teledyne Group. Together, Biotage and Isco account for approximately 90 percent of the market.

Discovery Chemistry business area

Biotage’s purification products offer performance that is unique in the market, and the quality of the purification columns, with patented technology, is cutting edge.

SPE

The foremost competitors within SPE (Solid Phase Extraction) are the American companies Varian and Waters. SPE is included as a small part in their total offer.

They have a considerably larger market share within SPE than Biotage.

Evaporation

The competition facing the Biotage V-10 system comes mainly from conventional evaporation techniques. The largest company in this area is Genevac, of the UK. In the field of evaporation, the Biotage V-10 system offers speed and automation unmatched by systems from competing suppliers.

Production

All systems and products in the purification area, the largest microwave synthesis system (Advancer) all synthesis and purification systems acquired by Argonaut, and the V-10 evaporation system, are manufactured at the Biotage production facility in Virginia.

Chemical components for Biotage consumables, such as reagents and purification columns, are manufactured at the factory in Cardiff, UK.

Microwave synthesis systems are manufactured by Partnertech AB, a sub- contractor.

Biotage prioritizes continuous improvements of efficiency at the production plants.

All manufacturing facilities are certified in accordance with ISO 9001.

In 2007, the Company implemented an automation project at its Cardiff factory, in an effort to increase gross margins. The production process for purification systems and consumables is monitored by the Six Sigma methods, with the Company conducting extensive quarterly quality reviews in which all reported deviations are followed up.

Biotage conducts extensive quality assurance in relation to its products.

The quality of the products is measured monthly by means of customer surveys. The surveys during the year indicate a definite improvement in quality, as experienced by the customers.

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Biosystems

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Biotage Annual Report 2007 13 The Biosystems business area focuses its operations on two major appli-

cation areas in which Pyrosequencing^® technology provides crucial added value. These areas are infectious disease and cancer research.

Infectious diseases

The field of infectious diseases encompasses infections caused by bacteria, virus, and fungi. Pyrosequencing^® technology can be used for microbiological identification, which means quick and precise identification of the bacteria, fungus or virus that is causing an infection. Pyrosequencing^® technology is also the cutting edge method of quickly identifying and type-determining antibiotic-resistant bacteria. Bacteria develop resistance by modifying their DNA. Biosystems’ equipment analyzes the DNA to quickly determine whether a bacterium carries a mutation in a gene that makes it resistant to antibiotics.

Cancer

In the field of cancer research, Pyrosequencing^® technology can be used to as- sess the level of methylation (methylation occurs at the CpG positions in DNA).

DNA methylation is one of the mechanisms that control gene expression in cells. The degree of methylation is affected by substances in food and environment and also increases with age. Research has shown that DNA-methylation is connected to the origin and development of tumors. Abnormal increases or decreases in DNA methylation are commonly found in connection with many cancer diseases, and the level of methylation also affects the course of the disease. By analyzing and following the degree of methylation it is possible to better understand how a patient is responding to a treatment.

Biotage’s equipment makes it possible to detect the methylation percentage, which is a great advantage compared to conventional methods, which

only show whether or not methylation is occurring. In addition, it is possible to discover small specific changes in the degree of methylation.

Biotage’s equipment can also be used to identify and study mutations. In this area too, Pyrosequencing^® technology offers distinct advantages in areas such as mutation studies of specific oncogenes including KRAS and BRAF. The mutations in these genes are located close to each other, and can often be difficult to distinguish using traditional methods.

Developments in 2007

2007 has been another successful year for the business area, Biosystems.

The ambition has been to continue the profitable trend from the previous years by increasing both instrument and reagent sales. A strong emphasis on sales efforts resulted in sales growth of 10 percent compared to last year.

Operating profit/loss increased by 138 percent to 26.2 M, after four profitable quarters.

An important factor behind the sales increase is Biotage’s investments in CpG-methylation, which has been very successful. In this application, Biotage’s instrument platform is appreciated for its high level of sensitivity, the possibility for fast analyses and the quantitative data that is obtained.

The business area, Biosystems, has continued to focus on reducing costs during 2007. Several of the production changes that were carried out in 2006 were fully implemented in 2007, which has created conditions for increased gross margins. However, the gross margin for 2007 was negatively impacted by the weak US dollar since a large part of sales occur in the US while manufacturing is done in Sweden. The gross margin for 2007 totaled 66.4 percent (72.0).

Focus for 2008

The operation within Biosystems is carried out in a very cost-efficient way as a result of previously implemented measures and continued cost focus in 2007. In 2008, Biotage will invest in an expanded marketing organization in order to take full advantage of the increased market interest for Biosystems’

systems and applications.

Biotage is currently conducting an extensive development project in the Biosystems business area. The project involves a new instrument that is expected to be launched at the end of the first quarter 2008. The new instrument,

The Biosystems business area offers systems for genetic analysis, mainly for use in clinical research. The product platform is based on the patented Pyrosequencing^® technology.

Biosystems business area

0 20 40 60 80 100 120

2007 2006

2005 Net sales SEK M

79.5

89.5

98.8

-40 -30 -20 -10 0 10 20 30 40

2007 2006

2005

-34.8

11.0

26.2 USA

Europe Other markets 45

47 8

Geographic breakdown of sales % What is Pyrosequencing^® technology?

Pyrosequencing^® is a patented technology in which a sample’s DNA sequences are read in real time with the help of sequencing by synthesis. This technology can be used in a large number of areas, ranging from the analysis of hereditary diseases and the identification of bacteria and viruses to the identification and study of mutations and DNA methylation.

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PyroMark^TMQ24, will have equal performance but be simpler and priced lower than existing systems. It was specially formulated for applications within cancer research but will also be a tool for researchers that work with genetic analysis.

The objective is that a broader market will be reached with PyroMark^TMQ24 including customers who previously thought that the platform was too expensive in relation to needs. With a lower price, the threshold for new customers to invest in Pyrosequencing^® technology is lower.

At the launch, PyroMark^TMQ24 will be IVD-certified (in accordance with directive 98/79/EG regarding medical technology products for in vitro diagnostics).

This would increase the market segment to also include diagnostic applications, an area with very great potential for Biotage. In 2008, Biotage will also increase its focus on developing new applications in the fields of infectious diseases and cancer research. This work is often conducted in collaboration with major research institutes in Europe and the United States.

The market

The Biosystems business area is focused primarily on the research market, which consists of both clinical and basic research. A smaller part of the Com- pany’s applications is also directed to the diagnostics market. This includes molecular diagnostics and hospital laboratories.

Biotage has direct sales in the Nordic region, USA, Great Britain, France and Germany. In addition, more than thirty countries are processed via distributors including Belgium, the Netherlands, Italy, Spain, China, Korea and Japan.

Sales in Europe have developed positively in 2007 with a sales increase of 35 percent compared with 2006 for countries with direct sales. In 2007, a marked increase in demand was noted in England, France and Italy, primarily from customers within the academic sector.

The strong sales growth in Europe means that this is now the largest geographic market corresponding to 47 percent of sales for 2007. The US had weaker growth in 2007 and accounted for 45 percent of sales while other countries accounted for 8 percent.

Factors affecting Biotage

Biotage primarily focuses on the research market within infectious diseases and cancer. This is a market that is largely steered by access to research appropriations. This means that the demand for Biotage’s products is affected by the size of the grants awarded to research in these fields. The declining economic growth in the US has had a marked effect on appropriations, where the level of appropriations has remained static in 2007 and in certain cases have been totally cancelled.

Continual launches of new applications based on Biotage’s instruments are important in order to be able to actively affect the demand for those solutions offered by the Company. Application development will be prioritized in 2008 with increased resources within research and development.

Customers

The majority of the instruments sold in 2007 were purchased by customers engaged in clinical research, with a somewhat smaller number sold to basic research, and finally, a small number to diagnostic laboratories. The percentage of instruments that were sold for applications within the oncology area increased substantially. Biotage has approximately 600 instruments installed with customers throughout the world. The majority of the instruments are sold to academic research institutions at universities and university hospitals (92 percent), as well as to government health institutes and the pharmaceutical industry (8 percent), for example, the National Institute of Health and the M.D. Anderson Cancer Center in the US.

What is DNA (CpG) methylation?

Methylation of CpG-dinucleotides is important for regulating biological processes at the gene level. In other words, it is involved in the genetic code’s ability to be expressed. The degree of methylation is affected by substances in food and environment and also increases with age. Research has shown that DNA-methylation is connected to the origin and development of tumors. In certain conditions, DNA methylation can affect specific genes so that these are totally shut down (the genetic code is deactivated), which is the case for a few cancer forms such as breast cancer, colon cancer, lung cancer and leukemia. By analyzing and following the degree of methylation it is possible to better understand how a patient is responding to a treatment.

Biosystems offers

Instruments PyroMark^TMID

Developed for the analysis of short and medium sized DNA sequences, which is well suited for the field of infectious diseases.

PyroMark^TMMD

Is more sensitive than PyroMark ID, which makes it possible to analyze very small amounts of DNA. Developed for use in cancer research.

PyroMark^TMQ24

The next generation’s instrument in 24-well format. Developed for genetic analysis within clinical research and IVD-certified for use within diagnostics (launch in 2008).

Software

PyroMark^TM Analysis Software

Performs automatic genotyping or sequence determination of up to 96 samples on a single microtiter plate.

IdentiFire^TM Software

Compares sequencing data with information in a database in order to identify a bacteria, fungus or virus species.

Assay Design Software

Used for design of PCR primers and sequence primers.

Pyro Q-CpG^TM Software

Performs quantitative analysis of one or more CpG positions in up to 96 samples on a single microtiter plate.

Reagents and tests Pyro Gold

Reagents for use with Biotage’s instruments.

PyroMark^TM Tests

Gene-specific tests for use with Biotage’s instruments.

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Biotage Annual Report 2007 15 Market position

Biosystems is an emerging force in a market dominated by a few major play- ers. The Company’s strength is its Pyrosequencing^® technology, which is very well suited for applications in the fields of cancer and infectious disease research. Biotage is a market leader within the area, CpG-methylation.

Competitors

Biosystems competition differs depending on the various applications. Com- petition comes mainly from instruments based on real time PCR. Biosystems also faces competition from sequencing instruments based on the Sanger method, of which Applied Biosystems is the largest supplier.

Pyrosequencing^® technology is considered to be robust and easy to use and is appreciated for its quickness. Analysis results provide the same information as the Sanger method, however, in much shorter times.

In certain research areas, Biotage products provide totally unique added value. An example of this is found in CpG methylation, where it is possible to determine the percentage level of methylation for specific positions on DNA and also possible to detect small changes in methylation levels. Another example

can be found in research for infectious diseases, where Biosystems’ systems can identify mutations that make bacteria resistant to antibiotics. With realtime PCR it is often only possible to identify the bacteria in question. However, in many cases you cannot see if it has developed a resistance to antibiotics.

Production

The majority of production within the business area, Biosystems, is currently outsourced to contract manufacturers. Biosystems itself produces all software, and engages in part of the manufacture of reagents.

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Customer case Discovery Chemistry

Molecular imaging is an emerging market that is playing an important role in the ongoing, worldwide efforts to improve health care. It has become one of the most promising new techniques for early detection and monitoring of disease. Dr. John F. Valliant, Acting Director of the McMaster Institute of Applied Radiation Sciences, at McMaster University in Canada, saw the benefits of molecular imaging early on. He is now collaborating with Biotage to speed up the development of imaging agents, that are at the heart of this technology.

Molecular imaging can be described as the visualization, characterization, and measurement of biological processes at the molecular and cellular levels in living subjects (patients or animal models of disease) non-invasively. The basic process requires the injection of minute amounts of radiolabeled com- pounds (molecular imaging agents) into live subjects. These imaging agents provide a signal that can be visualized using molecular imaging instrumenta- tion such as SPECT and PET scanners.

Early detection of disease

The potential benefits of molecular imaging are significant. Dr. Valliant ex- plained: “In general terms, molecular imaging facilitates earlier detection of disease, a better understanding of the biochemistry of disease, and will help manage and select the best care for patients.”

In the past, imaging has mainly focused on anatomy and is used to identify abnormal changes in structure.“It turns out that before a change in structure appears, for example the appearance of a tumor, there is a change in biochemistry that proceeds the full manifestation of disease. Molecular imaging allows you to see these changes, which means that you are able to detect

the tumor earlier,” said Dr. Valliant. The ability to characterize specific disease processes at a biochemical level in different individuals means that molecular imaging offers more personalized patient care.

Molecular imaging can also be beneficial in the drug development process.

By using imaging it is possible to find out the distribution properties of a drug, for example where it goes and how quickly it is metabolized, very early on in the drug development process. This information can be used to select the most promising candidates for more expensive advanced clinical trials and to prevent extremely costly late stage failures.

Development of imaging agents is critical

The critical part of molecular imaging is the development of imaging agents.

In the post-genomics era, scientists are discovering new targets that are associated with different kinds of disease. For example, researchers are identifying increased levels of specific proteins that are associated with a particular disease. If an imaging agent can be developed that follows the expression of that protein, it would be possible to detect the associated disease at a very early stage.

Dr. Valliant and his research group are focused on developing new methods to produce molecular imaging and therapy agents. At McMaster Institute of Applied Radiation Sciences (McIARS) they are in a unique position to conduct this research, because the McMaster University facilities include radiochemistry labs for handling active materials and a nuclear reactor which is used to produce medical isotopes, while also having a breadth of scientific expertise from chemists, engineers, physicists, and biologists.

“To be able to develop imaging agents you need to have access to medical isotopes¹. We are one of the few facilities in the world that can carry out the entire process, from producing the radioisotope to discovering new molecular imaging agents—and then testing the agent to see whether or not it is going to be useful in the clinic,” said Dr. Valliant.

Microwave synthesis improves development process

The imaging agents contain minute amounts of radioactive material which typically have short half-lives, ranging anywhere between 20 minutes and a day. This means that they need to be produced immediately before use and that production speed is of the essence. McMaster University’s collaboration with Biotage is aimed at developing more efficient methods to produce the imaging agents.

“Biotage has always focused on developing innovative equipment and consumables that accelerate the drug discovery process. The goal of our collaboration is to improve the development process of imaging agents by applying and adapting their core technologies,” said Dr. Valliant.

Biotage tools exceed expectations

The first phase primarily focused on one isotope, Technetium – which is the most widely used isotope in medicine. The results have so far exceeded expectations.

Dr. Valliant stated: “Preliminary studies showed an 85 percent reduction in synthesis time and 26 percent gain in yield, when compared with the traditional process. Microwave synthesis has allowed us to label molecules that we were unable to label previously. We are now going to expand our focus to include other isotope classes and other Biotage technologies, to see if we can gain similar benefits as we did with synthesis time and yield.”

McMaster opens Biotage Molecular Imaging Demo Lab

In addition to Dr. Valliant’s research, McMaster University has created the Biotage Molecular Imaging Demonstration Laboratory. This facility will give other researchers the opportunity to see the technology working in a real radiochemistry environment, and have firsthand experience with synthesis, purification, and evaporation solutions that Biotage offers.

1) A medical isotope is a radioactive element which is used in diagnostic or treatment procedures.

Biotage in 2007

Annual Report 2007

Table of Contents

Biotage in 2007

This is Biotage

Continued profit improvement in 2007

Discovery Chemistry

Biosystems

Biotage and McMaster University collaborate to improve molecular imaging agent

development