Viral Genetics: Company update

Our mission is to bring new drug compounds to the marketplace. And we've never been in a stronger position to deliver on that promise. We've built the solid foundation needed to take drug therapies from the laboratory to the marketplace. After years in development, we believe several of our most promising compounds are moving closer to clinical trials.

During 2009, Viral Genetics made significant strides on two fronts -- scientific and financial. Our drug compounds seem to be showing great potential. Additionally, we've built an infrastructure that enables us to use money wisely. We have retired nearly all of our external debt, enabling us to leverage any additional funding to advance new drug therapies -- rather than making interest payments to creditors.

Promising Drug Therapies

HIV/AIDS

Six international, human clinical trials found that our HIV/AIDS drug compound significantly reduced the viral load in some patients. That therapy led to the development of a second generation drug compound called VGV-X. We believe that VGV-X may address the reason that our first HIV/AIDS drug reduced the viral load in some patients, but not others. Preparing this therapeutic approach for human clinical trials will be a top priority during 2010.

Staph, Strep and Sepsis

Our new VGV-S drug compound has been found to provide an alternative to traditional antibiotics in laboratory animals infected with Staphylococcus or with high levels of Streptococcus. Testing during 2009 determined that some infected mice treated with VGV-S, made full recoveries. A control group of sick animals that weren't treated with this therapy either took much longer to recover or did not survive the infections.

The animal results of infection with these bacteria suggest that VGV-S may have the potential to treat sepsis, a life-threatening systemic infection.

Like some of our other drug compounds, it's based on targeted peptide discoveries made by Dr. Karen Newell and her team. TPT is our acronym for "targeted peptide technologies" and its mechanism is essential to several of our lines of research. Laboratory testing continues, both in the test tube and in animal studies, in preparation for possibly advancing this drug to human clinical trials.

Lyme Disease

An injection called VGV-L has been developed to treat Lyme disease, an illness that saw a 100% increase in CDC-confirmed cases from 1991 to 2006. Animal studies have been completed with positive results. We are now in the process of introducing our research to the FDA.

This research was supported by grants from two not-for-profit organizations that saw the promise in our approach. Last year, Time for Lyme provided the University of Colorado with $116,000 dedicated to our research. Turn the Corner Foundation contributed another $75,000 to the university during 2009, enabling us to reach this phase of development.

The proposed therapy, like several others in our R&D pipeline, is based on TPT and uses synthetic peptides to "trick" cells, making them vulnerable to the body's natural immune response mechanism.

Drug Resistant Cancer Cells

During 2009, Viral Genetics exercised its option for the right to develop drug compounds based on research published in 2002. That work seems to identify the unique characteristics of drug resistant cancer cells. This technology, called metabolic disruption therapy (MDT), is rapidly gaining attention as having the potential to offer hope to cancer patients. This early, patented work by Dr. Karen Newell has been validated and reinforced by recent research published by other scientists.

We are now working to develop a drug compound based on MDT for victims of glioblastoma, a particularly deadly brain tumor. Our expectation is that this therapy will be used in conjunction with traditional cancer treatments such as chemotherapy and radiation. The drug's role will be to target the cells capable of surviving those treatments. Drug resistance is the leading cause of death among cancer patients. Our hope is that our new approach may provide novel therapy aimed at reversing drug resistance.

Dr. Newell presented her most recent findings on MDT last August at a symposium of neurosurgeons and neuro-oncologists. The conference was hosted by the Department of Neurosurgery at the University of Colorado Denver School of Medicine.

Viral Genetics has created a wholly owned subsidiary called MetaCytoLytics, Inc., dedicated to advancing new treatments based on MDT.

Detecting Disease Through Saliva

Research continues on one of our first areas of interest—a kit that enables physicians to detect disease through a serum or saliva test. Our initial work, based on a thymus nuclear protein compound (TNP), determined that serum can be used as a "litmus" test indicating illness. Recent work suggests that saliva may provide an alternative to serum for detection. The priority for Viral Genetics' research team is to enhance the test's sensitivity and specificity for detecting a variety of illnesses.

The Science Behind the Treatments

Explaining Our Targeted Peptide Technology (TPT)

TPT is an acronym for "targeted peptide technology," a line of research developed by our lead scientist Dr. M. Karen Newell. This technology targets the body's immune cells. It seems to explain the mechanism behind some autoimmune diseases and presents a solution.

Autoimmune diseases occur when the body reacts to itself or self-tissues. In some cases, an external threat from disease-causing organisms activates too many of certain types of immune cells. A physical trait of those cells makes them impervious to the body's natural defense system that would ordinarily limit their numbers.

Targeted peptide technology works by tricking those impervious cells into dropping their defenses. They can be fooled into releasing their protective shields, swapping the shield for a synthetic polypeptide instead. Those peptides, created by our research team, have been engineered to make the cell susceptible to the body's natural defenses. We expect our TPT drug compounds to enable the body to destroy the cells that help trigger the symptoms of autoimmune diseases.  

Explaining Metabolic Disruption Technology (MDT)

A growing body of research indicates that interfering with cell metabolism is the key to targeting cancer cells. The way a cell metabolizes its sources of energy appears to determine whether it will survive the most common treatments for cancer—chemotherapy and radiation. Cells that rely on glucose (or sugar) for fuel are easily damaged and killed. Cells that can run on fat can become deadly. They continue to survive and even thrive during cancer treatments—thereby assisting in the development of drug resistant tumors that can become lethal to their victims.

Explaining Thymus Nuclear Protein (TNP) Compound

Thymus Nuclear Protein compound or "TNP" is a cocktail of histone protein fragments that includes approximately 2660 peptides. TNP is derived from the thymus, where immune cells develop. An early line of research investigated TNP for the potential to treat autoimmune diseases. Since then, TPT has been developed based on the potential identification and explanation of the therapeutic benefit first seen with TNP.

Changes to Our Portfolio of Intellectual Property

We have consolidated and expanded our portfolio of intellectual property by adding exclusive licenses to over 30 new patents and patent applications. During 2009, we extended our exclusive license agreement with University of Colorado and University of Vermont by adding all fields of use of targeted peptide technology and metabolic disruption technology. Our option rights have been replaced with direct licenses. That means Viral Genetics now has the exclusive right to develop any and all drug therapies based on TPT, TNP and MDT technology.

A Preeminent Advisory Board

Our expanded board of advisors is a who's who of leading scientists, pharmaceutical and medical professionals, including former U.S. Surgeon General Dr. C. Everett Koop. We are honored that they believe in the potential of our drug therapies and grateful for their guidance in bringing these promising new treatments to the marketplace.

A recipient of the Nobel Prize in Medicine joined the board in 2009. Dr. Luc Montagnier is the co-discoverer of the HIV virus and is lending his assistance in developing VGV-X.

We also announced last year that internationally renowned drug development expert Dr. Leslie Benet joined the board. The recipient of six honorary doctorates, Dr. Benet, is best known for his work related to pharmacokinetics and pharmacodynamics—the processes by which the human body absorbs and eliminates drugs and the pharmacologic effects observed from those drugs.

The board now includes:  

• Dr. C. Everett Koop  Former U.S. Surgeon General
• Dr. Luc Montagnier  Co-winner of the Nobel Prize for Medicine and co-discoverer of HIV virus
• Dr. Eric Rosenberg  Associate professor, Harvard Medical School
• Dr. Leslie Benet  Drug development expert
• Marshall C. Phelps  Head of intellectual property for Microsoft Corporation
• Richard T. Gerstner  Former senior corporate executive for IBM and Telular Corporation
• Anthony Freda, Jr.  Senior executive with global business management experience

Financial Highlights

We achieved significant improvements in our financial outlook during 2009. Burdensome debt has been retired or converted to stock, enabling us to dedicate our resources to our core mission. Additionally, we began filing updated financial statements and making corporate disclosures through Pink Sheets.

Financial highlights for the year include:

• Retired a total of $3.4 million of debt through conversion to common stock:
  • $2.2 million of convertible debt representing substantially all of Viral Genetics' remaining liabilities associated with its 2006 registered private placement financing
  • $500,000 of debt settlement for previously-disputed vendor payables and litigation expenses associated with our 2006 South African clinical trial and distribution management agreement
  • $500,000 of debt held by company insiders
  • $200,000 of other debts for services and acquisitions
• Raised a total of $2.4 million through private placement of common stock and warrants, as well as warrant and option exercise.
• Filed updated financial statements and corporate disclosures on the OTCIQ system available at www.pinksheets.com
• Funded through trial and advanced ongoing litigation with Timothy and Thomas, LLC, and its principals, related to South African Distribution Management Agreement.

Lead Scientist Dr. M. Karen Newell

Dr. Newell's scientific research and discoveries appear to compliment and enhance the over 10 years of human clinical experience we have at Viral Genetics. The acquisition of the rights to targeted peptide technologies holds significant promise to finally close the circle on our understanding of TNP. Dr. Newell has applied her expertise to our initial line of investigation, including identifying the active components and the likely mechanism of action.

Dr. Newell, PhD., leads a team of scientists that are actively engaged in developing our portfolio of drug compounds. Dr. Newell is a full professor in the Department of Biology at the University of Colorado, scientific director of the CU Institute of Bioenergetics, and the Clement and Margaret Markert endowed professor of biology. She formerly served as an associate director, Center for Computational Biology. She has authored or co-authored several dozen peer-reviewed papers predominantly focused on immunology and cellular metabolism, and she has over 30 issued or pending patents in her name.

The Competitive Landscape

Our licensed patent rights and licensing agreements give Viral Genetics the exclusive right to develop products based on TPT, TNP and MDT. We believe our lines of research hold tremendous promise for victims of devastating autoimmune diseases such as HIV, AIDS, and Lyme Disease, among others. We also have great hope about our approach to eventually addressing drug resistant cancer cells. Many researchers are now publishing peer-reviewed papers that validate our scientists' initial findings. However, our years of scientific effort and the financial investment it took to get our drug therapies to their current stage of development are solidly protected by exclusively licensed patent rights under and our license agreements.