Metabolism refers to chemical processes occurring within a living cell or organism that are necessary for the maintenance of life. During metabolism, some substances are broken down to yield energy for vital processes, while other substances necessary for life are synthesized. The term metabolic disease is a general description of diseases caused by an abnormal metabolic process. Metabolic disease can be a result of an abnormal condition inherited at birth or acquired due to dysfunction of an endocrine organ, or failure of a metabolically important organ such as the liver or other factors. Common examples of metabolic diseases include hyperlipidemia, diabetes and obesity.

Hyperlipidemia is a clinical condition characterized by an elevation of cholesterol and/or triglycerides in the bloodstream. Patients with hyperlipidemia have a greater risk of suffering from heart attacks and other forms of heart disease. Over 80% of patients with coronary heart disease, even those currently on medication, remain above the targeted levels for cholesterol set by the National Cholesterol Education Program. Heart disease is the number one killer of men and women worldwide, taking approximately 17 million lives annually.

Hyperlipidemia is characterized by elevated levels of fat-protein complexes in the blood, called lipoproteins. The best-known lipoproteins are LDL (low density lipoprotein) and HDL (high density lipoprotein). Excess LDL cholesterol contributes to the blockage of arteries, a condition that eventually leads to heart attack. Population studies have clearly shown that the higher the level of LDL cholesterol, the greater the risk of heart disease. This relationship is true in men and women, in different racial and ethnic groups, and in all adult age groups. Hence, LDL cholesterol has been labeled the "bad" cholesterol. In contrast, the lower the level of HDL cholesterol, the greater the risk of coronary heart disease. As a result, HDL cholesterol is commonly referred to as the "good" cholesterol. Hyperlipidemia may also include an increase in blood triglyceride (TG) levels (the most common form of fat) and lipoprotein (a), [Lp(a)]. Studies have shown that high triglyceride and Lp(a) levels are also associated with an increased risk of coronary heart disease.

MB07811 - A Novel Product Candidate for the Control of Cholesterol and Triglyceride Levels

General Description

MB07811 is the first of a novel class of product candidates discovered by Metabasis designed to lower serum cholesterol and TG's. MB07811 is a novel, orally administered, small-molecule beta-selective thyroid hormone receptor agonist designed to specifically target receptors in the liver involved in lipid metabolism. The combination of selectivity for the beta form of the receptor, liver targeting using our proprietary HepDirect technology and other structural characteristics that limit extra-hepatic activity, is designed to provide significant efficacy while avoiding side effects associated with activation of thyroid hormone receptors outside the liver.

We successfully completed a Phase 1b clinical trial for MB07811 in the second quarter of 2008. The 14-day, multiple-dose clinical trial in subjects with mild hypercholesterolemia showed MB07811 to be safe and well tolerated across the seven doses tested, ranging from 0.25 mg up to 40 mg. No differences in heart rate, heart rhythm or blood pressure were observed between MB07811 and placebo-treated patients. And, while this clinical trial was designed to assess the safety and tolerability of MB07811 as a treatment for hyperlipidemia, dose-related reductions in fasting low-density lipoprotein cholesterol (LDL-C) and fasting triglyceride (TG) levels were observed at day 14. Significant placebo-adjusted LDL-C reductions from baseline were observed at doses of 5 mg and above and ranged from approximately 15 - 41%, while placebo-adjusted TG levels were reduced by more than 30% at doses of 2.5 mg and above.

Mild increases in liver enzymes were observed at the higher doses of MB07811 along with dose-related mean shifts in thyroid hormone levels. The changes observed in both liver enzymes and thyroid hormones at the higher doses, while not unexpected based on this class of drugs' pharmacologic mechanism, will continue to be monitored and evaluated in future clinical trials. Importantly, we believe the overall safety and tolerability results in this clinical trial support continued development of MB07811 and speak to the potential of this drug class for the treatment of hyperlipidemia.

The Phase 1b clinical trial was a randomized, double-blind, placebo-controlled, rising multiple-dose study that enrolled 56 subjects with a mean baseline LDL-C of 126 mg/dL and a mean baseline TG of 118 mg/dL. Subjects received either placebo or MB07811 at an oral dose of 0.25 mg, 1 mg, 2.5 mg, 5 mg, 10 mg, 20 mg or 40 mg. We successfully completed a Phase 1a clinical trial for MB07811 at the end of 2006, which provided evidence that the candidate is safe and well-tolerated when administered as a single dose. Metabasis retains all development and worldwide commercial rights to MB07811.

Background

It has long been understood that thyroid hormone receptor activation plays a role in the control of lipid levels, exemplified in the significant reduction of LDL-cholesterol and triglycerides seen in patients suffering from hyperthyroidism or Graves' disease, a disorder characterized by the excessive production of thyroid hormone. Harnessing the beneficial therapeutic effects of thyroid hormone receptor activation to produce significant reduction of cholesterol has been a long-term goal within the pharmaceutical industry; however, these efforts have been hampered by the numerous side effects associated with thyroid hormone activation outside the liver, including adverse cardiac effects, muscle wasting and bone loss.

The discovery of two subtypes of thyroid hormone receptors constituted a major advance towards the goal of harnessing the potential of thyroid hormone regulation. The alpha and beta receptors, or TR alpha and TR beta, mediate many different activities in the body. Discovery of the alpha and beta subtypes, their localization and activities, suggested that, in theory, it might be possible to focus on the TR beta receptor subtype to attain the desired lipid lowering while avoiding the detrimental side effects associated with TR alpha activation. The illustrations below describe the major activities associated with each receptor subtype.

Despite the discovery of TR alpha and TR beta, application of this approach for a treatment of hyperlipidemia has yet to yield an approved drug and may prove difficult when studied long term. The difference between the TR alpha and TR beta receptors is relatively minor, with only one amino acid difference in the ligand-binding region, making design of a receptor agonist which is highly selective to one receptor subtype over the other difficult. This may result in a narrow therapeutic index (the separation between the dose that provides a therapeutic benefit and the dose that causes side-effects) due to unintended TR alpha activation. In addition, while TR beta receptors in the liver modulate lipid metabolism, activation of TR beta receptor outside the liver may prove to be a problem for long-term use.

The pituitary gland also contains the TR beta receptor that plays a role in the regulation of thyroid hormone through a regulatory cycle called the thyroid axis. The thyroid axis is the interplay between the pituitary gland, the thyroid gland, and levels of thyroid hormone in the systemic circulation. The pituitary gland produces a hormone known as thyroid stimulating hormone or TSH. TSH acts on the thyroid to stimulate production of thyroid hormone. TSH production is regulated in turn by the binding of thyroid hormone to the pituitary TR beta receptor via feedback inhibition. Activation of this receptor reduces the production of TSH leading to less production of thyroid hormone, which in turn leads to reduced activation of the pituitary TR beta receptor. In this way, the level of thyroid hormone is fine tuned and closely regulated.

Therefore, while an agonist selective for the TR beta receptor may avoid some of the side effects associated with TR alpha receptor activation including reduced cardiovascular effects, it may still have a negative impact on the thyroid axis. Nevertheless, attempts to develop TR beta receptor selective agonists continue with at least two such compounds in clinical development.

Metabasis' Approach

Using Metabasis' proven liver-targeting expertise, MB07811 has the potential to widen the therapeutic index of thyroid receptor activation, thus unlocking the beneficial lipid lowering effects of this approach. The Company's expertise for targeting the liver includes its HepDirect prodrug technology and know-how in limiting exposure outside the liver. Clinical evidence suggests that the HepDirect technology provides liver targeting and reduced systemic exposure.

MB07811 is a HepDirect prodrug of a novel TR beta receptor agonist, designated MB07344. After oral administration, MB07811 is designed to circulate throughout the body and the liver without interacting with the thyroid receptor. In the liver, it is cleaved to MB07344, which activates the TR beta receptor leading to the desired therapeutic benefit. MB07344 is then mainly eliminated through the bile, thus further limiting systemic exposure. Furthermore, MB07344 is designed such that any drug entering the circulation is unlikely to access cells in other organs as it is not recognized by the transport pathways in these tissues.

Metabasis believes that the combination of the TR beta receptor selectivity and liver targeting could harness the efficacy of the approach, while avoiding extra-hepatic activation of TR alpha and TR beta receptors that may lead to therapy-limiting side effects. The benefits may include:

• Reduction of LDL and total cholesterol
  
• Reduction of liver and serum triglycerides
  
• Reduced Lp(a) levels
  
• Enhanced clearance of liver fat

MB07811 has been extensively studied in preclinical models across species from rodents to primates with very encouraging results. For instance, in preclinical studies in rodents, results indicate that targeting TR agonists to the liver has the potential to lower both LDL-cholesterol (the "bad" cholesterol) and both hepatic and plasma triglyceride levels with an acceptable safety profile and an improved therapeutic index as compared to non liver-targeted TR agonists. MB07811 has also shown efficacy equivalent to and additive with the widely used statin, Lipitor ® (atorvastatin) in certain rabbit and primate models. Data from a monkey model are shown below - AT stands for atorvastatin and MB stands for MB07811.

Recent, preliminary clinical data have also supported the potential safety and efficacy of the approach.

Diabetes is a leading cause of death in the U.S. There are two forms of diabetes: type 1 or insulin-dependent, juvenile-onset diabetes, and type 2, often referred to as adult-onset diabetes. The World Health Organization estimates that approximately 90% of diabetes patients have type 2 diabetes. Type 2 diabetic patients suffer from elevated blood glucose levels that result from decreased glucose metabolism combined with increased glucose production. Decreased glucose metabolism in type 2 diabetes initially results from a decrease in the sensitivity of the body's tissues to the glucose-regulating hormone insulin action. Early in the disease, insulin is often elevated as the body attempts to compensate for this insensitivity. However, as the disease progresses, the ability of the pancreas to produce insulin wanes, contributing to the severity of the disease. A major contributor to elevated blood glucose is an over-production of glucose caused by increased synthesis of glucose predominately by the gluconeogenesis pathway in the liver. The defect in this pathway is also thought to become more severe as the disease progresses. Over time, as the disease progresses, it becomes increasingly difficult to treat. Additionally, the chronically elevated blood glucose levels in type 2 diabetic patients can lead to many long-term complications such as coronary heart disease, stroke, blindness, peripheral vascular disease, kidney disease and nerve damage.

MB07803, a Fructose-1,6-bisphosphatase Inhibitor for the Treatment of Type 2 Diabetes

MB07803 is a product candidate being evaluated as an important new treatment of type 2 diabetes. It is a member of a new class of drugs discovered by Metabasis using our proprietary NuMimetic technology. MB07803 is a prodrug of an orally active, potent and selective inhibitor of fructose-1,6-bisphosphatase (FBPase), a regulatory enzyme in the pathway responsible for the production of glucose in the liver known as the gluconeogenesis pathway. Inhibition of this pathway is believed to reduce blood sugar levels in patients with type 2 diabetes, independent of insulin levels and without increasing body weight. Metabasis is developing MB07803 independently, and we retain worldwide commercialization rights.

Diet modification and exercise are typically the initial course of treatment for patients newly diagnosed with type 2 diabetes. However, this approach often fails to adequately control elevated blood glucose levels, requiring patients to add an oral anti-diabetic therapy to control the disease, most often metformin. Like MB07803, metformin is believed to reduce liver glucose production, but unlike Metabasis' product candidate, which directly targets the gluconeogenesis pathway, metformin acts indirectly through an unknown mechanism and is believed to only partially inhibit the pathway at maximal doses. Additionally, metformin is contraindicated in many patients and is associated with gastrointestinal (GI) side effects, ultimately requiring discontinuation of therapy in 5-10% of patients. Of those patients able to tolerate metformin, 20-30% report mild to moderate GI side effects even after relatively long-term usage.

In the second quarter of 2008, we successfully completed and announced the results of a Phase 2a, 28-day, proof-of-concept clinical trial for MB07803. The clinical trial was a randomized, double-blind, placebo controlled trial involving 105 patients with type 2 diabetes with a mean baseline FPG of 187 mg/dL and mean baseline HbA1c of 8.2%. Patients received either placebo or MB07803 at an oral dose of 10, 50, 100 or 200 mg once daily. The primary efficacy endpoint of the clinical trial was change in FPG at day 28 from baseline.

The primary efficacy endpoint of the clinical trial was achieved with MB07803 administered once daily at 200 mg resulting in a statistically and clinically significant reduction in FPG at day 28 versus placebo (p=0.0177). This clinical trial showed that MB07803 was safe and well tolerated with 94% of the patients completing the study and no patients withdrawing due to drug-related adverse events. The overall adverse event profile was similar to that of the placebo. Fasting lactate levels were within the normal range and no patients experienced hyperlacticemia (a sustained lactate elevation above 4.5 mM).

We intend to submit the full clinical trial results for presentation at The World Congress on Controversies to Consensus in Diabetes, Obesity and Hypertension being held in Barcelona on November 1, 2008. In addition, the Company is proceeding with plans for initiation of additional clinical trials including initiation of a Phase 2b clinical trial for MB07803 in 2009, which we expect to be conducted in collaboration with a strategic partner. At the moment, we are conducting a clinical trial, which was initiated in September 2008, to evaluate higher doses of MB07803 in patients. The trial is expected to enroll at least 40 patients.