DiaMedica Inc. Announces Definitive Share Exchange Agreement With Shareholders of Sanomune Inc.

WINNIPEG, MANITOBA--(Marketwire - February 18, 2010) - DiaMedica Inc. (TSX VENTURE: DMA) ("DiaMedica" or the "Company"), a biopharmaceutical company that has discovered and is developing a novel approach to treating diabetes, today announced that, further to its non-binding letter of intent to acquire all of the issued and outstanding shares of Sanomune Inc. ("Sanomune") announced December 1, 2009, it has now entered into a definitive share exchange agreement (the "Share Exchange Agreement") with all of the shareholders of Sanomune.

Pursuant to the terms of the Share Exchange Agreement, DiaMedica has agreed to acquire from the Sanomune shareholders all of the issued and outstanding shares of Sanomune at closing (the "Proposed Transaction"), being a total of 3,751,463 common shares of Sanomune (each a "Sanomune Common Share") and 20,998,317 preference shares of Sanomune (each a "Sanomune Preference Share") on the basis of 0.517 of a DiaMedica Common Share for each Sanomune Common Share and 0.517 of a DiaMedica Common Share for each Sanomune Preference Share.

As a result of the Proposed Transaction, a total of 12,806,377 DiaMedica Common Shares will be issued to the current Sanomune shareholders, representing approximately 40% of the issued and outstanding DiaMedica Common Shares post-closing, and Sanomune will become a wholly-owned subsidiary of DiaMedica. Following completion of the Proposed Transaction, it is expected that there will be a total of 32,015,943 DiaMedica Common Shares issued and outstanding.

Approval of the Share Exchange Agreement and the terms of the Proposed Transaction from the board of directors of DiaMedica, including the unanimous approval of the independent directors, was received on February 18, 2010.

Completion of the Proposed Transaction is subject to certain conditions, including receipt of necessary TSX-V and regulatory approvals (including the exemptive relief described below), approval of DiaMedica shareholders (including the disinterested minority shareholder approval described below), completion of satisfactory due diligence and completion of definitive legal documentation, among others. It is also a condition of closing of the Proposed Transaction that the Sanomune shareholders place the DiaMedica Common Shares received by them in exchange for Sanomune Common Shares into escrow for a period of three years following closing, and the DiaMedica Common Shares received by them in exchange for Sanomune Preference Shares into escrow for a period of four months following closing. Subject to the satisfaction of such conditions, the Proposed Transaction is scheduled to close on or about March 15, 2010.

Background to the Proposed Transaction

Sanomune's lead compound, SAN-61, for the treatment of Alzheimer's disease, has demonstrated neural protection (protects brain cells) as well as the ability to trigger neural stem cell proliferation (generates new brain cells). In Alzheimer's transgenic mice treated with SAN-61, research indicates a restoration of neurogenesis to near normal/wild-type levels. The compound also exhibits potent protection against a variety of in vitro challenges such as amyloid beta peptide, hydrogen peroxide and oxygen/glucose deprivation including up to an 80% reduction of neuronal cell death in an Alzheimer's amyloid toxic challenge. Together, the data suggests SAN-61 could protect and regenerate brain tissue and therefore may represent a promising agent for the treatment of neurodegenerative diseases. Previous studies have demonstrated that SAN-61 has a statistically significant and measurable effect on EEG patterns (a marker of cognitive function) in dementia patients. SAN-61 has received regulatory clearance to enter a phase II clinical trial for Alzheimer's disease.

DiaMedica believes the Proposed Transaction will allow it to strategically connect the common base technologies of the two companies, while taking advantage of cost synergies. Following completion of the Proposed Transaction, DiaMedica's initial neurological focus will be on Alzheimer's and Huntington's diseases, with the possibility of expanding into autoimmune disorders such as rheumatoid arthritis and type I diabetes. Concurrently, DiaMedica will be advancing its small molecule, DM-71, for type II diabetes.

As a result of the Proposed Transaction, DiaMedica will also acquire Sanomune's panel of monoclonal antibodies (mAbs) that triggers the inhibition of glycogen synthetase kinase 3 beta (GSK3B) in vitro. GSK3B has been linked to diabetes, cancer and a variety of neurological disorders such as Alzheimer's and Huntington's diseases. This panel of mAbs is currently being tested at leading institutions around the world for these and other indications. The mAbs program will complement DiaMedica's core DM-199 program, which has also been shown to have GSK3B inhibiting activity as a potential follow-on product line.

MI 61-101 and Minority Shareholder Approval

The Proposed Transaction falls within the definition of "related party transaction", as set out in Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions ("MI 61-101"), as, at the date that the Proposed Transaction was agreed to, certain parties to the transaction were "related parties" (within the meaning of MI 61-101) of DiaMedica and Sanomune. More specifically, CentreStone Ventures Limited Partnership ("CentreStone LP") and its general partner, CentreStone Ventures Inc. ("CentreStone GP"), are each a "control person" of both DiaMedica and Sanomune, Genesys Ventures Inc. ("Genesys") is a promoter of both DiaMedica and Sanomune, and Mr. Eric Johnstone, DiaMedica's Vice-President, Finance, is also a shareholder of Sanomune. The following table sets out the number of Sanomune Common Shares, Sanomune Preference Shares and DiaMedica Common Shares which will be held by CentreStone LP, CentreStone GP, Genesys and Mr. Johnstone immediately prior to completion of the Proposed Transaction, as well as the number of DiaMedica Common Shares to be issued to CentreStone LP, CentreStone GP, Genesys and Mr. Johnstone as a result of the Proposed Transaction, and the number of DiaMedica Common Shares which will be held by CentreStone LP, CentreStone GP, Genesys and Mr. Johnstone upon completion of the Proposed Transaction:

                                                       DiaMedica
                                                         Common
                                                         Shares    DiaMedica
                                                          to be     Common
                                                         issued     Shares
                                                       upon compl-   held
                                                        etion of   following
           Sanomune     Sanomune                        Proposed   comple-
            Common     Preference   Total    DiaMedica Transaction  tion of
            shares       Shares    Sanomune   Common      (%       Proposed
             held         held     shares   Shares held  of total  Transac-
            (% of        (% of     held (%    (% of     DiaMedica  tion (%
             total        total      of        total     Common    of total
           Sanomune     Sanomune    total    DiaMedica   Shares    DiaMedica
  Related   Common     Preference  Sanomune   Common     to be      Common 
   Party    Shares)      Shares)    shares)   Shares)    issued)    Shares)
----------------------------------------------------------------------------
CentreStone    99                    99                    51         51    
     GP     (0.003%)     nil     (0.0004%)     nil     (0.0004%)  (0.0002%) 

CentreStone           14,798,444 14,798,444 4,316,600  7,657,373  11,973,973
     LP       nil      (70.47%)   (59.79%)   (22.47%)   (59.79%)   (37.40%) 

 Genesys   2,642,578             2,642,578  1,176,923  1,367,388  2,544,311 
            (70.50%)     nil      (10.68%)   (6.13%)    (10.68%)   (7.95%)  

    E.                  87,445     87,445                45,248     45,248  
 Johnstone    nil      (0.42%)    (0.35%)      nil      (0.35%)    (0.14%)  
----------------------------------------------------------------------------
  TOTAL:   2,642,677  14,885,889 17,528,566 5,493,523  9,070,060  14,563,583
            (70.44%)   (70.89%)   (70.82%)   (28.60%)   (70.82%)   (45.49%) 

MI 61-101 provides that, in the absence of any applicable exemptions, related party transactions, such as the Proposed Transaction, will be subject to the formal valuation requirements of Section 5.4 of MI 61-101 and the minority approval requirements of Section 5.6 of MI 61-101.

Formal Valuation

Implementation of the Proposed Transaction is exempt from the formal valuation requirements of Section 5.4 of MI 61-101 pursuant to Section 5.5(b) of such instrument, as none of DiaMedica's securities are listed or quoted on any "specified markets" as defined in MI 61-101.

Minority Approval

No exemptions are available from the minority approval requirements of Section 5.6 of MI 61-101 in respect of the Proposed Transaction, and, as such, DiaMedica is required to obtain "disinterested minority" approval (the "Minority Approval") for the Proposed Transaction from the holders of DiaMedica Common Shares at a meeting of such holders. For the purposes of MI 61-101, such approval must exclude any votes attached to DiaMedica Common Shares which, to DiaMedica's knowledge, are beneficially owned or over which control or direction is exercised by: (a) DiaMedica, (b) an "interested party", as such term is defined in MI 61-101, (c) a related party of an interested party, unless the related party meets that description solely in its capacity as a director or senior officer of one or more entities that are neither interested parties nor issuer insiders of DiaMedica, or (d) a joint actor with a person or company referred to in (b) or (c) in respect of the Proposed Transaction.

DiaMedica does not beneficially own, and it does not exercise control or direction over any DiaMedica Common Shares. To the Company's knowledge, there are no other "interested parties" in respect of the Proposed Transaction other than CentreStone LP, CentreStone GP, Genesys and Mr. Johnstone. In the aggregate, such parties beneficially own, or exercise control or direction over, a total of 5,493,523 DiaMedica Common Shares, or 28.60% of the total issued and outstanding DiaMedica Common Shares as of the date hereof.

As the holding of a meeting of shareholders is both costly and time-consuming, DiaMedica has applied to the Ontario Securities Commission for a decision under Section 9.1 of MI 61-101 exempting the Company from the requirement to call a meeting of shareholders to consider the Proposed Transaction, and to send an information circular to shareholders in connection with such meeting, and, in lieu of such requirements, to obtain the Minority Approval for the Proposed Transaction by obtaining the written consent of shareholders representing at least 50% + 1 of the DiaMedica Shares held by disinterested minority shareholders with respect to the Proposed Transaction.

Pursuant to Section 5.14(b) of TSXV Policy 5.3, the TSXV also requires approval of the Proposed Transaction by the disinterested shareholders of DiaMedica. DiaMedica has requested, and the TSXV has determined as part of its conditional acceptance of the Proposed Transaction, that such shareholder approval may be provided by the written consent of DiaMedica shareholders holding at least 50% + 1 of the DiaMedica Common Shares, as evidenced by the signing of consents by such shareholders, if permitted by applicable securities laws.

The information and form of consent to be provided to DiaMedica shareholders whose written consent to the Proposed Transaction is sought will be filed on SEDAR as a "Material Document", and will be accessible at www.sedar.com.

About Sanomune

Sanomune Inc. is a private biotechnology company focused on developing treatments for neurological diseases. The company's lead compound, SAN-61, is a promising treatment for Alzheimer's disease that has demonstrated neural protection (protects brain cells) properties as well as the ability to trigger neural stem cell proliferation (creates new brain cells). SAN-61 has received regulatory clearance for a phase II clinical trial and the compound has demonstrated measurable effects on EEG patterns (a marker of cognitive function) in dementia patients. Sanomune is also developing treatments for Parkinson's disease, Huntington's disease and other disease indications. In addition to its neurological products, the company is also developing a product for radiation exposure and a suite of mABs for Alzheimer's disease, mixed lineage leukemia and diabetes through the inhibition of GSK3B. The company was named a "Top 10 Canadian Life Science Company" for 2008/9 by the Ottawa Centre for Research and Innovation. For additional information, please visit www.sanomune.com.

About DiaMedica

DiaMedica is developing novel treatments for type 2 diabetes based on a newly discovered nerve signal mechanism. DiaMedica completed a successful phase II trial with its first clinical stage product, DM-71, which demonstrated the ability to reduce HbA1c (blood sugar) levels and weight in humans. DiaMedica also completed a successful phase II trial with its second compound, DM-83, which showed a decrease in insulin levels. Results from a phase IIa clinical trial demonstrated encouraging results that DM-99 may be able to lower blood glucose in type 2 diabetes patients after consumption of a meal. The Company's DM-199 compound is an improved proprietary recombinant version of DM-99. DiaMedica has been recognized as one of Canada's Top 10™ Life Sciences Company's for 2007/2008 and 2008/2009 by the Ottawa Centre for Research and Innovation. The Company is listed on the TSX Venture Exchange under the trading symbol "DMA". For additional information please visit the Company's website: www.diamedica.com.

Caution Regarding Forward-Looking Information

Certain statements contained in this press release constitute forward-looking information within the meaning of applicable Canadian provincial securities legislation (collectively, the "forward-looking statements"). These forward-looking statements relate to, among other things, DiaMedica's objectives, goals, targets, strategies, intentions, plans, beliefs, estimates and outlook, and can, in some cases, be identified by the use of words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may" and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Specifically, this press release contains forward-looking statements regarding matters such as, but not limited to, DiaMedica's ability to obtain the regulatory, stock exchange and shareholder approvals necessary to implement the Proposed Transaction, the satisfaction of all conditions precedent to the completion of the Proposed Transaction, including completion of satisfactory due diligence by the parties to the Proposed Transaction and the completion of definitive legal documentation, as well as DiaMedica's plans, strategies and objectives, and DiaMedica's ability to integrate and develop the compounds and other assets acquired as a result of the Proposed Transaction, as well as its own products. These statements reflect management's current beliefs and are based on information currently available to management. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from these expectations include, among other things: DiaMedica's inability to obtain the necessary regulatory, stock exchange and shareholder approvals to implement the Proposed Transaction, or to obtain such approvals on terms acceptable to DiaMedica, Sanomune and the Sanomune shareholders, the dissatisfaction of any of the parties to the Proposed Transaction with the results of their due diligence investigations, the inability of the parties to the Proposed Transaction to complete definitive legal documentation or to satisfy any other condition to closing, uncertainties related to clinical trials and product development, rapid technological change, uncertainties related to forecasts, competition, potential product liability, additional financing requirements and access to capital, unproven markets, the cost and supply of raw materials, management of growth, effects of insurers' willingness to pay for products, risks related to regulatory matters and risks related to intellectual property matters.

Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found in the body of this news release, as well as under the heading "Risk Factors" contained in DiaMedica's final long-form prospectus dated March 12, 2007. DiaMedica cautions that the foregoing list of important factors that may affect future results is not exhaustive. When relying on DiaMedica's forward-looking statements to make decisions with respect to DiaMedica, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Such forward-looking statements are based on a number of estimates and assumptions which may prove to be incorrect, including, but not limited to, assumptions regarding DiaMedica's ability to obtain the necessary regulatory, stock exchange and shareholder approvals to implement the Proposed Transaction on terms acceptable to DiaMedica, Sanomune and the Sanomune shareholders, satisfactory completion of due diligence by each of the parties to the Proposed Transaction, the completion of definitive legal documentation, the ability of the parties to the Proposed Transaction to satisfy all other conditions to closing, DiaMedica's plans, strategies and objectives, DiaMedica's ability to integrate and develop the compounds and other assets acquired as a result of the Proposed Transaction, as well as its own products, the ability of DiaMedica to obtain sufficient financing, the cost and supply of raw materials, insurers' willingness to pay for products, market competition and general economic conditions. These risks and uncertainties should be considered carefully and investors and others should not place undue reliance on the forward-looking statements. Although the forward-looking statements contained in this press release are based upon what management believes to be reasonable assumptions, DiaMedica cannot provide assurance that actual results will be consistent with these forward-looking statements. DiaMedica undertakes no obligation to update or revise any forward-looking statement.

The TSX Venture Exchange does not accept responsibility for the adequacy or accuracy of this release.