Viragen Holds Annual Stockholder Meeting: CEO Issues Progress Report

PLANTATION, Fla., Dec. 15 /PRNewswire-FirstCall/ -- The following is a letter from Charles A. Rice, President and CEO of Viragen, Inc. . In addition to these comments, stockholders and potential investors are referred to: the Company's SEC filings, including Form 10-K and Form 10-Q (Annual and Quarterly Reports); press releases; website; and other publicly disseminated information, which is available free of charge upon request by contacting the Company.

Dear Stockholder,

Today our Company holds its 2005 Annual Meeting of Stockholders, and due to critical business of great importance for our Company, I will be unable to attend to provide this President's update in person. The reason for my absence is related to our pending application in Sweden seeking approval for Multiferon(R) as a new first-line adjuvant therapy for the treatment of malignant melanoma. This potential approval is expected to serve as the cornerstone for our European strategy, a very significant market opportunity, and today I am meeting with the Swedish regulatory authorities to discuss their review of our application. While it troubles me not to attend our Stockholders' Meeting in person, this regulatory meeting is far too important to delay, and I appreciate your understanding that this represents a high priority event. Therefore, I have prepared this letter to serve as my report to you, our valued stockholder.

2005: A Year of Progress and Challenge

2005 has been both very exciting and challenging, as we have reported significant progress in many areas, and at the same time, we've been presented with certain difficulties, as can often be expected in this business. Despite the difficulties, I remain committed to building a "new" Viragen as a highly respected Company delivering high-value, life-saving products, and growing a sustainable business for the future. It is with great enthusiasm that I believe that calendar-2006 will be a year of breakthrough progress, and with significant near-term promise, I am convinced that we will be successful.

Multiferon(R)

Sales of Multiferon(R) have begun to improve as we and our active business partners continue to build brand recognition and generate increases in prescriptions. Over the next 12-24 months, and based on progressing marketing activities, pending registration approvals, availability of additional clinical trials data, the introduction of our new pre-filled syringe and the culmination of our ongoing licensing activities, we are forecasting dramatic sales growth. Although quarter-to-quarter sales may fluctuate, as we currently are dependent on a variety of international distributors in relatively small markets, year-to-year revenues are expected to substantially increase. For example, our sales in the first quarter of fiscal 2006 (through Sept. 2005) declined from the fourth quarter of the prior fiscal year, but sales for the second quarter (to date) of fiscal 2006 are at levels that should continue the positive trend.

European Strategy -- In February, we filed an application with the Swedish regulatory authorities seeking to expand the approval for Multiferon(R) to include the first-line adjuvant treatment of high-risk malignant melanoma, following dacarbazine (DTIC) after surgical removal of tumors. We presented data from this trial in a poster session at The American Society of Clinical Oncology (ASCO) Annual Meeting in May, and the Principal Investigator presented the trial and data at the World Melanoma Congress in Vancouver in September. We have met and held extensive discussions with leading melanoma experts from around the world at these important venues, and we continue to build global recognition for the Multiferon(R) brand. We have met with the regulatory authorities in Sweden on multiple occasions to answer questions about the submission, and continue to do so today, as part of the ongoing regulatory process for a new, first-line indication. We are confident that we are providing satisfactory responses and expect a final decision in the very near-term. Assuming we receive final approval for this important indication in Sweden, we are prepared to launch this new indication immediately.

Once Sweden becomes the first European Union (EU) member to approve Multiferon(R) for melanoma, and if the authorities agree, we will implement our plan to file for European approval of Multiferon(R) through the Mutual Recognition Procedure (MRP). This procedure allows a single registration dossier to be filed for approval among an identified group of EU countries via one submission and review process. We are required to have a "sponsor" state to recommend our dossier for approval, thus the need to first file and gain approval in Sweden. We will be requesting approval for first-line adjuvant treatment of high-risk malignant melanoma, as well as the "second line" indications already approved in Sweden for patients that fail recombinant alpha interferon therapy for any disease. We plan to be ready to file under MRP shortly after approval in Sweden, and after convening a meeting with the European regulatory authorities in preparation for the filing.

We have convened a panel of globally recognized experts in the field of melanoma to assist us in designing continuing clinical work to further expand upon the utility of Multiferon(R) for melanoma patients. Clinicians from Germany, the UK, France and Sweden are contributing to new ideas for clinical development, and we plan to request approval to begin a clinical trial in a pan-European setting in 2006.

Emerging Viral Threats -- We most recently announced the results of a preliminary in vitro comparative study on Multiferon(R) and the H5N1 virus strain, or avian flu. This is only a part of our ongoing anti-viral development work and we expect to report on additional studies in the coming months. We are using independent testing laboratories, government research laboratories, and global experts to develop preliminary and confirmatory study designs. From the data generated through these studies, we will be better able to identify appropriate regulatory pathways for clinical development and the approval of new indications. It is our intent to take advantage of a number of types of grant funding to help us achieve these objectives.

Clinical Programs -- We are making positive strides to supplementing our existing clinical data through our international collaborators.

The trend for sales in Mexico continues to grow since the official market launch with the higher number of prescriptions being related to cancer treatments. To support anti-viral marketing efforts as well, our distribution partner, Laboratorios Pisa, has initiated a 60-patient Phase IV "rescue therapy" clinical trial using Multiferon(R) to treat hepatitis C in those patients who have failed recombinant alpha interferon therapy. While only a portion of the total patients required have started treatment, the preliminary 12-week results on those who have reached this interim analysis point are extremely encouraging, and these results are surpassing protocol expectations. The 12-week interim analysis point is an accepted standard for hepatitis C trials. We expect this study, when complete, will give respected medical opinion leaders in Mexico highly positive working experience with our product in this market, and will add current clinical data to our growing international dossier. While quarter-to-quarter sales may fluctuate, we expect to continue the positive trend of increasing sales in Mexico.

We are conducting a clinical trial in Greece with 120 patients as rescue therapy for the treatment of hepatitis C. Arriani Pharmaceuticals is currently enrolling patients, and once again the early 12-week analysis indicates encouraging results in those patients who have reached this interim evaluation point. This study will enable us to continue to increase physician awareness of the utility and value of Multiferon(R) in difficult-to-treat hepatitis C patients and will be valuable in support of our overall EU strategy.

As part of our marketing program in Sweden, we are planning a new clinical trial in that country, with a modification to the treatment regimen, specifically to establish Multiferon(R) as the "rescue therapy" of choice. This is a 90-patient trial that is expected to start enrollment early in 2006.

With our historical clinical data, our ongoing trials in Mexico, Greece and soon-to-begin trials across Europe, plus our growing sales around the world, we intend to confirm that Multiferon(R) is indeed "The Natural Choice(TM)".

Licensing -- We have recently completed the licensing of Multiferon(R) for the South Korean market to Kuhnil Pharmaceuticals. We are very pleased to be associated with Kuhnil, and we look forward to a promising opportunity in this exciting territory. South Korea is home to 50 million people, and represents a valuable market opportunity for Multiferon(R).

We have entered into negotiations with pharmaceutical companies for the exclusive rights to Multiferon(R) for the largest market in South America - Brazil. We hope to be in a position to execute a formal License Agreement in the coming months. With a rather rapid registration process, we expect Brazil to contribute to sales during calendar 2006.

Our collaborator in Chile, Pentafarma, will launch Multiferon(R) near the end of the first quarter of 2006. And we are hopeful of reimbursement authorization in Bulgaria, the last step to market launch in this country.

I believe that each of these territories will be contributors to our short-term revenue growth, with long-term sustainability; however, our focus will remain on the EU.

In Sweden, Viragen will focus its efforts on increasing sales for all indications, including an aggressive market launch of the first-line melanoma indication (assuming appropriate approval), followed by the MRP filing. Europe is our priority target for Multiferon(R), with a total market value of just over $700 million.

While there can be no guarantees, I remain confident that our licensing goals will be realized. The field of interferon science is rapidly expanding and renewed interest in various forms of interferon alphas, including natural leukocyte-derived Multiferon(R), is evident around the world, and we must capitalize on these significant market opportunities.

Production -- While we may not be in "regular" production in Umea, our highly skilled and trained associates at ViraNative AB are by no means idle. The pharmaceutical and biotechnology industries are among the best examples of "continuous improvement" in practice. Evolving regulations, competitive developments and scientific advancement mandate a constant process of change to how we do things.

Our team in Umea has been active in continually upgrading facilities and equipment, as well as completing required validations, developing new analytical methods, production process improvements and operating procedures, validation of new contract manufacturers for ampoules and pre-filled syringes, and numerous other changes in preparation for European strategy. Early next year, we plan to file for approval of our new pre-filled syringe dosage form, for which we hope to have approval during mid-2006. We have produced new batches of Multiferon(R) in order to carry out these various validations, and to supplant our existing inventories.

We have enlisted the support of a leading Clinical Research Organization (CRO) to provide expert services in the preparation of our regulatory dossier, including all these upgrades and changes, into the required format for the next step in our strategy (Common Technical Document, or CTD, format).

The Future -- As we continue to develop more and more data on Multiferon(R), we are gleaning new insight into the therapeutic benefits of the product in a number of different indications. Not only are we adding to the scientific and regulatory dossiers for Multiferon(R), but we may identify potential new indications as well as second- and third-generation products that could be blockbuster additions to our product portfolio for the treatment of viral diseases and cancers.

Avian Transgenic Technology: The OVA(TM) System

In June, we announced a dramatic breakthrough in our pioneering collaboration with the Roslin Institute to develop an Avian Transgenic Biomanufacturing System (the "OVA(TM) System") to produce certain biotech drugs in hens' eggs.

In a historic announcement in June, we reported recovery of a functional humanized antibody incorporated only in the whites of eggs laid by a transgenic hen. It is important to note that to develop a highly competitive commercial system, it is most desirable to achieve germline transmission of the transgene (gene encoding the target protein), meaning that the transgene is passed along from one generation to the next, as we have indeed achieved. The analysis confirms that our results are being achieved through expression that is targeted to the specific tissue in the oviduct and not throughout the transgenic animal (tissue-specific expression) -- a major breakthrough.

There are nearly one hundred therapeutic proteins currently approved for sale with many hundreds more in the pipeline. As part of our project, we have included two protein drug candidates that are commercially marketed products, which collectively realize more than $5 billion in annual sales. In the coming months, we expect to publicly identify these products along with specific data demonstrating the increased value potential conferred by the OVA(TM) System. Following a successful presentation of our progress at BIO 2005 in Philadelphia late in June, and at BIO-Europe in November, we initiated discussions with global companies concerning this revolutionary technology.

We are also examining various alternatives that may be used to expedite future stages of the project so that we can enter into a production mode in a very rapid fashion. We expect to make many announcements of our progress over the next calendar year and we look forward to several exciting scientific publications as well.

One frequent question I receive from stockholders is the potential for avian flu virus to infect our transgenic chickens. For approximately 30 years, vaccines have been produced in chicken eggs, within Specified Pathogen Free (SPF) facilities. Such facilities have been operated successfully, without viral outbreaks, under the scrutiny of various global regulatory authorities, including the FDA and the EMEA (European Medicines Agency). We will make use of qualified, certified and inspected facilities operated by companies who are skilled in this field, thereby avoiding unnecessary delays to our projects. We are confident that the containment, control and testing procedures proven over decades of experience will prevent contamination of our transgenic flocks by any viral contaminant. Supplementing this will be our internal control procedures whereby we will retain and isolate genetic materials that we would use in the event of any catastrophic outbreak to resume a separate and unaffected new flock of birds. To date, there have not been any outbreaks of avian flu virus in animals contained in SPF facilities.

Anti-cancer Candidates

While our anti-cancer projects are in their preclinical stages, we are encouraged by the preliminary results being obtained. Based on these results, we have received numerous inquiries related to early-stage partnering. However, we must also realize that our limited resources are stretched quite thin in having so many projects at early stages of development. For this reason, we have implemented a prioritization of projects in order to reduce our ongoing expenses and to focus our attention on what we believe to be the most promising candidates for the future.

We eliminated one project earlier this year (VG104 or IEP-11), which we believe represented a higher level of risk than our other projects.

We are continually evaluating all of our projects to ensure that further development is warranted, and if not, we will swiftly revise our priorities as necessary and redirect our resources accordingly.

VG102 (Anti-CD55 Antibody) -- "CD55" is a control protein that shields normal cells from being destroyed by the body's own immune system. The same protein is over-expressed on most solid tumors including breast, ovarian and other types of cancers. VG102 holds tremendous potential as it has shown to bind to a unique region of the CD55 antigen in a unique way. The antibody has also been shown to bind only to malignant cells, acting to remove the protective effect on the tumor, allowing for the destruction of the cancer through complement-mediated cell lysis (the body's natural immune system) or by treatment with chemotherapeutic agents.

Earlier this year, we reported that VG102 was found to significantly enhance the activity of rituximab (Rituxan(R); Genentech/IDEC), a leading cancer medication, when both drugs were used together in a cell-based in vitro evaluation study. The combination led to a significant increase in the destruction of cancer cells as compared to rituximab alone. These preliminary results indicate the potential of VG102 to improve the efficacy of cancer therapies, and we expect to be able to expand these studies into in vivo models, also examining the effect of the antibody when used in combination with other anti-cancer antibodies.

In April 2005, we executed an exclusive global license to the rights to develop and commercialize this antibody with Cancer Research Technology UK.

We are continuing advancement of this humanized antibody with the help of an $833,000 grant, which was awarded from the Scottish Executive in April 2004. During 2006, we expect to begin manufacturing scale-up, complete analytical development and characterization of the antibody and to prepare for toxicity studies in early 2007. At the current time, our targets for this antibody are expected to be ovarian, breast and/or colorectal cancers, with a priority target dependent upon additional data.

The pharmaceutical industry is highly focused on the development of new antibodies for a variety of therapeutic indications. Viragen has received numerous inquiries about VG102 and interest in licensing this product at the pre-clinical stage. We cannot determine at this time if there will be any licensing agreement, but we are encouraged that there is keen interest. For this reason, our development plans must become more aggressive with VG102. In addition, VG102 may prove valuable as a diagnostic imaging agent. While not quite a "biomarker", VG102 may be useful in pinpointing the exact location and size of a tumor mass, plus identifying those patients most likely to benefit from treatment with the antibody.

Budget Update:

As of the end of calendar 2005, we will have executed a number of new strategic initiatives designed to reconstruct an exciting future for Viragen and our stockholders. These initiatives include a redirection of our resources, reassessment of our expenses to focus more on R&D, and a realization that expenses related to clinical trials must increase if we are to be successful.

But there remain other initiatives that must be put into place in order to further control our limited resources. In the coming weeks and months, we will be announcing a number of changes that will enable accomplishment of these critical objectives.

Debt Restructuring / Financing:

In June 2004, we announced the completion of a $20 million financing. These funds were raised from the sale of convertible promissory notes and common stock purchase warrants to eight institutional investors. The agreement gave the note holders the right to convert into shares of common stock at an approximate price of $1.52. This obligation was due to mature on March 31, 2006 meaning Viragen would need to repay the entire $20 million if the stock price did not appreciate appropriately to allow for sufficient conversions. With this deadline fast approaching, and the lack of any guarantee of sufficient revenues with which to repay the debt, a number of alternatives were evaluated and a new approach was agreed upon.

An agreement was reached to restructure this debt, extending the agreement with new terms into August of 2008. In addition, in September 2005, and as a contingent requirement, a group of four of these investors agreed to a new $2 million financing agreement. With this restructuring of our debt over a longer term, we have additional time to realize our objectives, grow our sales, generate licensing revenue and advance our research projects, and service the debt - all of which are critical to our success. Please refer to our Form 8-K, filed with the SEC, for full details of this financing, as well as the restructuring of debt.

At today's Stockholders' Meeting, we are seeking stockholder approval to ratify the new $2 million financing agreement and to increase the number of authorized shares in Viragen, Inc.

It is important that we have sufficient shares in reserve to be able to take advantage of potential future opportunities such as mergers, acquisitions and equity/debt financings. Our Board of Directors and Company Management recommends that you vote in favor of the initiatives as proposed, and we appreciate your support in these matters.

Closing

We believe we have set the stage for significant business opportunities to result from the products and technologies in our portfolio, as we continue to strive to advance these in a cost-effective and scientifically elegant manner. We are entering a period of development activity that is very expensive. For this reason, we have developed specific and targeted objectives, with go/no-go decision points throughout our product development plans. For the first time in many years, we will be spending more in pre-clinical and clinical development than we do in SG&A (Selling, General & Administrative Expenses).

While we must tap into new sources of working capital to be successful, we are pursuing creative solutions that can leverage the value of our life-saving and innovative pipeline and capitalize on the anticipated positive impact from a series of important new developments we expect to announce throughout 2006, including the identification of at least one new product, which I believe holds significant value for our stockholders.

In our industry, everything flows from good science. We are intensely focused on generating good science in all our projects and platforms, with both internal and external expertise. While there is always a degree of uncertainty, our progress in 2006 should easily eclipse prior years and set the stage for breakthrough scientific milestones and commensurate revenue for years to come.

All of us here at Viragen greatly appreciate your support, and we remain committed to make these objectives a reality.

Sincerely yours, Charles A. Rice President & CEO About Viragen, Inc.:

With global operations in the U.S., Scotland and Sweden, Viragen is a biotechnology company engaged in the research, development, manufacture and commercialization of pharmaceutical proteins for the treatment of viral diseases and cancers. Our product portfolio includes: Multiferon(R) (multi- subtype, natural human alpha interferon) targeting a broad range of infectious and malignant diseases; and humanized monoclonal antibodies targeting specific antigens over-expressed on many types of cancers. We are also pioneering the development of Avian Transgenic Technology, with the renowned Roslin Institute, as a revolutionary manufacturing platform for the large-scale, efficient and economical production of human therapeutic proteins and antibodies.

For more information, please visit: http://www.Viragen.com Viragen, Inc. Corporate Contact: Douglas Calder, Director of Communications Phone: (954) 233-8746; Fax: (954) 233-1414 E-mail: dcalder@viragen.com

The foregoing letter contains forward-looking statements that can be identified by such terminology such as "expect," "potential," "suggests," "may," "should," "could" or similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. In particular, management's expectations regarding future research, development and/or commercial results could be affected by, among other things, uncertainties relating to clinical trials and product development; availability of future financing; unexpected regulatory delays or government regulation generally; the Company's ability to obtain or maintain patent and other proprietary intellectual property protection; and competition in general. Forward-looking statements speak only as to the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

CONTACT: Douglas Calder, Director of Communications, Viragen,+1-954-233-8746, or fax, +1-954-233-1414, or dcalder@viragen.com

Web site: http://www.viragen.com/