TWST: We would like to begin with a brief historical sketch of the company and a picture of the things you're doing at the present time.

Dr. Scarlett: Tercica was founded approximately three years ago by Ross Clark who was a Professor of Endocrinology at Auckland University and who previously had been one of the key drug developers at Genentech during the late 1980s and early 1990s in the endocrinology area. Specifically, he was responsible for much of the work that was done in the area of IGF-1. So Ross recognized that there was an opportunity in today's world for treating children with IGF-1, and these would be children who actually had short stature due to metabolic abnormalities. Their short stature was not due to growth hormone deficiency, rather it was due to growth hormone resistance or, as we call it, primary IGF-1 deficiency. So these are children who, despite the presence of normal or even elevated growth hormone, have a downstream defect in the action of growth hormone, which results in low IGF-1 levels. IGF-1, the hormone, is the principal mediator of statural growth. So if you are IGF-1 deficient, you will be short. Tercica was founded to commercialize IGF-1 in order to serve this rather unmet medical need of children who were IGF-1 deficient, but whose IGF-1 levels couldn't be raised by treating them with growth hormone.

TWST: When you say short, just how short does that go?

Dr. Scarlett: These are children who, when they grow to an adult height, if they are not treated, on average may only achieve 4.5 feet of height. So they have a very significant growth deficit.

TWST: When children grow to less than 4.5 feet, are they nevertheless proportionate to the usual weight?

Dr. Scarlett: Yes, the children who we treat in general have otherwise normal development processes. So they don't have some of the abnormalities that have been associated with extreme short stature and other genetic syndromes. There are some children and adults who have dysmorphia of their bodies. They have altered body shapes, and that's generally because they have genetic abnormalities of cartilage development or even bone development. These children have normal cartilage and bone; they are just missing the hormone, in this case IGF-1, that stimulates normal growth.

TWST: And you're putting out a limit of 4.5 feet. How short might they be?

Dr. Scarlett: We say on average they could be around that height. Some of these children with an extreme form of this disorder never grow into adulthood beyond 3.5 feet in height.

TWST: Are they as strong as their height would indicate, or are they weak in any way?

Dr. Scarlett: This molecule IGF-1, like most hormones, has a multiplicity of effects. The one that's the most noticeable in childhood is the absence of bone and cartilage growth. But if you're IGF-1 deficient, you also have other abnormalities that often become more apparent as the children grow into adulthood. An adult with IGF-1 deficiency is very well described as having altered body composition; they're fatter and they have less mean body mass. They also have very significant total bone defects. They don't have normal bone mineralization, so they are prone to early fractures and osteoporosis. It's also known that patients with IGF-1 deficiency have increased cardiovascular risk and an increased risk eventually of morbidity and even mortality when they become adults. So overall, IGF-1, like many other hormones, has a multiplicity of effects. But again, we notice in childhood the stature is the one that really stands out to the casual observer.

TWST: In the development of your programs, do you know yet exactly how much you can do for this condition?

Dr. Scarlett: Yes, we know that we can have a very significant effect. In the studies that we reported first last year and that we've continued to supplement, we've now treated approximately 71 children for an average of about four years, and some of these children have actually been treated for over 10 years. The overall effect was to triple the growth rate in the first year and eventually to have approximately a doubling of the growth rate for the remaining years, and that's quite significant. So we can meaningfully and, from a clinical perspective, significantly improve their growth rates in such a way that we can make a difference in their lives.

TWST: Does an improvement in those other conditions go along with that?

Dr. Scarlett: We suspect it does, but there has not yet been a careful study of the effects on the metabolic aspects of IGF-1 replacement therapy in IGF-1 deficient children or adults. That's something for the future. We know that in short-term studies that have been reported that there were very favorable and positive changes, but we don't know over the long run, although there is a strong story there because we know that if children have growth hormone deficiency, they grow into adulthood, replacing the missing growth hormone has a very positive effect on these metabolic parameters. So we expect the same is likely to be true with IGF-1 replacement, but we need to go do some additional studies to prove that.

TWST: What are the upcoming things on your agenda?

Dr. Scarlett: I think the biggest thing to point out is that in our initial studies of this molecule that have taken place in the past, we've been focused on the children with the greatest medical need for whom there are really certainly no other alternative therapies. These are children who we would say have severe primary IGF-1 deficiency. And those are the results that I've described for you. However, there are other children who still are, relatively speaking, growth hormone resistant and hence are IGF-1 deficient. But they have a less severe form of the disorder, and these children also should benefit by the use of IGF-1 and IGF-1 replacement therapy. So we are exploring the use in clinical trials of the drug in that less severe patient population where we think that it should have a very similar and appropriate effect.

TWST: How widespread is the problem?

Dr. Scarlett: To put it in perspective, there are approximately 30,000 children in the United States today who have primary IGF-1 deficiency. The group that we've studied to date is 20% of that or the 6,000 patients who have the most severe form of the disease. To put that 30,000 number in perspective, that's probably 1.5 times the number of children who have the other somewhat allied condition or similar condition of growth hormone deficiency. So these are the two big major hormonal deficiencies that cause short stature. There are actually more children who are growth hormone resistant and have primary IGF-1 deficiency than there are who have the true form of growth hormone deficiency.

TWST: Are these often accompanied by some form of malaise or social maladjustment?

Dr. Scarlett: In the late 1980s and early 1990s as growth hormone replacement therapy became available for children who are growth hormone deficient, there was a lot of research done to really ask the question, 'Should children who are quite short and profoundly short have growth hormone replacement therapy? Should they have treatment? Is it really something that is important from a societal and an individual perspective?' I think the answer was resoundingly yes. Children who grow up to be very short adults have a true disability. There is a disability in terms of the jobs that are available to them. There is disability in terms of social interactions. As you might expect on the playground, it's been very clearly identified that the incidence of bullying and other social maladaptive behavior is very well described in particular for short children. Interestingly, that carries on into the adult population where obviously social interactions are significantly inhibited. So oftentimes people who are thinking of short individuals are thinking often of people who are at sort of the lower end of the normal range. That's not the group we are talking about here. We are talking about children and eventually adults who, without treatment, really are abnormally and significantly short and have very significant degree of short stature. Their degree of disability is significant and deserves treatment.

TWST: Could you give us a rough idea of your timetable for the next number of years?

Dr. Scarlett: Our most important event that will occur hopefully this year will be the approval of Increlex, which is our brand of recombinant human IGF-1. That application is pending at the FDA today. We've recently received word that the application had been formally filed and that we would receive a priority review, which means that we should be hearing from the FDA on or before August 31 as to how they view the application and what issues we may or may not have to resolve with them. So assuming we get a positive review from the FDA, there is a very good chance the product would be approved this year, and we anticipate formally launching the product at the very beginning of 2006. So I think that overshadows, frankly, most of the other events. The next critical event comes at actually the end of 2006 when we should be receiving some data from our ongoing studies in the area of this less severe IGF-1 deficient population. This population consists of the remaining 24,000 patients of that 30,000 who actually are less severely ill and less severely affected than the patients we've studied to date. That data should allow us to file a supplemental New Drug Application in order to be able to formally promote the product in the use of those children who have primary IGF-1 deficiency.

TWST: Do you intend to form alliances, partnerships, or relationships with some larger companies?

Dr. Scarlett: From the US perspective, we think that the most effective way to bring this product to the market and to make it available in this marketplace is actually by creating a focused sales force of our own. There are around 400 active pediatric endocrinologists in the United States today, and that is a very small number of physicians for whom we need to provide the relevant information for them to make the decision whether to use the product or not. So a small sales force in a relatively small infrastructure can actually cover that size of a population extremely well. So our plan is to launch the product ourselves in the United States. We haven't formally decided what to do in Europe; we are still evaluating some of the regulatory and other situations there. But I think that our plan, in general, will likely revolve around partnering the product there. It is fairly hard to take a single product and have that be an effective investment strategy in Europe where there is quite a bit of infrastructure that has to be built to serve a full European market. So we will probably have more to say about that in the future, but at the moment, we are certainly leaning strongly in the direction of partnering there. I should also say that we are being very opportunistic from an in-licensing perspective as well. We have evaluated a number of different compounds in the recent past and continue to do so. Our goal is to build an endocrine franchise and an endocrine health company. There aren't actually very many endocrine companies out there. We have had an opportunity to look at a number of other compounds, and there are other uses, by the way, of our existing product, Increlex, in other areas. So I think that you will see, in the future, additional opportunities there.

TWST: Regarding your primary product, how expensive is it likely to be, and what are the prospects regarding reimbursement?

Dr. Scarlett: Historically, the statural growth area has actually had very good reimbursement dynamics. I think that is because this is very well accepted science, and there is a tremendous amount of knowledge about the growth cascade, as we call it. The actual science behind growth has been extremely well studied in the last 20 years. And the role of both growth hormone and IGF-1 in that growth process is very well defined. So this is a very logical and, frankly, scientifically elegant answer to the problem of growth hormone resistance. We know that in the growth hormone deficiency area, the vast majority of prescriptions are ultimately reimbursed, and we expect a relatively high rate of reimbursement in this area equally as well. From the pricing perspective, we haven't made a formal decision about the exact dynamics of pricing for the product, but I think that it is very likely to be in the same general area of pricing as growth hormone is for growth hormone replacement. It is a very analogous situation ' a missing hormone, similar degree of disability of children and, ultimately, adults who have the deficiency. I think that that precedent probably will guide us pretty strongly. And today, growth hormone is reimbursed and costs are about, on average, $20,000 per patient per year. So I think IGF-1 treatment will likely be in that general vicinity. The specifics of it we certainly haven't decided, and we haven't made a final decision even on that.

TWST: What are the things that you are worrying about? What negatives could creep into the situation?

Dr. Scarlett: As any physician will tell you, any product, any therapy has some risks associated with it. We are fortunate in that because IGF-1 is downstream of growth hormone; we know a lot of the effects, and a lot of the fortunately fairly minor effects of growth hormones are similar to the effects that we see in some of our clinical trials. These can include a stimulation of the immune system, which causes the tonsils to grow. There can also be some abnormal growth or production of cerebrospinal fluid, causing some headaches and visual effects. But many of the associated effects of IGF-1 probably are quite similar to those seen over the years with growth hormones. There are, of course, differences between the two products. IGF-1 stands for insulin-like growth factor, and on one area it does have some structural similarity to insulin. So there probably is going to be a need to have children take this product in the setting of a meal so that they don't become hypoglycemic. But overall, we know a great deal about this product. It's been under evaluation for a long time, and at Tercica, we're finally pushing it over the finish line. But there are many studies that have been done, some by us and some by others, and there are also many publications and long-term follow-ups. I think the most impressive point that we would make is that in our own clinical studies of short stature using IGF-1 and Increlex, we've never had a patient drop out due to side effects. So I think it's a very well-tolerated product and, again, it's a very elegant product. It's really one of the last remaining hormonal deficiency states being treated with replacement therapy.

TWST: Does life expectancy come into the picture here?

Dr. Scarlett: We don't know the answer to that. No one has really followed patients with these types of disorders all the way out. I think it would be premature to make any statements about that.

TWST: Would you tell us about the backgrounds and the expertise of yourself and a couple of your key colleagues.

Dr. Scarlett: I've already mentioned our founder, Ross Clark. Professor Clark, who is truly a world expert in statural growth and growth biology, plays a very important role as our Chief Technical Officer. My own background is that I am a physician and trained as an endocrinologist. And beginning in about 1990, I returned to the world of endocrinology when I worked in the growth hormone field with another manufacturer, and then I founded another company that was a technology spinout from Genentech in the same area of growth hormone and IGF-1. So I have a lot of technical background and medical background in this area as well as my business background and entrepreneurial background. We have two other people who I think I should highlight. Thorsten von Stein is our Chief Medical Officer and Senior Vice President of Clinical and Regulatory Affairs. Thorsten is a very gifted drug developer. He came to the company at the beginning of the year and he is really driving the development of a clinical trial group as the engine of the company to create value. Thorsten got his start at Roche. The other person who I would highlight would be Chris Rivera, who recently joined us as Senior Vice President of the Commercial Group and is responsible for the Commercial Group. Chris has a great background in niche marketing, and specifically, he spent seven years at Genzyme where he was very instrumental in the development of another small, if you will, somewhat similar product, Renagel, for a very different market area but with very similar dynamics. So I think that we've put together a wonderful group of people who have a lot of expertise not only in their own disciplines, but also actually in these types of markets.

TWST: How many employees do you have now and how many will you have a few years from now?

Dr. Scarlett: We have approximately 70 employees today, and our expectations are to add additional employees probably on the order of roughly 30 in the commercial side of the organization. That will take place between the time that we get approval and the months following approval.

TWST: Do you see any need to improve the company's capital structure?

Dr. Scarlett: You can always improve the company's capital structure, especially with these small companies that are so capital intensive. We have approximately $90 million in the bank. We have been quite successful with our colleagues on Wall Street raising money. I think that people see that this is a new market with really the first new product in over 30 years to come to a very interesting and important area, statural growth. Clearly, we have excited key opinion leaders. We know that disease awareness is rising as we are out there with our clinical trials treating patients, and as people start to realize that this product really is going to come to the market. So there is a lot of excitement starting to be generated. And I am sure that at some point, we will need to return to the capital markets, but right now, we are very focused on the task at hand, which is getting an approval and launching this first new drug in 30 years in this area.

TWST: What would be the two or three best reasons for the long-term investor to start taking a close look at Tercica?

Dr. Scarlett: One point that's important is to say that it's a long-term disease, so the patients accumulate. Therefore, the revenues will accumulate. The second is that Tercica has a very focused strategy. We are not trying to be all things to all people; we are really organized around a very poorly served area where today, despite all of the tremendous productivity of the biotech and pharmaceutical industry, there is still only one drug out there up until now. So we are very focused on that area, and we'll make very significant inroads into the statural market. The third thing to point out to long-term investors is there is really a near-term commercial opportunity. Oftentimes, biotech investors have to be some of the most patient people in the world. They often make investments in companies where they still have to go through Phase III decision points and where there's still a long, long way to Tipperary, as they say. Here we're on the verge of becoming a commercial organization. The fourth is that we have a real commitment to running this business as a business, and our goals are to have a sustainable long-term business. A lot of biotech companies really don't focus on that goal; they focus on the wonderful science and the great long-term and very large opportunities that are all theoretical. We have a very practical approach toward, hopefully, long-term sustainability.

TWST: Is there anything you would like to add, particularly with regard to strategy and vision?

Dr. Scarlett: We have a very clear-eyed strategic view that this is an underserved market with patients who have a medical abnormality that we have it in our power to address today. These are patients who, if not treated, suffer with very significant and severe disability, and we are bringing a product to the market that will be immediately valuable to them. That's our real purpose in life. That's what we do. Of course, we also are here to do well by our shareholders and offer an alternative to the community of physicians. But at the end of the day, we really care about these patients. We want the real results come through when you see a parent or a child who has been consigned by the fate of history to be very significantly and really disabled, but we are able to turn that into a much more normal situation where that child can grow up to be an adult who has very minimal disability, if any at all. That's very rewarding and the real reason for our company being here.

TWST: Thank you. (MC)

DR. JOHN A. SCARLETT President & CEO Tercica, Inc. 651 Gateway Boulevard Suite 950 South San Francisco, CA 94080 (650) 624-4900 (650) 624-4940 www.tercica.com e-mail: medwards@tercica.com

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