New Product Development

Several factors are being considered as AXM Pharma, Inc. aggressively introduces innovative new products to enhance its competitive position in the Chinese marketplace. Management intends to pursue the development of new prescription grade drugs and medicines with a focus on antibiotics, anti-cancer and cardiovascular products that have the following attributes: (a) intellectual property protection, (b) trade secret technology, (c) exclusive marketing rights for AXM in China, (d) production efficiencies, (e) cost advantages, and (f) specialized ingredients with therapeutic effects. Products having no or few competitors and therefore offering high margins will be given priority in the selection of products for marketing and production. We plan to build on AXM’s technological excellence by concentrating on products that have large potential markets but are technically more demanding in their manufacturing process. This strategy will greatly limit the number of potential competitors and help AXM maintain higher margins for a longer time. We will attempt to introduce up to eight new products each year, of which at least five will have significant intellectual property protection. Sales and earnings goals will be met by aggressively marketing current AXM products. We believe that we can enhance sales and net profits beyond these goals through AXM’s New Products Growth Strategy and the introduction of new products from the AXM Pharma Shenyang research facility.

AXM Pharma's New Products

1. Whisper (Xin Shu) feminine hygiene product. Whisper is a proprietary product made with 10 herbal extracts that has been approved by the State Food and Drug Administration ("SFDA") in China as an adjunctive therapy for prevention of mild to moderate bacterial and viral vaginal infection and relief of vaginal itch from nonspecific causes. The Company has received manufacturing and marketing approval for this product from the State Food and Drug Administration ("SFDA") in China. The product is mild, easy to use, pH balanced, antiseptic, and anti-itch in a soothing cream form. It is considered to be effective and safe for all women, including those who are pregnant. Saatchi & Saatchi has been engaged to provide creative, production, execution and market research support for Whisper. On December 1, 2004, the Company announced it has begun selling its Elegance Therapeutic Feminine Hygiene Wash, a branded version of Whisper, in Shenzhen through the Shenzhen Accordance Pharmacy Chain Store Co. Ltd., which has more than 150 outlets. The Company also launched in Shanghai through Shanghai Huashi Chain Store Co., a division of Shanghai Pharmaceutical Co, in its over 140 chain stores.
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2. Qiyao Diabetes Capsule, an herbal formulation used as an adjunctive therapy for Type II Diabetes. This product has received clinical approval from the SFDA in China as an Over the Counter Adjunctive Therapy for the treatment of Type II Diabetes.The product is most effective when taken together with prescription oral hypoglycemic therapies and has shown minimal or no side effects, statistically significant hypoglycemic effects, and reduction of the effects of the symptoms of Type II diabetes. Full marketing approval from the SFDA is expected in the second half of 2004 and the Company expects to launch Qiyao immediately upon receipt of full approval. The Company intends to market Qiyao as an over the counter product with direct distribution into China's retail pharmacies.
   
   
3. Children's vitamins and vitamin supplements. AXM has acquired the exclusive rights to an oral drug delivery technology for chewable tablets, capsules and lozenges from WN Pharmaceuticals Ltd. The agreement includes the transfer of intellectual property and technical support for formulation and manufacturing processes, as well as distribution rights throughout Asia. The products will be marketed under the Sunkist brand, in accordance with AXM Pharma's exclusive trademark license with Sunkist. The initial range of products will include Children's vitamins and vitamin supplements. The Children's vitamin and vitamin supplement market in China is currently valued at US$750 million, according to Financial Insight Magazine.
   
   
4. Tong Yang Anti-Depression and Anti-Fatigue Compound. The Company has acquired the rights to Tong Yang, a compound that treats many of the symptoms of fatigue and depression. The product will be sold over-the-counter, addressing both the chronic and acute treatment requirements. Tong Yang's positioning and benefits are supported by clinical trial results showing a significant improvement in both clinical and subjective measures. Tong Yang is registered as a Functional Food, a category that includes homeopathic treatments in addition to other compounds. The functional food market in China is growing rapidly as the standard of living in China increases and there is more disposable income for health related products. According to Packaged Facts, functional food sales are projected to exceed $30 billion in the U.S. by the end of the decade. China is expected to follow a similar trend.
   
   
5. Soluleaves™ oral drug delivery technology. The Company has acquired the exclusive distribution rights in China to certain formulations of the Soluleaves™ oral drug delivery technology using dissolve-in-the-mouth films developed by BioProgress plc (NasdaqNM: BPRG). The agreement includes the option to extend the distribution rights throughout Asia. The products will be manufactured by the BioProgress subsidiary BioTec Films LLC and will be distributed by AXM PHARMA under the Sunkist brand and under AXM house brands.
   
   
6. Elegance is a menstrual relief lotion that is formulated with 8 herbal extracts and pH balanced. It is an extension of the existing Whisper line of feminine hygiene products. The product is positioned as a therapeutic lotion to relieve vaginal itch and vaginitis and to sooth any vaginal irritation that may be present.
   
   
7. LiveComf is a compound sulfur cream used to alleviate dermatitis seborrheica, scabies, acne and eczema. LiveComf is available in two doses, a 25g and 100g cream.
   
   
8. Bodyward is an Erythromycin Ethylsuccinate tablet available in 100mg and 125mg doses and can be used for patients who are allergic to penicillin when treating the following conditions: acute tonsillitis, acute pharyngitis, sinusitis caused by hemolytic streptococcus and streptococcus pneumonia, scarlet fever, acute cellulitis caused by hemolytic streptococcus, diphtheria and diphtheria carrier, gas-gangrene, anthrax, tetanus, actinomycosis, syphilis, listeriosis, legionnaires disease, mycoplasma pneumoniae pneumonia, chlamydia pneumoniae pneumonia, infection of genitourinary system caused by chlamydiae and mycoplasma, conjunctivitis caused by chlamydia trachomatis, nonnasality infection caused by clostridium difficile, campylobacter jejuni enteritis, whooping cough, rheumatic fever recrudescence and infective endocarditis (from rheumatic heart disease, congenital heart disease, after cardiac valve replacement) and preventive medicine for surgical procedures on the upper respiratory system.
   
   
9. Reheal is Piracetam capsule used to treat reduced memory capacity and impairment of cerebral function caused by acute/chronic cerebrovascular disease, cerebral trauma and toxic cerebral disease.
   
   
10. LifeGate is an anti-fatigue capsule categorized as a functional food that is used for increased energy and vitality. LifeGate is formulated from a compound that treats many of the symptoms of fatigue and depression. The product will be sold over the counter, addressing both the chronic and acute treatment requirements.