PolyNovo Limited

ABN 96 083 866 862

2/320 Lorimer Street, Port Melbourne VIC 3207

Tel: +61 3 8681 4050 Fax: +61 3 8681 4099

1

22 December 2015

Independent Valuation Report

PolyNovo Limited (“PolyNovo”) has today released an independent valuation report with respect to the acquisition of the minority interests in subsidiary companies NovoSkin Pty Ltd (“NovoSkin”) and NovoWound Pty Ltd (“NovoWound”) from entities associated with Associate Professor John Greenwood and Mr Julian Burton. As previously announced, the acquisition consideration comprises of $2.5 million cash and 32 million ordinary PolyNovo shares to be issued at completion but held in escrow until 29 May 2016 (‘Share consideration’). The attached valuation report has been prepared by Education & Management Consulting Services Pty Ltd (EMCS) and is being released to the market as required under ASX Listing Rule 7.1A.3. That rule requires the deemed issue price of the Share Consideration to not be less than 75% of PolyNovo’s volume-weighted average share price during the 15 trading days prior to the issue of the shares (‘15 day VWAP’). The valuation of EMCS using a mid point valuation finds the deemed issue price of shares for the acquisition is $0.166 which is 113% of the VWAP ($0.147). Therefore, PolyNovo complies with the ASX Listing Rules. Mr David Williams, Chairman of PolyNovo said “The valuation report refers to a mid point value for Polynovo of $77.2m. The report also sets out the potential benefits to shareholders arising from the transaction; in particular, the improved ability to more efficiently use tax losses. These benefits together with the favourable deemed issue price of the acquisition (113% of the VWAP) provides significant value for shareholders.”

For further information: David Williams Paul Brennan Chairman Chief Executive Officer Mobile: + 61 414 383 593 Mobile: +61 427 662 317 Email: dwilliams@kidder.com.au Email: paul.b@polynovo.com

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Education & Management Consulting Services Pty Ltd ABN 31 071 325 632 Authorised Representative of Collington Securities Pty Ltd Holder of Australian Financial Services Licence 450928

Valuation of Asset Acquired by Issue of Shares Polynovo Ltd Acquisition of 20% Shareholding in NovoSkin Pty Ltd and NovoWound Pty Ltd 21 December 2015 Suite 2, 18 Collington Ave Brighton Vic 3186 stevebishop@emcs.net.au Tel (03) 9592 8149 www.emcs.net.au

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Contents

1. Background ........................................................................................................................................................................ 2

2. Purpose of Report and Outcome ................................................................................................................................ 2

3. Method of Valuation ........................................................................................................................................................ 4

4. Summary of Valuation and Conformity with Chapter 7.1.3A.4 of ASX Listing Rules ................................. 5

4.1 Valuation of shares in NovoSkin and NovoWound ............................................................................................ 5

4.2 Conformity with ASX listing rule 7.1A.3 ....................................................................................................................... 8

4.2.1 Volume Weighted Average Price ................................................................................................................................ 8

4.2.2 Consideration ........................................................................................................................................................................... 8

5. Structure and Activities of PolyNovo ........................................................................................................................ 11

6. Market Opportunities by Business Unit .................................................................................................................... 14

6.1 PolyNovo Corporate Office ........................................................................................................................................... 14

6.2 PolyNovo Biomaterials Pty Ltd ...................................................................................................................................... 14

6.3 NovoSkin Pty Ltd .................................................................................................................................................................... 15

6.3.1 Cash Flow Sources ............................................................................................................................................................... 15

6.3.2 Financial Position as at Valuation Date .................................................................................................................. 15

6.4 NovoWound Pty Ltd ............................................................................................................................................................ 16

6.4.1 Financial Position as at Valuation Date .................................................................................................................. 16

6.5 NovoSkin and NovoWound Valuation Treatment ............................................................................................ 16

7. Valuation Approach ...................................................................................................................................................... 16

7.1 Market Applications ........................................................................................................................................................... 17

7.2 Assessment of Key Market Dynamics and Major Participants .................................................................. 17

7.3 Definition of Key Milestones ........................................................................................................................................... 18

7.4 Success Probabilities .......................................................................................................................................................... 18

7.5 Commercialisation Pathway ......................................................................................................................................... 18

7.6 Cash Flow Forecasts ........................................................................................................................................................... 18

7.7 Reasonableness of Output Review ........................................................................................................................... 21

8. Macro Valuation Assumptions ................................................................................................................................... 21

9. Sum of the Parts Valuation Summary....................................................................................................................... 23

9.1 Valuation Cross Check ..................................................................................................................................................... 24

9.1.1 Valuation Cross Check to Recent Sales ................................................................................................................. 26

Appendix 1: Key Application Assumptions ........................................................................................................................ 27

Appendix 2: Valuation Methods............................................................................................................................................. 29

Appendix 3: Sources of Key Information ............................................................................................................................. 32

Appendix 4: Volume Weighted Average Price ............................................................................................................... 33

Appendix 5: Assessment of Cost of Capital ...................................................................................................................... 34

Appendix 6: Statement of Qualifications, Declarations and Consents .................................................................... 43

Appendix 7: Financial Services Guide ................................................................................................................................. 45

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1. Background On 25 November 2015 PolyNovo Limited [“PolyNovo”] announced to the Australian Stock Exchange [“ASX”] that it was proposing to acquire the 20% minority interests in subsidiary companies NovoSkin Pty Ltd [“NovoSkin”] and NovoWound Pty Ltd [“NovoWound”] from entities associated with Associate Professor John Greenwood and Mr Julian Burton OAM.1 The acquisition would be settled by a combination of cash and shares in PolyNovo. ASX listing rule 7.1A.3 establishes a requirement that PolyNovo must demonstrate that the deemed issue price of any securities issued in consideration for acquiring non cash assets is no lower than 75% of the Volume Weighted Average Price [“VWAP”] of the shares calculated over 15 trading days prior to the either “a) the date on which the price at which the securities are to be issued is agreed or b) if the securities are not issued within 5 trading days of the date in paragraph a), the date on which the securities are issued.”2 There is a Note associated with the listing rule that the valuation may be provided by an independent expert, or by directors, provided the latter contains a similar level of analysis and is a similar standard to an independent expert’s report.

2. Purpose of Report and Outcome This report provides an assessment of the value of the shares to be acquired in NovoSkin and NovoWound to enable an assessment of whether proposed acquisition conforms to ASX listing rule 7.1A.3. The valuation of NovoSkin and NovoWound is assessed as part of a “sum-of-the parts” [“SOP”] valuation, as at 25 November 2015. The SOP valuation incorporating the material businesses of PolyNovo Limited [“PolyNovo”] is estimated to be in the order of $5.6m to $9.4m, with a mid-point (preferred point estimate) of $7.8m when profits are fully taxed. At this mid-point estimate the Deemed Issue Price of the acquisition is $0.166 which is 113% of the VWAP ($0.147) calculated from 15 trading days prior to the issue of the securities for the acquisition i.e. prior to 22 December 2015. Accordingly, our mid-point estimate exceeds the 75% VWAP requirement under ASX listing 7.1A3. The acquisition enables PolyNovo to have NovoSkin and NovoWound join the PolyNovo tax consolidated group. This would facilitate the utilisation of carried forward tax losses (subject to satisfying the same business and continuity of ownership tests) held in the PolyNovo Limited entity in a more efficient and effective way. This would add considerable value to the consolidated

1 http://www.asx.com.au/asxpdf/20151125/pdf/4338cyrr2l458x.pdf 2 See ASX listing Rule 7.1A.3

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group, in the order of $6.7m to $12.0m. As a consequence, the Deemed Issue Price for the acquisition is well above 100% of the VWAP.

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3. Method of Valuation A widely adopted view of the market value of a business or asset is3:

the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm's length.

Education and Management Consulting Services Pty Ltd [“EMCS”] has adopted this construct to assess the value of PolyNovo and its constituent parts. Our assessment of value can be viewed as the value of the business under the strategy and operational performance of the current management team. It does not explicitly include a premium that a buyer of a substantive parcel of shares may pay for control and a change in strategy of PolyNovo. Nevertheless there may be such a premium weighted by the probability of a change in control build into the market capitalisation of PolyNovo and so this may be reflected in our valuation through our reconciliation of the valuation with the market capitalisation. EMCS notes that it is challenging to assess a value of an early stage business without a substantive revenue stream. Nevertheless there is a well-established approach under such circumstances which EMCS has employed viz. a discounted cash flow method. This involved assessing possible cash flow scenarios and weighting them by the probabilities of the scenarios occurring. This in turn is informed by management’s updated expectations based on the most recent management knowledge of the scenarios and associated probabilities, together with cross checks with published statistics.

3See for example https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/Market-valuation-for-tax-purposes/?page=2#Part_A__Market_value_for_tax_purposes

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4. Summary of Valuation and Conformity with Chapter 7.1.3A.4 of ASX Listing Rules

4.1 Valuation of shares in NovoSkin and NovoWound The table below summarises the PolyNovo SOP valuation estimate and the estimated value of the 20% holding of NovoSkin and NovoWound (labelled BTM). The estimate incorporates low, mid and high scenarios which reflect changes to market share assumptions for the projected trading businesses and flow on associated impacts for volumes of product sold, distributor margins, manufacturer margins and licensor (PNV) royalty income. The SOP valuation range is $5.6m to $9.4m, with a mid-point value of $7.8m. This value range is net of the debt outstanding to PolyNovo Biomaterials of $300k and any explicit valuation of the benefits arising from utilising carry forward tax losses. EMCS’ preferred value is the mid-point value of $7.8m. TABLE 1 – VALUATION SUMMARY

The valuation assumes a simple pro-rata value for the minority positions in the NovoSkin and NovoWound entities.

PolyNovo LimitedSum of the Parts Valuation As at 25 November 2015A$m

Low High Mid Low High Mid

BTM ProductsNovoSkin & NovoWound Entities 23.7 38.9 32.1 5.9 9.7 8.1PolyNovo Biomaterials 70.1 75.6 72.8

Sub Total BTM 93.8 114.5 104.9Other Biomaterials Products 7.0 10.3 8.4AOD6904 - Osteo Arthritis Licence 1.0 1.2 1.1

Sub Total PNV Product Applications 101.8 126.0 114.4Total General R&D and Corporate Costs -34.0 -46.0 -40.0

Sub Total PNV Enterprise Value 67.8 80.0 74.4

Add Equity Adjustments

Intercompany Loan 0.3 0.3 0.3 -0.3 -0.3 -0.3Surplus Assets 2.5 2.5 2.5

Total Equity Adjustments 2.8 2.8 2.8 -0.3 -0.3 -0.3

Total PolyNovo Limited Equity Value - SOP 70.6 82.8 77.2 5.6 9.4 7.8

Source: EMCS Analysis

PNV Limited Shareholdings Minorities - 20%

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EMCS believes the most relevant cross-check in its estimation of the valuation of the NovoSkin and NovoWound entities pertains to the relationship between the estimated SOP value of the PolyNovo entity relative to the:

Observed market capitalisation ranges; and Pro rata equity value from the recent placement of 63m shares to institutional investors.

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This relationship is pertinent given the following:

PolyNovo Biomaterials is the majority equity owner (80%) of NovoSkin and NovoWound. Accordingly, it is reasonable to infer a pro-rata ownership position together with the cumulative value estimate for the remainder of the PolyNovo entities; and

The majority of the current PolyNovo value pertains to the BTM products for which the NovoSkin and NovoWound entities have contractual rights over certain marketing arrangements.

Consequently, the EMCS SOP valuation for ownership claims attributable to PolyNovo shareholders can be cross-checked to the observed PolyNovo market capitalisation. The table below sets out the comparison of the EMCS SOP value estimate range ($70.6m to $82.8m) relative to the observed market capitalisation ($67.6m to $72.4m) incorporating the recent share placement. The SOP range is above the observed market capitalisation by 4% to 14%, for the low to high ranges respectively. The preferred mid-point estimate SOP valuation is within a 10% tolerance to observed market capitalisation. This relatively tight tolerance suggests the EMCS SOP, as at the valuation date of 25 November, is broadly consistent with the observed market value. TABLE 2 – VALUATION CROSS CHECK – MARKET CAPITALISATION

PolyNovo LimitedSum of the Parts Valuation - Market Capitalisation Cross CheckAs at 25 November 2015A$m

Low High Mid

PolyNovo Limited Market Capitalisation Range * 67.6 72.4 70.0

PolyNovo Limited Equity Value - EMCS SOP 70.6 82.8 77.2

SOP (Deficit)/Surplus to Market Capitalisation 3.0 10.4 7.2

% Variance to Market Capitalisation Range 4% 14% 10%

* Market Capitalisation observed post issue of placement shares to institional investorson 2 December 2015

Source: EMCS AnalysisFor

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4.2 Conformity with ASX listing rule 7.1A.3 As noted in the background section. ASX listing rule 7.1A.3 establishes a requirement that PolyNovo must demonstrate that the deemed issue price of any securities issued in consideration for acquiring non cash assets is no lower than 75% of the Volume Weighted Average Price [“VWAP”] of the shares calculated over 15 trading days prior to the either “a) the date on which the price at which the securities are to be issues is agreed or b) if the securities are not issued within 5 trading days of the date in paragraph a), the date on which the securities are issued.” We have assessed the deemed issue price of the shares issued in consideration of the 20% holding in NovoSkin and NovoWound (based on our preferred mid-point value estimate) to be 113% of the VWAP calculated 15 days prior to the issue of the shares for the acquisition and therefore it conforms with the listing rule. 4.2.1 Volume Weighted Average Price

The VWAP for the 15 trading days prior to the issue of the securities for the acquisition was $0.147. The closing prices, trading volume and VWAP calculation is presented in Appendix 4. 4.2.2 Consideration

The consideration for acquiring the 20% minority interests in subsidiary companies NovoSkin and NovoWound was announced to the ASX on 25 November 2015. The announcement described the consideration as:

an issue of 32,000,000 share in PolyNovo (subject to AGM approval) and held in escrow until 31 May 2016

$500,000 cash at settlement $1,000,000 cash on 1 March 2016 $500,000 cash on 31 May 2016 $500,000 cash on 29 June 2016

EMCS assess the total value of the non-cash assets acquired by the shares to be in the range $3,123k to $6,923k. This is shown in the table below against the heading “Deemed Issue Price of Shares (excluding use of tax losses). The mid-point estimate is $5,323k on a present value basis for the cash ($5,520k undiscounted) and the therefore the deemed issue price per share to be $0.166. Also shown in the table is the deemed issue price as a percentage of the VWAP for 15 trading days prior to the issue of the securities for the acquisition. This is 113% for the mid-point estimate which therefore conforms to ASX listing rule 7.1A.3. It is 147% for the High Case and 66% for the Low Case. These valuations assume a simple pro-rata value for the minority positions in the NovoSkin and NovoWound entities. In assessing these values we have not explicitly valued all the benefits

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arising from the acquisition of the shares in NovoSkin and NovoWound as listed in the announcement to the ASX on 25 November 2015, for example:

Control over the marketing of the BTM and other NovoPore products; Improved ability to utilise tax losses carried forward from previous periods and

prospective trials and product development; and Other operating simplification benefits, both internally and in dealing with regulatory

bodies. EMCS has been advised that the carried forward losses in the PolyNovo entity are substantial (around $82m) as at 30 June 2015. PolyNovo management has advised EMCS that the structural arrangements prior to the proposed acquisition would not enable the business to offset any future NovoSkin and NovoWound taxable income against the losses held in the PolyNovo Limited entity. However the restructure allows the anticipated NovoSkin and NovoWound future taxable profits to be offset. It is therefore a potential asset that neither NovoSkin nor NovoWound could fully access unless without the restructure. As a result of the restructure these tax losses can be more effectively and efficiently utilised. This contrasts with acquiring 20% of the value of NovoSkin and NovoWounds assessed without access to the tax losses. As is apparent in the table below there is an estimated present value of the NovoSkin and NovoWound tax savings from utilisation of the tax losses in the range $6,700k to $12,000k with a mid-point estimate of $10,300k. When these benefits are taken into account in assessing the deemed issue price of the shares acquired the price now rises substantially to a range of $0.31 to $0.59 with a mid-point estimate of $0.49. The deemed issue price as a % of the VWAP is now well above 100% in all three cases.

Note: the cash component has been discounted at the term deposit rate on the funds held and invested (2.7%) for the anticipated payment.

Low Case$'000

Mid Case$'000

High Case$'000

Estimated Value of Asset Acquired 5,600$ 7,800$ 9,400$ Less Amount Acquired by Cash (Present Value) 2,477$ 2,477$ 2,477$

Estimated Value of Asset Acquired by Shares (excluding use of tax losses) 3,123$ 5,323$ 6,923$ Estimated Value of Use of Tax Losses - NovoSkin/NovoWound Income Offset 6,700$ 10,300$ 12,000$

Estimated Value of Assets Acquired by Shares 9,823$ 15,623$ 18,923$ Number of Shares to be Issued ('000) 32,000 32,000 32,000Deemed Issue Price of Shares (excluding utlisation of tax losses) 0.098$ 0.166$ 0.216$

Deemed Issue Price of Shares (including utlisation of tax losses) 0.307$ 0.488$ 0.591$ VWAP 15 days Prior To Issue of Shares 0.147$ 0.147$ 0.147$ Deemed Issue Price as % of VWAP (excluding use of tax losses) 66% 113% 147%

Deemed Issue Price as % of VWAP (including utlisation of tax losses) 209% 332% 402%

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EMCS advises that without the explicit consideration of usage of the tax losses the expected (mid-point) deemed issue price of the shares used for the acquisition of the assets is greater than 75% of the VWAP derived from 15 trading days prior to the issue of the securities for the acquisition - it is 113%. This rises to 147% in the high case but falls below the 75% requirement (66%) in the low case. Nevertheless this changes substantially when the tax losses are explicitly captured and ASX listing rule 7.1A.3 is not breached in any of the cases modelled.

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5. Structure and Activities of PolyNovo Polynovo is listed on the Australian Stock Exchange. The principal activities are associated with the development of a suite of biodegradable polymers that have potential applications across a number of therapeutic fields. In addition, Polynovo retains a financial interest in the AOD6904 peptide which is targeting osteo arthritis applications globally. The primary technology developed by PolyNovo is the NovoSorbTM technology. NovoSorbTM is a family of proprietary medical grade polymers that can be used to manufacture medical devices designed to support tissue repair and then degrade in a defined fashion in-situ to harmless by-products. PolyNovo is able to manufacture NovoSorbTM polymer devices with a range of mechanical properties and flexible degradation times from months to years that are suitable for many different medical applications.4 The technology has been employed in a number of clinical trials for the treatment of burns and further trials are underway. The trials are being undertaken to satisfy European Union, USA and Australian regulatory requirements. In addition, it has recently been awarded a Biomedical Advanced Research Development Authority [“BARDA”] contract to fund trials in the USA. At this time, PolyNovo does not have a well-defined revenue stream. PolyNovo has recently restructured. The restructure involved the sale of its interest in the AOD9604 peptide Intellectual Property to Lateral Pharma Pty Ltd (settled on 7 May 2015). The settlement afforded PolyNovo with a financial interest in the future sales of the product through a licence and royalty arrangement (detailed later). The AOD9604 peptide Intellectual Property was the major asset of a subsidiary of Metabolic Pharmaceuticals Pty Ltd consequently the subsidiary has no current source of income or value for the purpose of this report. The key structure of the Group is presented in Figure 1 below with details of each component summarised in Table 2 prior to undertaking the acquisition. There are four key entities in the PolyNovo Group. These are PolyNovo Limited which owns 100% of PolyNovo Biomaterials Pty Ltd which, in turn, owns 80% of the equity in NovoSkin Pty Ltd and NovoWound Pty Ltd. The remaining 20% of each of the entities is owned by Skin Pty Ltd. Skin Pty Ltd, in turn, is equally owned by Associate Professor John Greenwood and Mr Julian Burton.

4 Sourced from 2014 annual report

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FIGURE 1: KEY BUSINESSES IN THE POLYNOVO GROUP

EMCS notes that the proposed transaction involves the acquisition of a Trust entity wholly owned by The Skin Unit Trust which is wholly owned by Associate Professor John Greenwood and Mr Julian Burton. The entity listed above, Skin Pty Ltd, is the corporate trustee of The Skin Unit Trust. EMCS understands from PolyNovo management representations that The Skin Unit Trust has no other assets beyond the shares in NovoSkin or NovoWound and has no liabilities.

PolyNovo Ltd

PolyNovo Biomaterials Pty Ltd

NovoSkin Pty Ltd NovoWound Pty Ltd

Skin Pty Ltd

100%

80%80%

20%20%

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TABLE 3: CURRENT STAFFING & KEY ACTIVITIES OF MEMBERS OF THE POLYNOVO GROUP

Entity Key Activities

PolyNovo Limited 1. Employs PolyNovo Directors (excluding CEO) 2. Owns royalty flow entitlements from AOD9604 3. Undertakes some Corporate activities and costs e.g. ASX compliance

PolyNovo Biomaterials Pty Ltd

1. Employs executives and staff 2. Holds patents and all other IP for the NovoSorbTM technology 3. Conducts manufacturing operations and (would) subsequently

transfer product to the NovoSkin Pty Ltd entity for sales through global distributors

4. Manages all regulatory (and approval) activities 5. Undertakes marketing and other promotion activities 6. Manages ongoing R&D activities 7. Manages all grant applications 8. Engages third parties providing professional support 9. Manages corporate facilities and related corporate infrastructure 10. Will ultimately engage in sales and other commercialisation activities

generating sales and/or licensing stream revenues, incorporating:- a) Biodegradable Temporising Matrix [“BTM”] activities

incorporating skin breaches and defects b) Other therapeutic applications not incorporated above which

are currently being contemplated e.g. cosmetic / aesthetic applications

c) Future developments not incorporated in either a) or b)

NovoSkin Pty Ltd 1. NovoSkin is entitled to the free cash flows from commercialisation of BTM applications for skin breaches/defect only after recognition of costs and benefits accruing to PolyNovo Limited and PolyNovo Biomaterials e.g. sales revenues net of cost of sales and royalty income flows

NovoWound Pty Ltd 1. NovoWound is entitled to the free cash flows from commercialisation of BTM applications pertaining to intended applications for surgical wounds only after recognition of costs and benefits accruing to PolyNovo Limited and PolyNovo Biomaterials e.g. sales revenues net of cost of sales and royalty income flows

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6. Market Opportunities by Business Unit 6.1 PolyNovo Corporate Office As noted in Table 2, the Corporate Office owns royalty flow entitlements from AOD9604 and undertakes other corporate activities and incurs some costs e.g. ASX compliance. The royalty flow entitlements and potential future claims (detailed below) arose from the sale of its interest in the AOD9604 peptide Intellectual Property to Lateral Pharma Pty Ltd. The terms of the sale included:5

Possible licencing revenues which include 15% of Lateral’s revenues in the form of upfront payments, milestone payments and other licencing payments;

Royalties of 3.5% of Lateral’s sales of AOD9604 manufactured, marketed and distributed products;

Upon any future IPO by the purchaser, PolyNovo’s interest may convert, at the option of either PolyNovo or the Purchaser, into securities in the IPO at valuation: or upon full trade sale PolyNovo is to be paid 20% of the consideration received by the Purchaser less deduction for all expenses incurred by the Purchaser in its development, protection and commercialisation of the AOD assets to the date of sale, subject to a minimum payment of at least 15% of the consideration.

6.2 PolyNovo Biomaterials Pty Ltd There are a number of potential markets for NovoSorbTM BTM. The product works by stabilising a surgical skin wound and permitting a skin graft or cell growth to occur and the subsequent degradation of the product when the issue being treated repairs. In addition, the NovoSorb platform has potential for production in forms including fibre, sheet/film and prefabricated solids. As at 25 November 2015, the potential applications for the NovoSorb technology include applications for:

NovoPore; Burns (full thickness); Surgical Wounds; Breast Reconstruction; Breast Implant Coatings; Hernia; Bone Void Filler and Fracture Fixation; and Bladder Slings.

5 Extracted from a statement released to the ASX dated 30 April 2015

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Of these, the applications for surgical wounds are the closest to generating revenues (estimated market release in 2016). Applications for treating full thickness burns are the next anticipated revenue generators subject to satisfactory completion of trials in Europe and the USA (via the BARDA-funded trials).

6.3 NovoSkin Pty Ltd EMCS understands that the NovoSkin Pty Ltd entity was established to facilitate research and development collaboration with third parties, with a specific focus on the therapeutics applications for surgical wounds and burns. NovoSkin is funded by PolyNovo Biomaterials; it incurs expenses for some staff and costs associated with trials for the wounds and burns applications. In the immediate term, costs for the CE Mark trials and associated staff are anticipated to be material at approximately $2.2m p.a. Costs associated with the BARDA trials will be fully reimbursed. EMCS also understands that NovoSkin Pty Ltd does not hold any title to intellectual property or other contractual entitlements. 6.3.1 Cash Flow Sources

Once the surgical wounds and burns applications are released to the market, the existing contractual arrangements entitle NovoSkin to market the finished product manufactured by PolyNovo Biomaterials to PolyNovo’s distribution partners. This arrangement will give rise to revenue streams for Novoskin including:

A markup on the pass through of the finished product A share of royalty receipts from the distribution partners

The above revenue streams are the main driver of the cash flows incorporated in the valuation of the NovoSkin entity. 6.3.2 Financial Position as at Valuation Date

As at the valuation date, NovoSkin has negative net assets totalling around $1.3m. The majority of the negative net asset position pertains to an intercompany loan representing funding for direct costs from PolyNovo Biomaterials over a number of years.

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6.4 NovoWound Pty Ltd EMCS understands that the NovoWound Pty Ltd entity was established solely for the purpose of complying with R&D funding requirements. The entity does not trade and is reported on a consolidated basis with NovoSkin Pty Ltd for management purposes. Accordingly it is anticipated that all sales of BTM products would be effected through the NovoSkin entity. 6.4.1 Financial Position as at Valuation Date

As at the valuation date, NovoWound has an immaterial net equity position. EMCS also understands that NovoWound Pty Ltd does not hold any title to intellectual property or other contractual entitlements.

6.5 NovoSkin and NovoWound Valuation Treatment As the external shareholders of NovoSkin and NovoWound hold an equal proportion in both entities, it is not necessary to either allocate value from the wounds and burns applications to each entity; these entities can be grouped for valuation purposes. Accordingly, it is not necessary to differentiate/allocate the intercompany loan across the entities.

7. Valuation Approach EMCS has prepared the valuation on a probability-weighted discounted cash flow approach. Each application is segmented into phased and timed, major commercialisation milestones e.g. technical development, regulatory approvals, commercialisation partner finalisation. The cumulative probability is applied to the corresponding cash flow forecasts to derive the probability-weighted cash flows. As anticipated, the earlier in the commercialisation cycle a given stage is at, the lower the cumulative probability of success will be. Accordingly, the probability weighted cash flows and resultant value are lower for earlier stage applications all other assumptions being equal. Assumptions that led the cash flow forecasts have been provided by PolyNovo management. EMCS has provided sanity/commercial checks on certain data as it pertains to commercial/benchmark returns for the licensor and licensee parties. The following summary points outline the key parameters guiding the preparation of the valuation which are consistent across the constituent parts of the valuation.

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7.1 Market Applications The core polymer technology has applications in various therapeutic areas. The selection of the most prospective applications has been made by the PolyNovo CEO, having regard to the assessment of technical, regulatory and commercial probabilities of succeeding, together with the attractiveness of the overall market i.e. size and trends. EMCS notes the critical issue that several commercial discussions with distribution partners are in progress as at the report date. Accordingly, there are several key assumptions that cannot be disclosed in this report due to the material risk of prejudicing the potential commercial outcomes of the current discussions. Appendix 1 sets out the key assumption highlights for each application incorporated in the valuation analysis.

7.2 Assessment of Key Market Dynamics and Major Participants The market dynamics pertain to the anticipated end user channels to markets e.g. public hospitals, private clinics etc. Major participants are existing medical device manufacturers and distributors. The above elements guide the potential market sizing and inform the approximate market shares enjoyed by the major participants.

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7.3 Definition of Key Milestones The key milestones are generic in nature and each application has been assessed against this framework. The generic milestones include:-

1. Design; 2. Prototype Development; 3. Commercial Partner Selection; 4. Regulatory Approval; 5. Market Release.

The key milestones are given estimated dates and this results in a phasing of projected milestones leading to a market release.

7.4 Success Probabilities Success probabilities have been assigned to each milestone based on an assessment by the CEO. The cumulative probability of success represents the sum (multiplication) of each milestone leading up to any given stage. The cumulative probabilities for the core technology applications range from 22% to 85% depending on the development phase/status.

7.5 Commercialisation Pathway The commercialisation pathway pertains to the anticipated route to market for PolyNovo. Key aspects of the pathway include:

1. Research and Development – undertaken by PolyNovo, or jointly with a commercial partner;

2. Manufacturing – undertaken by PolyNovo or licensed to commercial partners; and 3. Distribution – sold directly by PolyNovo (through the NovoSkin entity for BTM applications)

or licensed to commercial partners;

7.6 Cash Flow Forecasts Detailed cash flow forecasts were prepared for each application (refer to NovoSorb Technology applications and AOD6904) based on PolyNovo management key assumptions. The cash flow outputs were estimated for each application by EMCS based on the key assumptions provided. The commercial outputs were reviewed by EMCS for reasonableness relative to existing market participants.

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The detailed calculations underpinning these assumptions have not been provided in this report due to their commercial in confidence nature. EMCS has had particular regard to the commercial negotiations currently in progress between PolyNovo and key commercial partners. There are however high level assumptions provided in Appendix 1 that provide some general guidance as the value driver parameters. The key elements of the cash flow forecasts prepared are set out in the table below:

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TABLE 4 – CASH FLOW ANALYSIS – KEY ISSUES ADDRESSED BY APPLICATION

Key Assumption Cross Checks

1. Market Overview o Market Needs/Focus o Geographic Markets Pursued o Market Sales Channels

2. Commercialisation Status

o Commercialisation Phases and Notes o Success Probabilities per Milestone

3. Cash Flow Forecasts (December 2015 to June 2035)

The cash flow forecasts were estimated from first principles have regard to express variables as follows: o Estimated Market Size o Addressable Market (sub market analysis) o Market Share (annual profile) o Units Sold o Selling Prices (annual profile) o Revenues – Licensee, NovoSkin and PolyNovo o Licensee Trading Margins and Profits (after all costs) o Product Manufacture Costs o Product Refinement (ongoing development) o Other Operating Costs o Capital Expenditure (incorporating existing plant capacity)

4. High Level Value Indicators

o Low, Mid and High value scenarios – market take up scenarios +/- 10%

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7.7 Reasonableness of Output Review Forecast cash flows for each application were assessed for reasonableness having regard to the following: TABLE 5 – OUTPUT REVIEW – REASONABLENESS CHECKS

Key Assumption Cross Checks

1. Revenues o Market share estimates (including maximums) enjoyed by existing market participants

o Selling prices per unit have been estimated having regard to existing product prices

2. Royalty Rates o Royalty Rate estimates were cross checked against share of EBITDA between PolyNovo/NovoSkin and the licensee

3. Licensee Returns o Benchmark estimate for pre-tax IRR performance has been adopted for licensees

8. Macro Valuation Assumptions The key macro valuation assumptions are set out in the table below: TABLE 6 – MACRO VALUATION ASSUMPTIONS

Key Assumption Notes

Exchange Rates – USD|AUD

2. All market data was forecast in USD 3. Conversion to/from USD to AUD based on prevailing spot and forward

rates as at 25 November 2015 as sourced from S&P Capital IQ as follows:

o Spot - $0.724 o June 2016 - $0.696 o June 2017 - $0.714 o Thereafter - $0.745

Discount Rate 1. EMCS has applied a post-tax cost of equity of 15% (mid-point estimate) to the probability weighted cash flows6

2. The operations are assumed to be fully equity funded

6 While there is a large variation in possible cash flows for the business, we have recognized these risks as being specific rather than systematic risks. These specific risks have been catered for by developing possible cash flow outcome scenarios, then recognizing the risk by applying probabilities to the outcomes. The discount rate reflects risks induced by movement in overall market conditions rather than the high risks of yet market unproven products and services. We have allowed for the small firm effect / liquidity risk through the beta and a specific recognition of higher required rate of return based on US data which captures both these effects.

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Key Assumption Notes

3. The discount rate is based on the following elements: a. Risk free rate – 2.9% (Australian Commonwealth Government Bond

Yield - 10 Year – 5 day average prior to 25 November 2015) b. MRP –7.0% c. Equity Beta – 0.8 to 1.1 (selected beta 1.0) d. Liquidity Premium – 5.0 % e. Mid-point Cost of Equity – 15.0% (Rounded)

Income Tax 1. PolyNovo currently holds significant carried forward tax losses 2. As at the valuation date, the carried forward losses were as follows:

a. PolyNovo Limited - $67.8m b. PolyNovo Biomaterials - $14.1m c. Novoskin - $0.5m

3. The income tax assumption applied to the probability weighted taxable income is dependent upon the entity in which the cash flows are attributed. The majority of tax losses are held in the head entity, which has only relatively minor cash flows (AOD6904 product)

4. Accordingly, the majority of taxable income is taxed at the standard corporate tax rate. This includes the NovoSkin and Biomaterials entities

Forecast Horizon 1. The forecast horizon is to December 2015 to June 2035 2. There are no assumed residual/ongoing value assumptions

Access to Funding 1. The forecast cash flows suggest that there are sufficient funds available to PolyNovo until June 2017 following the recent placement7

2. The Share Purchase Plan is anticipated to raise up to $3m which would further extend the cash balances available beyond June 2017

3. The forecast revenues generated from the anticipated market launch of the BTM Wounds application (late 2016) is anticipated to provide adequate cash inflows from this point to underpin subsequent market release initiatives

7 See page 22, ASX Release 25 November 2015, Investor Presentation

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9. Sum of the Parts Valuation Summary The table below summarises the PolyNovo SOP valuation estimate and the estimated value of the 20% holding of NovoSkin and NovoWound (labelled BTM). The estimate incorporates low, mid and high scenarios which reflect changes to market share assumptions for the projected trading businesses and flow on associated impacts for distributor margins and licensor (PNV) royalty income. The SOP valuation range (rounded) is $5.6m to $9.4m, with a mid-point value of $7.8m. This value range is net of the debt outstanding to PolyNovo Biomaterials of $300k and does not include the value of any access to carried forward losses for tax purposes. EMCS’ preferred value is the mid-point value of $7.8m. TABLE 7 – VALUATION SUMMARY

The valuation assumes a simple pro-rata value for the minority positions in the NovoSkin and NovoWound entities. In assessing this value we have not explicitly valued all the benefits arising from the acquisition of the shares in NovoSkin and NovoWound as listed in the announcement to the ASX on 25 November 2015, for example:

Control over the marketing of the BTM and other NovoPore products; Improved ability to utilise tax losses carried forward from previous periods and

prospective trials and product development; and

PolyNovo LimitedSum of the Parts Valuation As at 25 November 2015A$m

Low High Mid Low High Mid

BTM ProductsNovoSkin & NovoWound Entities 23.7 38.9 32.1 5.9 9.7 8.1PolyNovo Biomaterials 70.1 75.6 72.8

Sub Total BTM 93.8 114.5 104.9Other Biomaterials Products 7.0 10.3 8.4AOD6904 - Osteo Arthritis Licence 1.0 1.2 1.1

Sub Total PNV Product Applications 101.8 126.0 114.4Total General R&D and Corporate Costs -34.0 -46.0 -40.0

Sub Total PNV Enterprise Value 67.8 80.0 74.4

Add Equity Adjustments

Intercompany Loan 0.3 0.3 0.3 -0.3 -0.3 -0.3Surplus Assets 2.5 2.5 2.5

Total Equity Adjustments 2.8 2.8 2.8 -0.3 -0.3 -0.3

Total PolyNovo Limited Equity Value - SOP 70.6 82.8 77.2 5.6 9.4 7.8

Source: EMCS Analysis

PNV Limited Shareholdings Minorities - 20%

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Other operating simplification benefits, both internally and in dealing with regulatory bodies.

Consequently our deemed issue price underestimates the value of the asset acquired for PNV Limited Shareholders following the quantification of the above benefits.

9.1 Valuation Cross Check EMCS considers the most relevant cross check in its estimation of the valuation of the NovoSkin and NovoWound entities pertains to the relationship between the estimated SOP value of the PolyNovo entity relative to:

Observed market capitalisation ranges; and The pro rata equity value from the recent placement of 63m shares to institutional

investors. This relationship is pertinent given PolyNovo is the majority equity owner (80%) of NovoSkin and NovoWound. Accordingly, it is reasonable to infer a pro-rata ownership of the NovoSkin and NovoWound position together with the cumulative value estimate for the remainder of the PolyNovo entities. The intercompany relationships between NovoSkin/NovoWound and the PolyNovo Biomaterials operations (e.g. sales of goods through the NovoSkin entity) for which 80% of the trading margin is assumed by PolyNovo shareholders results in a very close relationship between the value of these entities relative to the PolyNovo consolidated entity. Consequently, the EMCS SOP valuation for ownership claims attributable to PolyNovo shareholders can be cross-checked to the observed PolyNovo market capitalisation. The table on the following page sets out the comparison of the EMCS SOP value estimate range ($70.6m to $82.8m) relative to the observed market capitalisation ($67.6m to $72.4m) incorporating the recent share placement. The SOP range is above the observed market capitalisation by 4% to 14%, for the low to high ranges respectively. The preferred mid-point estimate SOP valuation is within a 10% tolerance to observed market capitalisation. This relatively tight tolerance suggests the EMCS SOP, as at the valuation date of 25 November, is broadly consistent with the observed market value.

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TABLE 8 – VALUATION CROSS CHECK – MARKET CAPITALISATION

PolyNovo LimitedSum of the Parts Valuation - Market Capitalisation Cross CheckAs at 25 November 2015A$m

Low High Mid

PolyNovo Limited Market Capitalisation Range * 67.6 72.4 70.0

PolyNovo Limited Equity Value - EMCS SOP 70.6 82.8 77.2

SOP (Deficit)/Surplus to Market Capitalisation 3.0 10.4 7.2

% Variance to Market Capitalisation Range 4% 14% 10%

* Market Capitalisation observed post issue of placement shares to institional investorson 2 December 2015

Source: EMCS Analysis

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9.1.1 Valuation Cross Check to Recent Sales

The recent placement to institutional investors (see ASX Announcement 25 November 2015) provides a valid market value cross check for the EMCS SOP Valuation. Approximately 62.8m shares (around 14.95% of the issued capital) were issued for a total consideration of $8.5m, equating to approximately $0.135 per share. The placement was transacted at a 15.6% discount to the prevailing share price the cross check adjusts for this discount. The table on the following page sets out the comparison of the EMCS SOP value estimate range ($70.6m to $82.8m) relative to the implied market value of $75.4m from the recent share placement. The SOP range is above the implied market value by 2% to 10%, for the mid and high ranges respectively. The SOP low range is below the implied market value by 6%. This relatively tight tolerance suggests the EMCS SOP, as at the valuation date of 25 November, is broadly consistent with the recent sale, particularly for the low to mid-point values. TABLE 9 – VALUATION CROSS CHECK – RECENT SALES

PolyNovo LimitedSum of the Parts Valuation - Recent Sales Cross CheckAs at 25 November 2015A$m

Low High Mid

Instutional Placement - Announced 25 November 2015

Shares Issued - 62,776,413 @ $0.135 8.5 8.5 8.5

Add Discount Offered at 15.6% 1.3 1.3 1.3

Adjusted Market Value of Placement 9.8 9.8 9.8

Pro rata 100% Value - Post Placement % Issued - 13% 75.4 75.4 75.4

PolyNovo Limited Equity Value - EMCS SOP 70.6 82.8 77.2

SOP (Deficit)/Surplus to Recent Sales -4.8 7.4 1.8

% Variance to Recent Sales -6% 10% 2%

* Market Capitalisation observed post issue of placement shares to institional investorson 2 December 2015

Source: PolyNovo Management, EMCS AnalysisFor

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Appendix 1: Key Application Assumptions The table on the following page the key assumption highlights for each application incorporated in the valuation analysis.

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APPENDIX 1 – KEY APPLICATION ASSUMPTIONS

Application Market Est. Market Size (Global)

Planned Commercial Pathway

Current Status Est Launch

Year

Market Share (Peak)

Time to Peak Mkt Share

Cumulative Probability

BTM – Surgical Wounds New dermis repair following surgical procedures

US$800m PNV to manufacture and license distribution

FDA 510 (K) Pending 2016 5.0% 10 Years

85%

BTM – Wounds (CE Mark – markets)

New dermis repair following full thickness burns

US$80m PNV to manufacture and license distribution

CE Trials In Progress 2017 7.0% 8 Years 73%

BTM – Wounds (FDA – markets)

New dermis repair following full thickness burns

US$80m PNV to manufacture and license distribution

BARDA Trials Commencing 2016

2022 5.0% 5 Years 73%

Hernia Repair Surgical repair of hernias US$1b PNV to license manufacture and distribution

Design refinement 2019 5.0% 8 Years 35%

Breast Sling Breast reconstruction and augmentation

US$2b PNV to license manufacture and distribution

Design refinement 2019 7.5% 12 Years 42%

3D Breast Form Breast reconstruction US$250m PNV to manufacture and license distribution

Animal Trials pending 2024 5.0% 6 Years 22%

Bone Void Filler Orthopaedic surgery US$2.3bn PNV to manufacture and license distribution

Licensee discussions in progress

2023 5.0% 3 Years 22%

Bladder Sling Incontinence and pelvic floor repair

US$1.6m PNV to license manufacture and distribution

Early design specifications

2024 10.0% 8 Years 28%

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Appendix 2: Valuation Methods

There are a number of valuation methods available with which to value a project, a business or the shares in a company. The principal methods used are:

1. Capitalisation of earnings;

2. Discounted cash flow;

3. Net realisable value of assets;

4. Market based assessments; and

5. Recent offers.

Each of these methods is appropriate in certain circumstances. The decision as to which method to utilise generally depends upon the method most commonly adopted in valuing the asset in question and the availability of appropriate information.

Capitalisation of earnings The capitalisation of earnings method involves capitalising the earnings of a project, a business or a company at an appropriate multiple, which reflects the risks underlying the earnings together with growth prospects. This method requires consideration of the following factors:

1. Estimation of future maintainable earnings having regard to historical and forecast operating results, abnormal or non-recurring items of income and expenditure and other factors. Future maintainable earnings is generally based on net profit after tax, EBIT, EBITA or EBITDA;

2. Determination of an appropriate earnings multiple reflecting the risks inherent in the business, growth prospects and other factors;

3. Earnings multiples applied to net profit after tax are known as price earnings multiples and are commonly used in relation to listed public companies. Earnings multiples applied to EBIT, EBITA or EBITDA are known, respectively, as EBIT, EBITA or EBITDA multiples, and are commonly used in respect of companies comprising a number of businesses where debt cannot be precisely allocated or in acquisition scenarios where the purchaser is likely to control gearing;

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4. Adjustment for financial debt, in the event maintainable earnings are based on EBIT, EBITA or EBITDA; and

5. Assessment of any surplus assets and liabilities, being those which are not essential to the generation of the future maintainable earnings.

This method is appropriate where a company or business is expected to generate a relatively stable record of earnings.

Discounted cash flow The discounted cash flow method involves calculating the net present value of cash flows that are expected to be derived from future activities. The forecast cash flows are discounted by a discount rate that reflects the time value of money and the risk inherent in cash flows. This method is particularly appropriate in valuing projects, businesses and companies that are in a start-up phase such as PolyNovo and are expecting considerable volatility and/or growth in earnings during the growth phase, as well as businesses with a finite life (such as oil and gas fields). The utilisation of this method generally requires management to be able to provide long term cash flows for the subject company, asset or business.

Net realisable value of assets The net realisable value of assets method involves the determination of the net realisable value of the assets of a business or company, assuming an orderly realisation of those assets. This value includes a discount to allow for the time value of money and for reasonable costs of undertaking the realisation. It is not a valuation on the basis of a forced sale, where assets may be sold at values materially different to their fair market value. This method is appropriate where a project, a business or company is not making an adequate return on its assets or where there are surplus non-operational assets.

Market based assessments Market based assessments relate to the valuation of companies, the shares of which are traded on a stock exchange. While the relevant share price could, prima facie, constitute the market value of the shares, such market prices usually reflect the prices paid for small parcels of shares and as such do not include a control premium relevant to a significant parcel of shares. F

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An alternative market based assessment is the “merged and acquired company method”8, which is based on the observed prices at which entire companies or operating units of companies or significant interests in companies have changed hands. This approach is most useful when there are no observable day-to-day trading prices of relevant, comparable securities. It is, however, often harder to find data on mergers and acquisitions.

The key principles to observe when applying the merged and acquired company method include:

1. Identify companies which are reasonably comparable;

2. Consider transactions over a fairly long time; and

3. Relate transaction prices to financial fundamentals that affect the value.

Recent offers Where a recent genuine offer has been made for a company, business unit or asset, that offer may be used as a basis for valuation of the company, business unit or asset.

8 Pratt, S. “Valuing a Business”. McGraw-Hill. 5th Edition 2008. Chapter 12

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Appendix 3: Sources of Key Information Information Source

1. Technology Applications o Polynovo Strategy Paper – 2015 o PolyNovo Investor Presentations – September &

November 2015 o Management updates December 2015

2. PolyNovo Corporate Actions o Various ASX Announcements – September to November 2015

3. Market Estimates o Polynovo Management

4. Income Tax Losses Carried Forward o Polynovo Management

5. AOD6904 Applications & Forecast o David Kenley

6. Exchange Rates o S&P Capital IQ

7. Application Market Background Data o Various – including web searches

8. Market Participants Financials including sales, gross margins and EBITDA

o S&P Capital IQ

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Appendix 4: Volume Weighted Average Price

Date Close Price Volume Trading Days Prior to 21/12/15

Trading Value $

01-12-15 0.150$ 1,052,659 15 157,899 02-12-15 0.150$ 1,015,592 14 152,339 03-12-15 0.140$ 785,195 13 109,927 04-12-15 0.150$ 702,976 12 105,446 07-12-15 0.145$ 630,293 11 91,392 08-12-15 0.140$ 2,325,868 10 325,622 09-12-15 0.140$ 584,845 9 81,878 10-12-15 0.140$ 131,696 8 18,437 11-12-15 0.140$ 179,047 7 25,067 14-12-15 0.150$ 1,055,708 6 158,356 15-12-15 0.150$ 261,394 5 39,209 16-12-15 0.160$ 194,743 4 31,159 17-12-15 0.160$ 258,563 3 41,370 18-12-15 0.160$ 332,741 2 53,239 21-12-15 0.170$ 422,970 1 71,905

Total 0.147$ 9,934,290 1,463,245

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Appendix 5: Assessment of Cost of Capital

PolyNovo currently has no debt and it is anticipated that this will be the case in the foreseeable future. Consequently EMCS has used a cost of equity to discount the estimated future unlevered cash flows to a present value. In this regard the cost of equity can be viewed as an unlevered cost of capital. We estimates the nominal cost of equity for PolyNovo to be in the range 14% - 16% with a mid-point estimate of 15%. The lack of an explicit / observable cost of equity means that its estimation requires a model capturing the opportunity cost. The current paradigm for estimating the cost of equity is the Capital Asset Pricing Model (“CAPM”). It is the most widely used model for estimating the cost of equity. Although it does not fully describe security returns, there is not an alternative model that does better. Under the simplest version of this model, investors act as if they hold a well-diversified portfolio comprising some mix of a risk free and a risky portfolio viz. the market portfolio. Consequently the risk of a project / company is its impact of its inclusion on the risk of the well diversified risk portfolio – the ‘market’ portfolio. An important outcome of this model is that the risk of an investment / company / project is covariance with the market related not variation of cash flows in their own right. Alternatively stated, the total risk of a company is not the relevant risk from an investor’s perspective – it is the sub element called systematic risk – the component that contributes to overall market risk that matters for valuing businesses. This systematic risk is assessed as “beta”. It is a forward looking concept but is generally estimated by reference to how historical returns for the company and / or comparables have moved relative to market movements. Estimation of beta by this process can be imprecise and may require judgment to refine historical estimates. The cost of equity according to the CAPM is: re = rf + MRP * e (3) where

re is the estimated expected cost of equity rf is the risk free rate MRP is an expected market risk premium

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e is the beta or risk of the equity of a company relative to the market Estimation of each of these inputs is discussed below. Risk Free Rate

The nominal risk free rate selected is the yield on 10 year maturing Commonwealth Government Securities. This was an average of yields in the 5 trading days prior to the 25th November 2015. An average was used simply to ‘smooth’ daily fluctuations. The outcome was 2.91%. The best estimate of a risk free rate is the yield a government security. Observed yields for traded securities are unbiased forward looking rates Most of the market risk premium research undertaken in Australia has used the yield on a 10 year government bond as the proxy for the risk free rate to deduct from observed market returns for assessing the MRP. Further, longer term government bonds are not usually traded in Australia. Consequently the yield in 10 year Government bonds has been chosen as the proxy for the nominal risk free rate. The current yield on 10 year Government bonds is at the lower end of historical experience. This rate, in our view, represents an unbiased expectation of one year rates over the next 10 years. Consequently we do not advocate adjusting the number. The bond yield should reflect a current view of economic growth and inflation over time. Clearly both are at a low end of experience but reflect a long term (10 year) view. Market Risk Premium

The cost of equity is estimated from the CAPM. As noted the CAPM is a forward looking model – it guides an assessment of what equity investors require to compensate them for time and risk over the period of interest. Consequently all inputs need to be forward looking. Ideally, a method of forecasting investor’s expectations for the overall return on the market portfolio is required, or equivalently their required returns for the different risk class of assets, averaged over all classes to capture the market view. Unfortunately, while such models exist, they require additional assumptions about investor behaviour and models that provide reliable estimates are illusive. The forward looking MRP is probably not constant and cannot be adequately represented by a stable distribution. However, the theory as to what might cause the parameters of the distribution (and thus the mean ex-ante MRP) to change is not well developed. This makes forecasting changes difficult. In such circumstances, it is usual to rely heavily on historical data. The reason for relying on such data is that the expectations of investors will be framed on the basis of their experiences, which

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are of course historical. Therefore the mean of historical distributions of returns or models framing returns could be expected to have had the greatest influence on investors’ expectations about the future. Under these circumstances a longer time series is best as it will not only improve statistical ‘accuracy’ but also best weight events according to the likelihood of occurrence. Long term estimates of the historical market risk premium are provided in the table below. These are derived from a broad based stock market index and, in general, from the yield on a 10 year Commonwealth Government Bond. The long term historical average is generally in the range 6 – 7%. The final row signals the sensitivity of the estimate to particular years. The observed MRP in 2008 was -47%, the largest negative number in the entire period from 1883 to 2014. If this is given a 1 in 132 year weight in the period 1958 to 2014, as it is in the period 1883-2014, then the average with no imputation tax adjustment is 7% as shown in the last row of the table.

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HISTORICAL MARKET RISK PREMIUM Period Value of Imputation Credits

From To = 0 = 1

1883 2014 6.1 6.4

1958 2014 6.1 6.9

1958* 2014 6.2 7.0 Source Officer RR and SR Bishop “Market Risk Premium: Further Comments” Submission to AER, January 2009 subsequently updated. The historical average MRP is very volatile which means there is a wide band of uncertainty around the estimate. The 95% confidence interval for the period 1958 to 2014, without inclusion of imputation tax credits, is from 0.2% to 11.9% The imputation taxation system was introduced in Australia in 1987. Consequently any impact on the market return to investors will influence the historical MRP series after that date. Clearly it has a greater impact on the post 1958 time series than the post 1883 time series as is evident in the table. Surveys of market practice in Australia generally show that professional valuers generally ignore imputation tax credits and use a MRP of 6% for valuations and independent expert reports. However the data above suggest this may be too low. We have selected an MRP of 7% to represent the forward MRP which is reflective of the historical average. It also can be argued that it reflects greater risk aversion since the Global Financial Crisis [“GFC”]. Beta

We have selected the range 0.9 -1.1 to as an estimate of beta for PolyNovo with the point estimate being 1.0. The CAPM explicitly partitions the total risk of an investment in a security into its ‘contribution’ to the risk of a well-diversified portfolio (market portfolio) and into the risk that is ‘diversified away’. Under the CAPM it is the former that drives the expected return of investors and requires estimation for determining the cost of equity for a business. This is generally called ‘beta’ and it is a forward looking view of risk. However, estimation is usually based on the historical relationship using the market model (described below) which involves viewing beta as the coefficient of a regression of excess market returns (over the risk free rate) against excess returns on the stock (over the risk free rate). From a statistical perspective the more observations the more reliable is the estimate of beta however

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the longer the time period used (more observations), the more likely is a structural change in the relationship between the market and the company thus the beta may not be as contemporaneous as desirable. Our standard practice is to use 60 historical observations of stock market returns for the stock and for a market accumulation index. PolyNovo is listed on the ASX enabling a direct estimate of its beta. As noted, beta captures the relationship between the returns on equity in PolyNovo and the return on the market index. The first figure below shows the relationship between the cumulative return to an investor in PolyNovo and an investor in the market index since the beginning of 1999 to end of November 2015 on a monthly basis. CUMULATIVE RETURN FOR POLYNOVO AND THE MARKET AND RISK

It is apparent that the market price of PolyNovo has been quite volatile, especially in the period to April 2007. The second figure (on the right) breaks the volatility into the component that is a result of market movements and that due specifically to PolyNovo. It is evident that most of the volatility is specific to PolyNovo rather than due to responsiveness to market movements. This suggests that much of the risk of PolyNovo is diversifiable by investors holding a portfolio representative of the overall stock market. As a result the risk of PolyNovo investors can expected to be rewarded for (beta) will not be as high as the volatility alone suggests. The pattern of volatility in the figure on the left above implies that an estimate of beta will vary depending upon the time period chosen for its estimation. This is confirmed by the figure below which shows beta estimated on a 60 month rolling basis i.e. the first estimate uses the first 60 months of return data in the time series, the second estimates drops off the month 1 return and adds the month 61 return etc. The beta estimate varies from a minimum of 0.5 to a maximum of 2.8. Nevertheless it has been more stable since the post GFC period and this is the period paid most attention to when choosing a forward view of risk,

0

2

4

6

8

10

12

Cumulative Return

PNV All Ords

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%01

-11-

03

01-0

5-04

01-1

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1-13

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1-14

01-0

5-15

01-1

1-15

Systematic Vs Unsystematic Risk

Systematic Risk Unsystematic Risk

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BETA ESTIMATED ON A 60 MONTH ROLLING BASIS

To further inform the choice of beta, it was calculated on an evolving basis i.e. commence with an estimate using 60 observations then progressively add another month of return data until the last estimate uses all return observations. The outcome is captured in the figure below. It is apparent that the beta has evolved to be 1.1 in recent years.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

No

v-2

00

3

May

-200

4

No

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2

May

-201

3

No

v-2

01

3

May

-201

4

No

v-2

01

4

May

-201

5

No

v-2

01

5

Behaviour of Rolling 5 year Monthly Beta

Beta

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EVOLVING BETA

In selecting a beta that represents a forward view of risk we have placed most weight on the estimates derived from the post GFC period. We have selected a range of 0.8 to 1.1 as our initial range for the beta and a point estimate of 1.0. We also examined the beta of other companies operating in the pharmaceutical sector to further inform the choice of the selected range. Ideally we would examine the beta of comparable companies as a check however directly comparable ‘pure play’ companies are usually hard to find, particularly in Australia. Further, transporting beta estimated from other countries with a different market portfolio mixes, taxes and governance regimes is also problematic. Consequently beta estimates from comparables will not be precise and involve an element of informed judgment. Nevertheless we have estimated betas for companies with little or no debt in the pharmaceutical sector. Companies without debt in this sector are most likely to be comparable with the PolyNovo situation. The table below shows the estimates of beta if equity for companies in the ‘pharmaceutical’ sector that have no debt. The initial set contained 27 companies. One outlier was removed and 14 companies that had debt at some stage were removed.

0.0

0.5

1.0

1.5

2.0

2.5

No

v-2

00

3

May

-200

4

No

v-2

00

4

May

-200

5

No

v-2

00

5

May

-200

6

No

v-2

00

6

May

-200

7

No

v-2

00

7

May

-200

8

No

v-2

00

8

May

-200

9

No

v-2

00

9

May

-201

0

No

v-2

01

0

May

-201

1

No

v-2

01

1

May

-201

2

No

v-2

01

2

May

-201

3

No

v-2

01

3

May

-201

4

No

v-2

01

4

May

-201

5

No

v-2

01

5

Evolving BetaExtending the time period

Evolving Beta

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BETA OF EQUITY FOR PHARMACEUTICAL COMPANIES

We note there is considerable variation in the estimates across companies and for different time periods. We note that the estimate for PolyNovo is close to the average which provides some comfort for the selected range for PolyNovo described above.

Liquidity Premium

An established anomaly with the CAPM is that it understates the required return on small, low liquid shares.9 The table below captures US data and shows the actual return earned on portfolios of shares differing in size and liquidity using data from 1972 to 2014.10

9 See for example, Gray P & I Tutticci, “Australian Stock Market Anomalies: A Review and Re-examination of the January and Small Firm Effects”, Journal of Investment Strategy, Vol 2 No. s 2007 10 Source is Ibbotson, Chen, Kim & Hu, “Liquidity as an Investment Style” Financial Analysts Journal, May/June 2013. 2015 data update Ibbotson & Kim

ASX Code Name

Most Recent 60 Months

Entire Period

Since March 08

PNV PolyNovo Ltd 0.5 1.1 0.8ACR Acrux Ltd 0.7 1.0 1.2SPL StarPharma Ltd 0.8 1.3 1.0PBT Prana Biotechnology Ltd 0.3 0.8 0.6CUV Clinuvel Pharmaceuticals Ltd 0.1 0.8 0.6LCT Living Cell Technologies Ltd 1.2 1.6 1.4CIR Circadian Technologies Ltd 0.1 0.6 0.7MSB Mesoblast Ltd 1.1 1.0 0.8SRX Sirtex Medical Ltd 0.7 1.3 1.0NEU Neuren Pharmaceuticals Ltd 1.5 2.5 3.0POH Phosphagenics Ltd 1.1 0.8 0.7TIS Tissue Therapies Ltd 2.9 1.3 1.5

Average 0.9 1.2 1.1Median 0.8 1.1 0.9

Beta of Equity

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PORTFOLIO RETURN BY SIZE AND LIQUIDITY (US)

It is apparent that investors in small, illiquid stocks demand a higher rate of return than large liquid stocks. Since PolyNovo is relatively small (especially relative to US stocks) and illiquid, we have added a premium to the cost of capital to capture this higher expected rate of return arising from illiquidity. We have rounded the difference between the return on small and large stocks in the low liquidity group in the table above to 5%. Cost of Capital (Equity) for PolyNovo In summary our mid-point estimate of the cost of capital for PolyNovo is 15% derived from the following inputs: Risk free rate 2.9% Beta 1.0 (range 0.8 – 1.1) MRP 7% Liquidity Premium 5%

Low HighSmall 16.2% 16.5% 10.4% 0.7%

15.7% 14.6% 12.4% 6.2%14.1% 14.0% 13.0% 8.5%

Large 11.6% 12.3% 12.0% 9.2%

Liquidity

Size

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Appendix 6: Statement of Qualifications, Declarations and Consents This report has been prepared solely for the purpose of assisting PolyNovo fulfil the requirements of ASX listing rule 7.1A.3 in relation to its proposed acquisition of 20% minority interests in subsidiary companies NovoSkin Pty Ltd [“NovoSkin”] and NovoWound Pty Ltd [“NovoWound”] from entities associated with Associate Professor John Greenwood and Mr Julian Burton OAM. It is not intended that this report be used ore relied upon for any other purpose whatsoever. Education and Management Consulting Services Pty Ltd [“EMCS”] is qualified to provide this report. EMCS is an Authorised Representative of Collington Securities Pty Ltd ABN 62 166 799 828 Australian Financial Services Licence No. 450928. Prior to this engagement, EMCS has acted for PolyNovo in providing a sum-of-parts valuation as at 30 June 2015 for internal purposes only. The valuation has been updated for this report to reflect subsequent events and to conform to a standard considered suitable for the current purpose. Otherwise EMCS considers itself independent of the management of PolyNovo. The statements and opinions given in this report are given in good faith and the belief that such statements and opinions are not false or misleading. In the preparation of this report EMCS has relied upon information provided by management. It has undertaken reasonability assessments where possible to form a view as to its completeness, reliability and accurate. EMCS has no reason to believe that any information supplied to it was false or that any material information has been withheld from it. Nevertheless, EMCS does not imply and it should not be construed that it has audited or in any way verified any of the information provided to it, or that its inquiries could have verified any matter which a more extensive examination might disclose. The information we have had regard to in the preparation of this report is set out in Appendix 3 – Sources of Key Information. The valuation approach employed relies on many assumptions which lead to the cash flow forecasts under particular scenarios of success. These, in turn, are weighted by the probability of success. None of these assumptions and outcomes involve any certainty. Consequently actual events are likely to deviate from the predictions and may have a material impact of the valuation. EMCS cannot imply any certainly to the outcomes employed in the valuation. EMCS does not warrant that its enquiries have identified or verified all the matters that a formal audit or due diligence may disclose. Accordingly, this report and the opinions contained in it should be considered more in the nature of a commercial and financial review rather than a comprehensive audit or due diligence.

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This report should be read in its entirety to ensure that no isolated statements, analyses or other factors are construed out of context. The preparation of an opinion is a complex process and subject to professional judgement. Any liability to the maximum extent permitted by law, is hereby expressly disclaimed and excluded. EMCS will receive a fee not exceeding $40,000 plus GST for the preparation of this report. This fee is not contingent on the outcome of the transaction. EMCS will not receive any other benefit for the preparation of this report. EMCS does not have any other interests that could be reasonably regarded as capable of affecting its ability to provide an unbiased opinion in relation to its engagement or the transaction that is being assessed. Advanced draft of this report was provided to PolyNovo checking of material facts and assumptions. No alterations to the method or conclusions were made as a result of this process. The personnel involved in the preparation of this report are: Dr Steven Bishop, BEc (Monash), MCom (Hons), PhD (UNSW) FCPA, is an Executive Director of EMCS, has assumed overall responsibility for this report. He has over 45 years of relevant academic, commercial and advisory experience and has professional qualifications appropriate to the advice being offered. Mr. Michael Mileo, BA, MAppFin (Melbourne), FFIn, GAICD, a contractor to EMCS and long-time associate of Dr Steven Bishop, has been the primary person involved in the preparation of this report. He has over 30 years of commercial and advisory experience in areas such as accounting and providing financial/valuation advice. Michael has professional qualifications appropriate to the advice being offered. EMCS consents to the release by PolyNovo of this report to the market for the purposes of meeting the requirement of ASX listing rule 7.1A.3. Neither the whole nor any part of this report nor any reference thereto may be included in any other document without prior written consent of EMCS as to the form and context in which it appears.

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Appendix 7: Financial Services Guide Education and Management Consulting Services Pty Ltd, ABN 31 071 325 632, [“EMCS” or “we” or “us” or our as appropriate) provides general financial product advice on securities advice to retail and wholesale clients as an authorised representative of Collington Securities Pty Ltd ABN 62 166 799 828 (“CS” or “licensee”) AFSL No 450928. In the above circumstances we are required to issue a Financial Services Guide [FSG]. This FSG is designed to help retail and wholesale clients make a decision as to their use of our general security advice. This FSG includes information about: • Who we are and how we and the licensee can be contacted • The services we are authorised to provide under the licensee’s Australian Financial Services

Licence number 450928 • Remuneration that we, the licensee and any associates receive in connection with our general

advice • The licensee’s complaints handling procedures and how you may access them. The licensee has authorised this Financial Services Guide. Financial services we are authorised to provide

We hold Authorised Representative number: 001237240 authorising us to provide general security advice on behalf of the licensee. General Advice

We provide general advice, not personal advice because it has been prepared without taking into account your personal objectives, financial situation or needs. You should consider the appropriateness of this general advice having regard to your own objectives, financial situation and needs before you act on the advice. Where the advice relates to the acquisition or possible acquisition of a financial product, you should also obtain a product disclosure statement relating to the product and consider that statement before making any decision about whether to acquire the product. Benefits that we may receive

We charge fees for providing general advice. These fees will be agreed with, and paid by, the person who engages us. Fees will be agreed on either a fixed fee or time cost basis. Clients may request particulars within a reasonable time after receiving this Guide (and before any financial service is given).

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Except for the fees referred to above, neither EMCS, CS nor any of their directors, employees or related entities receive any pecuniary benefit or other benefit directly or indirectly for or in connection with the provision of financial product advice. Referrals

We do not pay commissions or provide other benefits to any person for referring customers to CS or us in connection with the advice that we are authorised to provide. Associations and relationships

CS is 50% controlled by EMCS’s professional advisory practice. Our Directors may be executive directors of CS. Complaints Resolution

Internal complaints resolution process As a holder of an Australian Financial Services Licence, CS is required to have a system for handling complaints from clients to whom it and its representatives provide financial product advice. All complaints must be in writing, addressed to: The Complaints Officer, Collington Securities Pty Ltd, Suite 2, 18 Collington Ave, Brighton, Vic 3186. When CS receives a written complaint it will record the complaint, acknowledge receipt of the complaint within 15 days and investigate the issues raised. As soon as practicable, and not more than 45 days after receiving the written complaint, it will advise the complainant in writing of its determination. Referral to External Dispute Resolution Proposed Scheme A complainant not satisfied with the outcome of the above process, or the licensee’s determination, has the right to refer the matter to the Financial Ombudsman Service Ltd [“FOS”]. FOS is an independent company that has been established to provide free advice and assistance to consumers to help in resolving complaints relating to the financial services industry. Further details about FOS are available from the FOS website www.fos.org.au or by contacting them directly at: Financial Ombudsman Service Ltd. GPO Box 3, Melbourne Victoria 3001 or Toll free 1300 78 08 08 or by facsimile (03) 9613 6399. Professional Indemnity insurance

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CS has Professional Indemnity insurance in place that covers claims in respect of current and former employees and representatives for services provided on behalf of CS.

Contact details

You may contact EMCS or Collington Securities at Suite 2, 18 Collington Ave, Brighton, Vic, 3186 or by phone 0411 195 177

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