JUST DON'T CALL IT POT

If you let your mind wander a bit, you might almost think you're
waiting in line at an upscale coffee shop. You're not, of course.

This is the Montreal lab of a Toronto-headquartered junior drug
developer called Cannasat Therapeutics Inc. But the white-coated lab
technician looks sort of like a barista, and the machine she's
operating, known as a tablet press, resembles a milk steamer.

The technician pours a few small packets of talc-like powder into a
hole in the metal base of the press.

It comes to life as she pulls on a lever, with a nearby computer
screen flashing assorted data as the press does its work. After a
moment, she lets go of the lever, and four thin tablets tumble onto an
aluminum plate, which the technician presents like a tray of hors
d'oeuvres to a pair of men standing nearby.

Cannasat CEO David Hill and Umar Syed, Cannasat's chief scientific
officer, both reach for tablets, briefly discussing where best to let
them dissolve in their mouths.

Under the tongue?

Towards the back? They decide to insert them along their gum
lines.

And in they go.

If these pills were real medications, rather than blanks containing no
active ingredients, Hill and Syed would, over the next 15 minutes,
receive a dose of a compound that shows great promise in treating
ailments ranging from neuropathic pain - caused by nerve damage
related to afflictions such as cancer, HIV and arthritis - to
psychiatric disorders including anxiety and schizophrenia. Combined,
these conditions, and related ailments, afflict 2% of the world's
population, creating a potential market worth billions of dollars if
this Toronto-based junior pharma can turn its up-and-coming science
into a blockbuster drug. But the hurdles in the pharmaceutical
industry are high, with scientific research and clinical testing
consuming millions of dollars and years of time just to reach the
point where a small firm like Cannasat can start shopping for
investment from the Pfizers and Bayers of this world to continue
research and development. And Cannasat faces barriers even more
formidable, due to the stigma surrounding the plant that has inspired
its research: cannabis sativa, aka marijuana.

It's almost as though all the studies produced over the past 20 years
supporting the use of marijuana in medicine - or more precisely its
psychoactive ingredient, tetrahydrocannabinol - had never been read or
believed.

Proudly tell the world that you're in the business of distributing
medical marijuana and that you're developing THC-based drugs - as
Cannasat did when it first went public on the TSX Venture Exchange in
2006 - and people either start cracking stoner jokes or start warning
you that you're undercutting your chances of winning regulatory approval.

"You learn your lessons the hard way," Hill says, philosophically. "If
I were to do this again today, I would have been all about the
diseases we were going after."

That might have been a good idea. Today, Cannasat's stock is stuck at
20=A2, having barely budged since an initial pop - and equally prompt
retreat - following its IPO. Even though the company has invested
almost $10 million in research and is the only firm in Canada devoted
to the development of cannabinoid drugs, it has, in recent months,
been preoccupied with scrubbing its profile of any connections to marijuana.

It has sold off its interests in cultivating and distributing medical
pot. It has pumped up its board with distinguished members of the
Canadian medical establishment, and dropped the word marijuana from
its lexicon, instead describing its research in terms of specific
molecules and chemical reactions in the brain.

More significantly, its leading drug prospect - a neuropathic pain
treatment code-named CAT 310 - technically doesn't have any marijuana
in it at all. Instead, it uses a man-made version of THC called
dronabinol, which has already been approved for use in other
pharmaceuticals. Furthermore, the company's pitch to potential
investors regarding CAT 310 focuses on its innovative delivery
mechanism (hence the pill demonstration) that Cannasat claims will
make its version of the drug easier to take and more effective, with
fewer side effects - a proven pharmaceutical repackaging strategy that
made billions for Biovail Corp. during its heyday.

For all the efforts Hill has made to dissociate Cannasat from its
marijuana roots, however, his most pressing concern comes down to
sheer survival.

Cannasat is now running out of money.

To stay alive, Hill will have to issue new equity on public markets
before the end of next year. If he can boost his firm's share price by
then - hopefully with the release of positive results from CAT 310
clinical trials scheduled to begin in January - he stands a good
chance of finding the money he needs.

If not, this could be the end of the line for Cannasat and all of
Hill's efforts to put its most acceptable face forward. "I've got one
more year to hit my home run," he says.

IN PERSON, HILL is cheerful and high-spirited. Seated at a boardroom
table in Cannasat's lab, he brims with enthusiasm as he runs through
the slide presentation he's been out showing to investors, tapping
firmly at the screen of an open laptop as he points out the most
impressive stats.

Forty billion, for instance.

That's the number of dollars up for grabs in the North American market
for pain, anxiety and mood disorders - the very markets Cannasat is
targeting with its treatments.

It's a massive opportunity, he says. Of course, with that kind of
money on the table, Cannasat faces international competitors in the
field of cannabinoid drugs.

Research showing the potential for cannabis-based drugs has been
trickling into pharmaceutical labs since the 1980s, and the scientific
community has long been convinced of their usefulness as
pain-relievers and appetite stimulants. Meanwhile, industry experts
say that major pharmaceutical firms such as Bayer and Sanofi-Aventis
have all quietly entered the space with their own cannabinoid platforms.

They're watching closely as junior companies like Cannasat and its
main competitor, U.K.-based GW Pharmaceuticals, develop the first
mainstream drugs based on cannabis derivatives or synthetic versions
of THC. For this reason, Hill may yet have time to hit his home run
and make good on the promise and optimism that was evident when Hill
and Lorne Gertner - his partner in his other business, a Toronto-based
merchant bank - founded Cannasat in early 2004. The duo came up with
their idea shortly after a series a court challenges that led to the
legalization of medical marijuana in Canada and Health Canada had
announced its decision to award an exclusive contract to Prairie Plant
Systems to grow the nation's first legal supply. Sensing an
opportunity, the duo approached Moses Znaimer - a co-founder of the
CITY TV television stations, and later the visionary behind such
specialty channels as MuchMusic - and clothing icon Joseph Mimran, one
of the founders of the Club Monaco chain. Their plan was to form a new
medical marijuana company based on a two-pronged strategy. First, they
would approach Prairie Plant Systems with an offer to buy a stake in
the firm. Then, they would use Znaimer's and Mimran's celebrity to
spread awareness of medical marijuana's availability. As the market
grew, cash that flowed to the firm from Prairie Plant would then be
funneled into marijuana-based drug development.

The first part of the plan went off without a hitch.

Znaimer and Mimran signed on, and the following summer, Prairie Plant
Systems agreed to sell Cannasat a stake in the company for $1.6 million.

Next, Cannasat raised $6.5 million from high-net-worth investors and
hired key company personnel.

But the good times would not last for much longer. Things started to
go wrong for Cannasat when it went public in April 2006, waving the
marijuana flag with gusto.

Hill ruefully recalls the company's coming-out party. Znaimer, then
company chairman, called a press conference to promote the newly
listed stock.

Reporters from all the major dailies were awestruck as the media mogul
- - with a bag of pot casually resting at his side - introduced Cannasat
and outlined its strategy of supplying medical marijuana while
developing cannabis-based drugs.

At one point during the conference, one reporter asked about
Cannasat's forthcoming product, "Does it give you a buzz?" The rest
tried not to smirk as Znaimer sternly responded, "This is not about
fun, it's about function." But his admonishment rang hollow.

After all, the man is the epitome of boomer bohemianism. Regardless of
any opinions Znaimer might have towards recreational pot use, his
public profile was hardly one people would immediately associate with
sober research.

But the press conference nevertheless served its purpose, and for a
brief moment, investors shared Cannasat's enthusiasm, quickly bidding
up the company's shares to 65=A2, more than triple their opening price.

Within days, however, the bloom had come off the rose, and Cannasat's
stock was in a severe slide.

Three weeks later, the FDA issued a brief press release claiming that,
despite years of scientific research to the contrary, there was no
medical benefit to be derived from smoking marijuana.

The general condemnation of the drug was a blow to Cannasat. Things
got worse when FDA staff began warning the company that its future as
a legitimate pharmaceutical firm could be in jeopardy so long as it
clung to its image as an all-purpose marijuana company.

By early 2007, Hill decided what would have to be done. The company
would have to start from scratch, shaking off any connection to
medical marijuana and becoming a pure-play pharmaceutical firm.
Immediately, he began to assemble a group of eminent directors to give
Cannasat the credibility it needed.

Znaimer graciously stepped down as chairman to make way for Dr. David
Pattenden, former CEO of the Ontario Medical Association. Seven months
later, Dr. Julia Levy joined the board, bringing her track record as
the founder of Vancouver-based biotech QLT Inc., maker of the hit
anti-blindness drug, Visudyne. Then, this past summer, Cannasat sold
its stake in Prairie Plant, breaking even on the deal.

BACK IN CANNASAT'S lab, chief scientific officer Umar Syed is
enthusiastically talking about CAT 310. The drug, he says, was
designed with the stigma of cannabinoid-based drugs in mind. At the
same time, he believes the company will get more mileage from the
potential of the delivery mechanism, known as "nano-encapsulation,"
which Cannasat is using under license from the Finnish university
researchers who developed it.

If CAT 310 clears its trials, its dissolving pill formulation will be
key to its ability to compete with a dronabinol drug already on the
market - an oral spray produced by GW Pharmaceuticals. So far,
reception to GW's spray has been mixed.

Patients have had a hard time with the bitter taste and tar-like
texture of the fluid and often swallow it before it has a chance to be
absorbed through the mouth.

Furthermore, the digestive process in the stomach converts the
dronabinol into a metabolite that has no analgesic properties but
still retains side effects associated with cannabinoids - dizziness,
sleepiness and the risk of paranoia.

In other words, they get high and then have to take more of the oral
spray to achieve pain relief.

By contrast, Cannasat's CAT 310 pill dissolves slowly in the mouth,
delivering the drug more efficiently to the bloodstream, says Syed,
and patients can take smaller doses, thus reducing unwanted side
effects such as intoxication. At least, in theory.

At the moment, the "nano-encapsulation" technology Cannasat uses to
make the CAT 310 tablets works too well. As the pill dissolves, it
encases the dronabinol molecules, preventing enough of them from being
absorbed.

That issue led to the failure of an earlier attempt to complete Phase
I trials for CAT 310. But Syed says that problem can be overcome with
a tweaking of the formulation in advance of CAT 310's new set of Phase
I trials.

But CAT 310 is only the first step in Cannasat's long-term
strategy.

The company has another, even bigger, project in the works - a
potential ace up its sleeve called CAT 320. The drug is based on a
molecule found in cannabis leaves called cannabidiol (CBD) - which has
none of the psychoactive properties associated with marijuana - and is
showing potential in the treatment of various mood and psychotic
disorders including schizophrenia, a huge global market.

Syed blurts out the word "gold mine" before checking
himself.

Still, he insists that the blockbuster potential of cannabidiol is no
exaggeration: "It is a complete breakthrough."

Well, maybe.

Research on CBD is still in early stages.

In 2005, German scientists reported results of a small study involving
schizophrenics, during the International Cannabinoid Research Society
conference, held in Tampa, Fla., that year. That study showed that
CBD, taken four times a day, was as effective as any of the dopamine
inhibitors currently on the market for schizophrenia - but without
side effects that include rapid weight gain and a muscle rigidity
resembling Parkinson's disease.

Since dopamine inhibitors are used to treat a variety of psychiatric
disorders, Cannasat is now rushing to replicate the German study and
reformulate CBD into a once-a-day time-release capsule, which is far
easier for mental patients to take. If the company's human trials -
scheduled to begin spring of 2009 - prove successful, CAT 320 could
ultimately compete with current dopamine drugs and take a substantial
chunk of the $15-billion market in North America. "We know we have a
winner," says Syed. "We just have to formulate it into a
once-a-day."

Other researchers, while perhaps not as enthusiastic as Syed, are at
least hopeful.

Dr. George Nomikos, a world-leading cannabinoid researcher who has
advised Cannasat in the past, says cannabidiol is an experimental
substance, and it's not clear how it works to treat schizophrenia.
"But the data that are coming in from animal experiments and human
clinical trials are extremely encouraging."

For Nomikos, a breakthrough for cannabinoid drugs doesn't hinge on the
success of individual products like CAT 310 and CAT 320. Instead, he
says it will come when scientists can develop a form of THC -
marijuana's most potent and most medically useful compound - that
people can take without getting intoxicated. That development is still
15 years off, and Nomikos says that what Cannasat is doing now -
reformulating natural compounds or known synthetics to make more
efficient drugs - is a logical step. "It makes a lot of sense," he
says. "It's a natural progression of what we know, and short-term,
this is the right thing to do, trying to take advantage of more
favourable formulations."

It's also a lower-risk proposition. According to Paradigm Capital
researcher Claude Camire, there are two factors that investors look at
in the biotech sector when determining risk: safety and efficacy.

Cannasat already has an advantage on the safety issue with is lead
drug, CAT 310. Because the key ingredient, dronabinol, has already
been approved for commercial sprays, the company will likely be able
to ask Health Canada and the FDA for fast-tracked clinical trials. "As
for efficacy," Camire adds, "we need to prove it with a number of trials."

For the time being, though, Cannasat's upcoming equity issue is the
priority.

If there's a jackpot moment in the company's future, it will come
later, perhaps within 18 months. If Cannasat gets through its Phase I
trials in the new year and can clear Phase II trials, it will be able
to approach major pharmaceutical firms for marketing deals, which will
give it the wherewithal to finance final Phase III trials.

Any deal will launch Cannasat's stock skyward.

Since it is working with well-known molecules, there is the risk of
competition if Cannasat is cleared to launch its lead drug. In Canada,
for instance, Bayer already distributes Sativex, the oral spray
produced by Cannasat's rival GW Pharmaceuticals, which has a big head
start thanks to the unwavering support it has enjoyed from the British
government since being founded in 1997. But Syed isn't fazed - because
of the limitations of oral sprays, he says that formulations like
Sativex can never have the "same potential efficacy of our lead
product, CAT 310." Camire echoes that sentiment: "Cannasat's key
advantage is their formulation." In any event, Camire says there's
plenty of room in the pharma space for cannabis-based drugs. "Look at
breast cancer. There are probably 10 drugs approved for that. If both
companies come up with differing products, they'll most likely be able
to sell both."

Cannasat's last remaining hurdle is the one they've already worked
hard to overcome: the market's reluctance to invest in cannabis-based
drugs.

It may seem trivial, but Cannasat's survival will depend on support
from fund managers, and Hill says the company has to do more to
convince them that its products will be accepted by regulators. After
all, similar drugs have already been approved.

Still, Cannasat has come a long way, and Hill has faced a steep
learning curve.

He's spent the past four years turning an idea generated by
entrepreneurs with no science background into a legitimate
pharmaceutical firm. Over that period, he's raised $10 million in
dribs and drabs.

But that will all change if Cannasat can secure a deal with a major
pharma firm.

When that happens, the industry and market will take notice, and Hill
dreams of a day when he'll be able to raise $20 million with just a
few phone calls in an afternoon. "We've stumbled onto something that
has huge potential," he says. "A lot of people have said we're like
the little engine that could.

We just keep motoring along, and I think we all believe that if we
just keep our heads down, we'll get to that point."