Ernest W. Andberg, CFA [email protected]

(612) 492-8836

Specialty Pharmaceuticals Orphan Medical, Inc. (ORPH - $9.70) January 21, 2003 Initiating Coverage – Aggressive Growth STRONG BUY

Financial Summary Key Points: S Rev (mil) 2001 2002E 2003E Initiating coverage with a STRONG BUY recommendation and a 9-12 month price target of $22.50. Mar $2.3 $3.7A $4.0 S Key drug launch underway – Xyrem® was approved by the FDA in July 2002 and Jun $2.4 $3.5A $6.0 Sep $2.9 $4.2A $7.5 launched in early October. The drug is the only currently approved treatment for Dec $3.6 $4.5 $8.5 cataplexy, a debilitating disease that has an immediate market potential approaching $125 million in the U. S.

FY $11.3 $15.9 $26.0 S Existing product portfolio continues to show surprising strength with growth of P/Sales 8.9x 6.3x 3.9x nearly 40% in fiscal 2002. S EPS 2001 2002 2003E High Gross Margin Model – We expect Orphan to generate gross margins in the mid 85% range, or higher. Mar ($0.19) ($0.11) ($0.44) S Jun ($0.23) ($0.16) ($0.30) Tax Sheltered Earnings – Tax loss carry forwards should shelter earnings over the Sep ($0.24) ($0.42) ($0.19) next four to five years. Dec ($0.14) ($0.42) ($0.11) S Favorable risk reward ratio – In our opinion, the approval of Xyrem has significantly

FY ($0.80) ($1.11) ($1.03) reduced the risk of current investments in Orphan’s shares while the upside potential P/E nm nm nm remains substantial. Investment Recommendation: Orphan Medical, Inc. is an emerging specialty pharmaceutical company on the verge of a Price: $9.70 significant expansion of revenues due to the FDA approval and commercial introduction of 52-Week Range: $15.00-5.95 Xyrem. Xyrem is the only approved treatment for cataplexy, a debilitating disease that has a Target: $22.50 market potential approaching $125 million in the U. S. In our opinion, Xyrem will help push Rating: STRONG BUY revenues from approximately $16 million in fiscal 2002 to between $65 to $70 million in fiscal 2005 and produce a rapidly growing, profitable bottom line beginning in the 2004 time Shares Outstanding: 10.4 mil frame. Float: 10.0 mil Mrk. Capitalization: $101 mil Ave. Volume: 35,000 At the current time, we continue to believe that the market is undervaluing the existing Instit. Ownership: 33% portfolio of drugs and the very real upside potential of Xyrem. Assuming our revenue and BV / Share $1.18 earnings estimates for fiscal 2003 through 2005 are reasonable, we believe the shares have Debt / Tot. Cap.: 0% upside potential into the $20- $25 range over the next twelve months. Our target price Est. LT EPS Growth: 50% assumes a terminal multiple of forty times our fiscal 2005 tax adjusted earnings per share Exp. Next Rpt. Date: 1/30/03 discounted at 25% plus a discounted value of the tax loss carryforwards. We are initiating coverage of the stock with a STRONG BUY rating for aggressive investors.

Company Description

Orphan Medical acquires, develops, and markets pharmaceuticals of high medical value for inadequately treated and uncommon diseases. The Company serves three therapeutic areas that are characterized by well-defined patient populations and served by physician specialists: antidotes,

oncology support and sleep disorders. Source: Reuters.

Feltl and Company Research Department. Please see important disclosures at end of report. 120 South Sixth Street, Suite 2600 Minneapolis, MN 55402 1-866-655-3431

Investment Overview Orphan Medical is an emerging, specialty pharmaceutical company focused on developing and marketing treatments for uncommon or inadequately treated diseases. The Company was originally established as a division of Chronimed, Inc. to explore and commercialize orphan drugs as defined in the Act of 1983. This Act provides incentives to companies to develop and market drugs for diseases or conditions that are known to affect fewer than 200,000 people in the United States. The Company became a publicly traded entity when it was spun out of Chronimed in 1994.

Today, Orphan’s efforts are targeted at three principal, therapeutic areas; oncology support, antidotes and sleep disorders. Each of these is characterized by a well-defined patient population and treated by an easily identified group of medical specialists. Orphan believes this focus allows a targeted marketing approach that makes a large sales force unnecessary because efforts can be focused on a limited number of medical specialists or patients. Orphan currently has six FDA approved drugs in the market. These include Busulfex® Injection, Antizol® Injection, Sucraid® oral solution, Cystadane®, Elliots B® Solution and Xyrem® () oral solution.

For all intents and purposes, Orphan looks like a virtual drug company. While the Company has a dedicated sales force to market it products, it conducts no in-house clinical research, and does no manufacturing or distribution. The Company does not conduct basic research and does not attempt to discover new drugs. To expand the pipeline, the Company normally seeks to acquire products that are already in Phase II or Phase III clinical trials, or in an earlier stage with proof of concept established. Clinical research is managed by in-house staff, but contracted out to independent research organizations. Manufacturing is likewise contracted out to third party contract manufacturers and distribution is done through third- party pharmacy benefit management and specialty pharmacy services firms.

Xyrem Appoval The U. S. Food and Drug Administration (FDA) approved Xyrem on July 17, 2002 and the drug was launched in early October. Xyrem is the first drug approved specifically for the treatment of cataplexy. Cataplexy is a debilitating symptom of narcolepsy usually triggered by strong emotions such as, laughter, anger, or surprise. Cataplexy sufferers often have fragmented sleep. In its most severe form cataplexy can cause a person to collapse during waking hours.

The approval of Xyrem represents the single most important catalyst in the Company’s history. In our opinion, Xyrem will prove to be a commercial success that will produce a rapidly growing revenue stream and lead to significant profitability over the next three to five years.

The Market Narcolepsy is a chronic neurological disorder that usually appears in patients in their mid- teens or early twenties. The disease is most often recognized by its primary symptom, excessive daytime sleepiness (EDS), which disrupts normal activities during the day. Additional symptoms include cataplexy, fragmented nighttime sleep, hypnagogic hallucinations (vivid and sometimes frightening dreams when falling asleep or waking up), and sleep paralysis (brief periods of feeling muscle paralysis upon waking).

Because narcolepsy is a and is not easy to diagnose, the total population of potential sufferers is difficult to define precisely, but most observers believe the disease affects approximately 150,000 persons in the United States about half of whom are diagnosed. Between 60-90 percent of narcolepsy patients are believed to also suffer cataplexy. Currently, there are approximately 25,000 cataplexy patients being treated off label with antidepressants (tricyclic and selective serotonin reuptake inhibitors). These drugs have limited efficacy and often produce unsatisfactory side effects. In addition, patients build up tolerance to these drugs over time. Initially Xyrem will target this universe of patients. Based

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on the initial pricing of Xyrem, this represents a potential market of approximately $125 million in the U. S.

ORPH is currently conducting a Phase III(b) clinical trial with Xyrem for the treatment of EDS associated with narcolepsy. The trial is designed to evaluate the effectiveness of Xyrem, in combination with stimulant drugs, in reducing the incidence of EDS in narcolepsy patients. EDS has traditionally been treated with stimulants like Ritalin and Provigil, but these drugs do not treat cataplexy.

Earlier trials have shown a statistically significant reduction in EDS when Xyrem was used in combination with stimulants. However, since this was not the primary endpoint of these trials the Company initiated the current Phase III(b) trial. ORPH expects to complete enrollment in this study by the middle of this year and if the earlier trials are born out, intends to file a supplemental NDA in 2004. Assuming a positive outcome and approval by the FDA, the total market potential for Xyrem could then be in the range of $300 to $400 million in the U.S.

Marketing and Distribution The active ingredient in Xyrem is sodium oxybate – the sodium salt of gamma hydroxybutyrate (GHB). GHB is a naturally occurring chemical found in the brain and other tissues. It was first synthesized in 1960 and was found to have sedative and anesthetic properties, but was supplanted by more effective anesthetic agents. In the early 1990’s, GHB was marketed as a dietary supplement for enhancing athletic performance, primarily among body builders, and became a “street” drug of abuse often described as a date-rape drug because of its sedative and anesthetic effects. As a consequence, the FDA and a number of states intervened to prohibit the manufacture or use of GHB.

In early 2000, a bill was passed and signed into law making GHB a controlled, Schedule I substance, similar to LSD or heroin. This is the most restrictive designation of the Controlled Substances Act. At the same time Xyrem received a Subpart H exemption and will be designated as a Schedule III drug, meaning it cannot be sold, distributed, or provided to anyone except by prescription.

As a consequence, ORPH and the FDA have worked to design a comprehensive risk management program for Xyrem. The program includes distribution through a single centralized pharmacy, physician and patient education programs, creation of a patient and physician registry and detailed patient surveillance. While these restrictions may slow the ramp up of Xyrem, they will not prevent Xyrem from being a commercial success in our opinion. To handle these requirements, Orphan retained Express Script’s Specialty Distribution Services (SDS) subsidiary to be the single source for the drug and to handle insurance approvals and reimbursement.

Orphan has hired a dedicated sales force of 36 persons to market Xyrem to the approximately 650 accredited sleep centers in the U. S. and to other specialists such as psychiatrists, pulmonologists and neurologists who treat sleep disorders. Additionally, ORPH is in active discussions with several potential partners to commercialize the drug outside the U. S. The notification in December that Xyrem has been recommended for Orphan Designation in Europe should be help in this effort. The Company expects to have a licensing agreement for Xyrem complete in the first half of 2003. Such an agreement is expected to involve revenue sharing as well as upfront and/or milestone payments. While the premium price of the drug and reimbursement issues outside the U. S. may limit the potential market, we expect some contribution to sales from foreign markets in the late 2004 to 2005 time frame.

We forecast Xyrem will generate sales of approximately $10 million in 2003, $30 million in 2004 and $50 to $55 million in 2005. As noted above, our 2004 and 2005 estimates include a revenue contribution from international. While that contribution will ultimately depend on the form of the licensing agreement Orphan strikes with foreign partners, we believe the

Page 3 Orphan Medical, Inc. 01/21/03

bottom line profit contribution will be similar whether the dollars come as revenues or royalties.

Other Approved Products Prior to the approval of Xyrem, Orphan had five other FDA approved drugs in the market. These include:

Antizol Injection – Antizol is used in the treatment of ethylene glycol or methanol poisonings. Ethylene glycol is the main ingredient in coolants and found primarily in automobile antifreeze. The ingestion of ethylene glycol often produces a medical emergency characterized by coma, metabolic acidosis, and renal failure. Methanol is a common household chemical used in windshield washer fluid and cleaning solutions. Methanol poisoning may cause severe morbidity, including blindness and death.

Antizol was initially approved for ethylene glycol poisoning in December 1997 and for methanol poisoning in December 2000. Antizol has become a first line therapy for ethylene glycol and methanol poisonings and is stocked in over 30 percent of the hospital emergency rooms in the country. Antizol contributed approximately 43% of total corporate revenues in 2001.

Busulfex (busulfan) Injection – Busulfex is an injectable form of busulfan that is used in combination with cyclophosphamide as a conditioning regimen prior to stem cell transplantation for chronic myelogenous leukemia (CML). The FDA approved Busulfex for this indication in February 1999. Conditioning regimens with Busulfex are used in bone marrow and stem cell transplants to kill abnormal cancer cells in the bone marrow and create room for transplanted cells to grow. Estimates put the number of bone marrow transplants (BMT) in the range of 20,000 annually in the U. S. While other treatments, principally interferon and Novartis’ Gleevec, are being used in earlier stage cancers, BMT’s are the only currently proven curative treatment for CML. Busulfex is being used in approximately 25% of BMT procedures and is being added to an increasing number of study protocols and drug formularies at leading research institutions and cancer treatment centers. We estimate that Busulfex accounts for approximately 50% of total corporate sales. Approval is expected in Europe in 2003. This could impact the reported revenues for Busulfex in late 2003 and 2004 because Orphan will revenue share with its foreign partners after approval. Currently, all sales are made by Orphan on a compassionate use basis.

Orphan’s three other approved products represent less than 10% of total corporate sales and have very limited market potential. Elliot’s B Solution is a buffered diluent for the intrathecal administration of chemotherapeutic agents into cerebrospinal fluid for the treatment of acute lymphoblastic leukemia. Cystadance is indicated for the treatment of homocystinuria, an inherited metabolic disease. Sucraid is used as oral replacement therapy to improve the digestion of sucrose in the small intestine for patients with a genetically determined sucrase deficiency.

Pipeline Orphan is actively seeking additional drugs to license for development. In addition, there are potential additional indications for Xyrem that the Company is exploring.

Last April the Company announced that it had licensed rights and acquired certain data relating to butamben (butyl-p-aminobensoate) suspension. Butamben is being investigated as a supplement to opiate analgesia treatment for intractable cancer pain. Orphan plans to meet with the FDA in the first quarter of this year to discuss a development plan for this drug. If agreement is reached on a development plan, we would expect clinical trials to begin later this year.

In addition to the current Phase III(b) trial evaluating the effectiveness of Xyrem in reducing EDS in combination with other stimulants, the Company plans to initiate a second Phase III(b) study (the EXCEEDS trial) to determine which is the better treatment regimen for EDS, i.e., Xyrem alone or in combination with stimulants. This trial is expected to be

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completed by the end of 2003 and the data will be submitted with the original Phase III(b) trial data in mid 2004. Orphan is also evaluating formulation alternatives that could extend the activity of a single Xyrem dose from the current two-four hour range to a six-eight hour range. Finally, a proof of concept trial for Fibromyalgia Syndrome (FMS) is scheduled for this year. FMS is characterized by widespread muscular pain, morning stiffness, fatigue and sleep disturbances. It is believed to affect more than four million people in the U.S. While the precise mechanism of action is uncertain, growth hormone imbalances may contribute to FMS and Xyrem induces the secretion of growth hormone.

Management Executive officers of the Company serve at the discretion of the Board of Directors with no fixed term. There are no family relationships between or among any of the executive officers or directors of the Company.

John Howell Bullion, Chief Executive Officer and Chairman of the Board - Mr. Bullion has been Chief Executive Officer of the Company since June 24, 1994 and Chairman of the Board of Directors since December 30, 1998. Mr. Bullion is a co-founder of Chronimed Inc., the company from which Orphan Medical, Inc. was spun-off in 1994. Prior to joining the Company, Mr. Bullion served as President of Bluestem Partners, an investment and consulting company, as President of Dahl & Associates, a soil and ground water remediation company and President of Concurrent Knowledge Systems, Inc., a software development company. Mr. Bullion also served as partner and Vice President with First Bank System Venture Capital Company for seven years.

William Houghton, M.D Executive Vice President, Chief Scientific and Medical Officer - Dr. Houghton has been the Company’s Executive Vice President, Chief Scientific and Medical Officer since May 2002. He joined Orphan as the Company's Chief Operating Officer in August 1998. Prior to joining the Company, Dr. Houghton was employed in a variety of positions at Iotek, Inc. from April 1995 to August 1998, most recently as Chief Scientific Officer and Vice President of Clinical and Regulatory Affairs. At Iotek, Dr. Houghton was responsible for all research activities, regulatory and clinical research, and served as the medical liaison with Iotek's Medical Advisory Board. From February 1984 to March 1995, Dr. Houghton held a variety of management positions with Abbott Australasia and Abbott Laboratories in the United States.

Mark D. Perrin, Executive Vice President, Chief Commercial Officer – Mr.. Perrin joined the Company as Executive Vice President, Chief Commercial Officer in May 2002. Prior to joining Orphan, Perrin was Executive Vice President, Commercial Operations at COR Therapeutics. He has held numerous sales and marketing positions in the including Vice President, Marketing and Sales at Burroughs Wellcome Company and Vice President and General Manager at Lederle Laboratories.

Timothy G. McGrath, Vice President and Chief Financial Officer - Mr. McGrath has been the Company's Vice President and Chief Financial Officer since October 1999. Prior to joining Orphan Mr. McGrath had worked as consultant providing financial services to growing companies in the Minneapolis and Saint Paul area. From 1994 to 1998, he was Vice President of Finance at E. W. Blanch Holdings, Inc., a publicly traded provider of integrated risk management and distribution services. Prior to joining E.W. Blanch Holdings, Mr. McGrath was with Ernst & Young LLP in Minneapolis, Minnesota.

Dayton T. Reardan, Ph.D. Vice President Regulatory Affairs - Dr. Reardan has been the Company's Vice President of Regulatory Affairs since May 1995 and had been the Director of Regulatory Affairs since joining the Company in 1994. From 1993 to 1994, Dr. Reardon was Director of Development at CV Therapeutics. From 1984 to 1993, Dr. Reardon held a variety of management positions at Xoma Corporation.

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Pamela J. Stahl, Vice President Commercial Operations - Ms. Stahl has been the Company's Vice President of Commercial Operations since October 2001. From February 2000 to September 2001, Ms. Stahl held a number of positions at America TeleCare, Inc., most recently as Vice President of Sales where she had responsibility for sales, marketing, and distribution. From 1992 through January 2000, Ms. Stahl held several management positions in sales, managed care, and sales training at AstraZeneca L.P. where she was a member of the team that launched Prilosec®, the leading treatment of acid related disorders. Ms. Stahl has also worked at Merck & Co., Inc. in sales and training positions supporting Zocor® and Pepcid®.

Outlook In a presentation at a major healthcare conference earlier this month, Orphan announced that revenues for the year ended December 31, 2002 would approach $16 million. This is at the top end of the Company’s earlier forecasted range of $15.5 to $16.0 million. This suggests fourth quarter revenues of approximately $4.5 million, about 10% above our previous expectations for the quarter. Xyrem revenues of an estimated $250,000 came in light due to delays in processing reimbursement requests at the central pharmacy, but other revenues appear to have matched or exceeded the third quarter totals. Management had projected that these sales would decline seasonally in the fourth quarter by about 10% relative to the third quarter of fiscal 2002.

The Company expects revenues in fiscal 2003 to be in the $25 to $27 million range and between $45 to $50 million in fiscal 2004. This includes $10-$11 million for Xyrem in 2003 and $30 to $35 million in 2004. Based on our understanding of the market for Xyrem and current pricing assumptions, this guidance appears reasonable. Our last published estimates were for total revenues of $26 million in 2003 and in the mid $40 million range for fiscal 2004. As a consequence, we are not raising our estimates for fiscal 2003 and 2004. However, we believe the Xyrem revenue potential in fiscal 2005 is now in the low to mid-fifty million dollar range. Coupled with sales of existing products, total revenues that year should approach $70 million with untaxed EPS of approximately $1.25 per share ($0.75 tax adjusted) on 14 million fully diluted shares outstanding. Previously, we had estimated that revenues could be in the range of $60 million in 2005. The turn to profitability should occur in mid 2004. Our estimates do not include any potential contribution from additional indications for Xyrem or for new product introductions.

At the end of fiscal 2001, Orphan had net operating tax loss carryforwards of approximately $42 million and Orphan Drug credit carryforwards of approximately $8.9 million available to reduce future tax liabilities. These carryforwards will begin expiring in 2009. Consequently, with the additional loss carryforwards generated through the turn to profitability we do not expect the Company to incur any material tax liabilities over the next four to five years.

Finances At the end of September 2002, Orphan had $13.1 million of cash equivalents and investments and no debt in the balance sheet. In addition, the Company has an unused $1.0 million working capital line of credit that is currently being renegotiated. We estimate that the Company burned $3.5 to $4.0 million in the fourth quarter of fiscal 2002. As a consequence, it appears that Orphan has sufficient cash resources to fund operations through the end of this fiscal year, but the Company may need to raise additional capital before profitable operations and positive cash flow is achieved. Any upfront and/or milestone payments for foreign distribution rights for Xyrem would ameliorate this situation. In addition, cash burn could be managed lower by reducing clinical trial spending if market conditions make a new capital infusion problematic.

Conclusion At the current time, we continue to believe that the market is undervaluing the existing portfolio of drugs and the very real upside potential of Xyrem. Assuming our revenue and

Page 6 Orphan Medical, Inc. 01/21/03

earnings estimates for fiscal 2003 through 2005 are reasonable, we believe the shares have upside potential in to the $20- $25 range over the next twelve months. Our target price assumes a terminal multiple of forty times our fiscal 2005 tax adjusted earnings per share discounted at 25% plus a discounted value of the tax loss carryforwards. We are initiating coverage with a STRONG BUY for aggressive investors.

Risks to Achievement of Price Target The risks to attainment of our price target are principally related to the Company’s ability to meet revenue and earnings expectations and to the valuation that investors are willing to pay for the shares. S We have assumed that Xyrem will be a commercial success and experience a rapid revenue ramp over the next three to five years. Currently Xyrem is indicated for the treatment of cataplexy and distribution is tightly controlled through one central pharmacy. If this distribution system is not flexible enough or if there are adverse reactions to Xyrem, our revenue targets could prove to be optimistic.. S Xyrem is a new drug and while there have been delays in approving reimbursements, no patients have been denied coverage to date. Still, changes in reimbursement procedures and/or rates could affect sales. S We have assumed that the Company will be able to realize gross margins of 85%, or better, in the future. This is in line with historic experience, but Medicare spending caps and/or private payer reimbursement decisions could impact future pricing. S Drug development is highly regulated. While Orphan has had an excellent track record with the FDA, a change in the regulatory environment could affect the timing of new product approvals. While we have not assumed any new indications or approvals in our 2005 revenue projections, the Company will need to bring additional products to market beyond this time horizon to maintain growth. S Drug companies are subject to strict “good manufacturing practices” review and product recalls. Problems with these regulations or a recall of a product could negatively impact sales. Orphan has chosen to use contract manufacturers to produce its drugs and is dependent on them remaining in good standing with the regulatory authorities. S Even if Orphan meets or exceeds our expectations in terms of revenues and earnings, investors may not be willing to pay as high a valuation as assumed in setting our price target.

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Orphan Medical, Inc. Income Statement (Fiscal Year ended 12/31)

FY 12/31 Act. Act Act. Est FY 00 E FY 01 E Mar-02 Jun-02 Sep-02 Dec-02 FY 02 E Mar-03 Jun-03 Sep-03 Dec-03 FY 03 E FY 04 E FY 05 E Revenues Existing Products $11,186 $11,273 $3,682 $3,506 $4,155 $4,350 $15,693 $3,000 $4,000 $4,500 $4,500 $16,000 $17,000 $17,500 Xyrem 0 0 0 0 0 250 250 1,000 2,000 3,000 4,000 10,000 28,000 50,000 Total Revenues 11,186 11,273 3,682 3,506 4,155 4,600 15,943 4,000 6,000 7,500 8,500 26,000 45,000 67,500 Cost of Sales 1,532 1,591 534 525 609 690 2,358 600 900 1,125 1,275 3,900 6,750 10,125

Gross Profit 9,654 9,682 3,148 2,981 3,546 3,910 13,585 3,400 5,100 6,375 7,225 22,100 38,250 57,375

Research and Develop. 6,832 4,933 1,077 1,331 2,254 2,500 7,162 2,500 2,500 2,500 2,500 10,000 10,000 10,000 Sales and Marketing 5,607 6,259 2,020 1,709 3,539 3,750 11,018 3,750 3,750 3,750 3,750 15,000 17,000 20,000 General and Admin. 4,095 4,809 1,068 1,465 1,922 1,500 5,955 1,500 1,750 1,850 1,900 7,000 8,000 10,000 Operting Expenses 16,534 16,001 4,165 4,505 7,715 7,750 24,135 7,750 8,000 8,100 8,150 32,000 35,000 40,000

Operting Profit (6,880) (6,319) (1,017) (1,524) (4,169) (3,840) (10,550) (4,350) (2,900) (1,725) (925) (9,900) 3,250 17,375 Other Income (Exp.) 793 321 84 66 64 25 239 25 15 10 0 50 0 0

Pretax Income (6,087) (5,998) (933) (1,458) (4,105) (3,815) (10,311) (4,325) (2,885) (1,715) (925) (9,850) 3,250 17,375 Preferred Dividend 872 902 225 227 235 250 937 250 250 250 250 1,000 0 6,603 Net Income ($6,959) ($6,900) ($1,158) ($1,685) ($4,340) ($4,065) ($11,248) ($4,575) ($3,135) ($1,965) ($1,175) ($10,850) $3,250 $10,773

Earnings Per Share ($0.86) ($0.80) ($0.11) ($0.16) ($0.42) ($0.39) ($1.09) ($0.44) ($0.30) ($0.19) ($0.11) ($1.03) $0.26 $0.77

Average Shares 8,135 8,597 10,282 10,344 10,373 10,375 10,343 10,500 10,500 10,500 10,500 10,500 12,739 13,947

Revenues 100% 100% 100% 100% #NAME? 100% 100% 100% 100% 100% 100% 100% 100% 100% Gross Margin 86.3% 85.9% 85.5% 85.0% 85.3% 85.0% 85.2% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0% Operting Expenses 123.1% 77.8% 59.3% Operting Margin -38.1% 7.2% 25.7% Pretax Margin -37.9% 7.2% 25.7% Tax Rate 0.0% 0.0% 0.0% Net Margin -41.7% 7.2% 16.0%

Future Value P/E 30 $23.17 40 $30.90 50 $38.62

Present Value 30 $14.83 40 $19.77 50 $24.72

Discount Rate 25% Years 2

Page 8 Orphan Medical, Inc. 1/21/03

Feltl and Company Rating System: Feltl and Company utilizes a four tier rating system for potential total returns over the next 12 months, and a three-tier system for risk assessment.

Potential Total Return Assessment Strong Buy: The stock is expected to have total return potential of at least 30%. Catalysts exist to generate higher valuations, and positions should be initiated at current levels. Buy: The stock is expected to have total return potential of at least 15%. Near term catalysts may not exist and the common stock needs further time to develop. Investors requiring time to build positions may consider current levels attractive. Hold: The stock is expected to have total return potential of less than 15%. Fundamental events are not present to make it either a Buy or a Sell. The stock is an acceptable longer-term holding. Sell: Expect a negative total return. Current positions may be used as a source of funds.

Related Risk Assessment Speculative: Business and financial risks are significantly greater than the market risk. The company has an inconsistent operating history and the share price may have significant volatility. Aggressive: Business and financial risks are higher than the market risk. The company has a history of revenue growth and/or operating profits. The share price may be more volatile than the general market. Market: Business and financial risks are in line with the general market.

Disclosure Statement The information contained in this report is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. Any opinions or estimates expressed herein reflect a judgment made of this date, and are subject to change without notice. This report has been prepared solely for informative purposes and is not a solicitation or an offer to buy or sell any security. The securities described may not be qualified for purchase in all jurisdictions. Because of individual requirements, advice regarding securities mentioned in this report should not be construed as suitable for all accounts. This report does not take into account the investment objectives, financial situation and needs of any particular client of Feltl and Company. Some securities mentioned herein relate to small speculative companies that may not be suitable for some accounts. Feltl and Company suggests that prior to acting on any of the recommendations herein, the recipient should consider whether such a recommendation is appropriate given their investment objectives and current financial circumstances. Past performance does not guarantee future results.

Conflicts of Interest Investors should assume that Feltl and Company is seeking or will seek investment banking or other business from the companies in our research universe. From time to time, Feltl and Company, or its officers, directors or agents, or members of their families, may have a position in securities mentioned and may make purchases or sales of the same in the open market or otherwise, and may own options, rights or warrants to purchase the same. Feltl and Company may be a market maker and may act as principal or agent with respect to the sale or purchase of securities mentioned, and may have managed or co-managed a public offering of the securities mentioned within the last three years. Additional information is available upon request.

Feltl and Company makes a market in this security.

The analyst or a member of his/her household holds a long or short position, options, warrants, rights or futures of this security in their personal account(s).

Feltl and Company has not been engaged for investment banking business with this Company during the past 12 months or does not anticipate any such business in the next 3 months.

The analyst has not received any compensation for any investment banking business with this Company in the past 12 months or does not expect to receive any in the next 3 months.

There is not any actual material conflict of interest that either the analyst or Feltl and Company is aware of.

Page 9 Orphan Medical, Inc. 1/21/03

Ratings Distribution for Feltl & Co. 1/21/03

Sell Hold 0% 25%

SB/Buy 75%

SB

Source: Reuters.

Date Nature of Report Rating Price Target 1/21/03 Coverage Initiated Strong Buy $22.50

Other Public Companies Mentioned. Chronimed, Inc. (CHMD - $6.95) Express Scripts, Inc. (ESRX $52.44) Novartis AG (NVS $37.74)

Page 10 Orphan Medical, Inc. 1/21/03 EQUITY CAPITAL MARKETS DIRECTORY

RESEARCH DEPARTMENT INSTITUTIONAL SALES Ernest W. Andberg Thomas Pierce 612-492-8836 Senior Vice President – Institutional Sales

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