Quarterly Report II, April 5, 2017

Dear Shareholders and Readers

We recently decided to announce an aggressive rights issue of 68 MSEK to conduct a pivotal phase II trial, DIAGNODE-2, based on intralymphatic administration of Diamyd®. The decision is based on the very positive preliminary results from the ongoing investigator initiated DIAGNODE-1 trial, also recently published in the New England Journal of Medicine, as well as on the previously published meta- analysis of previous clinical trials with our vaccine showing that Diamyd® with a 98% likelihood has a positive biological effect. The decision is subject to approval by the Extraordinary General Meeting to be held on April 19th.

Our discussions with major multinational companies continue, and the established path forward with our GAD and GABA projects has created a significantly stronger negotiation position. At the Bio Europe Spring meeting in Barcelona in March, where biotech and pharmaceutical companies met, we received positive feedback about the recently published results and the decision on the company's focus ahead - further proof that our strategy is right. There is an increasing interest from pharmaceutical companies with strong finances looking for licensing opportunities to fill their pipelines.

30-month results were presented in late March from the investigator initiated trial DIABGAD-1 led by Professor Johnny Ludvigsson at Linköping University. In this trial, Diamyd® was administered subcutaneously and combined with vitamin D and ibuprofen. Based on the results, the combination of vitamin D and ibuprofen does not seem to give a significant enhancement of the effect in newly diagnosed patients when the vaccine is administered subcutaneously. Meanwhile, the significant results after a possible remission phase are very interesting and will be further analyzed. The diabetes vaccine Diamyd® has been tested in pilot trials in various doses, and with different modes of administration (DIAGNODE -1 study), together with vitamin D, ibuprofen (DIABGAD-1 trial), and with TNF-alpha inhibitors (EDCR trial). Taken together the DIAGNODE-1 trial clearly shows the most promising results. Admittedly, the highly interesting trial in Alabama with the combination of GABA + Diamyd® is still ongoing, but the results from DIAGNODE -1 are so promising that the company has decided to focus on intralymphatic administration in newly diagnosed patients with a new pivotal trial, DIAGNODE-2.

In late March, results were published in Diabetologia where researchers at Linköping University show that the Swine flu vaccination may have had a negative impact on the results of the European Phase III trial with Diamyd®, conducted between 2008 and 2011. It is well known that the swine flu vaccine has a strong effect on the immune response, and this effect may possibly have interfered with treatment with Diamyd®. New research on GABA has been published by Professor Daniel Kaufman at UCLA who is also a member of Diamyd Medical's Scientific and Medical Advisory Board. The study, published in Nature (http://www.nature.com/articles/s41598-017-00515-y) shows how GABA and positive allosteric modulators of GABA receptors stimulate growth of the insulin-producing beta cells. The results provide further support for GABA's role as a potentially transformative therapy in diabetes.

We have recently confirmed that the production of Diamyd®, which until 2015 was produced by a former manufacturer, has now successfully been transferred to our new partner. Newly produced study drug lasts until 2021. Production of our own GABA study drug proceeds per plan and has entered formulation development where the aim is to manufacture and evaluate a few variants before the final product is selected for clinical testing.

During the turn of the year, the patent application covering intralymphatic administration of antigen entered international investigation phase. Here we have chosen to apply for a wide geographical patent protection; in addition to the major pharmaceutical markets US, Europe and Japan, we have also submitted the patent application to China, Canada, Russia, Australia, South Africa, Israel and India. Approved claims will give us protection that extends to 2035.

Stockholm, April 5, 2017
Ulf Hannelius
President and CEO, Diamyd Medical AB (publ)

Our discussions with major multinational companies continue, and the established path forward with our GAD and GABA projects has created a significantly stronger negotiation position.
Ulf Hannelius, President and CEO