EPITAN - Clinuvel Pharmaceuticals

EPITANInvestment summaryEpiTan is an Australian listed (ticker “EPT”) speciality pharmaceutical company with afocus on dermatology products. Its current market capitalisation is approximately£40m. The key value driver for the company is its developmental drugMELANOTAN, EpiTan’s brand name for [Nle 4 ,D-Phe 7 ]-α-MSH, a synthetic copy of anaturally occurring hormone which stimulates the production of melanin.MELANOTAN is a synthetic peptide which stimulates the production of melanin inthe skin. Melanin, specifically eumelanin, has been shown to protect the skin fromdamage resulting from exposure to ultra-violet (UV) radiation. MELANOTAN hasbeen shown to produce an increased melanin density in the skin (“a tan”) withoutexposure to UV radiation. The initial reaction of fair-skinned individuals (i.e. those witha low-level of starting melanin density) to UV radiation is sunburn, which is associatedwith increased risk of skin cancer. MELANOTAN is therefore being developed byEpiTan for the prevention of sunburn injury and other UV associated skin diseases anddisorders such as Polymorphous Light Eruption (PMLE).The company has announced that it is now seeking an admission to AIM, and lookingto raise approximately £15m to complete the development and commercialisation ofMELANOTAN.Key reasons to participate in this fundraising include:No major safety concerns were identified in early stage clinical trials withMELANOTAN.Effectiveness has been established in trials to date.Positive results from previous trials significantly lessen the likelihood of productfailure in late stage trials.We expect the product to reach market in 2008 with the publication ofsignificant trial results over the next two years driving a substantial increase inthe company’s valuation ahead of the product launch.We do not know of any comparable drugs currently in clinical development andtherefore there is unlikely to be any significant competition to the product forthe foreseeable future.EpiTan is planning to partner the product for commercialisation outside ofAustralia and New Zealand. This is likely to add to news flow over the next 6-18 months and has the potential to generate substantial payments to EpiTanfrom signing fees, milestone payments and royalties on commercialisation.MELANOTAN is likely to be first commercialised as a subcutaneoussustained release implant. However, EpiTan is also developing follow-onformulations, including a transdermal spray which we believe has the potentialto significantly expand MELANOTAN’s potential market.The potential markets for MELANOTAN include its use as a:o Prophylactic – primarily for the prevention of sunburn injury in at riskindividuals. This has the potential to reduce the number of cases ofskin cancer, which is the most prevalent form of cancer worldwide.o Therapeutic – as a preventative treatment for skin-related disorderssuch as Polymorphous Light Eruption (PMLE). This currently affects10-20% of people in the US and northern Europe, and is therefore asignificant market.EpiTan is building an infrastructure to support the sales and marketing of itsdermatology products in Australia and New Zealand. EpiTan currently has fourproducts in its portfolio and plans to expand that further to build a strongdermatology franchise. The infrastructure will allow EpiTan to optimise returnswhen it launches MELANOTAN in the Australian and New Zealand market.Our valuation of the MELANOTAN project suggests a current net presentvalue of £112m, significantly above Epitan’s current market capitalisation.3