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Summit is an AIM listed UK based drug discovery company targeting therapeutic sectors with high unmet clinical need as well as an innovative Seglin ™ technology platform and a portfolio licensed drug candidates that has already generated revenues of at least GBP5 million. Summit is an unusual biopharma play because it does not follow the traditional biopharma model!

Summit operates a low risk, high reward strategy by licensing its pre-clinical drug candidates to credible partners, who undertake at their cost all the future development and clinical trial costs. Summit secures an upfront payment for each licensed drug candidate agreement together with incremental clinical trial milestone payments and a 5% – 10% sales royalty, should the drug candidate actually make it to market.

Moreover, Summit’s business model chimes with Big Pharmas’ established, long-term strategic shift of focusing upon drug development and increasingly outsourcing research through early-stage deals that provide access to innovative technology platforms ( e.g., Seglins ™ , Ensemblins ™ and peptides). According to a 2009 Ernst & Young Report, ’11 of the 15 largest European deals in 2008 involved discovery programmes or assets in pre-clinical development.

Summit has an exciting portfolio of partnered and unlicensed drug candidates in the therapeutic areas of high unmet clinical need, such as cancer (melanoma or skin cancer); c. difficile, Duchenne muscular dystrophy (DMD), bioterrorism (agents to treat anthrax, Ebola, etc), Diabetes, Hepatitis C and cystic fibrosis.

Summit’s balance sheet remains healthy with GBP4.544 million net cash as at 31st July 2010, which at the current monthly burn rate of GBP0.26 million is enough to fund the company through to the end of the 2011 calendar year should it not receive any partnered milestone payments or license either new compounds or its technology platform. However, during the next calendar year, we anticipate that Summit will secure its first platform agreement as well as a licensing agreement for one of its growing Seglin ™ drug candidates, which will further extend the life of its cash pile.

We have adopted a low investment risk approach to valuing Summit (EV/Sales), which does not attribute any aspirational value to either its promising partnered or unlicensed drug candidates. But which only values its income stream based upon the high probability that the company will secure two agreements per annum in each of the financial years 2012 and 2013. Pharmaceutical companies can readily command EV/Sales multiples of up to 2.5 times but we have decided to initiate coverage of Summit on the basis of an undemanding EV/Sales multiple for its 2013 financial year of 1, which would indicate an initial target price of 5.7p. Therefore, with the shares trading at 2.625p and an undemanding initial target price of 5.7p we initiate coverage with a recommendation of strong buy.