DEET was originally developed in the 1940's to repel biting pests such as mosquitoes and ticks, including ticks that may carry Lyme's disease. DEET is used not only as a skin contact product to repel mosquitoes and ticks but also for animal bedding/litter treatment, animal treatment, and clothing treatment.

While generally regarded as an effective repelling agent, there have been several reports of neurotoxic episodes involving individuals who have used DEET containing products, predominately in children. There have 14 reported cases of seizure including 4 deaths which DEET may be implicated. Several more cases are currently under investigation. There was no clear relationship to the dose of DEET used and the incidence or severity of symptoms in the reported cases involving DEET. While it is controversial whether DEET has been the cause of these incidents, several states have restricted the concentration of DEET that can be contained in products. In New York, the NRDC sued the State in order to get concentration restriction.

Conventional DEET products must be applied relatively frequently (i.e. as much as every hour) and are absorbed relatively easily through the skin. The frequent application increases the potential dose of the product, thereby, increasing the propensity for potential side effects in susceptible populations such as children. Products currently on the market contain concentrations of DEET ranging from 4% to 100%. The lower concentration products (such as SC Johnson's Skidaddle and Skintastic) although presumably safer are not very effective. Also, concentrations of 35% or more are generally necessary to repel ticks. Most products contain about 10-25% DEET.

Market

It is estimated that about one in every five households and 30% of the U.S population uses DEET annually. The use of DEET annually, on a per person basis, has been estimated by the EPA to range from14-25 grams. This is assuming a 1-1.3 g application, 12-20 times per year.

The EPA estimates that the domestic usage of DEET is 4 million pounds (1.8 million kg). Assuming the average usage per person is approximately one gram and 30% of the U.S population uses DEET, only about 75 million g per year is used as a directly applied insect repellent to humans. This suggests that a large proportion of DEET usage in the U.S is derived from other forms of application.

A survey of DEET containing products in drug and grocery stores suggests that most cream or lotion products sell in the range of $8-$10 for approximately 125 ml (-8 cents/ml). Assuming one in five households uses DEET, a two-year shelf life for the average product, and a 14-25 ml per year application rate, one could predict that each household which uses DEET purchases one unit every other year. Assuming the number of U.S households is 83 million (250 million people /three people per household) and a $8 per unit purchase price, the estimated market for DEET containing products approximates $330 million annually (83M people X$8/unit X 0.5 units/year). Of course, this figure does not account for the non-consumer portion of this market (i.e., the military). In addition, very few products are registered specifically for use in animals.

While there are no figures to accurately predict growth, increasing awareness and concerns related to diseases transmitted by mosquitoes (encephalitis) and ticks (Lyme's Disease) would suggest that insect repellent is a growing market. Surely, as this market grows, there will be an increasing demand from consumers for safer and more effective products to replace the first generation products, which dominate the market today.

Competition

Competition is intense with 225 end-product registrations on file with the EPA for DEET containing products. Products currently on the market include OFF, Delphene, MGK deiethytoluamide, Detamine, Metadelphene, Chemform, Chiggar-Wash, Muskol, Cutter, Repel, and Old Time Woodsman. The major manufacturers of DEET are MGK Company, SC Johnson, Clariant Corporation, Schering-Plough, and Morflex, Inc. Competition comes from various types of products including pressurized liquids, sprays and sticks, foams, in addition to creams and lotions. Other competition comes from "natural" or "alternative" repellent which, although not shown in controlled studies to be particularly effective, are still sold and promoted as such.

Human studies with radiolabeled DEET have shown that about 20% of the material is absorbed through the skin and into the systemic circulation following dermal exposure. In the past few years, some efforts have been made by certain research groups to produce sustained release DEET products which, would confine DEET to the skin and reduce bioavailibility. Some of these efforts have been deemed to be prohibitively expensive for the consumer market. Several competitors have recently introduced products with sustained release characteristics. These include Amway's Hour Guard and Minnetonka Brands and BioPharm Labs, glycerin-based lotion. Many products also make cosmetic claims and in fact, AVON has a product called skin-so-soft which it tried to promote as having sunscreening, conditioning, and repellent properties (it did not contain an effective repelling agent so EPA disallowed label claims).

Distribution

Insect repellents are sold through a variety of retail outlets including pharmacies, grocery and convenience stores, sporting goods shops, direct mail, and even potentially cosmetic counters.

Market Opportunity

There is currently a need for insect repellents which, are effective in low doses and/or require less frequent application. Those products which can most effectively deliver DEET (i.e., provide efficacy at the lowest cumulative dose) should have significant advantages over other products which require more frequent dosing and therefore, a greater potential for systemic exposure. Although controversial amongst the scientific community, DEET seems to be forever more branded as a toxic chemical in the eyes of consumers. Until newer actives become available, however, the products most acceptable to those consumers with safety concerns should be those products that utilize the lowest concentration and require infrequent dosing.

Several products are currently marketed which combine DEET with sunscreens. The regulatory environment for these products is currently dynamic and uncertain. Still, the opportunity clearly exists for combination products, especially those in which application is less frequent, reducing potential exposure to DEET. The EPA is concerned about combination products because they believe that it could lead to over-application of DEET.

Cosmetic properties of the repellent-containing product are also most likely to be important to certain consumers. DEET has properties as a solvent, which make it cosmetically "unappealing"; several companies have attempted to formulate DEET in a manner to attenuate this problem. In addition, DEET can damage upholstery and pantyhose.

Regulatory Environment

As an insect repellent, DEET is regulated by the EPA. EPA has just recently evaluated DEET for re-registration and determined that DEET can be used without posing unreasonable risks to human health or the environment. The EPA has set forth requirements for DEET containing end products that are currently undergoing re-registration. Such products must comply with current pesticide product labeling requirements and submit certain data to the Agency. This data includes product chemistry and acute toxicity studies, product efficacy data, revised Confidential Statements of Formula, and revised labeling for re-registration. It is anticipated that any new formulation of DEET, such as a liposomal-encapsulated product, would be held to similar standards.

As mentioned the regulation of combination sunscreen/repellent products is be evaluated concurrently by the EPA and FDA. Sunscreens are currently regulated as drugs and the FDA has developed a list of acceptable sunscreen active ingredients. Currently, it appears that new sunscreen products formulated using approved active ingredients are treated similarly to other new formulations of generic drug products. Abbreviated New Drug Applications (ANDA's) are filed in order to demonstrate similar activity as approved marketed products. Clinical studies to show similar biological activity and bioavailibility are generally conducted as well as stability studies with the commercial scale manufacturing process.

Labeling

The EPA is currently mandating product-labeling requirements for DEET containing products. Since there is clear evidence that the incidents of DEET toxicity were related to the dose of DEET, no safety claims can be made for those products that contain lower concentrations of DEET. For instance, a 5% product cannot claim that it is "safe for children". Manufacturers can promote, assuming they have the supportive data that their products contain low concentrations of active or require less frequent application.

Technical Feasibility

DEET is a colorless liquid with a faint odor and is relatively stable, highly hygroscopic and sensitive to light. Technical DEET is practically insoluble in water and glycerin, but miscible with several organic solvents. A patent has been filed for liposomal­ encapsulated DEET suggesting that DEET can be formulated using liposomes. Domb et al. (J. American Mosquito Control Assoication 11(1): 29-34, 1995) developed what was described as a liposphere micro dispersion in the form of a lotion containing DEET. The formulation contained between 6 and 20% DEET and was effective for up to 6 hours against mosquitoes. A 3-fold reduction in dermal absorption relative to an alcohol solution was noted in rabbits following the application of radiolabeled DEET. The formulation was also reported to be stable at room temperature for at least one year.

Two potential formulation issues regarding DEET include the amount of DEET that is "encapsulatable" and the stability of the formulation at higher temperatures (i.e., above room temperature). Since the product would most likely be used during the summer and often transported outside, left in the car etc.... stability at 37°C will be important for adequate shelf-life of the product after it is purchased.

Efficacy testing should be able to be accomplished in a controlled fashion at an outside laboratory for relatively low cost (-20-25K). It is anticipated that the slow release features resulting from encapsulation should provide for an extended period of protection relative to other types of products. In addition, it would be predicted that the concentration needed for effect should be significantly less. Since consumers will most likely desire a product with not only extended duration but a relatively quick onset to action, consideration should be given to having some "free" DEET available (i.e. some non encapsulated DEET) present n the formulation. Also, some formulation modifications should be considered to best confine DEET to the top of the skin in order to reduce the transport of DEET across skin and the sustained release of product into the 99 systemic circulation.

Proprietary Position

Preliminary analysis of the existing patent literature suggests that LIPPOMIX should be able freely operate in the U.S with its own liposomal encapsulated product.

Financial Analysis

Discounted cash flow and expected profitability analyses suggest that the DEET project should be considered for development (Attachment 1). The analysis used various assumptions regarding the cost of goods etc...Product sales of the marketed product were conservatively estimated to peak at $2.5M. Using discounted cash flow analyses, the low up-front costs coupled with the potential for considerable manufacturing revenue in a short time period indicates the project has a positive net present value, even at a conservative discount rate of 30%, under a number of scenarios (NPV —$100,000 - $600,000). Furthermore, the project has an expected discounted net profitability of almost $1M.

A call option pricing technique was also utilized to determine the value of the project. Using the expected net profitability as the asset price, the investment needed as the strike price, 5% as the risk-free interest rate, 15% as a measure of volatility, two years as a duration figure, and three tree steps (formulation, efficacy, market) a value of approximately $900,000 was calculated.

Strategic Fit

A DEET product would fit well with LIPPOMIX's existing strategy to develop topical liposomal-based healthcare products. The potential to derive short-term profits within short development timeframes is particularly attractive at this stage of the company's history.

Other Considerations

Currently, marketed tick repellent products consist of DEET containing products with relatively high concentrations of DEET > 30%. These products are not completely effective (75-85%) and suffer from the same problems as all DEET containing products (potential toxicity, frequent application).

Ivermectin has been shown to possess activity against a variety of ectoparasites including ticks. Although ivermectin's antiparasitic effect is related to its ability to affect nervous system (gabanergic) activity of the host, it cannot be deduced from the literature whether ivermectin has repellent properties. Assuming ivermectin could quickly kill or disable a biting tick before it can release Lyme disease causing bacteria into the blood of its victim, it could serve as an effective protective agent alone or possibly in combination with DEET.