report

8 April 2009
Shareholders
Arana Therapeutics Limited

RE: Valuation of Arana Therapeutics Limited

This letter is in response to a request by shareholders for a valuation of
Arana Therapeutics Limited (“AAH” or the “Company”) based on its
current assets and the potential of its intellectual property (“IP”) to
generate future benefit for the company.
The following opinion is based on publicly available information such as
Company press releases and annual reports, augmented by data on drug
development costs and likelihoods of success. We have not had the
opportunity to undertake any due diligence on the Company and the
valuation must be considered an approximation, albeit a reasonable
approximation, from this respect.
The valuation is based on the generally accepted probability adjusted net
present value (“PANPV”) methodology, although we are confident that an
analysis of transactions for antibody therapeutics will support the analysis.
An examination of the Company’s share price in recent months may not
support the current valuation, although we offer the opinion that AAH is
financially strong and has sufficient cash reserves to continue the drug
development programs as outlined in the present analysis. Hence we
believe that the PANPV analysis provides a reasonable approach to
valuing the Company’s tangible and intangible assets.
The PANPV follows a process that is outlined in detail in the Independent
Expert Report on EvoGenix Limited prepared by Deloitte Corporate
Finance Pty Limited on 18 June 2007. In brief, the method applies
probability adjustments to the predicted cash flows for the Company’s
drug development and contracted research programs based on the
likelihoods of the proposed products transitioning through the various
stages of development and approvals. The probabilities that we have used
are similar to those used by Deloitte and derive from published data on
antibody therapeutics. We have allowed for progress in the products’
development since 2007 as described by the Company in its various
presentations.
We have only included the following drug development programs:
• ART621 in psoriasis and rheumatoid arthritis;
• ART010 in osteoporosis and metastatic bone disease;
• ART150 in melanoma.
The individual projected cash flows are based on licensing-out the IP at an appropriatetime point for licence fees, milestone payments and royalties, using industry norms, with the horizon for revenue streams being to expiry of the relevant patents.
No residual or terminal values have been included. In reality, it is likely that the patents will be allowed extensions of up to five years as pharmaceuticals and our analysis underestimates the values on this basis.
In addition, we have made estimates of the potential cash flows for the antibody development programs being undertaken on behalf of third parties and employed a similar PANPV process.
Royalties from Abbott and Johnson & Johnson are receivable by the Company up until the first quarter of 2011 in respect of its anti-TNF-α antibody patent and we have used AAH’s estimate of what these amounts may be.
Tax has been included at the corporate rate of 30% with the assumption that the Company is currently profitable and paying tax, ie. losses on individual programs are not carried forward.
Program cash flows have been discounted at rates of 15% and 18% (see the Deloitte report for derivation) and TNF-α antibody royalties at the risk free rate of 6%. Summary spreadsheets are attached.
We have included in the assets cash of $175 million as provided by the Company in its 26 February Company Presentation.
The following are our estimated valuations ($’mil):

The following are our estimated valuations ($’mil):
Discount Rate
18% 15%
ART621 Psoriasis & RA $109.5 $141.5
ART010 Osteoporosis $31.0 $42.8
ART010 Cancer $10.8 $15.7
ART150 $14.9 $22.4
anti-TNF Royalties $40.1 $44.5
HuAb Income $19.8 $25.3
Sum of Parts $226.2 $292.4
Add Cash $175.0 $175.0
Net Value $401.2 $467.4
Shares on Issue 228 million 228 million
Value per Share $1.76 $2.05

We offer the opinion that a reasonable valuation range is $400 million to $467 million.
It should be noted that this is a sum-of-parts valuation and not a valuation of the Company per se. A Company valuation would consider life to perpetuity, usually achieved through the inclusion of a terminal value, and additional expenses, such as continuing research and development to ensure sustainability, with the net effect that a Company valuation would be higher than presented here. Although such an analysis requires access to additional information concerning the Company and its prospects, a rough analysis suggests a valuation range from $410 million ($1.80 per share) to $515
million ($2.26 per share).
We reiterate that we have not been provided with technical details and status of programs, details of third party agreements or recent financial summaries to enable a detailed valuation. However, we believe that we have been conservative in our estimates of cash flows and timings.
This report has been prepared solely for use by shareholders of AAH and we disclaim liability to all other parties, however caused. The reader should be aware of the limitations under which this report was prepared. It is not a recommendation to buy or sell shares in AAH and we are precluded from making a comment on whether the proposed acquisition of shares by Cephalon International Holdings, Inc. is fair and reasonable to shareholders.

Dr Randerson has a Bachelor of Chemical Engineering (Monash University), Master of Science in Applied Science (UNSW) and a Doctorate of Philosophy in Biomedical Engineering (UNSW). He is a fellow of the Australian Institute of Company Directors and a member of the Institution of Chemical
Engineers.
As principal of Acuity for 18 years, Dr Randerson has undertaken in excess of 200 valuations in biomedical sciences and 90 in applied sciences.
Significant clients of Acuity have included Deloitte Corporate Finance, Bankers Trust, Macquarie Bank, Westpac Bank, Deutsche Bank and many high technology companies, research institutes