Fibroepithelioma of Pinkus (FEP) has long been viewed as a subtype of basal cell carcinoma (BCC). Recently, however, the proposal has been made that FEP represents a fenestrated trichoblastoma/trichoepithelioma. One of the main arguments is the presence of Merkel cells in FEP, which typically do not occur in BCC. As the new stem cell marker, PHLDA1 (TDAG51), labels trichoepithelioma but not BCC, our aim was to characterize its staining pattern in FEP. Because adnexal tumours have been viewed as recapitulating embryogenesis, we also examined PHLDA1 immunoreactivity in the skin of human embryos and fetuses. We studied immunohistochemically PHLDA1 staining in 31 FEPs, 14 BCCs and 16 trichoepitheliomas and compared this with its staining pattern in embryonic skin and with the distribution of Merkel cells. In FEP, PHLDA1 labels the anastomosing network of thin cellular strands but not the basaloid nubbins. During embryogenesis, PHLDA1 stains the basal cell layer of the epidermis, as long as adnexal structures develop. Immunoreactivity for PHLDA1 correlates positively with the presence of Merkel cells. We propose that the thin anastomosing network of PHLDA1-positive cells represents a type of epidermal hyperplasia specific to FEP. The multifocal BCCs that are PHLDA1-negative develop from this network which becomes incorporated into the tumour. Viewing the anastomosing network as a tumour-specific form of epidermal hyperplasia explains the hitherto enigmatic presence of Merkel cells in FEP.