Bullish On DARA Bio

On November 14, 2012, DARA Bio (NASDAQ:DARA) reported financial results for the third quarter ended September 30, 2012. The company did not report any revenues in the quarter. This was a little disappointing to us, as we expected at least some initial revenues from sales of Bionect, which the company launched in June 2012. I modeled $40,000 in Bionect sales in the third quarter.
Management reported to me that Bionect did generate prescriptions and sales in the third quarter but I should remind investors that DARA only has a co-promotion agreement on this drug. Bionect is controlled by a private company, Innocutis Holdings, LLC. Innocutis pays DARA on sales into the oncology and radiation oncology marketplace. As of September 30, 2012, Innocutis had not reported the breakout in revenues during the third quarter back to DARA. As a reminder, the company launched Soltamox in October 2012. Management expects to report revenues on both Bionect and Soltamox in the fourth quarter of 2012. I currently model $200,000 in Soltamox and $50,000 in Bionect for the fourth quarter.

Net loss for the third quarter totaled $2.0 million, or $0.16 per share. Loss was driven by $1.77 million in SG&A and $0.36 million in R&D. Operating costs remain low at the company despite the launch of two new products in the past six months. DARA exited the third quarter 2012 with $9.05 million in cash and investments. Working capital stood at $7.96 million as of September 30, 2012 (Form 10Q).


The financial position remains solid. I believe the current cash position is enough to fund operations into the fourth quarter 2013. DARA burned net only $0.25 million in cash during the quarter, driven by $1.3 million in operating and investing burn offset by $1.2 million generated from some shareholders exercising outstanding warrants. The basic share count as of November 13, 2012 stood at 18.7 million. At today’s price of only $0.70 per share, the market value of $13.1 million is only $4.0 million above net cash and investments.

Recommendation

In September 2012, I recommended shares of DARA at $0.86 per share. Based on my DCF modeling, I see $2.50 per share as fair-value for the company. I see the company as well financed, with enough cash to fund operations into the second half of 2013. I see potential sources for non-dilutive capital by partnering KRN-5500 or selling non-core assets in phase 2a ready DB959.

As noted above, DARA launched Soltamox in October 2012 and Bionect in June 2012. I anticipate the launch of Gelclair by the end of the first quarter 2013. The company is also working to complete the reformulation and dose-ranging studies on KRN5500. From my point of view, KRN5500 is a completely ignored asset by the market. This is a real drug with a real market opportunity. The FDA has already granted KRN5500 'Fast Track' status. I'm hoping management can move forward here in 2013.

As noted above, I see the current cash balance, which is about 70% of the current market value, as enough to fund operations for the next twelve months. So, while the current cash balance is not sufficient to fund operations to cash flow positive, I think by the time DARA will require additional financing drugs like Bionect, Soltamox, and Gelclair will be on the market, providing  investors with greater visibility of the emerging story. Accordingly, I expect the company to secure additional financing in 2013 on better terms than today.

The addition of Gelclair into the DARA portfolio is an excellent move by management in my view. The company continues to execute on its strategy to build out an oncology supportive care product suite, and drugs like Soltamox, Bionect, and now Gelclair are all complementary pieces to the puzzle.

I think Gelclair is a potential $5 million product in the U.S. for DARA. EKR Therapeutics was able to drive sales to approximately $4 million in 2009 without significant co-marketing of oncology care and supportive products. I think the ability to detail Gelclair next to supportive care products like Bionect and Soltamox will help drives sales back to $4 million by 2016. I suspect that any physician amenable to hyaluronate-based products will use both Bionect and Gelclair. DARA is building a product suite where 1+1+1 could equal 4 or 5.

I also expect that management will look to expand its licensing agreement on Soltamox to additional regions outside the U.S. On August 16, 2012, the company announced it has entered into an exclusive distribution agreement with Seyer Pharmatec Inc. for the sale of Soltamox in Puerto Rico. This is a small deal, but I fully expect more deals like this in the next few months to expand Soltamox distribution.

I also believe that the company will look to expand its relationship with Rosemont and Uman on additional generic injectable cytotoxic agents. DARA is targeting drugs that had 2010 combined U.S. sales in excess of $5 billion. Deal number one was gemcitabine. The company is in development talks with potential generic formulations of oxaliplatin, docetaxel, and pemetrexed for the future.

The U.S. specialty oncology market represents an attractive opportunity for DARA. There are just over 15,000 oncologists in the country. The three largest areas include medical oncology, hematology, and radiation oncology. DARA plans to focus on the top decile of physicians with its five-person sales force. DARA may look to supplement or partner with other small specialty pharmaceutical companies, as well as with wholesalers or specialty oncology providers to drive sales of its newly acquired products. I expect that by the time DARA launches Gelclair in the first quarter 2013, the sales staff may be expanded beyond its current numbers.

From DARA’s standpoint, the strategy makes sense - build a small sales force to promote Soltamox, Bionect and Gelclair, and then add value by making generic cytotoxic agents available to existing relationships. It provides for an attractive margin with low operating costs. For DARA shareholders, it gives the potential for real revenues and growth in the future – a strategy, and something DARA has been sorely lacking over the past few years.

I have conducted a discounted cash flow (DCF) analysis of DARA which incorporates Soltamox, Bionect, Gelclair, gemcitabine, and KRN5500. My model has factored in the dilution from the registered direct and public offerings of preferred stock earlier in the year. I find fair-value to be above $2.50 per share. I think DARA looks very interesting for long-term investors. The company is well financed and both Soltamox and Bionect should be posting revenues by the end of the year. Gelclair should start contributing by the middle of 2013. Another product in gemcitabine will be under FDA review soon. Investors get the biggest potential product in the pipeline, KRN5500 which is essentially phase 2b ready, for free. Analysis of the previous phase 2a study yielded some encouraging results.

I see the current market value as vastly under-valuing this opportunity. From here on out, it’s all execution.