Dara: The Future Of Oncology BioPharma On The Cheap

Dec. 3.12 | About: Midatech Pharma (MTP)

I'm not the first person to write on this company, I'm not a doctor, nor a specialist in the field, and quite frankly I find micro-cap bio firms extremely risky and difficult to analyze, let alone value. But just like with Chromadex (OTC:CDXC), every now and then a client comes to me with a company to look into that seems compelling enough that I can't help but take on the project. Dara Biosciences (DARA) fits that mold perfectly. This is the first in what will be a few posts on the company. I'm not going to get into too much detail here because I primarily want to discuss, simply, the upside - which I believe to be substantial - and a few risk factors (the latter should be obvious but for the retail investor I'll discuss some briefly).

Let's start with what I believe is a great writeup from another Seeking Alpha contributor, Jason Napodano that hits the basics and then some. Of course you should read the SEC filings and company presentations, explore the website and make sure not to put all of your money into a relatively speculative name, but I hope I don't need to elaborate on those points.

Here's the deal:

You simply cannot, from a fundamental valuation perspective, value a transformative company in this space. You can, however, recognize a company that is going to transform the way certain ailments are treated and very likely make good money in so doing. Whatever your risk tolerance, you cannot deny that just by demographics and incidence rates of cancer, especially here in the U.S. that a firm that's recently reorganized and refocused on treating cancer-related issues is one worth putting some of your money into.

Ladenburg just initiated coverage with a $2 target, or about 150% return from the current price, which given the products, pipeline, and progress I don't think is unreasonable. That is the sort of return you're not going to ever get close to, for that short a period, on any large cap. The penny stock price is a concern of mine that I've discussed at fair length on previous posts, if for no other reason than that and the small market capitalization leaves the stock prone to being manipulated - up and down - by unscrupulous types. With very basic risk management though, this risk can be almost entirely dealt with by using stops/limits instead of market orders and proper position sizing relative to your account and risk tolerance.

I've had a few Doctors look into DARA's drugs and development stage for me to aid in preparing my work, and while there is a some concern about the size of the study, for example, with FDA stage 2a KRN5500, the upside I believe far outweighs the downside given the risk management and simple fact that the firm is targeting health issues that seem, by all indications, to lack other effective treatments.

My personal opinion, while unconfirmed by any reports, is that DARA is a very likely takeover target by several of the Big Pharma firms or will sign licensing deals with them that should generate significant revenues. As the firm is still, as far as I'm concerned, in the transformational stage, this is just my professional analytical opinion after speaking with medical professionals, fund managers in the space, etc. I know the financial statements don't currently look gorgeous, but such is the nature of firms like DARA. That said, I think the various opportunities for DARA's 3 main treatments alone are worth a very serious consideration for your portfolio regardless of retail or institutional account.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Stone Street Advisors’ company policy is to keep the bespoke, paid research and analysis we do for clients confidential. However, in certain circumstances – and only with a client’s explicit permission – we may share some or all of that research publicly. The above (the analysis/article) contains some of the research we performed for/with a client, however the opinions presented herein are those of Stone Street Advisors LLC. Neither Stone Street Advisors LLC nor any of its members has a position in DARA, nor do we have any plans to initiate one in the immediate future. The information and opinions presented in this article are presented as-is, and do not constitute any offer, solicitation or investment recommendation. Stone Street Advisors LLC makes no representation as to the accuracy or completeness of the information contained herein and has no duty to update the information and opinion in the article. The content presented is not investment advice, nor is Stone Street Advisors LLC a Registered Investment Advisor.