Seeking Alpha
Special situations, micro-cap, biotech, healthcare
Profile| Send Message|
( followers)  

DARA Biosciences (NASDAQ: DARA) drew a lot of attention from the market after a press release on January 17, 2012 that announced the official "acquisition" of the private, South Carolina-based specialty pharmaceutical company known as Oncogenerix. This transitioned DARA from a research-oriented biopharmaceutical company to a more mature pharmaceutical company focused in the sales and marketing of oncology and oncology-related products.

Although the headline implies that DARA bought Oncogenerix through a traditional purchase agreement, the actual transaction was more like a merger. In exchange for the equity in Oncogenerix, its shareholders received a total of 1,114,560 shares of DARA Biosciences with milestone payments worth an additional 1,114,560 shares of DARA in the future. Based on the $1.30 closing price of DARA stock on January 13th 2012 (the Friday prior to the Monday that the acquisition was announced), the acquisition only cost DARA around $1.5 million upfront, with future costs clearly dependent upon the performance of the stock.

The key benefit for DARA in the arrangement was the gain of exclusive commercialization rights for Soltamox® in the United States. Soltamox®, an FDA-approved liquid formulation of the estrogen receptor antagonist tamoxifen, is a widely-used treatment for a type of breast cancer referred to as "ER+", or "Endocrine Receptor Positive" that makes up about three out of every four cases of the disease. Since breast cancer is found in well over 200,000 new patients every year, the introduction of Soltamox® brings tamoxifen in oral liquid form to breast cancer patients who were limited to tablet-form tamoxifen prior to the launch of Soltamox® in October 2012. DARA licensed this product from Rosemont Pharmaceuticals (UK), which will receive royalties on Soltamox® as payment for the manufacturing of the compound.

The speculation over the Oncogenerix deal, along with news that DARA had acquired US commercialization rights for the anticancer drug gemcitabine from Uman Pharma, plus the rights to co-promote Bionect®, a topical product for the treatment of radiation-induced skin damage, drove DARA up to a new 52-week high of $2.77/share (roughly 100% higher than the price of shares prior to the arrangement with Oncogenerix). Gemcitabine is a chemotherapeutic agent that is most commonly used as a first-line treatment for ovarian, breast, lung, and pancreatic cancer. Bionect® was already marketed into the dermatology area by Innocutis, a private South Carolina-based company with which DARA developed a co-promotion agreement.

Since DARA was still a very small company at this point (with a market cap of $9 million), investors were especially excited that DARA would be marketing the compound that brought Eli Lilly about $780 million/year under the branded name GEMZAR®. The obvious drawback was that the patent for gemcitabine was already expired, so it was unreasonable for DARA to expect such enormous sales figures in partnership with Uman due to the arrival of generic competition.

Nonetheless, the company was confident that the deal would provide growth potential due to the increasing demand for chemotherapeutic agents, combined with the value of partnerships with Rosemont, Innocutis and Uman. According to company statements, Uman was a good choice due to their ability to efficiently produce gemcitabine in line with the FDA's Current Good Manufacturing Practices (cGMPs), which act as a "quality control" for any FDA approved products. After Uman submits and receives FDA approval for an ANDA (Abbreviated New Drug Application), gemcitabine will join the other products in the DARA sales and marketing portfolio.

In September, the company announced that it had obtained commercial rights to Gelclair® from the Helsinn Group, in Lugano Switzerland. Gelclair® is an FDA-cleared product indicated for the treatment of oral mucositis, a common complication of cancer chemotherapy. DARA plans to launch Gelclair® late in the first quarter of 2013.

Although DARA is currently marketing two products and close to marketing a third, the company reported steep losses in Q3 2012 that were more than double the losses accumulated in Q3 2011. This was due to a new sales and marketing budget of about $534,200 per quarter (which will support Bionect® and Soltamox® and pave the way for the launch of Gelclair® ) and a parallel increase in general and administrative expenses.

Counteracting the negative connotations of increases in company expenses is the future cash flow of these products in the long run. DARA, anticipating impending financial challenges, generated $10.25 million in a public offering of convertible preferred shares in April of this year. According to the balance sheet, as of September 30th, DARA is still holding $8.26 million in cash and about $790,000 in marketable securities. Given the cash burn-rate from the Q3 2012 earnings release DARA can continue to operate without any additional income whatsoever for at least another year, but we are expecting to see the sales revenue from marketed products erode the losses or even bring the company to profitability.

It's difficult to tell how successful Soltamox® will be at this point since it's essentially offering a widely used compound (tamoxifen) in a different dose form. However, the company feels it will provide patients with an alternative that might suit individual preferences (some prefer liquid medications), enhance compliance with the 3-5 year chronic treatment regimen (offering some variety) or fulfilling clinical need (in those patients who have swallowing difficulties that preclude taking pills). Some stock research analysts are willing to provide "ballpark estimates" that could gauge how much DARA's product could generate. Zacks' analyst Jason Napodano published an article in Seeking Alpha in September of this year, and saw about $25 million in peak sales for the product. There was also an estimate of $3-4 million for Bionect® . For Gelclair®, his estimate was a relatively conservative $5 million in peak sales.

Although DARA has already created a substantial product portfolio in the oncological treatment (and support) market, they are also developing an entirely new compound called KRN5500 for the treatment of chemotherapy-induced neuropathic pain (CIPN). Chemotherapy-induced neuropathic pain is an extremely painful side effect of the nerve damage that cancer patients may experience after receiving a damaging chemotherapy regimen. The consensus among the medical community is that CIPN, which has no FDA-approved treatment options at this time, is extremely detrimental to the well-being of cancer patients due to its discomfort and potentially debilitating effects.

KRN5500 has shown promise in previous clinical trials, and was also granted Fast Track designation in October 2011 which expedites the approval process for the drug and shows that the FDA is considering this compound a potentially important product for unmet demand in CIPN. While KRN5500 is only in Phase 2 trials at this point, it has yet to reach a bloated valuation. DARA estimates that KRN5500's target market might be as big as $2.5 billion/year in sales.

Further adding to the potential for this drug was news received last week that DARA has filed KRN5500 for orphan drug designation by the FDA, which would ensure seven (instead of the standard five) years of exclusivity in the US market along with other incentives like tax breaks and relief from PDUFA fees. KRN5500 would certainly generate a lot more attention for itself and DARA if successful, since orphan drugs have proven to be very popular investments amongst biotech traders this year. Considering how low DARA's market capitalization of $16 million is relative to the peak sales potential of KRN5500, it's easy to infer that the stock could move up in a drastic fashion given that more attention were paid to it.

Source: DARA Biosciences Seeks Orphan Drug Status For KRN5500