On October 22, 2013, DARA Biosciences (NASDAQ:DARA) entered into a Securities Purchase Agreement with certain institutional investors providing for the issuance and sale by the company in a registered direct offering of 5.1 million shares of common stock at an offering price of $0.50 per share. Also included in the agreement is the sale of warrants to purchase another 5.1 million shares of common stock with an exercise price of $0.56 per share. The five year warrants are exercisable starting in six months from the issuance date. DARA expects net proceeds from the transaction after deducting for placement agent fees and expenses will total roughly $2.3 million.
DARA exited the second quarter ended June 30, 2013 with $4.94 million in cash and investments. Total cash burn in the quarter was roughly $2.4 million. If we assume burn held consistent over the last three months, DARA should have held around $2.6 million in cash as of September 30, 2013. Adding in the net $2.3 million from the registered direct offering noted above should put total cash at around $4.1 million as of today, with an estimated year-end 2013 figure of around $2.5 million.
…Cash To Fund Sales Force Expansion…
The company intends to use the proceeds from the above transaction to expand the marketing and promotion of its products. On October 28, 2013, the company entered into an agreement with Alamo Pharma Services, Inc. pursuant to which Alamo will provide DARA with a 20 person dedicated sales force for the promotion of Soltamox, Gelcair, and Bionect, along with certain other complementary products owned by Mission Pharmacal Company, the parent of Alamo Pharma Services. The additional products include:
A strawberry flavored, once-weekly alendronate sodium buffered solution for the treatment of osteoporosis.
Prescription iron therapy for treatment of anemia.
A protective oral spray for the treatment of chemotherapy or radiation therapy-induced dry mouth.
As per terms of the transaction, DARA and Alamo will share costs on the 20 person sales force. Alamo will be responsible for the hiring, training, compensation, and logistical support of the sales force, whereas DARA will be responsible for the management of the sales force. DARA expects to have the sales force trained and in the filed by January 1, 2014. Under the terms of the agreements, DARA will pay Alamo a fixed monthly fee, subject to an annual escalator, and reimburse Alamo for certain expenses and will receive compensation from Mission for promoting their products. In the coming years of the agreement, we expect the cost of the sales force to be modestly offset by the co-promotion payment. The agreement is for an initial term of three years and subject to automatic one-year renewals unless either party provides at least 60 days' written notice of termination prior to the end of the relevant term.
Our Take On The News
The financing news is not a surprise. DARA was down to around four months of cash and management had to raise cash to keep operations moving forward. The company has spoken at length on recent investor calls or at conferences that the primary reason for the slow uptake to date in Soltamox is due to a lack of awareness. In our previous report we noted that management needed to dramatically step up the marketing and promotional effort behind Soltamox, which included greatly expanding the sales force beyond the current five person sales force that was in place since the second quarter 2013.
We remind investors that DARA started implementing changes to its commercial strategy at the end of the second quarter 2013. Management realigned the original sales force of five representatives to smaller territories, thereby increasing sales call frequency to targeted high volume customers. According to management, the outcome of this refinement was a significant increase in product sales in third quarter 2013. We will see just how significant when the company reports financial results in two weeks. Sales in the second quarter totaled only $76,936.
Management believes this deal today with Alamo Pharma Services should continue to drive the product momentum kicked off by the sales force realignment initiated in June 2013. The company believes partnering with Alamo and expanding the sales force provides the necessary scope and coverage of high prescribing oncologists to maximize the potential of the product portfolio. The partnership with Alamo and Mission quadruples the promotional effort around Soltamox and Gelclair. It also provides three new, highly complementary products that DARA can promote to medical oncologists. We have been impressed with how DARA has built up its specialty oncology product suite to date. The inclusion of Bionosto, Ferralet-90, and Aquoral further broadens this model and should allow for meaningful top-line growth in the coming years.
That being said, investors are no doubt getting frustrated with the continued dilution at DARA. We are down 42% since recommending the stock back in September 2012 at $0.86. The primary reasons for the decline in share price since our recommendation are the slow launch of Soltamox and Gelclair, and the lack of visibility on the KRN5500 orphan drug designation (ODD) application filed in November 2012. By now, we fully expected the company to be generating at least $1 million in revenue per quarter and for management to have provided an update on the ODD for KRN5500. Instead, revenue in the second quarter 2013 totaled only $76,936 and the ODD status on KRN5500 remains unknown. The news of the dilutive offering noted above is a direct result of two things: 1) not generating enough revenue from product sales to cover the current SG&A run-rate, and 2) no partnership on KRN5500.
However, the company believes increasing the sales force from five full-time representatives to 20 by January 1, 2014 with Alamo will help get the ball rolling on Soltamox and Gelclair. The company has made a number of other moves over the past few months as well, including instituting a co-pay program to help level the out-of-pocket expense that the patients pay for Soltamox versus generic tamoxifen tablets and signing co-promotional and partnership agreements. Examples of these agreements include the deal with Prime Therapeutics Specialty Pharmacy LLC for distribution of both Soltamox and Gelclair in April 2013 and the co-promotion agreement with Pronova Corporation for Soltamox in the Southern U.S. that started last quarter.
Additionally, DARA continues its efforts to enroll patients in the CAPTURE registry program. CAPTURE (Compliance and Preference for Tamoxifen Registry), has three key goals: 1) To identify the rate of dysphagia in hormone receptor-positive breast cancer women, 2) To quantify the percent of women that prefer a liquid formulation versus a tablet formulation, and 3) To better understand the compliance of women on tamoxifen. CAPTURE will seek to enroll 600 women at 25 leading cancer-treatment centers around the U.S., with the ultimate plan to publish the data in a medical journal in 2014. In the company's earnings update filed on August 14, 2013, management noted that a total of 13 centers have been enrolled to date and nearly half the 600 patients are in the program. We suspect that DARA will be able to enroll all 600 patients very soon. Enrolling 600 patients sounds like a daunting task in such a narrow timeframe, but there are simply so many breast cancer women on tamoxifen that we believe the company remains on track with respect to presenting the findings at the San Antonio Breast Cancer Symposium in early December 2013.
We remind investors that Soltamox has approximately 1.5% of the tamoxifen market in the UK and Ireland. We see the opportunity as similar in the U.S. DARA tells us the feedback they get when speaking to oncologists is encouraging. Some oncologists have noted that Soltamox may be an excellent solution for up to 5% of their patients. With only 2% share of the U.S. tamoxifen market (~1.8 million prescriptions per year), we see peak sales of Soltamox at roughly $20 million.
We think if DARA can start to gain traction with Soltamox, Gelclair is surely to follow. Oral mucositis is a common side effect of most cancer treatments. We have seen estimates ranging from 10% to as high as 30% of all cancer patients develop mucositis, nearly half of which may be grade 3 or 4. In grade 3 oral mucositis, the patient is unable to eat solid food, and in grade 4, the patient is unable to consume liquids as well. A recent study (Elting et al. Cancer 2008; 113:2704-13) reported that 87% of patients with severe mucositis used analgesics regularly during radiotherapy, 70% of which required opioid treatment. Over 400,000 patients per year will develop oral mucositis, representing a very large market opportunity for Gelclair. It is the perfect companion product to promote alongside of Soltamox. DARA only just launched Gelclair in late April 2013, so we are anxious to see what sales were for the three months ended September 30, 2013.
We are inclined to give our 'Buy' recommendation on DARA another few months to play out. The company obviously underestimated the initial promotional effort required to drive uptake of Soltamox and Gelclair, so the financing above it designed to correct that problem. If Soltamox and Gelclair are truly value-added products for oncologist and patients suffering from dysphagia or oral mucositis, then management owes it to shareholders to step-up the effort. New products acquired today such as Bionosto and Ferralet-90 are excellent compliments to Soltamox and Gelclair. However, if the stepped-up effort does not start to show meaningful improvement in trends by the second quarter next year, it might be time to cut the name loose.
As for the ODD on KRN5500, DARA is at the mercy of the FDA. We understand that there have been a few rounds of back-and-forth questioning between DARA and the FDA on the application since the initial filing last November, specifically around the patient population and label indication. Similarly to the stepped-up promotional efforts around Soltamox and Gelclair, we are inclined to given the company (and FDA) another few months here. We see ODD KRN5500 as the gate-keeper to a potential deal with a development partner. If ODD emerges, the DARA story gets significantly more attractive. In the meantime, our thesis on DARA, though behind schedule, remains intact and we are more optimistic about the potential for accelerating revenue growth today than a few months ago.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.