This past week, Pfizer Inc. (NYSE:PFE) said that it expects to spend up to 23.5% less than previously projected on research and development in 2012. According to a newly published report from Dow Jones, Pfizer will maintain or increase research investments in neuroscience, oncology, inflammation, immunology and vaccines. The Pfizer news is but one in a series of articles lately that point in the direction of an expected surge in big pharma acquisitions and partnerships with biotech companies.
Never mind that the same surge was expected, but did not happen in 2010. While the markets were bouncing back, the time marker of expiring patent protection began putting more pressure against some of the leading drugs and their manufacturers. Many of those big pharma have been stashing tens of billions away and some appear ready to start spending that money on companies and drug candidates in the later stages of development who have a high probability of success in the Phase III trials.
One of the visionaries who saw this scenario playing out long before the table was set was Richard Franco, the Chairman and Chief Executive Officer of DARA BioSciences (NASDAQ:DARA) a biopharmaceutical development company in the business of acquiring promising therapeutic candidates, developing them through proof of concept in humans and subsequently selling or out-licensing them to larger pharmaceutical players.
"When we founded this company we asked ourselves the question, ‘Can we make money for ourselves and our shareholders by developing drugs with a modest treasury,'" explains Franco. "And is there a market that really returns, on our investment, a high multiple while keeping our risk down?"
Franco and his team began doing their research and what they found has yielded him and previous investors a hefty return along the way, thus far.
"What became clear to us, was that what was going to happen with this patent cliff over the next several years was going to really diminish revenue in the U.S. Pharma business like no other time in history," Franco says. "We drilled down a little bit and we found that of the top ten drugs in the world, nine will lose their patent protection over the next several years and of the top twenty, eighteen will do the same. So, there is a great need to fill and replace this revenue; which totals about $92 billion. Almost a third of $300 billion which is generated in sales in the United States. So we set about saying, 'What do we need to do to get a major position in here and have big pharma take interest in what we're doing?'
"We set up some criteria for ourselves. First, anything we acquire must participate in a large and growing market. Number two, the intellectual property position must be strong. Number three, the regulatory pathway has to be understood so there are no surprises- as there are sometimes with the biologicals. In many cases, with the FDA these days, there are many surprises. So we looked at all of that and we also started looking at what the FDA was doing with regard to new molecular entities; and nowadays they are only approving about half of what they would approve in the 1990s. So we knew there was going to be a scarcity in the market for these high profile, high value compounds. So we set about saying, ‘Let us start looking at what's available out there that we can acquire for very little cash or for a position in a subsidiary company that we could form where we don't have to put a lot of money up front.' The other commitment that we made to our initial shareholders is, as that we were building the company – because drug development takes some time, although we don't take it through Phase III, it still takes time to acquire, to get regulatory IND approval, and then to start clinical trials and if we're fortunate and we do the modeling right, these drugs will succeed. We made a commitment to our initial investors that we'd look around for companies that were very high interest, that we knew the people, that we understood their technology and in which we could invest less than two million dollars."
What did Franco and his group did with a small chunk of those first two million? They funded Medivation, Inc. (NASDAQ:MDVN) and helped launch it into a public company, whose shares have traded as high as $40 during the last 52-weeks. If you've noticed that DARA's business plan sounds eerily similar to MDVN's you're not alone.
"We found Medivation," says Franco. "One of our co-founders actually found the company. He conferred with me. We were very much impressed with David Hung, M.D. (President and Chief Executive Officer of MDVN) and the technology, so we went to MDB capital and they actually took the company public, but before that happened we invested, net, under a million dollars and bought 18% of the company.
"After the company went public we then made a distribution, to our shareholders, of 95% of the stock we held as return of capital. We held on to 5% and used that for non-dilutive working capital. The return to our investors, if you look at the number of shares- we did that in early 2007 - depending on where the shareholders sold that stock, it ran above $40 dollars if I remember correctly. It was worth about $80 million to our shareholders. We sold our portion for an average price of about $20 to fund the company. For us, that was a big homerun. For our shareholders it was also a big home run. It was great return on investment. I never calculated how big a bagger that was, but it was quite a large one."
Franco is hoping he and his DARA investors can hit the jackpot again. He had already retired from the company, but he couldn't stand to watch as the fellow who took over "tried to do everything at once and just ran the company's cash down to almost zero." Franco came back two years ago, in January, and reorganized what the company's priorities should be. "We went out and raised some money. We turned it around and now we're very focused. We reduced our overhead by almost 60%. These days you need to be very focused and particularly where mother nature is kind to you. "
Presently DARA has two drug candidates with cleared IND (Investigational New Drug) Applications from the FDA and they are deep into clinical study. In addition, the Company has a pipeline of diverse drug candidates, with 82 granted patents and 56 pending applications (U.S. and foreign). Their leading drug candidate, at least while they still own it, is KRN5500.
"At the same time we started looking for compounds, we discovered KRN5500, which was a drug that was initially thought of as an oncology drug, as a chemotherapeutic agent," Franco explains. "The National Cancer Institute (NCI) did three Phase I studies in the United States and there was a fourth study done in Japan supported by Kirin. The drug actually failed as a chemotherapeutic. But during the trials at Massachusetts General Hospital, they had a patient- who had been a long term patient of theirs- who had Neuropathic Pain for twenty plus years. When put on KRN5500, had complete remission of the pain. The pain never returned and the patient ultimately passed away about a year later from cancer. Given that observation, the people at Mass General, David Borsook, MD in particular, took on to do three different animal models looking at Neuropathic Pain. All were successful.
"At that point in time, when we caught wind of what was going on, it was an excellent opportunity. Kirin had lost interest in the drug from a chemotherapeutic standpoint. We then got Kirin Pharmaceuticals and the capital partners together and cut a deal to have exclusive worldwide rights for pain and for CNS disorders. That's how we acquired it. As Kirin and the NCI wound down their IND , we filed our IND. We had a pre-IND meeting with the FDA and got our IND approved to study KRN5500 in Neuropathic Pain; primarily in cancer patients initially. We then said, in a company like ours what we'd like to do is really test the drug hard to see if it's going to give is a very positive signal in regards to safety and efficacy.
"So the enrollment criteria for our Phase II study were: First, they were patients with advanced cancer who had to have failed on two other drug regimens for their Neuropathic Pain. They had to have at least two symptoms for Neuropathic pain and they had to have an NRS (Numerical Rating [Pain] Scale) score of at least 4 or greater. Although this study was a small study with 19 patients; 12 on the active side and 7 on the placebo side, this study was not sized to show statistical significance. However, we believe because of the robustness of the drug, and the fact that this was very severe pain that it made its primary endpoint in reduction in pain and was statistically better than placebo at .03- which was an amazing finding given such a small study. We realize it's a small study. But we did the study in those small numbers because to recruit those kinds of patients, if it was a large study it would take forever and we just wanted to test this drug to see if it worked and lo and behold it worked even better than we thought.
"A component of that study was to also look at Allodynia (other pain). Over 80% of the patients in the trial had Allodynia. Again, KRN5500 reduced that by 33% in the active arm. In the placebo arm it was about 3% or 8 %, I forget exactly. No severe side effects were noted. There was some nausea and vomiting, the cause of which was hard to figure out because these patients were on other medications at the time. Again, in advanced cancer patients, you're going to try to make them very comfortable and treat their symptoms as best you can. So we were very, very fortunate. Given the results of that study, the NCI and DARA got together. NCI then did due diligence on the study and once they finished, joined into a clinical research agreement where the NCI will fund the study and we will only have to supply drug and placebo for chemotherapy-induced peripheral neuropathy or CIPN; which occurs in about 40% of patients that are on multi-chemotherapy or in HIV patients that have completed antiretroviral therapy. It's a severe problem. There are no drugs indicated for CIPN and about 80% of the patients in the Phase II trial had CIPN, so it was a very good finding for patients who really don't get relief from present therapies or get minimum relief, in this case KRN5500 was used where these other drugs failed."
That's the story on KRN, but as Franco tells it, the bargain shopping didn't end there. DARA is also thick in the middle of developing DB959 a drug to treat chronic hyperglycemia and the dyslipidemia that accompanies Type 2 Diabetes. The growing diabetes epidemic has created an oral market for Type 2 Diabetes which is expected to surpass $12 billion this year.
"How we acquired our diabetes drug candidate was when Bayer was merging with Schering AG (OTC:BYERF). They decided to abandon their metabolic program in the United States and they had two lead compounds and a large library of molecules that are PPAR.
"We were able to acquire the whole program for a reasonable amount with certain milestones and certain minimum payments. But as you can imagine, for a small company like us, we didn't pay a huge amount of money, but it was significant for us because the pre-clinical data that Bayer had generated on DB959 was very, very compelling particularly from a safety standpoint and also an efficacy standpoint. We then took the Bayer data, we completed the pre-clinical work, we applied for an IND . It was approved and we recently, just completed our first 1A study as you can see from our press release and from our presentation; and as you know Phase 1A was for tolerability, pharmacokinetics (what the body does to the drug), and we added an additional cohort for looking at the effect that food would have on the administration of the drug. The results showed that it was a very well tolerated drug even though we dose up to ten times the anticipated oral dose- the human dose.
"The kinetics certainly support once a day - it is an oral medication. And the food effect cohort showed there was little effect on the administration of the drugs, so we are proceeding, but hopefully in late February or early March, we start the Phase 1B which certainly will be a multi-dose escalation study in healthy volunteers to see what the cumulative effect of the drug would be over time. That study should be completed by mid-year in our best estimate. We will report on that data in the second half of the year.
"We've also been able to build an inventory of compounds. We have a family of CPT1 inhibitors that we believe could be an interesting topical administration candidate for Plaque psoriasis (the most common type of psoriasis). There was some initial work that was done which looks very promising but it's very, very early.
"We also now have a library of dipeptidyl-peptidase IV (DPP-4) inhibitors that we've in licensed. We're taking a little bit different approach. We believe based on some published information, that treating stem cells before transplantation, with potent DPP-4s can help homing and engraftment.
"We are proceeding on a very non-exclusive basis with a company called America Stem Cell, which is a virtual company out of California, but hope to advance that program once we have the animal proof of concept; treating stem cells ex-vivo, before transplantation.
"There's been a number of published articles where PPARs have been used in Nonalcoholic fatty liver disease (NAFLD), in Non-alcoholic steatohepatitis (NASH), in Alzheimer's, in Malaria, in cystic fibrosis. The second compound that we acquired, that was in development, and we now have named DB900; once we monetize our first compound, we will look at that for NAFLD, in NASH, which is a very underserved and very large market. We still have it in inventory. We have not discontinued it, we just put it on hold because we wanted to focus our cash on the two lead compounds given our business model and not take a shotgun approach, but a more focused approach on those two compounds. And we've been very fortunate. Mother nature has been very good on the results of those studies.
If you're wondering about the surge in DARA's stock price, you need not look further than the company's small float and ability to deliver positive news flow.
"All of our news has been positive with regard to our technology and our drugs," says Franco. "We haven't had any failures and the company was extremely undervalued. Before the surge the market cap was around $9 million. I think that the investors that have come in have helped started to get the word out. I've been on the road more. I believe that it was just about people understanding what the intrinsic value of this company was- that it was way undervalued and that there was an opportunity here. The latest round of investors have introduced us to other people and we are busy telling our story and people have been buying the stock at the market. "
What caught our attention was something Franco told a group of investors at a recent conference. It's also what is likely to push shares higher as speculators take positions in the stock.
"Big phrama is interested in us," says Franco. "We started the process of putting KRN5500 out there as an out-license candidate. We have a number of companies, right now, doing deep due diligence. We have a virtual due diligence room. There are companies both big and medium sized, both international and domestic that are looking at KRN5500 right now. That is our business model. Once we have proof of concept, is to out-license that to big pharma. The analogy we use, is that we get the ball into the red zone and big pharma then finishes the work and commercializes the product. Their need is great right now. I think when it comes to timing, sometimes you have to be rather lucky than good and I think our timing is very good based on the research we did several years ago."
"You never know with big pharma. I did business development with Glaxo for three years and I know how the vagaries go- like the president of Pfizer changes and everybody freezes in place. I'd hate to forecast that, but what I can tell you is that deal flow has increased dramatically. We've looked at comps with regard to both KRN500 and DB959 and although we are not ready to do anything with DB959 until we at least complete phase I, there were three deals in the pain area done in 2010, and the average out front was about $25 million and the milestones were around $3 to $4 hundred million and the royalty rate was somewhere in the mid-teens. When you look at the one deal that was done between Forest Laboratories and TransTech Pharma on a Type-II diabetes drug in phase I, that was a 1.1 billion dollar deal with $50 million upfront and the royalty, again, in the mid-teens.
"That seems to be where everybody is pegging right now. Again, that drug had finished Phase I, had some data and we want to finish our Phase I- like I said by mid-year- and then see what the data and market looks like. I don't want to go out too soon, but I don't want to go out too late either, so we're probably going to look closely at what we're going to do in regard to out-licensing DB959 in the third quarter."
And if you're worried that DARA may be out touting their story because they're looking to raise money, think again.
"We just finished raising," says Franco. "We over-subscribed an offering. We had a $4 million offering and we closed it at $4.8. We over-subscribed it. We have cash on hand at about $5.6 million and if the one year warrants are in the money, which they are now, and people exercise it; that could be an additional $5 million to us. So we have, cash on hand now, we have at least enough to last us for at least 12 months."
For the moment, Franco recognizes that his number one challenge is to get KRN5500 out licensed and then to complete the Phase I work on DB959.
"Right after that we have to present that data at scientific meetings, as we have been doing in the past," says Franco. "I think we have a great deal of interest on the retail side, the pace where I fell down was on the institutional side and I think we're getting some help on that now. That's a challenge for us, but we're starting to make some inroads. We're just at the beginning. Those are the challenges for us. We don't have any debt. We're in good share with Nasdaq so I think, overall, I think it's about execution right now."
The company is institutionalizing their story. We alerted BioMedReports subscribers to that fact and believe that DARA shares will continue to rise as the active efforts to tell DARA's story continue along Wall Street. Equity research coverage efforts have also begun and that typically creates a wave of buying from firms and institutional types.
Disclosure: No Positions