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Meet the new DARA Bio

Over the past nine months DARA Biosciences, Inc. (NASDAQ:DARA) has gone through a dramatic change. These changes include the acquisition of Oncogenerix, Inc. in January 2012, the exclusive agreement with Innocutis Holdings, LLC in March 2012, and a deal announced yesterday with Helsinn Group of Switzerland. These deals brought in three commercial ready assets in Soltamox, Bionect, and Gelclair, respectively. Besides these three deals, the company also has a relationship with Uman Pharma and Rosemont Pharma, both designed to help DARA build an oncology and oncology-supportive care pipeline for the future. All the above orchestrated by the key management changes that took place late last year.

Soltamox

In our view, the DARA story is really starting to come together. We see Soltamox as a $25 million peak opportunity for DARA Bio. Soltamox is a U.S. FDA approved (in 2006) oral liquid formulation of tamoxifen citrate primarily used to treat breast cancer. Soltamox is the only FDA approved oral liquid formulation of tamoxifen available for sales in the U.S.

DARA plans to launch Soltamox in October 2012, which just so happens to be breast cancer awareness month. The commercial supply will be sourced from Rosemont, with DARA paying cost plus a small royalty (we estimate mid-single digits) on sales. DARA will promote the product with five full-time regional business directors (RBDs) around the U.S.

The company's promotional efforts will focus around physician and pharmacy education about the benefits of an oral liquid formulation of tamoxifen. Patients undergoing radiation treatment or with oral mucositis may find it difficult to swallow (dysphagia) the tamoxifen oral tablet. The liquid formulation provides easy of administration and convenience of dose. Post-menopausal women with hormone positive breast cancer may be on a number of oral medications. Soltamox provides differentiation from solid dose medications. This may lead to improved compliance.

We believe awareness is key to the Soltamox uptake, especially at the pharmacy where Soltamox can be suggested to the patient if there is evidence or a mention of difficulty swallowing oral tablets. According to the National Cancer Institute, approximately 230,500 women were diagnosed with breast cancer in 2011. The one-year mortality rate is roughly 17%. There were an estimated 350,000 prescriptions written for generic tamoxifen in 2011. DARA will focus on high tamoxifen prescribers, leading cancer centers, and brand awareness to drive sales.

Soltamox has approximately 1.5% of the tamoxifen market in the UK and Ireland. We see the opportunity as similar, perhaps a tad bigger, in the U.S. We expect that Soltamox will command a premium price to the generic, perhaps as much as $250 per month, and gain tier-3 formulary coverage. We expect that DARA will offer a co-pay assistance program to patients so that the out-of-pocket expense for Soltamox vs. generic tamoxifen is negated.

With an estimate 2% share of the U.S. tamoxifen market, we see peak sales of Soltamox at roughly $25 million. We forecast sales in the first year of launch will be around $3 million, growing to near $20 to $25 million around the time of the patent expiration in 2018. The benefit to DARA is that patients starting on Soltamox will most likely continue on the drug for up to five years. We think sales will build slowly, but as awareness grows each patient turns into an annuity stream for the company, eventually leading to a highly profitable venture for DARA.

Bionect

In June 2012, DARA announced that it has launched Bionect for the treatment of skin irritation and burns associated with radiation therapy. The company launched the product with the aforementioned five field-based regional business directors (RBDs) noted above. These RBDs will coordinate the commercial introduction of Bionect for the cancer care market across the U.S. We expect the company to record the first revenues from Bionect in the third quarter 2012.

There are an estimated 4,300 radiation oncologists in the U.S. We believe DARA can effectively target the top decile with its small dedicated specialty oncology and oncology supportive care sales team. There is little competition promoting directly to these physicians, and we expect that DARA will offer patient support programs to help drive uptake of the product. In most occasions, Soltamox and Bionect will be used by the same patient at the same treatment center, targeting both the oncologist and radio-oncologist, making for highly efficient promotion. In the first quarter of 2013, DARA expects to bring a third product, Gelclair, to the same physician or center.

Inncoutis Holdings, LLC is a private company, so we do not have a sales history on Bionect into the dermatology market. Our best guess is that the product does around $3-4 million per year. We see the sale potential into the oncology and radiation oncology market as a similar opportunity. We note that DARA will collect a tiered royalty (co-promotion payment) on each Bionect prescription it sells.

Skin irritation is a common side effect associated with chemotherapy and radiation. Roughly two-thirds of cancer patients receive radiation therapy. Nearly all (87% according to DARA) will develop moderate to severe radio-dermatitis. Skin irritation is one of the primary side effects of radiation therapy, and a chief reason why patients discontinue treatment before a full cycle completes. There is evidence (Radiotherapy and Oncology Vol.42(1997)155-161) that prophylactic use of hyaluronic acid cream during radiation treatment reduces the incidence of high grade radio-epithelitis, and may be used as a supportive treatment to improve compliance and quality of life in patients undergoing radiation therapy.

According to industry prescription tracking, there are an estimated 150,000 prescriptions for radiation dermatitis annually in the U.S. Remedy includes everything from A&D ointment, to aloe vera gel, to both low and high molecular weight hyaluronic acid. Studies show that high molecular weight hyaluronic acid does not penetrate into the dermis, and thus is ineffective in relieving symptoms of severe skin irritation caused by radiation. There is little active promotion of any pharmaceutical product for radiation-induced dermatitis. We believe that Bionect could capture 5% to 10% market share with DARA promotion.

Gelclair

On September 13, 2012, DARA Biosciences announced it had entered into an exclusive agreement with Helsinn Group of Switzerland for the U.S. commercial rights to Gelclair (hyaluronate sodium). No financial terms were disclosed. However, we believe that DARA paid Helsinn a small upfront payment for the rights to Gelclair in the U.S. Helsinn will provide product supply to DARA, which we model includes a built-in mark-up for Helsinn and 80-85 margin to DARA. Gelclair is FDA approved and DARA plans to launch the product in the first quarter of 2013.

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 get mucositis. Treatment with 5-fluorouracil (5-FU) tends to increase the incidence of oral mucositis up to 40%, 10-15% of which develop grade 3-4 mucositis. Irinotecan is associated with severe gastrointestinal mucositis in over 20% of patients. 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.

Mucositis is most common in patients receiving radiotherapy for head and neck cancer. Data published in the Annals of Oncology in 2009 (20(supp4):174-7) cited almost 100% incidence for these patients, over 50% grade 3-4. Data in published in the Journal of Supportive Oncology in 2007 (2(2 Suppl 1):13-21) cited a similar near 100% incidence for patients undergoing high-dose chemotherapy with hematopoietic stem cell transplant (HSCT). Oral mucositis is particularly profound and prolonged among HSCT recipients who receive total-body irradiation.

Patients with severe mucositis are more prone to developing bacterial or fungal infections. Patients also often require parenteral nutrition because they cannot swallow. It's a significant burden to the patient and caregiver. Many patients have to reduce chemo or radiotherapy due to the toxicities resulting in mucositis. This puts the patient at greater risk for cancer disease progression, not to mention increase cost of time on therapy and potentially delayed discharge from the hospital. Over 400,000 patients per year will develop oral mucositis, representing a very large market opportunity for Gelclair.

The idea of DARA distributing Gelclair marries well with the concept of Soltamox (liquid tamoxifen) and Bionect (low-molecular weight hyaluronic acid). DARA will use the same five full-time regional business directors (RBDs) currently promoting Bionect and soon Soltamox to promote Gelclair.

We see Gelclair as a potential $5 million opportunity in the U.S. The product has somewhat of a rocky past. Gelclair was approved by the U.S. FDA in January 2002 at UK-based Sinclair Pharmaceuticals. Sinclair licensed the product to Cell Pathways, and the product was launched in June 2002. In October 2002, Cell Pathways signed a co-promotion agreement with Celegene for the U.S. marketing and distribution of Gelclair. At that time, management at Cell Pathways stated that Gelclair was a potential $25 million product in the U.S., and the backing of Celegene seemed to validate that estimate. However, Cell Pathways, Inc. was acquired by OSI Pharmaceuticals in June 2003, and OSI Pharma terminated their co-promotion agreement with Celegene shortly after the deal closed. Meanwhile, Sinclair sold the global rights to Gelclair to Helsinn Group in August 2003. Gelclair struggled at OSI Pharmaceuticals, as OSI focused on the launch of Tarceva at Genentech and the later failed merger with Eyetech Pharmaceuticals. Gelclair posted U.S. sales of only $1.2 million in 2004, down from $1.6 million in 2003.

Following the merger with Eyetech Pharmaceuticals, OSI Pharma returned the U.S. rights of Gelclair to Helsinn in 2006. Helsinn licensed the rights to EKR Therapeutics in October 2006. EKR brought in ProStrakan Group to co-promote the product in April 2009. In 2009, we estimate Gelclair sales were around $4 million. However, EKR Therapeutics shifted focus in 2009 to the cardiovascular market and rights were returned to Helsinn. The product has been off the market since that time.

The Pipeline

Besides the three commercial assets discussed above, DARA has a pipeline focused on generic cytotoxic agents and oncology-care products. Through the company's partnership with Uman Pharma, we expect a abbreviated new drug application for gemcitabine to be filed with the U.S. FDA in the next few months. Behind the ANDA for gemcitabine, DARA and Uman Pharma are working on applications for generic formulations of oxaliplatin, docetaxel, and pemetrexed as well.

Additionally, we still believe that KRN5500 is a valuable asset for the company. DARA presented positive study results from its phase 2a dose escalation study with KRN5500 at the 13th World Congress on Pain in September 2010. The multicenter, placebo-controlled phase 2a study was designed to evaluate the safety and efficacy of KRN5500 for treatment of neuropathic pain in patients with cancer.

In May 2012, DARA announced a new analysis of the above data by an external biostatistician with extensive FDA experience. The data reported above was based predominantly on patient-reported Numeric Rating Scale (NRS) pain scores collected by healthcare professionals in a clinic setting during weekly visits. The new analysis focused specifically on self-reported daily pain scores from patients' diaries. Responders in this analysis were defined as patients attaining a clinically-meaningful (at least 20%) improvement in mean NRS scores from baseline within any given week. Of the 12 patients who received KRN5500 in this 19-patient trial, 7 (58%) were classified as responders. Further, 5 of the 7 (71%) showed sustained pain relief over several weeks. Of the 7 patients who received placebo, none were responders.

DARA Bio has a clinical trial agreement on KRN5500 with the Division of Cancer Prevention (DCP), National Cancer Institute (NCI), National Institutes of Health (NIH), for the treatment of Chemotherapy Induced Peripheral Neuropathy (CIPN) in patients with cancer. Under the terms of the collaboration, NCI will fund the phase 2b studies and DARA will supply KRN5500 at costs plus expenses. We expect this phase 2b trial to start during the first half of 2013. We believe DARA will seek a development and commercialization partner for KRN5500 once this phase 2b study completes.

A Cheap Stock

DARA Bio current trades with a market capitalization of only $10.4 million. The company exited the second quarter 2012 with $9.3 million in cash and investments. We find this level of cash sufficient to fund operations into the second quarter of 2013.

DARA is currently burning cash as it funds the launch of Bionect with its five-person specialty sales force. We expect DARA to launch Soltamox in October 2012 and Gelclair in the first quarter 2013. We do not see the current cash balance as sufficient to fund operations to cash flow positive, but by the time DARA will require additional financing we suspect that Bionect, Soltamox, and potentially now Gelclair will be on the market, providing to investors greater visibility in the emerging story. Accordingly, we expect the company to secure additional financing on better terms than today.

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 decline 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.

From DARA's standpoint, the strategy makes sense. Build a small sales force to promote Soltamox, Bionect and Gelclair, then add value by making generic cytotoxic agents available to existing relationships. It provides for an attractive margin with low operating costs. Drive KRN5500 with help from the NCI and then seek a partner for phase 3. For DARA shareholders, it gives the potential for real revenues and growth in the future - a strategy; something DARA has been sorely lacking over the past few years.

We have conducted a discounted cash flow (DCF) analysis of DARA which incorporates Soltamox, Bionect, Gelclair, gemcitabine, and KRN5500. Our model has factored in the dilution from the recent registered direct and public offerings of preferred stock. We find fair-value to be above $2.50 per share. We think DARA is starting to look very interesting for long-term investors. The company is well financed and both Soltamox and Bionect should be producing 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, and KRN5500 is nearing phase 2b funded by the NCI. We see the current market value as vastly under-valuing this opportunity. From here on, it's all execution.

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.

Additional disclosure: I am an employee of Zacks Investment Research. This article is part of a larger body of work on DARA Bio. To obtain a copy of the full 11 page report, please contact me directly.