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Is DARA BioSciences' Rebound Sustainable?

|Includes: Midatech Pharma PLC (MTP)

DARA BioSciences, Inc. (NASDAQ: DARA) is a Raleigh, North Carolina-based pharmaceutical company specializing in supportive oncology care. The company manufactures and sells a portfolio of drugs for preventive care and treatment of side-effects of chemotherapy in cancer patients. The product portfolio contains six drugs sold directly and in partnership with oncology treatment centers. The flagship product has been Soltamox, which is a liquid form of Tamoxifen, used in breast cancer treatment.

Recent Results Impress

DARA Biosciences released its Q1 2014 results on May 12, 2014. Its revenue increased eight-fold to $161.5 million from $21.200 million in Q1 2013. Gross margins improved to 67 percent from 17 percent in Q1 2013.

Sales and marketing expenses increased in the current quarter since the company expanded its sales force to twenty from five in the last quarter, due to the partnership with Alamo Healthcare. The cash balance as of March 31, 2014 doubled to $6.8 million from $3.4 million in March 2013. Equity of $6 million was raised in February 2014 at a price of $2.75 per share.

Clinical Pipeline

The FDA has granted orphan drug status to DARA's KRN5500, a drug used for chemotherapy induced neuropathy treatment, which will provide seven years market exclusivity and cost benefits. The company signed partnership agreements with Raintree Oncology Services and WellCare (NYSE: WCG) to sell Gelclare and Soltamox.

Additionally, the company raised $6 million to finance business operations and further investment in R&D. The company is organizing various events to spread awareness on oncology supportive care and to induce the intake of liquid form of Tamoxifen.

A market study by GBI Research indicates that the oncology supportive care market is estimated to grow at a CAGR of 2 percent from 2009 to 2016, when the market size will reach $12.6 billion. Growth is expected to slow down post 2014 due to many drugs losing exclusivity.

The study also suggests that specific segments like bone metastases and oral mucositis care are expected to show high growth of 8 percent and 6 percent respectively. Big players like Pfizer (NYSE:PFE), Johnson & Johnson (NYSE: JNJ), Amgen (NASDAQ: AMGN), Roche (OTCMKTS: RHHBY) and Novartis (NYSE: NVS) also have presence in this market and this will provide tough competition for DARA Biosciences in gaining market share.

The pipeline of the company has only one drug in Phase IIb, which makes future growth prospects slightly apprehensive.

Fundamentally

The company posted EPS of $0.60 in 2012, which reduced to $0.39 in year ended 2013. The EPS in Q1 2014 reduced to $0.37 from $0.55 in Q1 2013. Depreciation costs are expected to go up due to significant capitalized assets which are expected to be expensed once revenues are booked.

Analysts expect the 2014 year ended EPS to be $1.00. The stock is currently trading at a Price to Sales multiple of 0.013x while a year ago it was trading at 0.23x. The stock lost 60 percent since its public offering in February 2014 due to less than expected numbers.

Conclusion

On May 28, 2014 the stock rebounded by 98 percent to close at $2.18. This uptrend could potentially take the stock up to $2.75; the recent public offer price. The current view on the stock is neutral, at least until signs of revenue and EPS growths are visible in Q2 and Q3 of this fiscal year.

Investors will also look for more product addition to the stage pipeline and subsequent licensing to build confidence. Consolidation can also be expected in coming years since the overall market size is small with big competitors.