DARA Plans Pipeline Acceleration - Analyst Blog

Financial Highlights

On May 14, 2010, DARA Biosciences (DARAD) reported financial results for the first quarter ended March 31, 2010. The company reported no revenues during the first quarter 2010. During the three months ended March 31, 2010, cash used in operating activities was $1.12 million.

DARA exited the first quarter ended March 31, 2010 with $3.99 million in cash and investments. During the quarter, management raised approximately $1.75 net cash from the private placement of common stock and warrants, and $100k from the exercise of options by management.

On May 17, 2010, DARA announced it has commenced an underwritten public offering of $10 million in units comprised of shares of common stock and warrants, plus an option for underwriters to purchase up to $1.5 million in additional units to cover any over-allotments. Management plans to use the proceeds from the offering to accelerate development of the company’s two leading pipeline candidates, KRN5500 and DB959.

Besides the potential to raise net proceeds of $11+ million in late May / early June 2010, DARA is still holding approximately 1.61 million shares and 0.4 million warrants (at $0.80/share) of stock in privately-held SurgiVision. We remind investors that in December 2009, SurgiVision filed a Registration Statement with the SEC for an Initial Public Offering (IPO). Based on recent disclosures at SurgiVision, the company is targeting June / July for the IPO.

DARA’s lock-up period on these shares expires in June 2010, so we estimate that DARA will be able to raise an additional $10 million in cash – assuming the IPO is priced at $5/share – once SurgiVision begins trading.

Gearing Up for the Pipeline Push

In April 2010, DARA Bio announced that it has entered into 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 studies and DARA will supply KRN5500 and placebo at costs plus expenses.

We note that DARA will supply DCP-NCI with a new improved formulation of KRN5500. The new formulation has been proved equivalent and is that is lyophilized to provide for easier dosing administration. The NCI will utilize its established national network of investigators (Community Clinical Oncology Program -- CCOP) to conduct the planed phase IIb study. We expect this program will begin in the second half of 2010.

With DCP-NCI handling the costs and expenses for the planned phase II program in CIPN, DARA is now free to explore additional indications with KRN5500, including post-herpetic neuralgia (PHN), diabetic peripheral neuropathy (DPN), and HIV-associated distal neuropathy (HIV-DSP). Management plans to use the proceeds from the planned public offering in late May / early June 2010 to fund the phase IIa proof-of-concept data on the next wave of indications for KRN5500.

We expect that these phase IIa programs will be similar to the phase IIa conducted in CIPN. That program was a 14-week (multi-center/double-blind) placebo-controlled dose escalation study that randomized 19 terminally ill cancer patients to receive treatment with either KRN5500 (n=12) or placebo (n=7) in doses ranging from 0.6 to 2.2 mg/m2.

In March 2009, the U.S. FDA cleared DARA’s investigational new drug (IND) application allowing management to commence phase I clinical testing of DB959 in humans. The phase I study will enroll approximately 75 volunteers and will be conducted at Quintiles' Overland Park facility. The main objectives are to determine the safety (maximum tolerated dose) and pharmacokinetics (pk) of single ascending oral doses of DB959. The company expects to report the results of the study during the second half of 2010. We expect the trial to cost DARA roughly $1 million.

The next step would be a phase Ib multiple ascending dose program to begin in late 2010 or early 2011. After that, a larger-scale phase II study in which DARA plans to study DB959 as both monotherapy and in combination with other standard glucose lowering agents such as metformin, dipeptidyl-peptidase IV (DPP-4) inhibitors, and sulphonylureas (SU).

DARA is also conducting a 2-year carcinogenicity program on DB959, as well as a 29-day toxicology study so that all the preclinical data can be analyzed and in hand by the time the company is ready to seek a development or out-license partner on DB959 in 2012. Management plans to use the proceeds from the public offering in late May / early June 2010 to fund these programs.

Stock Hit Hard By Non-Fundamental, Short-Term Negatives

DARA Bio’s stock has been hit hard over the past week based on the implementation of the 1-for-16 reverse split, a purely psychological negative, and the recent announcement to issue potentially $11+ million in new stock through a public offering. The news of the highly dilutive offering, potentially 85% at the current market value, came only a trading day after the reverse split took effect.

For DARA shareholders, the reverse split is a good thing. It allows the company to maintain compliance with the NASDAQ listing requirements for minimum bid. Maintaining a listing on the NASDAQ Capital Market ensures liquidity and access to capital, as evidenced by the announcement of a public offering a few days later.

The highly dilutive offering is certainly discouraging from an existing shareholder standpoint, but we note that DARA plans to use the cash to push development of its two leading pipeline candidates, KRN5500 and DB959, as discussed above. We believe that spending the money to fund these programs now, instead of waiting until 2011 or beyond, will greatly add to the attractiveness of the candidates when management seeks to find a development or out-licenses partner in the future.

Based on our analysis of the pipeline, we see DARA fairly valued at $12 per share. Our assumptions assume that DARA takes both KRN5500 and DB959 through phase IIb proof-of-concept and then out-licenses to a mid- to large-cap pharmaceutical company. Post-phase II products have been commanding upfront payments in the area of $25 million, followed by NDA filing and approval milestones north of $40 million, with another potential $200+ million in backend sales related milestones and royalties in the mid-teens.

Neuropathic pain candidate KRN5500 should be ready for a partnership post phase IIb data in 2011. Potential blockbuster type 2 diabetes candidate, DB959, is roughly one year behind, meaning that another lucrative partnership could follow in 2012.

Based on our analysis, KRN5500 alone is worth more than the entire market value. DB959 and several interesting preclinical candidates for metabolic and inflammatory disease round-out an impressive pipeline from which DARA should be able to extract value over the next several years. Therefore, we think upside is significant for this under-followed / under-valued story.
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