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Monday, March 5, 2012

DARA's Focuses On Oncology: The Right Move

By Jason Napodano, CFA

Merger With Oncogenerix, Inc.

In January 2012, DARA Bio (DARA) announced it has entered into a transaction to merge with privately-held Oncogenerix, Inc. of Mount Pleasant, SC. Oncogenerix is a specialty bio-pharmaceutical company focused on the identification, development and commercialization of branded and generic oncological bio-pharmaceutical products. Oncogenerix is presently engaged in two key areas of product development, oral liquid formulations of U.S. Food and Drug Administration (FDA) approved products and sterile injectable cytotoxics. Oncogenerix is now a wholly-owned subsidiary of DARA Bio.

Oncogenerix’s lead product is Soltamox, 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. The product was licensed from UK-based Rosemont Pharmaceuticals, Ltd. Rosemont currently sells Soltamox in the UK and Ireland. 

Tamoxifen was originally developed by over 30 years ago. The product was first commercialized as Nolvadex by ICI Pharmaceuticals, later acquired by AstraZeneca Plc. Sales of tamoxifen oral tablets peaked at $1.1 billion in 2001. It is now widely available as a generic tablet for as little as $50 per month with tier 1 coverage. A typical course of treatment on tamoxifen involves daily dosing for up to five years. 

…A Commercial Ready Asset…

DARA plans to launch Soltamox in the third quarter 2012. The commercial supply will be sourced from Rosemont, with DARA paying cost plus a small royalty (we estimate mid-single digits) on sales. We expect that DARA will build a sales force of approximately five full-time representatives to promote Soltamox 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 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 (dysphagia). According to the National Cancer Institute, approximately 230,000 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 $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.

Former Oncogenerix, Inc. CEO, Christopher Clement, has joined DARA Bio as the company’s Chief Operating Officer and member of the board of directors. We note that an additional member to the board of directors will be appointed representing Oncogenerix shareholders in the near future.

…Our Take On The Deal…

We like the deal from a commercial standpoint. Soltamox offers peak sales in the U.S. of approximately $25 million. We believe the potential for Oncogenerix to license additional oncology or oncology-care products in the future marries well with DARA’s phase 2b ready asset, KPN5500 for chemotherapy induced peripheral neuropathy (CIPN). The ability to acquire a commercial asset with $25 million in peak sales for only $1.73 million in stock is a big win for DARA shareholders. Couple that with the upside in future licensing and pipeline expansion at Oncogenerix makes us believe DARA’s future looks brighter post deal. Besides Oncogenerix, we are intrigued with the potential for an alliance with UK-based Rosemont Pharma.

Rosemont controls the rights to Soltamox in Latin America and Asia as well. Rosemont manufactures (cGMP) and supplies over 140 liquid medicines including, including both licensed and unlicensed products. Rosemont is looking to expand its pipeline and DARA, with five specialty oncology representatives coming on board later this year, will be looking to expand its promotional efforts. We would not be surprised to see DARA and Rosemont collaborate on future products for the U.S. or Ex-U.S. oncology market.

Deal With Uman Pharma

Less than a month after the deal to acquire Oncogenerix, in February 2012, DARA Bio entered into an exclusive distribution agreement with Uman Pharma Inc, for the exclusive license to import, sell, market and distribute Uman's gemcitabine lyophilized powder product in 200mg and 1g dosage sizes in the U.S.

Gemcitabine was first discovered by Eli Lilly in the early 1980’s. The drug was approved by the U.S. FDA in 1996, and was sold exclusively as branded Gemzar by Eli Lilly up until the patent expiration in 2011. U.S. sales of branded Gemzar in 2010 totaled $780 million. Sales of Gemzar peaked at over $1.7 billion worldwide in 2008. The drug is now widely available as a generic in 200mg and 1g single use vials. We estimate the total generic gemcitabine market in the U.S. is roughly $600 million.

…ANDA Later This Year…

Under the terms of the agreement, Uman is responsible for all formulation, analytical, and manufacturing and development activities required for obtaining and maintaining required FDA regulatory approvals for commercial sale of gemcitabine in the U.S. Uman plans to file an Abbreviated New Drug Application (ANDA) with the U.S. FDA later this year. DARA will have exclusive rights to commercialize gemcitabine manufactured by Uman in the U.S. for seven years from the date of the first commercial sale. DARA will make certain milestone and royalty payments based on minimum sales requirements to Uman.

Currently, the FDA review and approval process for generic ANDA filings is taking, on average, approximately 36 months. However, as of late last year, the FDA noted a shortage of essential chemotherapy drugs, including vincristine, methotrexate, leucovorin, cytarabine, doxorubicin, bleomycin, and paclitaxel. Although gemcitabine is currently not listed on the list of chemotherapy drug shortages, we believe the FDA intends to accelerate ANDA approvals on generic chemotherapy agents in the next few quarters. Therefore, approval of Uman’s ANDA is likely earlier than 36 months from the filing. We model the filing in the third quarter 2012 and approval late 2014.

We expect that DARA Bio will be in position to provide generic gemcitabine to wholesalers and distributors in 2015. There are existing generic gemcitabine products already on the market, but we think given the sizable opportunity here, if DARA can partner with small providers and cancer clinics around the country, we think providing generic gemcitabine is a $20-25 million opportunity for DARA at peak.

Excellent Fit With KRN5500

The new focus on oncology and oncology-care products marries well with DARA's lead pipeline candidate, KRN5500. DARA’s stated goal is to leverage the core-expertise from Oncogenerix in oncology, seek-out generic injectable cytotoxic agents, and maximize its relationships with manufacturers such as Rosemont and Uman. Agents such as oxaliplatin, docetaxel, and pemetrexed all recently lost patent protection and would be ideal candidates for the company. We think having a phase 2b product for chemotherapy induced peripheral neuropathy (CIPN) fits nicely within the model of providing value-added oncology-care products. 

DARA Bio has had a phase 2b ready asset in KRN5500 for over a year now. The company first 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. The trial assessed KRN550 vs. placebo to compare treatment differences in median changes from baseline in pain scores recorded by patients in a daily diary as measured by the numeric rating scale (NRS). The picture below summarized the strong data from that phase 2a program.

These results indicate that KRN5500 was effective in reducing pain in patients with CIPN in a dose-response relationship. The data show that higher doses of KRN5500 result in greater reductions in pain over time. KRN5500 was generally well tolerated with adverse reactions limited to nausea and vomiting. We are encouraged by the phase 2a results. The data was recently published in the Journal of Pain and Symptom Management in October 2011.

...NCI Program Up Next... 

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 at costs plus expenses. We note that DARA will supply (at cost) DCP-NCI with a new improved nano-emulsion 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 phase 2b study. They will also handle all costs to run the trial, which we estimate at around $4 million, except for the drug supply as noted above. This should cost DARA only around $250K.

We expect this program will begin in the second quarter 2012 and will enroll approximately 100 subjects with CIPN in a multi-center, randomized, double-blind, placebo-controlled format. The trial should take approximately 18 months to complete. Similar to the phase 2a program, we expect that patients will have to have had confirmed CIPN for a period of time, actively failing standard-of-care pain meds, including NSAIDs, anticonvulsants, antidepressants, and opioids. We note the phase 2a data showed a meaningful reduction in CIPN patients taking KRN5500 even after having failed previous cycles with high-dose opioids. It’s a difficult trial, but one that should work to the benefit of KRN5500 if positive given the significant treatment opportunity and limited competition. We remind investors that the U.S. FDA has granted DARA “Fast Track” status for KRN5500 in this indication. We believe data from this program will be highly intriguing to a potential partner if positive.

…A Partnership After phase 2b…

Management has reported being in discussion with several interested parties on KNR5500. We see neuropathic pain as a sizable market opportunity for KRN5500. CIPN represents an excellent niche indication with a quick route to market, especially with the FDA “Fast Track” designation and funding from the NCI. Larger indications within neuropathic pain and fibromyalgia represent a billion-dollar opportunity. However, given the highly competitive nature of the indications and the fact that the market is dominated by generic gabapentin, along with billion-dollar branded pharmaceuticals in Lyrica and Cymbalta, and the recently approved gabapentin extended release molecule, Gralise, we are not expecting that DARA will move forward in neuropathic pain without a major backer.

Still though, a partnership for KRN5500 allows management to continue driving forward with Soltamox and gemcitabine, while they search for additional opportunities. And, the potential exists in the future that DARA may look to specialty promote KRN5500 along its partner. The ideal situation for DARA would be to have Soltamox, generic gemcitabine, an additional generic cytotoxic agent or two, and KRN5500 all on the market by 2017-2018, all being promoted by DARA’s small specialty sales force.

New Management / Right Focus

In December 2011, DARA Bio announced key senior management changes. Former Chairman and CEO, Richard Franco, announced his retirement. To replace Mr. Franco, the Board of Directors appointed David J. Durtz President and CEO and Steven Gorlin as Chairman of the Board.

Mr. Gorlin was a founder of DARA and previously served as a member of the Board of Directors. Mr. Gorlin currently serves as Chairman and CEO of DemeRx, Inc., Chairman of NTC China, Inc., and Vice Chairman of MiMedx, Inc. Mr. Gorlin formerly served as a founder and director of Hycor Biomedical, Inc., Theragencis Corporation, CytRx Corporation, Medicis Pharmaceutical Corporation, EntreMed, Inc., Medivation, Inc., and MRI Interventions, Inc. Mr. Gorlin currently sits on the board of The Johns Hopkins Alliance for Science and Technology Development, The Johns Hopkins BioMedical Engineering Advisory Board, and on the board of the Andrews Institute.

Dr. Drutz’ career spans 36 years in clinical medicine and patient care, basic and clinical research, pharmaceutical and biotechnology operational and research management and venture capital. Dr. Drutz received his M.D. degree at the University of Louisville, and postgraduate medical training at Vanderbilt University, following which he served as a U.S. Navy medical officer in Taiwan, Vietnam and the Philippines. He is board-certified in Internal Medicine, and a Fellow of the American College of Physicians and the Infectious Diseases Society of America.

Additional information on the backgrounds of Dr. Drutz and Mr. Gorlin can be found on the DARA Bio website. Along with new COO, Chris Clements from Oncogenerix, we believe the company has the right management team in place to see the new strategy to fruition and build shareholder value in the long-run.

Financial Position & Recommendation

DARA Bio exited 2011 with just over $1.3 million in cash and investments. In January 2012, shortly after the deal to acquire Oncogenerix, Inc., DARA entered into a definitive agreement with one institutional investor providing for the sale of $1.7 million of shares of Series B convertible preferred stock (convertible at any time into a total of 1,238,616 shares of common stock at a conversion price of $1.3725 per share) and five year warrants to purchase 619,308 shares of common stock at $1.31 per share.

Our model forecasts that DARA Bio will exit the first quarter 2012 with approximately $1.3 million in cash and investments. We expect the company to opportunistically raise an additional $5+ million in cash over the next few months. DARA needs the cash to fund the creation of the 5-person Soltamox sales force and continue funding operations while discussions continue around KRN5500. We expect that management will look to out-license the diabetes pipeline, which includes phase 2a ready DB959, and preclinical DB160 and DB900.

Future dilution is a foregone conclusion at this point. But the market capitalization of only $12 million seems to be vastly under-valuing the opportunity. We have conducted a discounted cash flow (DCF) analysis of DARA which incorporates Soltamox, gemcitabine, and KRN5500. Our model has factored in future dilution with a goal to raise $10 million over the next year. We have posted our model below. We find fair-value to be $3.50 per share. However, our rating is 'Neutral' while we wait for additional updates from the company on Soltamox, KRN5500, and financing.

Click To View Model

1 comment:

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