By Jason Napodano, CFA
On November 14, 2014, DARA Biosciences (DARA) reported financial results for the three month period ending September 30, 2013. Total revenues in the quarter were $138,886, comprised of sales of both Soltamox and Gelclair. Sales increased by 81% sequentially over the second quarter 2013, driven in part by the sales force realignment and refined commercial strategy put into place earlier this year. Sales of Gelclair totaled around $90k and Soltamox totaled around $50k. Although sales remain far below what is needed to achieve breakeven operations, we are pleased to see the sequential acceleration in the top-line and believe the company now has the right strategy for growth heading into 2014. Prescriptions for both products increased >70% in the third quarter.
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Operating expenses were generally in-line with expectations, excluding cost of goods sold. The company reported costs of goods sold of $124,052 in the third quarter, resulting in a gross margin of only 10.7%. However, included in this figure was an $81,000 inventory write-off for expired product. Management tells us they are trying to estimate what will expire in 2014, so this looks like a conservative approach. We hope there will be no additional product nearing expiration, and so we consider this charge an unfortunate one-time expense. Excluding this expense, gross margin would have been respectable 69.0%. SG&A totaled $2.182 million in the quarter, consistent with expectations and down roughly $0.118 from the second quarter 2013. R&D expense totaled $0.453 in the quarter, comprised mainly of clinical manufacturing of KRN5500.
Net loss in the quarter totaled $2.534 million, or $0.10 per share based on an average of 25.0 million shares outstanding during the quarter. EPS was right in-line with expectations. The company reported cash and investments of $2.585 million as of September 30, 2013. Total cash burn in the quarter was $2.356 million.
In October 2013, DARA Biosciences entered into a Securities Purchase Agreement with certain institutional investors providing for the issuance and sale by the company in a registered direct offering of 5.1 million shares of common stock at an offering price of $0.50 per share. Also included in the agreement is the sale of warrants to purchase another 5.1 million shares of common stock with an exercise price of $0.56 per share. The five year warrants are exercisable starting in six months from the issuance date. DARA expects net proceeds from the transaction after deducting for placement agent fees and expenses will total roughly $2.3 million.
We forecast operating cash burn of approximately $2.5 million in the fourth quarter 2013, meaning the company should exit the year with around $2.1 million in cash and investments. We believe this is sufficient to fund operations into March 2014. Therefore, we believe the company will require additional funds early in 2014 to continue to operating on plan, which includes the newly expanded sales force and three new products to co-promote acquired from the Mission Pharmacal transaction in October 2013.
We are inclined to give our ‘Buy’ recommendation on DARA another few months to play out. The company underestimated the initial promotional effort required to drive uptake of Soltamox and Gelclair, so the financing that took place in October was designed to correct that problem. If Soltamox and Gelclair are truly value-added products for oncologist and patients suffering from dysphagia or oral mucositis, then management owes it to shareholders to step-up the effort. New products acquired such as Binosto, Aquoral, and Ferralet-90 are excellent compliments to Soltamox and Gelclair. However, if the stepped-up effort does not start to show meaningful improvement in trends by the second quarter next year, it might be time to cut the name loose.
As for the ODD on KRN5500, DARA is at the mercy of the FDA. We understand that there have been a few rounds of back-and-forth questioning between DARA and the FDA on the application since the initial filing in November of 2012, specifically around the patient population and label indication. Management has recently provide the agency with additional information and we are hoping to hear something g back early next year. Similarly to the stepped-up promotional efforts around Soltamox and Gelclair, we are inclined to given the company (and FDA) another few months here. We see ODD KRN5500 as the gate-keeper to a potential deal with a development partner. If ODD emerges, the DARA story gets significantly more attractive.
In the meantime, our thesis on DARA, though behind schedule, remains intact and we are more optimistic about the potential for accelerating revenue growth today than a few months ago. It’s not often you can invest in a specialty oncology / supportive care company with six commercial products at such a favorable valuation.
For additional information on DARA Biosciences, please see: SCR.Zacks.com
By Jason Napodano, CFA