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Slow Q1 Doesn't Derail DARA Thesis

By Jason Napodano, CFA

On May 15, 2013, DARA Biosciences (DARA) reported financial results for the first quarter 2013. Total revenues in the quarter were only $0.02 million, far below our estimate of $0.11 million. Management noted in the press release that the roll-out of Soltamox has been slow, primarily due to a lack of awareness by the top-prescribing oncologists.

…Awareness Key For Soltamox… 

Over the past several months, DARA has been conducting market research to identify the market opportunity for Soltamox; which is used when the patient either prefers or requires a liquid formulation due to difficulty swallowing (dysphagia). Dysphagia may be caused by oral mucositis, a common side effect of chemotherapy and radiation treatment. Data shows the liquid formulation provides ease of administration and convenience of dose. Soltamox provides differentiation from solid dose medications, and thus may lead to improved compliance.

And the data clearly shows that compliance is the key to survival. Current clinical practice guidelines from the American Society of Clinical Oncology recommend women with estrogen receptor positive (ER+) breast cancer stay on tamoxifen for five years. However, in November 2012, at the San Antonio Breast Cancer Symposium, data from the ATLAS (n=12,894) study, recently published in The Lancet show that women taking tamoxifen for 10 years cut their risk of mortality by 29% when compared to women stopping treatment after five years. Unfortunately, compliance for even five years of tamoxifen therapy is low. We can only guess as to the reason why, but point to the fact that oral liquid formulations of cold and cough medications are preferred nearly 2:1 over tablets. We believe as high as 10% of female tamoxifen patients may prefer Soltamox over the generic tablet. 

That said, patients cannot request Soltamox and oncologists cannot prescribe Soltamox if they are unaware it exists. This seems to be the challenge for DARA at this early point in the launch. The company does not have the financial ability to promote with a multi-million dollar advertising campaign with direct-to-consumer television ads. DARA promoted Soltamox in the first quarter primarily through a 5-person specialty sales force focused on the top few deciles of high-prescribing tamoxifen oncologists. The feedback that DARA has received to date on Soltamox is encouraging, but it has become clear to management that awareness and share-of-mind when these top-prescribing oncologists is low. 

In that regard, DARA has made a number of changes to the Soltamox roll-out that we believe could help drive prescriptions in the coming quarters. 

- Firstly, the company has increased the number of regional business directors from 5 to 7. DARA also plans to increase the rate of sampling and tele-detailing done by these sales reps to drive awareness and uptake of Soltamox at the cancer treatment office.

- Second, these 7 representatives will narrow their focus onto the highest decile of high-prescribing tamoxifen oncologists – increasing the call frequency from once a month to potentially as often as three-times a month. For oncologists to write prescriptions for Soltamox, they need to be aware it exists and specifically looking for patients with dysphagia. This is not something oncologists, who may be writing prescriptions for tamoxifen tablets for the past 3 decades, are used to doing. We note the highest decile of oncologists write roughly 80% of the tamoxifen prescriptions. 

- Thirdly, DARA is instituting a co-pay program to help level the out-of-pocket expense that the patient will pay for Soltamox versus generic tamoxifen tablets. Feedback on Soltamox from oncologists is good, but the two things DARA hears most often are that Soltamox must be bio-equivalent and cost-equivalent. There is plenty of data to back-up the bio-equivalence of Soltamox. On the cost side, couponing and providing co-pay assistance should help convince the oncologist that the patient’s out-of-pocket will be unchanged for Soltamox. As noted above, DARA plans to increase sampling to help drive that first Soltamox prescription.

- Fourthly, in April 2013, DARA signed an agreement with Prime Therapeutics Specialty Pharmacy LLC for distribution of both Soltamox and Gelclair. Prime Therapeutics is a pharmacy benefit manager (PBM) serving nearly 20 million live. Prime Therapeutics is collectively owned by 13 Blue Cross and Blue Shield Plans, subsidiaries or affiliates of these plans. The company delivers medication to members and provides ongoing support through member education and guidance from experienced pharmacists and nurses to help manage the specialty condition and the pharmacy benefits. 

- Finally, DARA has formed a co-promotion agreement with Pronova Corporation for Soltamox in the Southern U.S., and area that accounts for approximately 10% of the total tamoxifen market. Pronova will bring 10 sales representatives to the promotion of Soltamox starting in the second quarter 2013. 

All of these changes are designed to drive awareness and facilitate uptake of Soltamox. One additional measure DARA is taking is to build a tamoxifen registry intended to enable health care providers to better understand the complexities of patent adherence, and how patient preference or need for a liquid form of tamoxifen may improve long term compliance. The registry, CAPTURE (Compliance and Preference for Tamoxifen Registry), has three key goals: 1) To identify the rate of dysphagia in hormone receptor-positive breast cancer women, 2) To quantify the percent of women that prefer a liquid formulation versus a tablet formulation, and 3) To better understand the compliance of women on tamoxifen. CAPTURE will seek to enroll 600 women at 25 leading cancer-treatment centers around the U.S., with the ultimate plan to publish the data in a medical journal in 2014. We suspect that DARA will be able to enroll all 600 patients by the end of the third quarter 2013, and perhaps present some of the findings at the San Antonio Breast Cancer Symposium in early December 2013. 

We see CAPTURE as a brilliant strategy – it’s both market research and marketing. Through CAPTURE, DARA will have the opportunity to introduce Soltamox directly to patients, and hopefully pull through prescriptions at the clinic. Other marketing activities for Soltamox include publishing educational brochures in the Oncology Nurse Society (ONS) journal, and distributing marketing information to oncologists and nurses at both ASCO and ONS-Congress in the next few months. DARA plans to use oncology key opinion leaders to help get the Soltamox message out around these key events. A high-prescribing oncologist may write as many as 2,000 prescriptions for tamoxifen a year. DARA’s goal is to educate doctors and nurses on the rate of dysphagia and preference for liquid medications, and introduce Soltamox as the solution. 

Soltamox recorded sales to date are roughly $75,000. However, we note the company deferred recognition of an additional $115,000 in revenues shipped to wholesalers. The company books revenues only when the product is shipped from the wholesaler to the pharmacy, hospital, or clinic. We expect the ramp to continue to be slow in the second quarter of 2013, then gaining steam later in the year following key educational and KOL events and market research publications at both ASCO and ONS. 

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. DARA tells us the feedback they get when speaking to oncologists is encouraging. Some oncologists have noted that Soltamox may be an excellent solution for up to 5% of their patients. With only 2% share of the U.S. tamoxifen market (~1.8 million prescriptions per year), we see peak sales of Soltamox at roughly $20 million. We forecast sales in 2013 at $0.82 million, growing to near $20 million by 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. 

…Gelclair Launched… 

DARA  launched Gelclair in late April 2013. We see a meaningful opportunity for Gelclair, as the product is an excellent complement to Soltamox. Gelclair is a hyaluronate sodium FDA approved for the treatment of oral mucositis. 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 develop mucositis, nearly half of which may be grade 3 or 4. 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. Over 400,000 patients per year will develop oral mucositis, representing a very large market opportunity for Gelclair. 

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. 

The idea of DARA distributing Gelclair marries well with the concept of Soltamox and Bionect, DARA’s low-molecular weight hyaluronic acid for radiation burns. We see Gelclair as a potential $5 million opportunity in the U.S. Despite being off the market since 2009, awareness of Gelclair remains surprisingly high. DARA has been conducting market research over the past several months in anticipation of the launch that took place in April 2013. Management found that both awareness and interest in using the product is high. We suspect there may even be some pent-up demand for the product from high Gelclair prescribers back in 2009 excited to see the product return to the market. For 2013, we see Gelclair sales at $0.5 million, growing to $6.0 million by 2018. 

…Operating Results Should Improve…

Net loss for the first quarter 2013 totaled $2.5 million, or $0.11 per share. Loss was driven by $2.05 million in SG&A and $0.7 million in R&D. DARA exited the first quarter 2013 with $7.3 million in cash and investments, with around $6.5 million in positive net working capital. We remind investors that in January 2013, the company received approximately $2.5 million in net proceeds from issuance of Series B-3 and B-4 convertible preferred stock. Also, during the first quarter 2013, DARA had investors in the B-2 preferred stock exercise roughly 1.2 million warrants at $0.80 per share for proceeds of approximately $971,000 and 250,000 warrants at $1.00 per share for proceeds of approximately $250,000. We model an operating burn of roughly $2.5 million in the second and third quarter 2013. 

Therefore, we believe DARA has cash to make it to year-end 2013. However, we suspect that the company may seek to raise funds again later in 2013, unless a development and commercialization partnership on KRN5500 can be signed providing a nice, non-dilutive, upfront payment. 

KRN5500 Remains The Key Wildcard 

In November 2012, DARA Bio announced it has submitted an application to the U.S. FDA requesting Orphan Drug Status (ODS) for KRN5500 for the treatment of chronic chemotherapy-induced peripheral neuropathy (CCIPN). CCIPN is a type of pain that results from nerve damage and is characterized by an abnormal hypersensitivity to innocuous, as well as noxious stimuli. This type of pain is extremely difficult to manage, fails to respond to standard analgesic interventions including opioids, and often worsens over time. There are currently no FDA approved treatments for CCIPN. We remind investors that the U.S. FDA has previously granted DARA Fast Track status for KRN5500 in this indication. 

We see the CCIPN market as highly attractive to DARA. There are an estimated 12 million Americans living with active cancer and some 1.6 million new cases each year. We found during our research that neuropathic pain occurs in 30% of cancer patients  with up to 90% in patients with advanced cancer. The incidence and severity of CCIPN vary considerably for each neurotoxic agent, administered alone or in combination, but for vincristine, cisplatin, oxaliplatin, and paclitaxel, estimates are as high as 70% to 90%. As many as 60% of patients treated with docetaxel and 40% treated with carboplatin develop CCIPN.

Conservatively, if we assume that 30% of 12 million cancer patients develop neuropathic pain, the market stands at approximately 3.6 million patients. Of that 3.6 million patients, we estimate that one-third, or around 1.2 million patients have developed chronic pain – i.e. pain that persists for at least three months after all chemotherapy has been stopped or completed. Standard of care for these patients includes gabapentin, pregabalin, and opioids. DARA is seeking an orphan indication from the FDA for those patients that are refractory to standard of care. Given the maximum allowable population of 200,000, we believe that DARA has carved out a subset of the 1.2 million cancer patients with chronic neuropathic pain, or perhaps 10-15% of this group. 

DARA is currently engaged in dialogue with the FDA on ODS. The conversation center mainly around epidemiology and the 200,000 patient population maximum allowable for ODS. At this point, it’s difficult to say whether or not DARA receives ODS on KRN5500. The chronic neuropathic pain in cancer patient market is clearly larger than 200,000. We see KRN5500 has having a significant market opportunity clearly beyond the subset of a subset of patients identified for the application. Obtaining ODS might make KRN5500 an attractive asset for a larger pharmaceutical company given the seven year exclusivity and waiver or PDUFA fees. However, other partners may only be interested in developing KRN5500 if they can target the larger 1.2 million or entire 3.6 million population identified above. We believe the data on KRN5500  is impressive enough to warrant moving forward regardless of ODS or not, and we encourage investors to view our previous piece from November 2012 that highlights the data and market opportunity. 


Based on our DCF modeling, we see $2.00 per share as fair-value for the company. We see the company as well financed, with enough cash to fund operations into 2014. We see potential sources for non-dilutive capital by partnering KRN-5500. 

An interesting specialty pharmaceutical story has emerged. DARA is focusing on oncology and oncology supportive care products with Soltamox, Bionect, and Gelclair. We expect many of the same patients will be users of DARA’s three core products, and that marketing and promoting the suite to oncology centers can be achieved in an efficient and profitable manner.

There are just over 15,000 oncologists in the country. The three largest areas include medical oncology, hematology, and radiation oncology. DARA is focusing on the top decline of physicians with a small sales force. The company is also looking to supplement or partner with other small specialty pharmaceutical companies, as well as with wholesalers or specialty oncology providers.

We have conducted a discounted cash flow (DCF) analysis of DARA which incorporates Soltamox, Bionect, Gelclair, 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 $2.00 per share. We think DARA is starting to look very interesting for long-term investors. The company is well financed, and Soltamox and Gelclair should be posting meaningful revenues by the end of the year. The big wildcard remains KRN5500, which could be worth many multiples of the current valuation once validated in a pivotal program. Nevertheless, we see the current market value as vastly under-valuing this opportunity. From here on, it’s all execution.

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