DARA’s KRN5500 Looking Attractive (DARA)

Jason Napodano, CFA

DARA’s KRN5500 Looking Attractive

DARA Biosciences (DARA) lead product candidate is KRN5500, a non-narcotic/non-opioid, analgesic agent, currently under development for the treatment of chemotherapy-induced peripheral neuropathy (CIPN) in patients with cancer. DARA has successfully completed phase 2a studies with KRN5500 and is planning to enter phase 2b trials shortly.

CIPN is a major dose limiting side effect of many commonly used chemotherapeutic agents, including platinum drugs (carboplatin and oxaliplatin), taxanes (paclitaxel and docetaxel), epothilones (ixabepilone), vinca alkaloids (vincristine), thalidomide, bortezomib, and lenolidamide. CIPN develops when chemotherapeutics travel through the body and damage peripheral nerves, often affecting the hands and feet. Symptoms tend to get worse as treatment persists and can often become disabling.

KRN5500 is a novel spicamycin molecule derived produced by Streptomyces alanosinicus. The drug offers a potentially new treatment options for CIPN. DARA has been working with the National Cancer Institute’s (NCI) Division of Cancer Prevention (DCP) for development of KRN5500. On August 18, 2011, the U.S. Food and Drug Administration (FDA) granted Fast Track designation to KRN5500 for chemotherapy-induced neuropathic pain in patients with cancer.

• The FDA’s Fast Track program is designed to facilitate the development and expedite the review of new drugs that are intended to treat serious or life threatening conditions and that demonstrate the potential to address the unmet medical need. The purpose of the program is to get important drugs to the patient earlier. New Drug Applications (NDA) for products in the Fast Track program normally receives Priority Review. In addition, the FDA may now consider the KRN5500 NDA submissions on a rolling basis. This process permits DARA to submit, and the FDA to review, sections of the NDA in advance of DARA’s completing entire submission for marketing approval. The partial submission and review process may result in expedited review times. Historic data from the FDA’s website shows that Priority Review reduces the review time by as much as half. Fast Track status also entitles DARA to more frequent correspondence and meetings, which can facilitate faster answers to questions and additional assistance with development direction and study design.

…Phase 2a Data Impresses…

Last September, DARA Bio presented positive study results from its phase 2a dose escalation study with KRN5500 at the 13th World Congress on Pain. 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 KRN5500 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). In order to be entered into the study, patients had to have failed on at least two previous courses of therapy for their pain. The trial met its two primary endpoints of safety and reduction of pain from baseline. Results show:

• KRN5500 significantly reduced neuropathic pain when compared to placebo (24% vs. 0%; p = 0.03) when looking at the median decrease in pain intensity from baseline.

• KRN5500 significant improved the number of patients achieving pain reduction from baseline of > 20% when compared to placebo (83% vs. 29%; p = 0.04).

• KRN5500 significantly reduced NRS from baseline compared to placebo when looking at the best weekly median response (29.5% vs. 0%; p = 0.02).

• In addition, regression analysis of the best response for each patient over doses showed a significant linear decrease in pain intensity with increase in dose (slope = -18.2; p = 0.009).

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. DARA just recently presented additional findings from the trial in March 2011 at the 2011 International Conference on Accelerating the Development of Enhanced Pain Treatments.

…Impressive Phase 2a Data…

As noted above, DARA is working closely with the NCI’s Division of Cancer Prevention (DCP) to advance KRN5500 into phase 2b studies. The NCI-DCP will fund the studies and DARA will supply KRN5500 at costs plus expenses. We note that DARA has spent much of the past year re-formulating KRN5500 into a newly improved nano-emulsion (lyophilized) formulation of KRN5500 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. We expect this program will later this year and will enroll approximately 40 subjects with CIPN in an open-label, single arm format. We believe DARA is using an open-label format so that they can get preliminary data from the program as early as the first quarter 2012.

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.

With DCP-NCI handling the costs and expenses for the planned phase 2b 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).

…Partnership After phase 2b…

Beside expanding the planned phase 2b trial and indications, and 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 backing of the NCI and the recent FDA Fast Track designation and potentially Priority Review status..

Larger indications such 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 be able to secure an upfront payment and phase 3 development partnership until after the phase 2b data on KRN5500 has been released. At that time investors and potential partners will have a much better understanding of the market potential for the drug. Partnering now, we believe the company would receive vastly less than if the phase 2b data are positive.

We have looked at a number of deals for phase 2 neuropathic pain molecules over the past several years and conclude that DARA should be able to secure a meaningful upfront payment and sizable backend deal + royalties on KRN5500. For example:

• In April 2010, Bristol-Myers paid Allergan $40 million upfront for AGN-209323, phase II-ready, orally administered small molecule for neuropathic pain. The deal included the potential for another $373 million in backend milestones plus royalty payments on worldwide sales.
• Total Deal Size: $413 million ($40 million upfront)

• In November 2008, Solvay Pharmaceuticals licensed the N.A. rights to DM-1796 (gabapentin extended release) for all neuropathic pain indications from Depomed. The deal included $25 million upfront, plus the potential for $370 million in regulatory and backend milestones. Depomed is entitled to receive royalties between 14% and 20% of net product sales. At the time of the licensing, DM-1796 was in its second phase 3 trials, having missed the primary endpoint in the first. Depomed reported positive phase 2 data in late 2006 with DM-1796.
• Total Deal Size: $395 million ($25 million upfront)

• In June 2009, Astellas, licensed Qutenza, an 8% trans-capsaicin patch for the treatment of post-herpetic neuralgia (PHN) from NeurogesX, for all 27 EU member states, plus Iceland, Norway, Liechtenstein, and Switzerland, along with the Middle East and Africa. Qutenza was approved in the EU in May 2009. The deal included $42 million upfront and the potential for $97 million in development and sales related milestones for Qutenza. NeurogesX is also entitled to a mid-teen to mid-20s percent scaling royalty on sales of the product. This deal is smaller than the previous two, mainly because of two reasons: 1) The deal is for the EU, and 2) The trans-capsaicin patch offers significantly less sales potential then an orally active small molecule.
• Total Deal Size: $139 million ($42 million upfront)

It’s our belief that DARA should be able to fetch $20 to $25 million as an upfront payment for KRN5500 sometime after the phase 2b data is out. The total deal size for KRN5500 should be in similar size to AGN-209323 or DM-1796, or around $200 to $300 million. On a risk adjusted, NPV analysis, this program alone is worth more than the entire market capitalization of only $13 million.

DARA exited the second quarter with $3.5 million in cash and investments. We see the current cash balance as sufficient to fund operations in 2011. However, we believe the company may seek to raise funds either later this year or in early 2012 to keep the clinical pipeline on track. Accordingly, on March 25, 2011, the company filed a shelf registration statement with the SEC allowing the company to offers and sell up to $30 million of securities, including equity, debt and other securities as described in the registration statement.

We currently see DARA fairly-valued at $4 per share. Our target takes into account the company raising capital in the next few months to fund operations through the planned phase 2b analysis of KRN5500. Assuming the phase 2b data matches the positive phase 2a outcome, a deal becomes likely in 2012.

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