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DARA > SEC Filings for DARA > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for DARA BIOSCIENCES, INC.

Form 10-Q for DARA BIOSCIENCES, INC.


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our Unaudited Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011, which has been filed with the Securities and Exchange Commission (the "SEC").

This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. When used in this Form 10-Q, the words "believe," "anticipates," "intends," "plans," "estimates," and similar expressions are forward-looking statements. Such forward-looking statements contained in this Form 10-Q are based on management's current expectations and are subject to factors that could cause actual results to differ materially for us from those projected. Those factors include risks and uncertainties relating to our current cash position and our need to raise additional capital in order to be able to continue to fund our operations, the potential delisting of our common stock from the NASDAQ Capital Market, the potential stockholder dilution that may result from the reset provisions of the Series B-2 preferred stock and from future capital raising efforts, restrictive covenants in agreements from prior financing transactions may restrict or prohibit our ability to raise additional capital on terms favorable to the Company and its current stockholders, our limited operating history which may make it difficult to evaluate our business and future viability, our ability to retain our managerial personnel and to attract additional personnel, our ability to timely commercialize and generate revenues or profits from Bionect®, Soltamox®, Gelclair® or other products given that DARA only recently hired its initial sales force, our ability to successfully integrate Oncogenerix, any revenue we generate will come from a small group of commercialized products, our ability to successfully develop and out-license our drug candidates as anticipated, the current regulatory environment in which we develop and sell our products, the market acceptance of those products, dependence on partners and third-party manufacturers, successful performance under collaborative and other commercial agreements, potential product liability risks that could exceed our liability coverage, potential risks related to healthcare fraud and abuse laws, competition from other pharmaceutical companies, biotechnology companies and other research and academic institutions, the strength of our intellectual property, the intellectual property of others and other risk factors identified in the documents we have filed, or will file, with the SEC. We caution investors that there can be no assurance that actual results, outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as result of various factors, including, among others, the potential risks and uncertainties described in the Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations sections of our Annual Report on Form 10-K for the year ended December 31, 2011 and in any subsequently filed Quarterly Reports on Form 10-Q. You should also carefully consider the factors set forth in other reports or documents that we file from time to time with the SEC. Except as required by law, we undertake no obligation to update any forward-looking statements.

Overview

We are a North Carolina-based specialty pharmaceutical company focused on the development and commercialization of oncology treatment and supportive care pharmaceutical products. Through our acquisition of Oncogenerix, Inc., which occurred on January 17, 2012, we acquired exclusive U.S. marketing rights to our first commercial proprietary product, Soltamox® (oral liquid tamoxifen). Soltamox® has been approved by the U.S. Food and Drug Administration ("FDA") for the treatment of breast cancer.

We have an exclusive license with Helsinn Healthcare SA ("Helsinn"), to distribute, promote, market and sell Gelclair® for treatment of certain approved indications in the United States and the right to subcontract certain of those licensed rights to subcontractors. Gelclair® is an FDA-cleared product indicated for the treatment of oral mucositis.

In addition, we have a marketing agreement with Innocutis Holdings, LLC pursuant to which we will promote Bionect® (hyaluronic acid sodium salt, 0.2%) within the oncology and radiation oncology marketplace. Bionect® has been 510(k) cleared by the FDA for the management of irritation of the skin as well as first and second degree burns.

We also have an exclusive distribution agreement with Uman Pharma Inc. to commercialize gemcitabine in the U.S. Gemcitabine went off patent in 2011 in the U.S. and is widely prescribed as first-line therapy for ovarian, breast, lung and pancreatic cancers. Additionally, we continue to have an internal clinical development program focused on our drug candidate KRN5500 for the treatment of neuropathic pain in cancer patients and are pursuing out-license opportunities for DB959 for the treatment of metabolic diseases including type 2 diabetes.


In our sales and marketing efforts we will employ a multi-disciplinary approach to reach and educate health care providers, dispensers, patient advocacy groups, foundations, caregivers and patients directly. We believe we can accomplish this through utilization of a combination of our own specialized sales organization and independent sales representatives, innovative marketing programs, partnerships with specialty pharmacy providers, working with patient advocacy groups and foundations as well as collaborative arrangements with third party sales organizations.

In our internal development program, we contract with and manage outsource partners to complete the necessary development work. This permits us to avoid incurring the cost of buying or building laboratories, manufacturing facilities or clinical research operation sites and allows us to control our annual expenses and to optimize our resources.

In order to successfully achieve our goals, having sufficient liquidity is important since we do not currently have a recurring sales or revenue stream to provide such working capital. We have not generated any revenue from operations to date. We have liquidated or distributed to our stockholders some of our investments made in other companies. Our primary source of working capital has been from the proceeds of investments made in other companies as well as capital raised from the sale of our securities. From inception through September 30, 2012, we have raised $48,448,052 from issuance of preferred stock, common stock and warrants, net of issuance costs, and received $4,538,682 in net proceeds from the sale of investemnts in affilates and $1,951,211 in net proceeds from the sale of marketable securities.

We expect to continue to incur operating losses in the near-term. Our results may vary depending on many factors, including the success of our building a successful sales and marketing organization, our ability to properly anticipate customer needs and obtain timely regulatory approvals, as well as the clinical results of our KRN5500 program and the progress of licensing activities of our other drug compounds with pharmaceutical partners.

Product Commercialization and Development

While in the past we had a broad range of drug development programs, currently our primary focus is on the development and commercialization of the following types of oncology treatment and supportive care pharmaceutical products:

? Soltamox®, an FDA-approved liquid formulation of tamoxifen and other liquid formulation products;

? Gemcitabine and other generic sterile injectable cytotoxic products; and

? Cancer support therapeutics, including Bionect®, an FDA 510(k) cleared product for the management of irritation of the skin as well as first and second degree burns and Gelclair®, an FDA-cleared product indicated for the treatment of oral mucositis.

Oral liquid formulations of FDA approved products

Oral liquids can effectively provide an attractive alternative to solid dose formulations for those patients with dysphagia, or difficulty swallowing, or who simply prefer to take drug products in liquid form. Dysphagia is a condition that exists in a portion of the population, particularly the elderly. Those suffering from dysphagia often have difficultly or experience pain when using oral tablet or capsule products and can benefit greatly from liquid formulations of drugs. In addition, breast cancer patients receiving chemotherapeutic agents are subject to severe oral mucositis, which makes liquid medical formulations preferable.

Soltamox®

Soltamox® (oral liquid tamoxifen), our first proprietary, FDA approved product, is a drug primarily used to treat breast cancer. Soltamox® is the only liquid formulation of tamoxifen available for sale in the United States. As a result of our acquisition of Oncogenerix, we became party to an exclusive license and distribution agreement with Rosemont Pharmaceuticals, Ltd., a U.K. based manufacturer, for rights to market Soltamox® in the United States. Currently, Soltamox® is marketed only in the U.K. and Ireland by Rosemont Pharmaceuticals, Ltd. Soltamox® is the subject of a U.S. issued patent which expires in June 2018. We launched Soltamox® in the U.S. in the fourth quarter of 2012.

Generic sterile injectable cytotoxic products

We are also focusing on the development and commercialization of generic sterile injectable cytotoxic products. Many cytotoxics have recently lost patent protection or are scheduled to shortly lose such patent protection. We plan to partner with sterile injectable product manufacturers who have the expertise and capability to provide a finished product from FDA inspected and approved facilities. Currently, the FDA review and approval process for generic products is taking on average approximately 36 months.

Gemcitabine

In February 2012, we entered into an Exclusive Distribution Agreement with Uman Pharma Inc. pursuant to which we received an 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 went off patent in 2011 in the U.S. and is widely prescribed as first-line therapy for ovarian, breast, lung and pancreatic cancers. Uman plans to file an Abbreviated New Drug Application for gemcitabine with the FDA in the second half of 2012.


Cancer support therapeutics

We are also focusing on the development and commercialization of cancer support therapeutics.

Bionect®

On March 23, 2012, we entered into an Exclusive Marketing Agreement with Innocutis Holdings, LLC pursuant to which we will promote Bionect® (hyaluronic acid sodium salt, 0.2%) within the oncology and radiation oncology marketplace. Bionect® has been approved by the FDA for the management of irritation of the skin as well as first and second degree burns. Bionect® is currently being promoted and sold by Innocutis in the dermatology market. The Company will be compensated by Innocutis for each unit sold in the oncology and radiation oncology market. The Company began marketing and selling Bionect® in the U.S. in the second quarter of 2012 and expects revenues resulting from sales of Bionect® in the fourth quarter of 2012.

Gelclair®

On September 12, 2012, we entered into a distribution and license agreement with Helsinn Healthcare SA. The Company was granted an exclusive license to distribute, promote, market and sell Gelclair® for treatment of certain approved indications in the United States and the right to subcontract certain of those licensed rights to subcontractors. Gelclair® is an FDA-cleared product indicated for the treatment of oral mucositis. Under the License Agreement, the Company is obligated to launch Gelclair® in the United States within six months of September 12, 2012 and is obligated to meet minimum sales thresholds during the License Agreement's ten-year term. The License Agreement also provides that the Company will receive exclusive rights to distribute, promote, market and sell Gelclair® for an additional indication if Helsinn is able to obtain regulatory approval for such indication.

Internal Drug Candidates

DARA had two internal drug candidates in clinical development prior to the acquisition of Oncogenerix in January 2012.

? KRN5500, a cancer support product for the treatment of neuropathic pain in cancer patients; and

? DB959, a first-in-class drug candidate for the treatment of type 2 diabetes and dyslipidemia.

KRN5500

KRN5500 is a novel, non-narcotic/non-opioid intravenous product for the treatment of neuropathic pain in patients with cancer. The drug has successfully completed a Phase 2a proof of concept study in patients with end-stage cancer and analgesia-resistant neuropathic pain where it showed statistically-significant pain reduction versus placebo (p = 0.03) using standardized pain test scores. There were no major safety concerns. The FDA has designated KRN5500 a Fast Track drug, based on its potential usefulness in treating a serious medical condition and in fulfilling an unmet medical need. We are working with the National Cancer Institute (NCI) to design an additional clinical trial under joint DARA-NCI auspices. Since KRN5500 would complement our portfolio of oncology treatment and supportive care pharmaceuticals, we are considering further internal Phase 2 development to a potential ex-US partnering point, while retaining the US market opportunity.

We incurred $81,423 and $239,108 in development costs associated with the development of KRN5500 during the three and nine month periods ended September 30, 2012, respectively and we have incurred third party costs of $5,012,323 from inception to date.

DB959

DB959 comes from a family of PPAR alpha/delta/gamma agonists licensed from Bayer Pharmaceuticals Corporation. DB959 is a first-in-class, small molecule, non-TZD PPAR delta/gamma agonist for the treatment of diabetes and hyperlipidemia. The drug activates genes involved in the metabolism of sugars and fats, thereby improving the body's ability to regulate both aspects of diabetes. DB959 has successfully completed Phase 1 trials, in which it demonstrated a good safety profile even when dosed at approximately 10 times the anticipated human dose. In addition, the drug has a pharmacokinetic profile which appears to support once-a-day oral dosing. Our review of non-clinical studies in models predictive of human disease indicates that DB959 provides glucose control and increases
(good) HDL cholesterol better than rosiglitazone (Avandia) with less weight gain. We are targeting DB959 for out-licensing to partners more able to sustain the prolonged time-lines and significant costs involved in diabetes drug development.

We incurred $202,362 and $303,612 in development costs associated with DB959 during the three and nine month periods ended September 30, 2012, respectively and we have incurred costs of $7,750,290 from inception to date.


Pre-clinical Drug Candidate Programs Available for Out-license Opportunities

We also have families of patents covering additional PPAR agonists and DPPIV inhibitors, with potential applications in the areas of diabetes, metabolic and inflammatory disease, as follows:

DB900 - a series of compounds which are PPAR gamma/alpha/delta agonists;

DB160 - a dipeptidylpeptidase (DPPIV) inhibitor for the treatment of type 2 diabetes;

DB200 - a series of carnitine palmitoyltransferase-1 enzyme inhibitors with potential applications for skin diseases including psoriasis.

Other than the maintenance of the intellectual property of these assets, we are not devoting any resources to their further development and are currently evaluating partnering and other opportunities to maximize the potential commercial value of these assets.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to clinical trial expenses, stock-based compensation and asset impairment and significant judgments and estimates. We base our estimates on historical experience and on various other factors that are believed to be appropriate under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Research and Development Expenses

We expense research and development expenses when incurred. The cost of certain research programs, such as patient recruitment and related supporting functions for clinical trials, are based on reports and invoices submitted by the contract research organization ("CRO") assisting us in conducting the clinical trial. These expenses are based on patient enrollment as well as costs consisting primarily of payments made to the CRO, clinical centers, investigators, testing facilities and patients for participating in our clinical trials. Certain research and development costs must be prepaid which, if the research and development work ceases to progress for whatever reason, are not refundable to us. In such cases, those costs are expensed when paid.

Accrued Expenses

As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when invoices have not yet been sent and we have not otherwise been notified of actual cost. The majority of our service providers invoice monthly in arrears for services performed. We make estimates of accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued expenses include:

? fees paid to CROs in connection with preclinical and toxicology studies and clinical trials;

? fees paid to investigative sites in connection with clinical trials;

? fees paid to contract manufacturers in connection with the production of raw materials, drug substance and drug products; and

? professional service fees.


Share-Based Compensation

Share-based compensation is accounted for using the fair value based method prescribed by Financial Accounting Standards Board Accounting Standards Codification 718, Compensation-Stock Compensation. For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings based on the fair value of the award. For transactions with non-employees in which services are performed in exchange for the Company's common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance. Our Company's share-based compensation transactions for employees and non-employee directors resulted in compensation expense of $50,545 and $104,847 for the three month period ended September 30, 2012 and 2011, respectively, and $266,946 and $314,776 for the nine month period ended September 30, 2012 and 2011, respectively. The Company recognized stock-based compensation expense for awards to consultants for services totaling $262,526 and $1,052 for the three month period ended September 30, 2012 and 2011, respectively, and $336,736 and $101,160 for the nine month period ended September 30, 2012 and 2011, respectively.

Carrying Value of Property and Equipment and the Value of Certain Liabilities

The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires that we make estimates and assumptions that affect the reported amounts and disclosure of certain assets and liabilities at our balance sheet date. Such estimates include the carrying value of property and equipment and the value of certain liabilities. Actual results may differ from such estimates.

Results of Operations

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

The Company incurred sales and marketing expense of $534,181 in the three months ended September 30, 2012 as a result of its merger with Oncogenerix and the costs incurred in establishment of a sales and marketing infrastructure to support the promotion of Bionect® and to prepare for the launch of Soltamox® in the fourth quarter of the year. As of September 30, 2012 sales and marketing costs consist of salaries, and benefits to sales and marketing personnel, marketing programs, and distribution establishment costs. Prior to the merger the Company had no commercial activities.

Research and development expenses decreased $204,434 from $562,214 for the three months ended September 30, 2011 to $357,780 for the corresponding 2012 period, as a result of the Company's decision to focus on the KRN5500 program and to pursue out-license opportunities for the DB959 program, which resulted in decreasing development costs for DB959.

General and administrative expenses consist primarily of salaries and benefits, professional fees related to administrative, finance, human resource, legal and information technology functions. In addition, general and administrative expenses include facility costs, basic operational and support costs and insurance costs. General and administrative expenses increased $525,860 from $707,967 for the three months ended September 30, 2011 to $1,233,827 for the corresponding 2012 period, primarily as a result of expenses associated with our increase in investor relations activities, additional compensation expense, and non-cash amortization expense totaling $175,108 related to the Rosemont, Bayer, Uman and Helsinn licenses for the three month period ended September 30, 2012. Non-cash amortization for the three month period ended September 30, 2011 was $30,000.

Other income, net reflects non-operating activities associated with investments and dispositions on investments made in collaborations with other companies, as well as interest earned and expensed and other revenues not related to normal basic operations. Other income increased $25,103 from $87,549 for the three months ended September 30, 2011 to $112,652 for the corresponding 2012 period. The increase is due to the gain on the Company's net sale of its marketable securities of $110,309 offset by a decrease in interest income of $85,206. The income of $87,549 for the corresponding 2011 period was primarily as a result of the benefit to accrued interest from the recognition of previously unrecognized state tax benefits of $188,486.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

During the nine month period ended September 30, 2012, the Company incurred sales and marketing expense of $942,473 as a result of its merger with Oncogenerix and the costs incurred in establishment of a sales and marketing infrastructure to support the promotion of Bionect® and to prepare for the launch of Soltamox® in the fourth quarter of the year. Prior to the merger the Company had no commercial activities.


Research and development expenses decreased $733,233 from $1,953,064 for the nine months ended September 30, 2011 to $1,219,831 for the corresponding 2012 period, as a result of the Company's decision to focus on the KRN5500 program and to pursue out-license opportunities for the DB959 program, which resulted in decreasing development costs for DB959.

General and administrative expenses increased $1,587,939 from $2,299,932 for the nine months ended September 30, 2011 to $3,909,605 for the corresponding 2012 period, primarily as a result of expenses associated with our increase in investor relations activities, additional compensation expense, and non-cash amortization expense totaling $506,878 related to the Rosemont, Bayer, Uman and Helsinn licenses for the nine month period ending September 30, 2012. Non-cash amortization for the nine month period ending September 30, 2011 was $90,000.

Other income, net reflects non-operating activities associated with investments and dispositions on investments made in collaborations with other companies, as well as interest earned and expensed and other revenues not related to normal basic operations. Other income increased $26,053 from $89,646 for the nine months ended September 30, 2011 to $115,699 for the corresponding 2012 period. The increase is due to the gain on the Company's net sale of its marketable securities of $110,309 offset by a decrease in interest income of $84,267. The income of $89,646 for the corresponding 2011 period was primarily as a result of the benefit to accrued interest from the recognition of previously unrecognized state tax benefits of $188,486.

Liquidity and Capital Resources

Overview

From inception through September 30, 2012, we have financed our operations
primarily from the net proceeds of (1) registered direct offerings and private
placements of equity securities, through which we raised $48,448,052 in net
proceeds, and (2) the sale of securities we held in subsidiary companies and
marketable securities, through which we raised $1,951,211 and $4,538,682,
respectively.

Working Capital

                       September 30,       December 31,
                           2012                2011
Current assets        $     9,395,235     $    1,462,866
Current liabilities         1,437,219            867,995
Working capital       $     7,958,016     $      594,871

At September 30, 2012, our principal sources of liquidity were our cash and cash equivalents which totaled $8,259,476 and our investment available for sale in the amount of $788,574. As of September 30, 2012, we had net working capital of $7,958,016. Our cash resources have been used to acquire licenses, and to fund research and development activities, capital expenditures, sales and marketing and general and administrative expenses. From December 31, 2011 to September 30, 2012, our working capital increased by approximately $7,363,000 due primarily to the Series B-1 and Series B-2 equity financings totaling approximately $10,744,000, exercises of Series B-2 $1.00 warrants totaling approximately $1,170,000, cash received from the sale of available for sale securities . . .

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