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1 Small Cap Research September 14, 2012 Jason Napodano, CFA scr.zacks.com 111 North Canal Street, Chicago, IL DARA BioSciences, Inc. (DARA-NASDAQ) DARA: Get On Board With the DARA Story Upgrading To Buy. Current Recommendation Buy Prior Recommendation Neutral Date of Last Change 09/13/2012 Current Price (09/14/12) $0.86 Target Price $2.50 SUMMARY DATA 52-Week High $ Week Low $0.64 One-Year Return (%) Beta 1.64 Average Daily Volume (sh) 270,758 Shares Outstanding (mil) 12 Market Capitalization ($mil) $10 Short Interest Ratio (days) 3.31 Institutional Ownership (%) 1 Insider Ownership (%) 3 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 RATINGS UPGRADE DARA Biosciences is a new company, with a new strategy. In January 2012, DARA acquired Oncogenerix, and with it, rights to Soltamox, an oral liquid formulation of tamoxifen, for sale in the U.S. In April, DARA announced a deal to co-promote Bionect. DARA plans to create a five-person specialty sales force to promote both products. The company launched Bionect in June We expect the Soltamox launch in October 2012 and Gelclair in the first quarter of We like the new strategy, and believe it fits well with CIPN drug, KRN5500. We think the story is really starting to come together at DARA, and with the recent financing complete the focus has now turned to management execution. We think the market is vastly under-valuing the potential. Our target is $2.50 per share based on DCF. Risk Level Type of Stock Industry ZACKS ESTIMATES High Small-Growth Med-Biomed/Gene Revenue (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 0 A 0 A 0 A 0 A A 0 A 0.04 E 0.28 E 0.32 E E E 5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%) P/E using TTM EPS P/E using 2012 Estimate P/E using 2013 Estimate Earnings per Share (EPS is operating earnings before non recurring items) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) $0.26 A -$0.31 A -$0.18 A -$0.44 A -$1.20 A $0.29 A -$0.14 A -$0.14 E -$0.09 E -$0.58 E $0.21 E $0.12 E Copyright 2012, Zacks Investment Research. All Rights Reserved.

2 WHAT S NEW DARA Licenses U.S. Rights To Gelclair On September 13, 2012, DARA Biosciences announced it had entered into an exclusive agreement with Helsinn Group of Switzerland for the U.S. commercial rights to Gelclair (hyaluronate sodium). No financial terms were disclosed. However, we believe that DARA paid Helsinn a small upfront payment for the rights to Gelclair in the U.S. Helsinn will provide product supply to DARA, which we model includes a built-in mark-up for Helsinn and 80-85% margin to DARA. Gelclair is FDA approved and DARA plans to launch the product in the first quarter of Gelclair is a viscous oral gel designed to provide rapid pain relief for patients suffering from oral mucositis. Oral mucositis is a painful, acute inflammation and ulceration of the mucous membranes lining the digestive tract, usually as an adverse effect of chemotherapy and radiotherapy treatment for cancer. Gelclair works by adhering to the mucosal surface of the mouth and by preventing over stimulation of exposed and sensitized nerve ending within the mucosa. The product can be used in combination with other treatment options for managing oral mucositis, which is a significant problem for patients undergoing chemo and radiotherapy for the treatment of cancer. The clinical data on Gelclair is impressive. A 53 patient study on patients receiving therapy for cancer conducted by D Andrea et al. (Annals of Oncology 2003; 14 (suppl. 4):97) demonstrated a 57% reduction in pain, a 42% improvement in functionality, and a 50% reduction in mucositis grade after only three days of use. A study by Linsay et al. (Australian Nursing Journal 2009; 16(9):30-3) demonstrated a 57% reduction in pain scores (85% response rate) from 33 head and neck cancer patients have four days of treatment with Gelclair. A study conducted by Flook C et al. (Supportive Care in Cancer 2005; 13(6):443-4 (abs )) showed that Gelclair was at least as effective as benzydamine, the recommended standard of care for oral mucositis caused by radiotherapy by the Multinational Association of Supportive Care in Cancer (MASCC) guidelines. In fact, results from the study showed that fewer patients on Gelclair needed opioid medication (20% vs. 37%) versus benzydamine, and that no patients on Gelclair needed artificial feeding with a nasogastric study versus 12.5% with benzydamine. D Andrea et al. Linsay et al. Flook C et al. 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 get mucositis. Treatment with 5-fluorouracil (5-FU) tends to increase the incidence of oral mucositis up to 40%, 10-15% of which develop grade 3-4 mucositis. Irinotecan is associated with severe gastrointestinal mucositis in over 20% of patients. 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: ) reported that 87% of patients with severe mucositis used analgesics regularly during radiotherapy, 70% of which required opioid treatment. 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. Zacks Investment Research Page 2

3 Several other types of cancer and cancer treatments are associated with high incidence of mucositis. Patients with severe mucositis are more prone to developing bacterial or fungal infections. Patients also often require parenteral nutrition because they cannot swallow. It s a significant burden to the patient and caregiver. Many patients have to reduce chemo or radiotherapy due to the toxicities resulting in mucositis. This puts the patient at greater risk for cancer disease progression, not to mention increase cost of time on therapy and potentially delayed discharge from the hospital. Over 400,000 patients per year will develop oral mucositis, representing a very large market opportunity for Gelclair. The idea of DARA distributing Gelclair marries well with the concept of Soltamox (liquid tamoxifen) and Bionect (low-molecular weight hyaluronic acid). DARA will use the same five full-time regional business directors (RBDs) currently promoting Bionect to promote Soltamox (launch expected in October 2012) and Gelclair (launch expected in the first quarter 2013). The company s promotional efforts will focus around physician and pharmacy education about the benefits of all three products, looking to establish relationships with cancer clinics and oncologists treating patients with various types of cancer and undergoing chemotherapy or radiation treatment. For example, one patient on with oral mucositis may find it difficult to swallow (dysphagia) and have skin irritation as a result of their radiotherapy. That one patient could be a candidate for all three DARA products. We see Gelclair as a potential $5 million opportunity in the U.S. The product has somewhat of a rocky past. Gelclair was approved by the U.S. FDA in January 2002 at UK-based Sinclair Pharmaceuticals. Sinclair licensed the product to Cell Pathways, and the product was launched in June In October 2002, Cell Pathways signed a copromotion agreement with Celegene for the U.S. marketing and distribution of Gelclair. At that time, management at Cell Pathways stated that Gelclair was a potential $25 million product in the U.S., and the backing of Celegene seemed to validate that estimate. However, Cell Pathways, Inc. was acquired by OSI Pharmaceuticals in June 2003, and OSI Pharma terminated their co-promotion agreement with Celegene shortly after the deal closed. Meanwhile, Sinclair sold the global rights to Gelclair to Helsinn Group in August Gelclair struggled at OSI Pharmaceuticals, as OSI focused on the launch of Tarceva at Genentech and the later failed merger with Eyetech Pharmaceuticals. Gelclair posted U.S. sales of only $1.2 million in 2004, down from $1.6 million in Following the merger with Eyetech Pharmaceuticals, OSI Pharma returned the U.S. rights of Gelclair to Helsinn in Helsinn licensed the rights to EKR Therapeutics in October EKR brought in ProStrakan Group to copromote the product in April In 2009, we estimate Gelclair sales were around $4 million. However, EKR Therapeutics shifted focus in 2009 to the cardiovascular market and rights were returned to Helsinn. The product has been off the market since that time. Upgrading To Buy The addition of Gelclair into the DARA portfolio is an excellent move by management in our view. The company continues to execute on its strategy to build out an oncology supportive care product suite, and drugs like Soltamox, Bionect, and now Gelclair are all complementary pieces to the puzzle. We think Gelclair is a potential $5 million product in the U.S. for DARA. EKR Therapeutics was able to drive sales to approximately $4 million in 2009 without significant co-marketing of oncology care and supportive products. We think the ability to detail Gelclair next to supportive care products like Bionect and Soltamox will help drives sales back to $4 million by We suspect that any physician amenable to hyaluronate-based products will use both Bionect and Gelclair. We think DARA is building a product suite where could equal 4 or 5. DARA exited the second quarter 2012 with $9.345 million in cash and investments. We find this to be sufficient to fund operations into the second quarter DARA is currently burning cash as it funds the launch of Bionect with its five-person specialty sales force. We expect DARA to launch Soltamox in October 2012 and Gelclair in the first quarter The company is also working to complete the reformulation and dose-ranging studies on KRN5500. We do not see the current cash balance as sufficient to fund operations to cash flow positive, but by the time DARA will require additional financing we suspect that Bionect, Soltamox, and potentially now Gelclair will be on the market, providing to investors greater visibility in the emerging story. Accordingly, we expect the company to secure additional financing on better terms than today. Zacks Investment Research Page 3

4 There are opportunities for non-dilutive financing as well. We expect that management will look to out-license the diabetes pipeline, which includes phase 2a ready DB959, and preclinical DB160 and DB900. We also expect that management will look to partner, or at the very least out-licenses Ex-U.S. rights to, KRN5500. We also expand that management will look to expand its licensing agreement on Soltamox to additional regions outside the U.S. On August 16, 2012, the company announced it has entered into an exclusive distribution agreement with Seyer Pharmatec Inc. for the sale of Soltamox in Puerto Rico. We expect more deals in the next few months to expand Soltamox distribution. We also believe that the company will look to expand its relationship with Rosemont and Uman on additional generic injectable cytotoxic agents. DARA is targeting drugs that had 2010 combined U.S. sales in excess of $5 billion. Deal number one was gemcitabine. The company is in development talks with potential generic formulations of oxaliplatin, docetaxel, and pemetrexed for the future. The U.S. specialty oncology market represents an attractive opportunity for DARA. There are just over 15,000 oncologists in the country. The three largest areas include medical oncology, hematology, and radiation oncology. DARA plans to focus on the top decline of physicians with its five-person sales force. DARA may look to supplement or partner with other small specialty pharmaceutical companies, as well as with wholesalers or specialty oncology providers to drive sales of its newly acquired products. From DARA s standpoint, the strategy makes sense. Build a small sales force to promote Soltamox, Bionect and Gelclair, then add value by making generic cytotoxic agents available to existing relationships. It provides for an attractive margin with low operating costs. For DARA shareholders, it gives the potential for real revenues and growth in the future a strategy; something DARA has been sorely lacking over the past few years. We have conducted a discounted cash flow (DCF) analysis of DARA which incorporates Soltamox, Bionect, Gelclair, gemcitabine, and KRN5500. Our model has factored in the dilution from the recent registered direct and public offerings of preferred stock. We have posted our model below. We find fair-value to be above $2.50 per share. We think DARA is starting to look very interesting for long-term investors. The company is now well financed and both Soltamox and Bionect should be producing revenues by the end of the year. Gelclair should start contributing by the middle of Another product in gemcitabine will be under FDA review soon, and KRN5500 is nearing phase 2b funded by the NCI. We see the current market value as vastly under-valuing this opportunity. From here on, it s all execution. Zacks Investment Research Page 4

5 INVESTMENT UPDATE Soltamox Launch Expected In October Soltamox is 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 is an antagonist of the estrogen receptor in breast tissue via its active metabolite, hydroxytamoxifen. Tamoxifen competitively binds to estrogen receptors on tumors and other tissue targets, producing a nuclear complex that decreases DNA synthesis and inhibits estrogen effects. Tamoxifen is a selective estrogen receptor modulator (SERM) effective in treatment estrogen receptor-positive breast cancer in pre-menopausal women. The drug is also used as part of the standard of care in post-menopausal women with estrogen receptor (hormone) positive breast cancer. The results of the Breast Cancer Prevention Trial (BCPT) showed a reduction in diagnoses of invasive breast cancer among women who took tamoxifen for five years. 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 It is now widely available as a generic tablet for as little as $25-50 per month with tier-1 coverage. A typical course of treatment on tamoxifen involves daily dosing for three to five years. DARA plans to launch Soltamox in October 2012, which just so happens to be breast cancer awareness month. The commercial supply will be sourced from Rosemont, with DARA paying cost plus a small royalty (we estimate mid-single digits) on sales. DARA will promote the product with five full-time regional business directors (RBDs) 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 (dysphagia) 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 oral tablets. According to the National Cancer Institute, approximately 230,500 women were diagnosed with breast cancer in The one-year mortality rate is roughly 17%. There were an estimated 350,000 prescriptions written for generic tamoxifen in 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 $20 to $25 million around the time of the patent expiration in 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. More With Rosemont 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 now in the field promoting Soltamox and Bionect, will be looking to expand its promotional efforts with additional products. We would not be surprised to see DARA and Rosemont collaborate on future products for the U.S. or Ex-U.S. oncology market. Line extension opportunities with Soltamox alone include unit dosing and various flavors of the oral suspension. Zacks Investment Research Page 5

6 Bionect Launched In June In June 2012, DARA announced that it has launched Bionect for the treatment of skin irritation and burns associated with radiation therapy. The company launched the product with the aforementioned five field-based regional business directors (RBDs) noted above. These RBDs will coordinate the commercial introduction of Bionect for the cancer care market across the U.S. We expect the company to record the first revenues from Bionect in the third quarter There are an estimated 4,300 radiation oncologists in the U.S. We believe DARA can effectively target the top decile with its small dedicated specialty oncology and oncology supportive care sales team. There is little competition promoting directly to these physicians, and we expect that DARA will offer patient support programs to help drive uptake of the product. In most occasions, Soltamox and Bionect will be used by the same patient at the same treatment center, targeting both the oncologist and radio-oncologist, making for highly efficient promotion. In the first quarter of 2013, DARA expects to bring a third product, Gelclair, to the same physician or center. A Little Background on Bionect On March 26, 2012, DARA BioSciences announced it has entered into an exclusive agreement with Innocutis Holdings, LLC for the U.S. commercialization rights to Bionect within the oncology and radiation oncology marketplace. Bionect is the only low-molecular weight hyaluronic acid (0.2%) available in the U.S. The product is currently approved for the dressing and management of partial to full thickness dermal ulcers (pressure sores, venous stasis ulcers, arterial ulcers, diabetic ulcers), wounds including cuts, abrasions, donor sites, and postoperative incisions, irritations of the skin, and first and second degree burns. Innocutis currently promotes Bionect into the dermatology market. Inncoutis Holdings, LLC is a private company, so we do not have a sales history on Bionect into the dermatology market. Our best guess is that the product does around $3-4 million per year. We see the sale potential into the oncology and radiation oncology market as a similar opportunity. We note that DARA will collect a tiered royalty (copromotion payment) on each Bionect prescription it sells. Skin irritation is a common side effect associated with chemotherapy and radiation. Roughly two-thirds of cancer patients receive radiation therapy. Nearly all (87% according to DARA) will develop moderate to severe radiodermatitis. Skin irritation is one of the primary side effects of radiation therapy, and a chief reason why patients discontinue treatment before a full cycle completes. There is evidence (Radiotherapy and Oncology Vol.42(1997) ) that prophylactic use of hyaluronic acid cream during radiation treatment reduces the incidence of high grade radio-epithelitis, and may be used as a supportive treatment to improve compliance and quality of life in patients undergoing radiation therapy. According to industry prescription tracking, there are an estimated 150,000 prescriptions for radiation dermatitis annually in the U.S. Remedy includes everything from A&D ointment, to aloe vera gel, to both low and high molecular weight hyaluronic acid. Studies show that high molecular weight hyaluronic acid does not penetrate into the dermis, and thus is ineffective in relieving symptoms of severe skin irritation caused by radiation. There is little active promotion of any pharmaceutical product for radiation-induced dermatitis. We believe that Bionect could capture 5% to 10% market share with DARA promotion. Zacks Investment Research Page 6

7 Deal With Uman Pharma Less than a month after the deal to acquire Oncogenerix, 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 is an antimetabolite fluorouracil chemotherapy agent that disrupts DNA replication through nucleoside self-potentiation and inhibiting ribonucleotide reductase (RNR). Gemcitabine causes cell apoptosis, arresting tumor growth and providing broad anticancer activity in various solid tumors, including pancreatic cancer, bladder cancer, ovarian, breast cancer, non-small-cell lung cancer, and mesothelioma. The drug is part of the standard of care used to treat several different types of cancer, and is often used in combination with platinum chemotherapy agents, carboplatin or cisplatin. 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 U.S. sales of branded Gemzar in 2010 totaled $780 million. Sales of Gemzar peaked at over $1.7 billion worldwide in 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 before year-end and approval late We expect that DARA Bio will be in position to provide generic gemcitabine to wholesalers and distributors in 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. Zacks Investment Research Page 7

8 KRN5500 Still A Valuable Asset DARA presented positive study results from its phase 2a dose escalation study with KRN5500 at the 13th World Congress on Pain in September 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). 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 significantly reduced neuropathic pain when compared to placebo (29.5% vs. 0%; p = 0.02) when looking at the median decrease in maximum pain score reduction from baseline. KRN5500 significantly improved the number of patients achieving pain reduction from baseline of > 20% when compared to placebo (83% vs. 29%; p = 0.04). KRN5500 improved the number of patients achieving pain reduction from baseline of > 30% when compared to placebo (50% vs. 14%; p = ns). 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). Showed improvement in Dynamic Allodynia (touch-induced pain) compared to placebo (33% vs. 0%; p = ns). Showed improvement in Thermal Allodynia (cold-induced pain) compared to placebo (33% vs. 8%; p = ns). Source: DARA BioSciences, Inc. These results indicate that KRN5500 was effective in reducing pain in patients with chemotherapy induced peripheral neuropathy (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. This data was published in October 2011 through the on-line edition of Journal of Pain and Symptom Management We are encouraged by the phase 2a results. In fact, it looks like management has yet to find the maximum tolerated dose (MTD), so it is possible that the next phase 2b study will assess higher doses of KRN5500 in CIPN or other neuropathic pain indications. In May 2012, DARA announced a new analysis of the above data by an external biostatistician with extensive FDA experience. The data reported above was based predominantly on patient-reported Numeric Rating Scale (NRS) pain scores collected by healthcare professionals in a clinic setting during weekly visits. The new analysis focused specifically on self-reported daily pain scores from patients' diaries. Responders in this analysis were defined as patients attaining a clinically-meaningful (at least 20%) improvement in mean NRS scores from baseline within any given week. Of the 12 patients who received KRN5500 in this 19-patient trial, 7 (58%) were classified as responders. Further, 5 of the 7 (71%) showed sustained pain relief over several weeks. Of the 7 patients who received placebo, none were responders. Zacks Investment Research Page 8

9 Responder Analysis Responders (Identified as >20% improvement in NRS) Responders with Sustained Pain Relief over 7 Weeks KRN5500 (n=12) Placebo (n=7) 58% 0% 71% 0% We consider these new findings impressive since patients enrolled in this proof-of-concept trial had unrelenting pain at baseline despite the concomitant use of other approved analgesic agents. Reformulation Since the release of the phase 2a data, DARA has been working on reformulating KRN5500 to remove excipients from the injection. DARA obtained KRN5500 product from Japan s Kirin Brewery. A new, improved and easier to use formulation of KRN5500 is under development with a leading firm with expertise in intravenously administered products. DARA believes that this reformulation could address some of the nausea and vomiting observed during the 2a clinical trial. Dose-ranging studies with this new formulation are being planned. NCI Ready To Initiated Phase 2b 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 phase 2b studies and DARA will supply KRN5500 at costs plus expenses. 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 2013 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. The newly released responder analysis confirms our belief that KRN5500 has significant utility in CIPN and potentially other instances of neuropathic pain. 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. Building Around KRN5500 KRN5500 fits well within the new oncology and oncology-care focus of DARA Bio. 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. We think having a phase 2b product for CIPN fits within the model of providing value-added oncology-care products like Soltamox, Bionect and Gelclair. Plus, with DCP-NCI handling the costs and expenses for the planned phase 2b program in CIPN, we believe that KRN5500 will work in other neuropathic pain indications, including post-herpetic neuralgia (PHN), diabetic peripheral neuropathy (DPN), and HIV-associated distal neuropathy (HIV-DSP). No clinical trials are planned to test this hypothesis, but it certainly presents upside to the DARA story, especially after a development partnership is signed on the drug because DARA can bake in additional milestones and regulatory payments on label expansion. We remind investors that the U.S. FDA has granted DARA Fast Track status for KRN5500 in this indication. Seeking A Partner 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 Fast Track designation and funding from the NCI. A partnership for KRN5500, even for rights outside the U.S., allows management to continue driving forward with Soltamox, Bionect, and gemcitabine. We think the potential exists that DARA may look to co-promote KRN5500 along its partner in the U.S. The ideal situation for DARA would be to have Soltamox, Bionect, Gelclair, generic gemcitabine, an additional generic cytotoxic agent or two, and KRN5500 all on the market by , all being promoted by DARA s small specialty sales force. Zacks Investment Research Page 9

10 PROJECTED FINANCIALS DARA BioSciences, Inc. Income Statement DARA Bio 2010 A 2011 A Q1 A Q2 A Q3 E Q4 E 2012 E 2013 E 2014 E 2015 E KRN5500 (CIPN) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 YOY Growth Gelclair $0 $0 $0 $0 $0 $0 $0 $0.50 $1.50 $3.00 YOY Growth Bionect (Co promo royalty) $0 $0 $0 $0 $0.0 $0.1 $0.1 $0.30 $0.60 $1.00 YOY Growth 150.0% 100.0% 66.7% Gemcitabine (w/ Uman) $0 $0 $0 $0 $0 $0 $0 $0 $0 $3.00 YOY Growth Soltamox (tamoxifen) $0 $0 $0 $0 $0 $0.2 $0.2 $2.50 $5.00 $10.00 YOY Growth % 100.0% 100.0% Licensing & Collaborative $0 $0 $0 $0 $0 $0 $0 $1.00 $1.00 $1.00 YOY Growth Total Revenues $0 $0 $0 $0 $0.04 $0.28 $0.32 $4.30 $8.10 $18.00 YOY Growth % 88.4% 122.2% Cost of Goods Sold $0 $0 $0 $0 $0.00 $0.03 $0.03 $0.48 $1.05 $2.55 Product Gross Margin 100.0% 89.3% 90.6% 89.0% 87.0% 85.8% SG&A $3.14 $4.13 $1.73 $1.35 $1.80 $2.00 $6.88 $8.50 $9.00 $10.00 % SG&A % 197.7% 111.1% 55.6% R&D $3.34 $2.63 $0.32 $0.55 $0.40 $0.40 $1.66 $1.50 $1.65 $1.75 % R&D 519.4% 34.9% 20.4% 9.7% Operating Income ($6.48) ($6.76) ($2.05) ($1.90) ($2.16) ($2.15) ($8.26) ($6.18) ($3.60) $3.70 Operating Margin 20.6% Interest & Other Net $0.49 $0.09 ($0.00) $0.00 ($0.00) ($0.00) ($0.01) ($0.01) ($0.01) ($0.01) Pre Tax Income ($5.99) ($6.67) ($2.05) ($1.90) ($2.16) ($2.15) ($8.27) ($6.19) ($3.61) $3.69 Taxes / Other $0 ($0.2) $0 ($0.32) $0 $0 $0 $0 $0 $0 Tax Rate 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Non Controlling Interest $0.34 $0.31 $0.06 $0.10 $0.06 $0.05 $0.27 $0.25 $0.15 $0.10 Net Income ($5.65) ($6.17) ($1.98) ($1.47) ($2.10) ($2.10) ($7.99) ($5.94) ($3.46) $3.79 YOY Growth 58.7% 9.2% Net Margin 21.1% Reported EPS ($1.80) ($1.20) ($0.29) ($0.14) ($0.14) ($0.09) ($0.58) ($0.21) ($0.12) $0.11 YOY Growth 10.9% 33.6% 51.6% 64.1% 44.6% 193.9% Shares Outstanding Source: Zacks Investment Research, Inc. Jason Napodano, CFA Copyright 2012, Zacks Investment Research. All Rights Reserved.

11 HISTORICAL ZACKS RECOMMENDATIONS DISCLOSURES The following disclosures relate to relationships between Zacks Investment Research ( ZIR ) and Zacks Small-Cap Research ( Zacks SCR ) and the issuers covered by the Zacks SCR analysts in the Small-Cap Universe. ZIR or Zacks SCR Analysts do not hold or trade securities in the issuers which they cover. Each analyst has full discretion on the rating and price target based on their own due diligence. Analysts are paid in part based on the overall profitability of Zacks SCR. Such profitability is derived from a variety of sources and includes payments received from issuers of securities covered by Zacks SCR for non-investment banking services. No part of analyst compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in any report or blog. ZIR and Zacks SCR do not make a market in any security nor do they act as dealers in securities. Zacks SCR has never received compensation for investment banking services on the small-cap universe. Zacks SCR does not expect received compensation for investment banking services on the small-cap universe. Zacks SCR has received compensation for non-investment banking services on the small-cap universe, and expects to receive additional compensation for non-investment banking services on the small-cap universe, paid by issuers of securities covered by Zacks SCR. Non-investment banking services include investor relations services and software, financial database analysis, advertising services, brokerage services, advisory services, investment research, and investment management. Additional information is available upon request. Zacks SCR reports are based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed by Zacks SCR Analysts are subject to change. Reports are not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks SCR uses the following rating system for the securities it covers. Buy/Outperform: The analyst expects that the subject company will outperform the broader U.S. equity market over the next one to two quarters. Hold/Neutral: The analyst expects that the company will perform in line with the broader U.S. equity market over the next one to two quarters. Sell/Underperform: The analyst expects the company will underperform the broader U.S. Equity market over the next one to two quarters. The current distribution of Zacks Ratings is as follows on the 1005 companies covered: Buy/Outperform- 14.5%, Hold/Neutral- 77.3%, Sell/Underperform 7.7%. Data is as of midnight on the business day immediately prior to this publication. Copyright 2012, Zacks Investment Research. All Rights Reserved.