Transforming into a speciality pharma company
DARA BioSciences is a pharmaceuticals company operating in the US, with central functions based in Raleigh, North Carolina. Its portfolio consists of five oncology support products, which help cancer patients manage some of the side effects that arise from their treatments.
Midatech acquired DARA through an all-stock transaction of 5.42m new shares. Each DARA share was exchanged for 0.272 Midatech ordinary shares. At the Midatech price of 265p at the time the acquisition was announced, DARA was valued at $21.7m (£14.4m), or $1.20 a share. This is a premium of 50.8% over the closing price of $0.796 on 3 June 2015 when the deal was announced, and a premium of 55.6% over the previous 30-day volume weighted average closing price of $0.771. Additionally, there are contingent value rights (CVRs) up to a maximum of $5.7m (£3.8m), which are payable in cash if certain sales milestones are achieved: in 2017 CVR holders will receive between $0.07 and $0.11 per CVR if gross sales of Oravig and Gelclair exceed $15-18m. In 2018 CVR holders will receive between $0.11 and $0.16 per CVR if gross sales of Oravig and Gelclair exceed $26-31.2m. In conjunction with the closure of the sale, Midatech shares became available for trading on NASDAQ on 7 December 2015. The new Midatech shares, in the form of ADRs, represent 16.3% of the current total issued share capital.
The acquisition looks to fit well in Midatech. Operationally, it provides it with the US infrastructure to commercialise its own in-house developed products. In the near term, we would expect management to devote efforts to identifying additional in-licensed products to broaden the existing portfolio. Although the deal is clearly not driven by cost synergies, management believes it has identified at least $0.5m of potential annual savings.
DARA’s portfolio is marketed by a specialist sales force of 20 reps. Its products are as follows:
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Gelclair is a bio-adherent gel rinse used for the painful symptoms of oral mucositis, a condition often associated with chemotherapy and radiation-based treatments (particularly in head and neck cancers). There are an estimated 400,000 cases annually of therapy-induced oral mucositis in the US. Gelclair was licensed for the US from the Helsinn Group of Switzerland in September 2012, launched in Q413 and is the leading gel barrier prescribed in the US retail market. Company guidance calls for $3.7m in sales of both Gelclair and Soltamox (detailed below) together in 2015. Since launch, numerous national players and cancer institutions have approved Gelclair for preferred formulary position. Patent expiry is in 2021.
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Oravig is the established anti-fungal miconazole in a novel buccal tablet that dissolves rapidly in the mouth and is indicated for oral thrush. This is often a side effect of therapy as the reduced immune activity can result in fungal overgrowth. The exclusive rights for the US were acquired from Onxeo in March 2015 and the treatment was launched into the US in October. Oravig is the only local once-daily treatment for oral thrush, with other treatments administered a minimum of four times per day. DARA sells Oravig to the specialist clinicians in oncology (which account for ~80% of prescriptions for oral thrush) directly and has an agreement with Mission Pharmacal to promote to primary care where the highest prescribing physicians of oral thrush are targeted. Patent expiry is in 2022.
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Soltamox is the only oral liquid formulation of tamoxifen available in the US. Tamoxifen is widely used in the treatment and prevention of breast cancer in women, with nearly 2m prescriptions written annually. Soltamox gives a useful alternative to women who have difficulty in swallowing or cannot take solids. This is licensed from Rosemont Pharmaceuticals (UK) and is patent protected through to 2018.
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Ferralet 90 (iron supplement for anaemia) and Aquoral (artificial saliva spray) are both Mission Pharmacal products, which DARA has rights to co-promote to its specialist oncology audience.
Additionally, there is a programme, KRN5500, in-licensed from Kirin that is in Phase II development for chronic chemotherapy-induced neuropathic pain. A Phase IIa proof-of-concept study was completed successfully, with the FDA granting Fast Track and two Orphan Drug designations. It is not clear at this stage whether Midatech would pursue further development or seek to out-license or divest this programme.
In Q315 to September, DARA reported gross product sales of $1.5m and net revenues of $1.2m (vs $0.6m in Q314), with a loss before tax of c $2.7m ($2.1m Q314). As of September 2015, net assets were $10.1m and cash and equivalents were $4.7m. Operating expenses in Q315 were $3.6m ($2.7m in Q314). Based on our forecasts, DARA is expected to become cash flow positive in the latter part of 2017.
Anti-cancer product Zuplenz added to US oncology portfolio
Subsequent to the closure of the DARA acquisition on 7 December, Midatech announced the acquisition of oncology product, anti-emetic treatment Zuplenz from Galena, on 18 December. Zuplenz is an oral soluble film formulation of 5-HT3 receptor antagonist Zofran, a preventative for post-operative, chemotherapy- and radiation-induced nausea and vomiting, which dissolves on the tongue in about 10 seconds. It is individually packaged, enabling faster absorption, increased convenience and better compliance for patients compared with other easy-to-use Zofran formulations, which are dissolvable and therefore require water. We note that sales of Zofran were $1.7bn in 2007 before patent loss, of which an undetermined amount was used off-label to expectant mothers. Zuplenz, which is patent protected until at least 2029, should slot in easily with the current DARA portfolio of three supportive anti-cancer treatments.
Midatech purchased marketing rights to Zuplenz for $3.75m from Galena, which had originally in-licensed it from MonoSol Rx. While detailed terms of the deal have not been disclosed, we expect Midatech to pay royalties on sales similar to those paid by Galena, in addition to the reported up to $26m in cash if certain sales milestones are achieved. Marketed by other firms in the past, Galena relaunched Zuplenz in July 2015 and we currently forecast peak sales of $10m before patent expiry in 2029.