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DARA Bio Starting To Look Interesting

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DARA Bio Starting To Look Interesting

By Jason Napodano, CFA

Meet the new DARA Bio

Over the past six months DARA Biosciences, Inc. has gone through a dramatic change. These changes include the acquisition of Oncogenerix, Inc. in January 2012 and the exclusive agreement with Innocutis Holdings, LLC in March 2012. These deals brought in two commercial ready assets in Soltamox and Bionect, respectively, both which we expect to hit the market in the third quarter 2012.

We encourage investors to take a look at our most recent research report, published on April 5, 2012. Inside the report we highlight the company's relationship with Uman Pharma and Rosemont Pharma, and how we believe this will help DARA build an oncology and oncology-supportive care pipeline for the future. Our report also goes into detail on the company's legacy product, KRN5500, for chemotherapy induced neuropathic pain. And finally, the key management changes that made it all possible.

In our view, the DARA story is really starting to come together. We see Soltamox as a $25 million peak opportunity for DARA Bio. In our report, we discuss the market opportunity for Soltamox, how the company plans to promote the product to oncologists, and how the newly acquired Bionect fits nicely into this model. We also highlight how KRN5500 and generic cytotoxic agents could provide meaningful upside in the years to come. In the past six months, DARA has gone from little to no near-term drivers, to a pipeline of products that has the potential to drive cash flow positive operations in 2014.

Financing Risk Removed

Our report was published on April 5, 2012. In the report we noted, despite what we see as an attractive specialty pharmaceutical story emerging, that our rating was 'Neutral' due to the potential for a near-term financing of $8 to $9 million. Less than a week later, on April 9, 2012, DARA announced its intention to raise $10.1 million through a public offering. The deal, which was increased to $10.25 million, closed last week. This was the second raise of the year. The company secured $1.7 million in January 2012.

With the financing now complete, we believe management can begin to execute on its commercial strategy. More importantly, a major overhand for the stock has been lifted. As a result, we are currently re-assessing our rating on the shares.

We have conducted a discounted cash flow analysis on the new DARA, and currently see $2.50 per share as fair value. This value includes the dilution from the recent financing, including over 10 million new warrants exercisable with a price below $1.25.

Rating Under Review

Given our DCF value calculation at $2.50 per share and the fact that the financing overhang has been removed, we are currently re-assessing our 'Neutral' rating on the shares. We are waiting for the filing of the Form 10K expected on or before May 15, 2012 before we publish a new report.

At this point, we advise that investors should familiarize themselves with the DARA Bio story; and, if comfortable, look to establish a long-term position. DARA Bio, if successful at its transformation, is seeking to become a profitable specialty pharmaceutical company with a focus on oncology and oncology care. We believe the right management is in place to get the job done. From here on, it's all execution.

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