DARA to Receive Big Cash Infusion from SurgiVision IPO

SurgiVision Files S-1 For IPO…

On December 23, 2009, DARA BioSciences (DARA) received notification from privately-held SurgiVision that the company had filed a Registration Statement with the SEC for an Initial Public Offering (IPO). SurgiVision has retained Rodman & Renshaw, LLC as the lead banker on the deal. As of December 23, 2009, DARA held approximately 2.2 million shares of SurgiVision (at a cost basis of $1/share) and 0.4 million warrants (exercisable at $0.80/share).

…DARA Would Immediately Strengthen Balance Sheet…

As few days later, on December 31, 2009, DARA exchanged roughly $500k in outstanding debt plus $36k in interested owed to SurgiVision for the return of 536k shares. Cancelling this outstanding debt reduces DARA’s current portion of liabilities and raises the company’s stockholders’ equity comfortably above the $2.5 million minimum threshold for listing on the NASDAQ stock market.

As a reminder, DARA’s stockholders’ equity at the end of the third quarter September 30, 2009 was $3.0 million. Less cash burn in the fourth quarter and the stockholders’ equity would have at or below the NASDAQ minimum level. Exchanging the debt should put the company comfortably above the $2.5 million level at year end 2009.

…And Provides Significant Non-Dilutive Cash Opportunity Later This Year…

Even after the debt exchange, DARA will still own approximately 1.66 million shares and 0.4 million warrants of SurgiVision stock. Some key assumptions lead us to believe that DARA will be in position within the next few months to monetize its SurgiVision holding for a significant cash payout.

  • IPO should take place in the second quarter 2010
  • IPO should be priced at least at $5/share (potentially higher)
  • DARA’s lock-up period expires in June 2010 (fixed)

DARA’s current market capitalization is roughly $21 million. The company should have exited 2009 with roughly $3.0 million in cash on hand, enough to fund operations into the second half of the year. However, assuming the SurgiVision IPO takes place at the rate and terms we expect, DARA should be able to monetize its approximate 2.1 million shares for a net payout of at least $10 million in cash — a significant return on its $2 million investment back in 2004. We do not yet think the market has come to grips with this significant non-dilutive cash opportunity. 

This Just Might Be the Catalyst DARA Needs…

Cash alone on the balance sheet by the end of the second quarter 2010 should be north of $0.25 per share.  By that time we expect that KRN-5500 will be starting its phase IIb program in neuropathic pain and DB-959 will be progressing in a phase I program for diabetes. At only $0.48 per share, the stock is significantly undervalued, in our view. KRN-5500 alone is worth over $1 per share.

However, investor focus has rightfully been focused on the cash position and the threat of NASDAQ delisting. The SurgiVision IPO, and the significant non-dilutive cash it allows management to raise, just might be the catalyst the shares need to start moving toward our $1.60 price target. We maintain our Outperform rating.

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