A Number of Actionable Events for XenoPort, With Capital to Back Them Up

With U.S. rights to Horizant returning in full to XenoPort (XNPT) in just two months, and a number of significant developmental catalysts within the same time frame, shares of this small-cap drug developer are in for a move higher as the company repositions itself for momentum in a new direction. XenoPort reported 4Q and year-end 2012 results last night, and as we wrote in mid-January, the company has a number of compelling programs ongoing, both developmental and commercial endeavors. Horizant is XenoPort’s FDA approved treatment for Restless Leg Syndrome (RLS), and up until 3Q of last year, it was being commercialized by GlaxoSmithKline (GSK). You can read details in PropThink’s prior report, but following a lawsuit against the large-cap pharmaceutical company, full rights to Horizant were returned to XenoPort. Per the settlement, GSK will wind down its marketing efforts, and on May 1, XenoPort will begin commercializing the product on its own. With nearly negligible revenues since approval in April of 2011 — Horizant blames Glaxo’s lackadaisical marketing efforts — Horizant could be an incremental positive to what analysts and investors consider a pipeline story. In 2Q 2013, XenoPort will report results from a Phase III trial of arbaclofen placarbil (affectionately called AP), a potential treatment for spasticity in patients with multiple sclerosis (MS), and shortly thereafter will have early-stage results for XP23829 (AKA ‘829) in hand, an oral MS and psoriasis treatment candidate that is notably similar (and may be superior) to Biogen Idec’s (BIIB) much-loved BG-12 compound. The ‘829 compound is a key reason to own XNPT, and important catalysts to drive the stock in the coming months include expected FDA approval for BG-12 (end of March; validates this class of drugs in MS), a potential partnership on ‘829, and the AP data in 2Q. XNPT mentioned on its year-end conference call that it will begin entertaining partnership offers on this valuable compound, hence speculation on a deal should bring new investors to the story.

Development Programs May Provide Inflection Points in the First Half

XenoPort expects to release top-line, pivotal data for lead candidate, arbaclofen placarbil (or AP) in the second quarter, the results of a recently completed Phase III trial that enrolled 228 MS patients affected by spasticity (read more in PropThink’s prior report). Assuming positive results, XenoPort will file a New Drug Application with the FDA by the end of the year, and according to the company, “market research continues to confirm the dissatisfaction with current oral spasticity agents and the high level of physician interest in AP.” Baclofen, the leading generic spasticity treatment, is well-established in the market, although roughly 20% of MS patients receive no benefit or the side-effects make it a sub-optimal therapy. AP may, then, be able to reach this underserved population, and analysts model in peak sales of approximately $100M by 2020, suggesting that this product alone could substantiate XNPT’s current market capitalization.

Investor focus in the near-term, however, should rest on XP23829 (‘829), XenoPort’s early-stage multiple sclerosis therapy. What makes this a compelling asset at the moment is the March 28th FDA approval decision for Biogen Idec’s BG-12, or dimethyl fumarate. XP23829 is monomethyl fumarate, a metabolite of dimethyl fumarate. We expect that the obvious similarities, plus the potential for a more readily absorbed, less-frequently dosed product like ‘829 will spur interest in XNPT with the approval of BG-12. XenoPort has initiated two Phase I studies since last October, a multiple ascending dose study examining the safety in steady state pharmacokinetics of ascending doses of formulation, one dose twice a day and two doses once a day in healthy subjects. On Monday’s conference call, management noted that they may be able to introduce a BG-12 treatment cohort to one of these early trials to compare dosing and pharmacokinetic properties between the two compounds. According to XNPT, all of these studies should be completed by mid-year, and the addition of a BG-12 comparator may offer some crucial insights, especially if the company pursues this strategy further along in development. BG-12 has added roughly $12B to BIIB’s valuation in just 15 months, so the noticeable opportunity may spur buying in XNPT.

Clarity on the Horizant Path Forward

XenoPort reported that during the 4Q and full year 2012, revenues totaled $0.5M and $21.6M respectively, compared to $5.4M and $43.5M for the same periods in 2011. The apparent declines were due in-part to milestone payments received in 2011, nevertheless, it appears that GSK continues to make little headway in its marketing efforts for Horizant — a new, concerted effort would hardly be expected given the legal situation. However, XenoPort expects that after April 30, when it takes over full marketing efforts to Horizant, it will be able to significantly increase sales of the drug in the RLS and Post-Herpetic Neuralgia (PHN) treatment segments. The number of unique Horizant prescribers since launch was close to 9,000, with about 80% of the prescriptions coming from a highly concentrated subset of only about 2,200 physicians. Thus, XenoPort has hired 40 full-time specialty reps to focus on particular U.S. regions, based on current Horizant prescribers, sleep specialists, pain specialists treating PHN, and neurologists who are high prescribers of RLS and PHN drugs. In addition, XenoPort will utilize 40 part-time primary care sales reps from an established primary care team. It’s an uphill battle for Horizant, which is being marketed against generic competition, and whether this focused effort pays off will begin to take shape in the second quarter. Management is confident that their diligence and market research will pay off, but in truth, we’re more focused on the pipeline than Horizant, as we believe most investors are. It is worth noting that Horizant is protected by a composition-of-matter patent that expires in 2022, a significant timeframe for XenoPort to ramp Horizant sales, and the company expects an extension to 2025. In addition, Xenoport has begun recognizing (a quarter late per its licensing arrangement) royalties on Horizant in Japan, called Regnite, from partner Astellas Pharma. Said CEO Ronald Barrett of the Japanese commercialization effort: “Sales in the third quarter were modest, but I should remind you that in the first year after the establishment of pricing for our new prescription product in Japan, physicians are limited to writing prescriptions for two weeks, requiring patients to come back to the physician’s office frequently. We believe that this restriction has likely had some dampening effect on sales, but it will be lifted in May. So we believe we will begin to get a better sense of the opportunity for Regnite in the coming months.” In our view, any success with Horizant or Regnite will be considered an incremental, surprise bonus to the XNPT investment thesis.

Financials are Solid Through Key Data Read-Out

At December 31, 2012, XenoPort had cash, equivalents, and short-term investments of $139M. The company expects to burn $100-$110M in 2013, implying that XNPT is sufficiently funded to meet potential inflection points this year. Notably, this rate of cash use factors in success of the AP Phase III clinical trial, according to management, due to spending on this asset as it moves toward FDA review and approval. If the Phase III AP trial does not show a positive result, the spending guidance would clearly be lower, hence investors get another product for the incremental spend. With a number of upcoming catalysts, XNPT makes for an interesting trade, particularly around the BG-12 approval, with speculative investors able to hold long-term through Horizant’s progress and AP’s potential approval and commercialization. There are few neuroscience companies in the marketplace with a diversified base of products. In our view, this puts XNPT on the radar as a potential take-out candidate, particularly if the ‘829 and AP compounds advance favorably. The sell-off following XNPT’s conference call should be seen as a buying opportunity.