By Ivan Deryugin
XenoPort (XNPT) will deliver Phase III trial results for its lead pipeline candidate, Arbaclofen Placarbil, in early 2Q, and the company is moving forward on re-launching its approved restless leg treatment Horizant in the U.S. XNPT's balance sheet is solid with over $140M estimated at the end of 2012, and with the company set to start receiving royalties on Japanese sales of Regnite, its cash position will be strengthened further.
Pipeline candidate, XP23829, which is being developed to treat multiple sclerosis, shares many similarities with Biogen Idec's (BIIB) BG-12 product, except perhaps that XP23829 may have better dosing and tolerability profiles. Hence when BG-12 gets FDA approval on March 28th, XNPT shares are expected to trade up in sympathy, a validation of both the compound's drug class and mechanism of action. Note that BG-12 is expected to be a blockbuster compound, and with multiple billions in annual sales, the drug has added approximately $12B in market capitalization to BIIB over the past 15 months. Hence, XP23829 could ultimately become the lead value driver for XNPT, providing significant upside to the stock as the compound advances and major pharmaceutical companies begin to take interest. Several catalysts are in store for XNPT in 1H 2013, and even with the strong move over the past 9 months, the stock is likely to see further gains this year. With a big pullback since XNPT hit a high of $12.86 on October 5th, investors have a chance to buy the stock ahead of the anticipated news flow at a great price. De-risked and high value neurology assets are rare in the pharmaceutical industry, which is why we believe XNPT may be listed as one of the high potential take-out targets in 2013.
Horizant: Rescuing the U.S. Opportunity, Japanese Sales Gaining Traction
Horizant (gabapentin enacarbil) is XenoPort's treatment for restless leg syndrome (RLS), approved in the U.S. in April 2011 and in Japan in January 2012. Horizant has gone through a turbulent period since receiving approval from the FDA, but XenoPort is now on a path to turn things around. XenoPort originally struck a deal with GlaxoSmithKline (NYSE:GSK) under which XenoPort was to receive royalties based on sales of Horizant in the U.S., with GSK responsible for all commercialization and marketing. However, sales of Horizant have been lackluster (a GSK tradition for emerging company partnerships), and in February 2012, XenoPort sued Glaxo, alleging that the company did not perform on the marketing of the drug. Glaxo countersued, and in November, the two companies settled all outstanding litigation, with full rights to Horizant returning to XenoPort. The company will pay Glaxo $1 million per year, starting in 2016, for its inventory of Horizant. Glaxo will continue to manufacture and market Horizant until the end of April 2013, after which XenoPort will take on the marketing responsibility. Glaxo will continue to bear the costs of post-marketing studies, which were required by the FDA as a condition for Horizant's approval.
There is debate as to why Horizant wasn't selling in the U.S. Analysts estimate peak sales of around $157 million (by 2020), but the drug is not readily moving towards that goal. XenoPort blames Glaxo, while XenoPort's critics blame Horizant, and point to generic RLS drugs as minimizing the need for Horizant. Gabapentin, the compound from which Horizant is derived, was approved in 1994 for the treatment of post-hereptic neuralgia and partial seizures. In subsequent years, physicians and researchers discovered that gabapentin could be used to treat RLS. However, the issue with using gabapentin alone is that its bioavailability (its ability to enter the bloodstream as an oral medication) is low, and actually decreases as dosages are increased. Furthermore, the effects of oral gabapentin are short, meaning that RLS patients must take the drug up to 4 times per day to see an effect. XenoPort, however, has combined gabapentin with encarbil to make the drug absorbable by the entire GI tract. Thus, Horizant is far more effective at treating RLS vs. gababentin alone. However, other generics (those with other mechanisms of action) exist, and are frequently used for RLS treatment. For instance, Mirapex and Requip, two older medicines for the treatment of RLS, are available in generic form, but both are dopaminergic drugs and have a number of problematic side effects, including nausea, vomiting and orthostatic hypotension (blood pressure drop upon standing).
Horizant's main selling point relative to generics, then, is lower side effects and improved dosing, as both Mirapex (pramipexole) and Requip (ropinerole) require high doses to achieve their effects, just as gabapentin does. In Phase III trials, Horizant did not show meaningful superiority relative to these two drugs, therefore its selling point will be more convenient dosing and fewer side effects.
CEO Ronald Barrett has spent a great deal of time discussing how Horizant can succeed in the U.S. RLS treatment market. In November, Dr. Barret spoke at Credit Suisse's healthcare conference and stated that in October 2012, there were 5,000 total prescriptions written for Horizant in the United States (the drug is also approved for the treatment of post-herpetic neuralgia). 60% of Horizant prescriptions are written by specialists, mostly neurologists, and 70% are filled through commercial insurance plans. According to XenoPort, there are 6 million total RLS prescriptions written in the U.S. each year, and dopaminergic drugs account for around 80-85% of the total. But, as CEO Ronald Barrett stated, "the American Academy of Sleep Medicine identified gabapentin enacarbil as the only α2δ compound with high evidence of efficacy. And as you are probably aware, Horizant is the only FDA approved non-dopaminergic treatment for RLS. "There has been a shift in thinking regarding first-line treatments for RLS, and sentiment is shifting toward non-dopaminergics such as Horizant. As XenoPort takes over commercialization efforts for Horizant for the treatment of RLS, the company has the potential to revitalize its drug. It will be making a much more disciplined effort than was seen with GSK, and we expect sales to reflect the improved strategy.
Horizant is also approved for sale in Japan (sold as Regnite), where the commercialization and marketing is being carried out by Astellas (OTC:ALPMY). XenoPort is set to receive royalties on all sales of the drug in Japan, and Astellas estimates that there are 2.1 million patients with RLS in the country. XenoPort will be receiving royalties in the "mid-teens" on all sales of Regnite, and the company began receiving payments in Q4 2012. In Japan, the RLS market is far different than in the U.S., with branded Mirapex being the current treatment option, thereby giving Regnite a better competitive position than Horizant has here in the U.S. Astellas also owns the rights to Horizant in 5 other Asian countries (Korea, Taiwan, the Philippines, Indonesia and Thailand).
Horizant is also approved for the treatment of post-herpetic neuralgia (PHN), which the FDA approved in June 2012. PHN is a common and painful complication of shingles, with around 100,000 new cases reported each year. However, the case for Horizant in the treatment of PHN is not as compelling as the RLS opportunity. Depomed's (DEPO) Gralise was approved in January 2011 for the treatment of PHN, and it has similar effects when compared with Horizant (both are gabapentin derived). XenoPort is behind Depomed in this market, and firms such as Credit Suisse have stated that "the largest share of the PHN market is owned by anticonvulsants, in particular gabapentin," hence this market is pretty well served. Credit Suisse does acknowledge that there is potential for Horizant in the PHN market, but notes that there are "no clear winners" in terms of efficacy between Horizant and Gralise, meaning that Horizant will have to compete on more than just efficacy. As a result, XenoPort will target neurologists, sleep specialists, and pain specialists in the U.S. to carve out a niche for Horizant. The company believes that there is a solid overlap between physicians who would prescribe Horizant for both RLS and PHN, which would make it less costly to commercialize the drug on its own. And as royalty payments from Astellas begin to flow into the company, XenoPort will have more financial resources to invest in Horizant in the U.S. Because of Horizant's lack of success thus far in the U.S., expectations for the drug in terms of sales have come way down, so this gives XenoPort a chance to beat estimates if it can successfully re-launch the product.
Late-Stage Studies and Promising Early Candidates Will Drive Value
XenoPort's pipeline currently consists of four clinical programs:
- Arbaclofen Placarbil ((AP)): In Phase III testing for the treatment of spasticity.
- XP21279: In Phase II testing for the treatment of Parkinson's Disease.
- XP23829: In Phase I testing for Relapse-remitting multiple sclerosis ((RRMS)) and psoriasis (pre-clinical).
Improving on standards of care, AP stands to take an untapped portion of the spasticity market. Spasticity is commonly associated with neurological disorders such as MS, strokes, and cerebral palsy (it is not merely a symptom of these disorders, but rather a separate disorder), and AP is designed to address spasticity and its symptoms. It is estimated that 60% of MS patients are affected by spasticity, and that 40% of spinal cord injury patients are affected. The current standards of care for spasticity are baclofen and tizanidine, both of which are generically available. According to CEO Ronald Barrett, baclofen currently has about 60% of the spasticity market, and tizanidine has about 20%. That leaves another 20% of the market untapped, an opportunity for AP, especially given the fact that 40-45% of spasticity patients do not respond to baclofen or tizanidine as first-line treatments. For non-responders, there are few alternatives to turn to. Patients can choose invasive Botox injections if their spasticity is localized, intrathecal baclofen (spinal injection), or surgery to cut the nerves that control the muscles in question. AP can compete readily against these alternatives enabling doctors to titrate (dose adjust) the drug at whatever dosage is needed. And importantly, AP significantly improves on the tolerability of its generic predecessors.
XenoPort's Phase IIb study of AP in the treatment of spasticity in patients with spinal cord injuries yielded positive results in 2009, with the trial meeting its primary endpoint, which was improvement on the Ashworth Scale (a treatment metric in spasticity) relative to placebo. The Phase IIb trial yielded no statistically significant improvement in the lowest dose (of three), but did demonstrate highly statistically significant improvements in the 20mg dose (p=0.0059) and the 30mg dose (p=0.0007). The 10mg dose (lowest) yielded a 0.17 improvement on the Ashworth Scale, the 20mg dose yielded a 0.60 improvement, and the 30mg dose yielded a 0.88 improvement. XenoPort's secondary analysis of the Phase IIb data showed statistically significant improvements in all 6 of the muscle subgroups in the trial. Importantly, AP was well tolerated, with no patients withdrawing from the trial due to adverse events and much lower rates of somnolence vs. its direct competitor baclofen. In the trial, 3% of patients in the AP arm reported somnolence, and 5% of AP patients reported dizziness. This compares very favorably to baclofen, which has sedation and somnolence rates of up to 63%, according to XenoPort CEO Ronald Barrett. XenoPort is set to report preliminary Phase III data for AP early in 2Q 2013, which could be a value driving event for the stock.
XP23829: Potential for a better BG-12? XNPT could get credit upon BG-12 approval
XP23829 is a fumaric acid ester compound and a patented prodrug of Mycophenolate mofetil (MMF). BG-12 (dimethyl fumarate) is also a prodrug of MMF that is being developed for the treatment of RRMS and psoriasis. In October, Xenoport announced positive Phase I pharmokinetic and safety data for XP23829, and that it would continue to advance the compound in clinical trials given the robust results. A new trial evaluating the drug's metabolic properties is set to commence in the first half of 2013. Inevitably, XP23829 will be compared to BG-12, BIIB's MS drug, which is currently awaiting FDA approval and is expected to be a blockbuster product. If and when the drug receives FDA approval in March, we expect positive sentiment for BIIB to translate to XNPT as well given the similarity of the drug's and their mechanisms of action.
XenoPort critics will contend that XP23829 is too early-stage to threaten BG-12, and that XNPT is too small of a competitor to worry about. But XP23829's chemical properties suggest that it has the potential to hold its own against BG-12. XenoPort is positioning XP23829 as a drug with fewer side effects than BG-12 and with improved dosing, possibly once-daily as opposed to BG-12's twice or three-times daily dosing. Biogen's data for BG-12 shows a high rate of flushing (over 30%), as well as a variety of gastrointestinal side effects (unlikely, however, to derail BG-12's FDA approval). XP23829 is more soluble relative to BG-12, something that gives XenoPort the ability to do several things with XP23829. The drug's formulation can be customized much more than BG-12, allowing for higher variations in dosing. In addition, XP23829's "dwell" time in the intestine is much lower, meaning that it permeates the intestinal barrier faster. Will XP23829 threaten the BG-12 franchise in the long run? It's hard to say at this juncture, but we believe that 1) BG-12's success is a win for both compounds, and 2) as XP23829 advances, major drug companies may seek to partner with XNPT on the development of this compound, and this could bring in high value for shareholders of the company. Major players in the multiple sclerosis treatment segment include Teva Pharmaceuticals (NASDAQ: TEVA), Merck Serono (XXX), Pfizer (NYSE: PFE), Merck (NYSE:MRK), and we believe XP23829 is now on the radar screens of these companies. Other big players in the neurology segment like AstraZeneca (NYSE: AZN) and Eli-Lilly (NYSE: LLY) could be interested in this compound as well. Like BG-12, XP23829 is also being tested for the treatment of psoriasis, but it is in pre-clinical testing, and it is too early to speculate about the indication's future. The main point here is, if XP23829 continues to advance in clinical trials, the compound could be worth significantly more that the total value of XNPT today.
Financials: Clear Skies Ahead for XenoPort
The company's financial position gives it a good measure of stability. XenoPort ended Q3 2012 with $112.9 million in cash and investments and an average quarterly cash burn rate of $7.9 million for the first 3 quarters of 2012 (the company has not yet scheduled its Q4 2012 earnings release). At this burn rate, XNPT is able to fund its operations for more than 2 years with existing capital. XenoPort began recognizing royalties on sales of Regnite in Q4 2012, which will strengthen the company's financial position, and help fund the re-launch of Horizant. If the company is successful in commercializing Horizant on its own in the U.S., XenoPort's long-term financial profile should improve. Many are concerned that Horizant's commercialization efforts will be a drain on XNPT's cash, forcing a capital raise. But as part of the settlement with Glaxo, the major pharmaceutical company committed to purchase up to $40 million of XenoPort stock in two tranches of $20 million. Both tranches were executed near the end of next year, adding $40M to Xenoport's cash balance in the third quarter, a boon as the company moves towards commercializing a drug product on its own.
The XNPT story offers many reasons to own the stock.
XNPT offers investors upcoming Phase III results, a drug launch ramp to track (against very low expectations), and a potentially high-value early-stage asset, all with a strong balance sheet. This diversified story is bound to attract investors wishing to play multiple catalysts. For investors of emerging biotech and pharma companies, XNPT seems to have it all.
Additional disclosure: PropThink is a team of editors, analysts, and writers. This article was written by Ivan Deryugin. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relation ships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at www.propthink.com/disclaimer.