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When analyzing developmental stage bio-tech companies for potential catalyst-driven trades, I look for a number of specific criteria. In this article I will delve into XenoPort (NASDAQ:XNPT) and present why it may be a perfect candidate for a successful run-up trade.

Catalyst and Drug Details:

XNPT has an approaching opportunity with their drug XP19986 Arbaloclofen Placarbil - a transported prodrug of R-baclofen. Arbaloclofen Placarbil (AP) is a patented, oral new chemical entity that utilizes naturally-occurring, high-capacity nutrient transporters in the gastrointestinal tract to generate active, efficient absorption into the body. Once absorbed, AP is rapidly converted to the R-isomer of baclofen, a generic drug that is racemic (a mixture of the R- and S-isomer). Baclofen is a selective GABA-B agonist.

AP is being developed as a potential treatment for patients with spasticity, and Phase III data should be released soon. In the Q4 2012 Earnings Conference Call on March 11, 2013 5:00 PM ET the CEO stated:

"We are in the process of completing entry of the data from the Phase III efficacy trial, locking the database on blinding and conducting the statistical analysis. This process typically takes eight to 10 weeks to get to the topline results. Therefore, we will be releasing topline data by press release in the second quarter."

Considering baclofen is the most widely prescribed drug for the treatment of spasticity, safety should be of little issue to the FDA, as they have already approved a variant of the same drug. Furthermore, a modified and more effective version of the same medication provides XNPT with a sizable market opportunity. Assuming positive Phase III results, converting doctors into prescribing XP19986 should be made easier by the fact that it is merely a better version of what they are already accustomed to prescribing. This should lead to significant market penetration and pave a clear path to sales and profitability in a relatively short period of time.

Spasticity

Spasticity is a common condition resulting from damage to the motor neuron at the spinal cord or cerebral level. It is typically associated with multiple sclerosis (MS), spinal cord injury (SCI), stroke, cerebral palsy, and traumatic brain injury [1]. The prevalence of spasticity is estimated at approximately 5 million individuals in the USA [2] with 80-85% of patients with MS, 65-78% of patients with SCI and 35% of patients with stroke demonstrating some degree of spasticity [1, 3].

BACLOFEN

Oral baclofen has been used since the mid-1970s for the treatment of spasticity and has been shown to reduce velocity dependent muscle tone on the Ashworth scale that is dose dependent [6, 7]. Interestingly, despite the positive impact observed on the Ashworth scale there does not appear to be any effect on the functional impact of spasticity.

Baclofen is a racemic drug in which the "R" form is the active compound. It is absorbed in the small intestine, crosses the blood brain barrier where it binds to the GABA receptor at the presynaptic terminal. This binding results in the decrease of calcium that results in a reduced release of neurotransmitter that inhibits the spinal reflexes. After oral administration baclofen is rapidly absorbed with a mean half-life of 3.5 hours and is rapidly cleared from the blood. It is estimated that 80% of baclofen is excreted, virtually unchanged in the urine. Therefore, patients on oral baclofen must take the drug up to four times a day. Even with frequent dosing blood levels of baclofen fluctuate and concentrations in the blood are related to the time after administration.

XP19986 - ARBACLOFEN PLACARBIL

AP is a prodrug that was developed by Xenoport, Inc. A prodrug is a biologically inactive compound that becomes active after metabolic processing. As shown in Figure 4, Xenoport, Inc. made an addition to the known chemical structure of R-Baclofen to yield the prodrug AP [8]. AP is in a class of prodrugs called acyloxyalkyl carbamate. This class of drugs have two significant properties: 1) they contain chemical structures that are recognized by the monocarboxylate transporter-1 which is present within both the small and large intestine[9] and 2) contain chemical structures that are known to undergo hydrolysis to release them from active drug[8].

In vitro studies on AP showed it was chemically stable over both physiologically ranges of pH and temperatures. The hydrolysis of AP to R-Baclofen was similar from various species in numerous tissue preparations demonstrating the metabolic stability of AP. The major enzyme responsible for the hydrolysis of AP to R-Baclofen is carboxylesterase -2 whereas carbosylesterase-1 plays only a minor role while the CYP450 pathway is not involved in metabolism[8]. Epithelial polarized cell transport studies demonstrated that AP is partially hydrolyzed during transport from apical to basolateral membrane.

Multiple in vivo animal studies in a variety of species were conducted to evaluate the bioavailability of AP and R-Baclofen. Intravenous administration of AP resulted in rapid conversion to R-Baclofen in the blood. Oral administration of AP demonstrated only a small amount of AP enters the blood stream. In addition, the amount of R-Baclofen available after oral administration of AP was dose dependent and bioavailablity was species dependent with upwards of 94% of R-Baclofen present in the blood. Intracolonic administration of AP or just R-Baclofen showed low levels of both in the blood. However, after the administration of AP there was a substantial amount of R-Baclofen demonstrating the addition of the chemical moiety resulted in absorption through the entire intestinal tract[8].

Recently, the safety and efficacy of AP was studied in patients with SPI who had spasticity as determined by the Ashworth scale. Thirty-seven SPI patients participated in a multiple-dose randomized, double-blind placebo controlled, two-period crossover study [1]. Doses of the drug were 10, 20 and 30 mg and were given twice a day. There was a dose dependent reduction in spasticity as determined by the Ashworth scale meeting the primary endpoint (Figure 6[2]). The secondary endpoint was met with a statistically significant reduction in patient-rated spasticity at doses of 20 and 30 mg. No deaths were reported during the trial nor changes in vital signs, blood values or EKG. Adverse effects (AE) were rated as mild to moderate with urinary tract infection being the most common AE (11%). Other AEs included pain in extremity, insomnia and nasopharyngitis. No participated stopped the study due to AE[1].

After completion of the SCI study that resulted in positive primary and secondary endpoints the FDA approved a single phase 3 efficacy and safety study in MS patients. The phase III clinical trial for the use of AP in patients with MS is called "Command Trial." The study was conducted in 35 different sites in the US which enrolled 75 patients of either sex from ages of 18-70. The Command Trial is an open label extension study and results are anticipated by April 30, 2013.

Currently, Xenoport, Inc. is near completion of renal impairment studies. Additional studies will include full food effect and carcinogenic studies. Anticipated 2013 NDA filing will also need to be completed.

Float and Institutional Ownership

XNPT has 42M shares outstanding of which 33M is the float. 75% of the float are held by institutions. Since institutions own 75% of the 33M float, that only leaves 8.25M shares are available for active trading. Some of those institutions or funds that hold shares literally control billions of dollars such as BlackRock, Vanguard, Orbimed Advisors, Price T. Rowe, Wellington Management, etc. Big money usually does extensive research into companies prior to taking such a large position so one would assume those companies are optimistic regarding the chances of success. If the phase III results are positive, one would assume those companies would increase their stake in XNPT. With only 8.25M shares freely trading, there could be a significant upward spike on positive data.

Financials

XNPT currently has a market cap of $330.2M. With over $100M in cash and limited debt that leaves XNPT's pipeline valued at approximately $250M. XNPT retains the sole rights to commercialization of arbaclofen placarbil which gives XNPT very significant upside potential. XNPT hit a high of $13 in October, 2012. With favorable phase III results by Q2, it is possible that XNPT will break through that previous high in 2013 especially given the limited shares available for trading and high institutional ownership.

Other Pipeline Items

Drugs currently marketed by XNPT include: Horizant® (gabapentin enacarbil) Extended-Release Tablets is approved in the United States. Initially, they were in partnership with GSK for commercialization of Horizant but this agreement has recently ended and XNPT will have sole rights to commercialization. In addition, Regnite® (gabapentin enacarbil) Extended-Release Tablets is approved in Japan and five other asian countries and Astellas Pharma Inc. (OTCPK:ALPMY) holds all development and commercialization rights[9].

Technical Analysis Suggest a Breakout Near

With a nice base forming in the lower $7.00 range, it is set up for a recovery breakout. Over $7.40 should trigger this breakout and send it to its first price target of $9.00 and possibly higher in the months to come.

Other Catalyst Breakouts in Comparison

I have written about stocks that had clear potential for a run-up trade before. My article on Alexza Pharmaceuticals (NASDAQ:ALXA) detailed reasons very similar to this situation. The low float, extensive capital, drug potential and great technical support took it from the $3.00 range when the article was introduced, to over $6.00 at multiple points throughout the run up.

Also in comparison, Navidea Biopharmaceuticals (NYSEMKT:NAVB) had a run up and approval for Lymphoseek. Lymphoseek is an injected, mannose receptor binding radiopharmaceutical agent used in lymphatic mapping procedures. The drug is the first new lymph-node mapping agent approved in more than 30 years and is replacing the current process. Phase III endpoints have been reached for trials using agents for use on breast cancer as well as head and neck cancer. Compounds could provide very useful for oncology surgeons. Again, you see that a replacement drug, procedure, or device has a high chance of a run up and approval.

Work Cited:

1. Nance, P.W., et al., Efficacy and safety study of arbaclofen placarbil in patients with spasticity due to spinal cord injury. Spinal Cord, 2011. 49(9): p. 974-80.

2. Xenoport, I., JPMorgan Global Healthcare Conference. 2012.

3. Nielsen, J.B., C. Crone, and H. Hultborn, The spinal pathophysiology of spasticity-from a basic science point of view. Acta Physiol (NYSE:OXF), 2007. 189(2): p. 171-80.

4. Young, R.R., Spasticity: a review. Neurology, 1994. 44(11 Suppl 9): p. S12-20.

5. Rekand, T., Clinical assessment and management of spasticity: a review. Acta Neurol Scand Suppl, 2010(190): p. 62-6.

6. Hudgson, P. and D. Weightman, Baclofen in the treatment of spasticity. Br Med J, 1971. 4(5778): p. 15-7.

7. Simon, O. and A.P. Yelnik, Managing spasticity with drugs. Eur J Phys Rehabil Med, 2010. 46(3): p. 401-10.

8. Lal, R., et al., Arbaclofen placarbil, a novel R-baclofen prodrug: improved absorption, distribution, metabolism, and elimination properties compared with R-baclofen. J Pharmacol Exp Ther, 2009. 330(3): p. 911-21.

9. www.xenoport.com/default.asp, February 17, 2013.

10. www.nasdaq.com/symbol/xnpt/institutional-holdings, 2013 Feb 13.

Source: XenoPort: A High Probablity Run-Up Trade