XenoPort: Buyout Appears Imminent

| About: XenoPort, Inc. (XNPT)

Summary

Last October, XenoPort announced that it will seek to partner its development stage assets.

RBC took its price target to $10 – more than double the current stock price citing that this decision can finally unlock strategic value as an M&A candidate.

As per Reuters's report in January, XenoPort is exploring a sale of the company.

Deerfield Management is aggressively buying XenoPort shares, (bought ~5 million shares last week) which is a pretty bullish signal.

XenoPort, Inc. (NASDAQ:XNPT) is a biopharmaceutical company focused on commercializing HORIZANT for the treatment of moderate-to-severe primary restless legs syndrome (RLS) and postherpetic neuralgia (PHN) in adults in the United States. XenoPort has entered into a clinical trial agreement with the NIAAA under which the NIAAA has initiated a clinical trial evaluating gabapentin enacarbil as a potential treatment for AUD. XenoPort has out-licensed REGNITE® (gabapentin enacarbil) Extended-Release Tablets, which is being marketed in Japan by Astellas Pharma Inc. (OTCPK:ALPMF).

XenoPort has granted exclusive worldwide rights for the development and commercialization of its clinical-stage oral product candidate, arbaclofen placarbil, to Indivior PLC for all indications. XenoPort's other product candidates include XP23829, a novel fumaric acid ester prodrug that is a potential treatment for patients with moderate-to-severe chronic plaque-type psoriasis and potentially for patients with relapsing forms of multiple sclerosis, and XP21279, a prodrug of levodopa that is a potential treatment for patients with idiopathic Parkinson's disease.

XP23829: Two Shots, Two Goals

Soon after the announcement of positive Phase 2 study results for XP23829 in last September, XenoPort came out with a plan to focus on sales of their commercial asset Horizant. XenoPort also announced that it will seek partners for the rest of the compounds in their pipeline. As of the last quarterly results call, there were multiple parties interested in XP23829.

Multiple Sclerosis

XP23829 is a patented prodrug of monomethyl fumarate (MMF) which is the active moiety of Biogen Idec's (NASDAQ:BIIB) blockbuster Tecfidera (a $3.6 billion/year drug). Obviously, the market for multiple sclerosis (MS) drugs is huge and if a potential partner believes that XP23829 can succeed in a Phase 3 trial, get approval, and capture 1-2% of MS market, sales could be in the ranks of $100-$200 million/year. Interestingly, the FDA has asked for only a Phase 3 safety study (and not efficacy study) from Alkermes (NASDAQ:ALKS) for its MMF prodrug candidate ALKS8700 for approval in MS, which can pretty well be the case with XenoPort too. Such a regulatory path can significantly shorten the time to reach market and reduce costs and risk associated with an efficacy study, which shall be of significant value to potential partners.

Psoriasis

Tecfidera isn't approved for psoriasis (another multibillion-dollar indication); however, there are better products available in the market. Though XP23829 appeared not as effective as Tecfidera in the Phase 2 Psoriasis trial, a potential partner would weigh in factors like (i) it wasn't a head-to-head study, and (ii) the effect of prior-treatment with biologics in the XP23829 trial (which was absent in Tecfidera's trial). Anyway, the Psoriasis indication can be considered secondary to a larger indication like MS and any value from Psoriasis may turn out to be bonus for a partner/acquirer.

RBC values XP23829 worth as much as $8/share of XenoPort.

Horizant: Worth the current MCap alone

As per the company's guidance, Horizant is expected to yield sales close to $39 million in 2015. With patents expiring in 2022 to 2029, Horizant can be easily valued at 3x-4x of estimated peak sales. A conservative peak sales estimate of $75 million would mean that Horizant is worth $225-$300 million to a potential acquirer, which coincides well with the current MCap of XenoPort (~$262 million as of 17th Feb 2016). For investors, it also provides a downside cushion in case an acquisition/partnership doesn't live up to expectations.

Cash and Debts

At September 30, 2015, XenoPort had cash, cash equivalents and short-term investments of $152.4 million. With a net loss of approximately $25 million in each Q2 and Q3 of 2015, XenoPort is likely to have close to $85-$95 million in cash and cash equivalents by the end of Q2 2016, a conservative time frame by which the company can find an acquirer (assumed reduced burn rate due to discontinued development of XP23829 and XP21279).

On February 3, 2015, XenoPort completed the sale of $115.0 million aggregate principal amount of its 2.50% convertible senior notes due 2022, or the convertible notes, raising net proceeds of approximately $111.4 million.

So I assume that current net cash and debts are almost equal and thus will not weigh much into valuation if the company is acquired anytime soon.

Underestimated Positives

There have been a few things about XenoPort, which haven't been talked about by analysts:

  1. As per the latest available information from the FDA, no generic application has been filed for Horizant till date. This shall result in a significant value as delayed generic filing results in extended period of marketing exclusivity for XenoPort.
  2. Under the partnership terms with Indivior/Reckitt for Arbaclofen, XenoPort will be eligible to receive aggregate cash payments of up to $70 million upon the achievement by Reckitt Benckiser Pharmaceuticals of certain development and regulatory milestones, as well as up to $50 million for commercial milestones. In addition, XenoPort is entitled to receive tiered double-digit royalty payments up to the mid-teens on a percentage basis on potential future net sales of arbaclofen placarbil in the United States and high single-digit royalty payments on potential future net sales outside the United States. Indivior expects to get results from the ongoing Phase 2A study of Arbaclofen in Q3 2016.
  3. Results from the NIAAA funded clinical trial evaluating Horizant as a potential treatment for AUD are expected by end of Q4 2016 - early 2017. Positive results can expand the market for Horizant.

Conclusion: XenoPort has been officially exploring strategic alternatives from last October. The assets are of clear value to a potential partner/acquirer. So it's not a matter of if but when they strike a deal or two, and the time appears ripe.

Disclosure: I am/we are long XNPT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.