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Executives

Jackie Cossmon - IR

Ron Barrett - CEO

Bill Rieflin - President

Bill Harris - Senior VP of Finance and CFO

Analyst

Greg Wade - Pacific Growth

Rachel McMinn - Cowen &Co

Lucy Lu - Citi

Xenoport, Inc. (XNPT) Q3 2007 Earnings Call November 7, 2007 5:00 PM ET

Operator

Good afternoon. My name is Jeremy, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the XenoPort Third Quarter Financial Results Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answered session. (Operator instructions).

Thank you. Ms. Cossmon, you may begin your conference.

Jackie Cossmon

Thank you, Jeremy. Good afternoon and thank you for joining us on the call. Here with me today are Ron Barrett, our Chief Executive Officer; Bill Rieflin, our President; and Bill Harris, our Senior Vice President of Finance and Chief Financial Officer.

Before we begin our discussion of today’s news, I would like to note that the information to be discussed on this conference call and webcast, including answers to questions asked during this call, will include forward-looking statements that involve risks and uncertainties, including statements related to our future preclinical and clinical development programs and timing thereof, financial guidance, and our future clinical trials and regulatory submission.

XenoPort can give no assurances with respect to these statements, and we assume no obligation to update them. For detailed information about the risks and uncertainties that could cause actual results to differ materially from those implied by, or anticipated, in these forward-looking statements, please refer to the risk factors section of our most recent SEC filings, including our discussion of the inherent risks of clinical trials.

This webcast is a copyright of XenoPort. No reproduction, retransmission or other copies of this webcast may be made without the express written permission of XenoPort.

At this time, I would like to turn the presentation over to Ron.

Ron Barrett

Thank you, Jackie. Good afternoon, everyone, and thank you for joining us on the conference call today. I'll start today's call with a review of our clinical development programs and recent business development activities. Bill Harris will provide highlights of our financial results for the quarter, and then we will open the call to questions.

I'm pleased to report that we remain on track to complete the studies required to file next year in NDA for our lead compound XP13512 for the treatment of restless legs syndrome. There is a lot of work involved. The NDA will contain a total of 16 Phase 1 studies, four Phase 2 efficacy safety studies, and four Phase 3 studies, as well as the full battery of non-clinical safety studies, normally associated with a new chemical entity.

We've also been working with GSK to transfer 512 manufacturing know-how, and are actively engaged with GSK teams on the logistics of the NDA submission, which will be done by GSK. We intend to release top-line data from the remaining two new pivotal efficacy studies XP060 and XP053 in the first quarter of next year.

For other studies, we intend to disclose results through medical conference presentations and managed care publications in the future, unless the results would materially change our plans.

We were also pleased with the progress of our partners in expanding the development of 512. Astellas has initiated two Phase 2 clinical trials with 512 in Japan: one in restless legs syndrome patients and one in patients with painful diabetic neuropathy.

We believe Astellas' knowledge of the regulatory requirements and commercial markets in Japan, and the other Asian in their licensed territory offer a great opportunity to maximize the value of 512 in those countries.

GSK is also moving forward with plans to initiate clinical trials of 512 in more than one neuropathic pain indication in the first quarter of next year. We anticipate disclosure of some of the details of these studies before the enrollment of the first patients. We are also encouraged by the research and planning that GSK is conducting for other potential indications for 512.

With respect to 986, we announced in September the preliminary results of the multiple-dose ranging placebo-controlled Phase 1 trial of 986 in healthy subjects. The study examined once- and twice-a-day repeated dosing of a tablet formulation of 986. The pharmacokinetic and safety tolerability from the study were encouraging and provided a foundation for finalizing our plans for future efficacy and safety studies.

We plan to initiate by the end of this year a double-blind, randomized placebo-controlled dose ranging Phase 2 trial that will evaluate symptoms in GERD patients over four weeks of treatment. The study will test 986 formulation designated SR3, that we believe maybe suitable for once-a-day dosing.

The study will be conducted in the US on approximately 150 subjects, and will examine doses of 20 milligrams, 40 milligrams and 60 milligrams dose once daily, and 30 milligrams dose twice a day. We plan to get guidance on the expected completion of this study, after we have experienced with patient enrollment.

We also plan to initiate a Phase 2 clinical trial of 986 in spinal cord injury patients with spasticity. The trial is designed to evaluate 986 as a twice-a-day treatment in a randomized, double-blind, placebo-controlled crossover study, where approximately 36 patients will receive one of three doses of 986, 10 milligrams, 20 milligrams or 30 milligrams dose b.i.d. and placebo. This study will test a 986 formulation designated as SR1 that we believe may be suitable for twice-a-day dosing.

Moving on to the GERD study until we have a better understanding of the enrollment of patients in the study, we are not anticipating when we expect results from this study. Our development programs on XP21279 and XP20925 are also making good progress.

We believe we are on track to initiate our first human trial with 279, our Transported Prodrug of L-Dopa before years' end, and anticipate results of the Phase 1 study compared to pharmacokinetics of 279 to generic [sediments] in healthy subjects in the first quarter of next year.

Our Transported Prodrugs of propofol, for the potential treatment of migraine, has also begun development activities, and we look forward to providing guidance as to when we may initiate clinical studies, when we get a little further along with this program.

Finally, I’d like to turn to XP21510, which is an example of work that has been going on behind the scenes of our disclosed development programs. We announced the licensing of this compound Xanodyne on October 15.

510 is the Transported Prodrug of tranexamic acid, which has been approved in several countries in Europe for the treatment menorrhagia, or excessive menstrual bleeding. The CDC estimates that 9%-14% of healthy women suffer from menorrhagia, and in the US there is currently no approved, non-hormonal option for treating this disorder.

We believe that 510 could potentially provided unique benefits to women with this disorder, and that Xanodyne is a great partner to maximize the potential of the value of this compound.

We believe that the 510 licensing agreement also is a nice example of the capabilities of our Transported Prodrug technology, and XenoPort's ability to derive value from our discovery expertise beyond that, which we are creating through our internal development efforts.

There are other projects that are being worked on behind the scenes, and we look forward to updating investors when we have completed our patent filings and/or initiated development activities on these projects.

To summarize, the third quarter has been, and the rest of 2007 will be, largely spent in executing the blocking and tackling of our drug development programs. There is a tremendous amount of work there, and I would like to particularly recognize the dedication and hard work of XenoPort's employees and our business partners.

We believe that 2008 is going to be a year when a lot of these efforts will come to fruition. In the first quarter, we expect to have the results of two pivotal Phase 3 efficacy studies for 512 in RLS, the initiation of neuropathic pain studies by GSK, and the results of the 279 Phase 1 study.

Better review, we expect the filing of the U.S. NDA for 512 in RLS and possibly to see the results of Phase 2 studies of 986 in GERD and/or spasticity. We also anticipate that additional data on the completed 512 and 986 studies will be presented at medical conferences throughout the year.

We very much appreciate the support of our investors as we strive to make better medicines available to patients.

And with that, I'll now turn the presentation over to Bill.

Bill Harris

Thanks Ron, and good afternoon. I'll spend a few moments on the key items of our financial results for the third quarter of 2007, including the continuing impact of revenues from our GSK collaboration. We will then take your questions.

As of the last two quarters, revenues for the third quarter were positively impacted by the recognition of revenues associated with the upfront milestone payments from our collaboration with GSK.

As a result of the significant increase in collaboration revenues, we are profitable this quarter and may have profitable quarters from time-to-time in the future. However, while the recognition of these revenues may result in a profitable year for 2007, we continue to expect to incur loses over the next several years.

With that as a [prefix], our revenues for the third quarter of 2007 were $35.4 million, compared to $3.1 million for the same period in 2006. Our clinical expenses for 512 and clinical and pre-clinical expenses for 986 increased in the third quarter, compared to the same period last year, as you might expect, given their respective stages in development.

However, research and development expenses were positively impacted by decreased manufacturing expenses for 512, that included a non-recurring $3.6 million reimbursement due from GSK for 512 drug substance, resulting in R&D expenses being slightly lower for the quarter compared to the same period last year.

The modest increase in general, administrative expenses of $200,000 compared to the same period last year, fairly reflects increased personnel cost due to increased headcounts and increased non-cash stock-based compensation.

Net income for the third quarter of 2007 was $15.6 million, compared to a net loss of $16.3 million for the same period in 2006. Net income per diluted share was $0.60 for the third quarter of 2007, compared to a net loss per basic and diluted share of $0.67 in the same period in the prior year.

And finally, at September 30, 2007, we had cash, cash equivalents, and short-term investments of $159.6 million. With that we'll now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Greg Wade with Pacific Growth.

Greg Wade - Pacific Growth

Good afternoon. Thanks for taking my question. First up, for Ron. You indicated there is four Phase 3 for 512. Can you just remind me what the fourth Phase 3 is?

Ron Barrett

Sure.

Greg Wade - Pacific Growth

And then, for Bill Harris. In terms of expenses on a going forward basis for this year and perhaps next year for R&D, would it be more appropriate to take this R&D spend for this quarter, add back to $3.6 million and use that as a run rate? Thanks.

Ron Barrett

Okay, Greg, thanks for the question. And with regard to the description four Phase 3 trials there is no new news here. We have three pivotal efficacy studies 052 which we’ve already reported positive results of. The two studies that I mentioned today are 60 and 053. And then we have a fourth study which is the long-term expansion study, patients who come out of 52 and 53 are offered the ability to roll over to an Open Label Extension Study, that study is called XT-55. So that is an open-label safety study, but it is a Phase 3 study.

Greg Wade - Pacific Growth

Hey, Bill.

Bill Harris

Hi, Greg, it's Bill. Regarding the go-forward run rate on R&D, as you know our policy is to only provide guidance for the cash position. But, having said that, I think it is important to remember that the [3.6] is a non-recurring events, so adding that back is not unreasonable.

Qualitatively you can imagine our expenses are going to track the, primarily the Phase 3 RLS development program, which is kind of crescendo-ing as we speak and expect to wane in the first half of '08, and underneath that you'll have the Phase 2, the two Phase 2s for 986 kind of building up underneath it. So qualitatively, I think you need to think of those two things, but adding back the 36 is reasonable.

Ron Barrett

Operator, can we have the next question?

Operator

Your next question comes from the line of Rachel McMinn with Cowen & Company.

Rachel McMinn - Cowen &Co

Hi, there are a couple of questions. Just to go further on that R&D expense as you mentioned, you guys are going to be completing this big Phase 3 program. So, just philosophically here without asking for specific guidance, should we expect you guys to kind of continue to build up a pipeline, so that those numbers would be similar or should we really be thinking about this as a high water mark?

Ron Barrett

Yes. Just to comment--first one--that all the programs next year, as I alluded to earlier, we will be ramping up two Phase 2 studies in the 986 program, the Phase 1 work on the 279, and we can expect, as well, there will be additional studies on 279. And then we have the propofol Prodrug that may start clinical work next year.

So, that’s the scope of the clinical work, and I think you've accurately, perhaps, described the fact that those studies in total are not as much work as the Phase 3 program that we've been conducting over the last year, and which will be in the first half of next year. But I'll let Bill talk more specifically about the financial aspects.

Bill Harris

Yeah, Rachel, I think you are thinking about it correctly, and the cost of the Phase 3 program are, in total, more substantial than the Phase 2s and Phase 1s that we anticipate executing on. So I would anticipate probably pulling back a bit from where we are when we completed the Phase 3 until we move back in to Phase 3 of our other programs.

Rachel McMinn - Cowen &Co

Okay. That’s very helpful. And do you have updated cash guidance for the year, it looks like you spend somewhat less over the first three quarters here, relative to your original cash guidance. Are you still sticking with the 125 to 135?

Bill Harris

Yes we put that guidance out at the beginning of the year and we don’t update it.

Rachel McMinn - Cowen &Co

Okay. So, we should [agree] with a stale guidance not that it's necessarily, you are not updating it?

Bill Harris

I am not updating it correct.

Rachel McMinn - Cowen &Co

Okay. And then Ron, on the carcinogenicity studies, I know you have mentioned in the past that the in-light portion is complete. When should we be expecting the actual write up to be delivered to you?

Ron Barrett

Yes, as I indicated in the script there earlier, we don’t intend to give any updates on those studies unless the results would materially affect our plans. And typically, it takes anywhere from four months to nine months before you have the results of the study. Obviously, you are getting updates along the way. But we don’t intend to announce the results unless there would be something that would materially change our plans.

Rachel McMinn - Cowen &Co

Right. But I guess when we think about when, if there was something that sort of popped out, or if there is let's say a more positive side. So assuming that you complete the studies, everything looks good, would you be in a position to just let people know or a timeframe at which we could or should we just say okay, well they file the NDA therefore they [must decide], is that the only real visibility we'll have.

Ron Barrett

I think I'll stick to the statement I made, that unless it was something that changed our plans we wouldn’t be given a specific disclosure of the result.

Rachel McMinn - Cowen &Co

Okay. And then last question. Just in terms of the Xanodyne deal, and thinking about other potential deals, it sounds like you have other programs. Do you have a particular sort of section within your company that’s devoted to like other indications that you might think your technology would be very suitable for or may be you can describe like how you then came across this particular product?

Ron Barrett

Sure, we do have a very active discovery research group. Most of the attention on the company is focused on our development activities, but this group has not been sitting ideal really. We look for opportunities like gabapentin, baclofen the other things in our pipeline that could fit our strategic ambition of focusing in the CNS area, but where we do see projects where we can apply our technology at relatively little resource cost and come up with a compound that we think will be an improvement over existing compounds, we'll certainly do that.

This was a nice example. Our patent applications for this compound have been published, and if you look at the chemical structures involved here, you’ll see that there is lot overlap with our gabapentin and baclofen prodrug programs. So I would say that this is a great example where knowledge that we built up over the years on one programs, we were able to apply to a new program and align ourselves with the partners who we think will do a great job.

Operator

You next question comes from the line Lucy Lu with Citi.

Lucy Lu - Citi

Thank you. On this program actually, can you please talk about how much this tranexamic acid does for menorrhagia in Europe and the Asia, just tell me if patients are taking the drugs?

Ron Barrett

Sure, I'll let Bill Rieflin handle that.

Bill Rieflin

Hi, Lucy. Yeah, so tranexamic acid in Europe is a compound that is sold through some generic dealers, so its difficult to get a sense of the total sales. But it is fairly commonly used there, and the people of Xanodyne are fairly optimistic that they are going to be able to create a market in menorrhagia in the United States. As you are probably aware, they have a Phase 3 compound that they are developing which is sustained-release version of tranexamic acid.

And the 510 compound which has allowed composition-of-matter protection is a very nice lifecycle management opportunity for them. They have roughly 100 sales reps in the Untied States, the vast majority of them are in the OB/GYN space. So, women's health is a real focus for them, and so we thought that for the reasons Ron mentioned earlier that this is outside of our strategic focus and that Xanodyne was a great partner in the women's health area.

We are blessed to have more assets than we have development capacity, and so one of the things that’s very important to us from a strategic perspective is to retain focus in our sweet spot, and so I think that Xanodyne deal is an example of how we intend to stick to our knitting in CNS, but also monetize the great work that’s been done on the research side of the house.

Operator

(Operator Instructions). There are no further questions at this time.

Ron Barrett

Well, I'd like to thank you all for joining us this afternoon, and as always if you have further questions please feel free to call us at 408-616-7220. Again thanks for participating in the call and have a great day. Thank you.

Jackie Cossmon

Operator?

Operator

Ladies and gentlemen this concludes today's conference. You may now disconnect your lines.

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