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Xenoport, Inc. (NASDAQ:XNPT)

Q3 2007 Earnings Call

November 7, 2007 5:00 pm ET

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

Operator

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

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

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

Jackie Cossmon

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

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

XenoPort can give no assurances with respect to thesestatements, and we assume no obligation to update them. For detailedinformation about the risks and uncertainties that could cause actual resultsto differ materially from those implied by, or anticipated, in theseforward-looking statements, please refer to the risk factors section of ourmost recent SEC filings, including our discussion of the inherent risks ofclinical trials.

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

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

Ron Barrett

Thank you, Jackie. Good afternoon, everyone, and thank youfor joining us on the conference call today. I'll start today's call with a reviewof 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 completethe studies required to file next year in NDA for our lead compound XP13512 forthe treatment of restless legs syndrome. There is a lot of work involved. TheNDA will contain a total of 16 Phase 1 studies, four Phase 2 efficacy safetystudies, and four Phase 3 studies, as well as the full battery of non-clinicalsafety studies, normally associated with a new chemical entity.

We've also been working with GSK to transfer 512manufacturing know-how, and are actively engaged with GSK teams on thelogistics of the NDA submission, which will be done by GSK. We intend torelease top-line data from the remaining two new pivotal efficacy studies XP060and XP053 in the first quarter of next year.

For other studies, we intend to disclose results throughmedical 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 inexpanding the development of 512. Astellas has initiated two Phase 2 clinicaltrials with 512 in Japan:one in restless legs syndrome patients and one in patients with painfuldiabetic neuropathy.

We believe Astellas' knowledge of the regulatoryrequirements and commercial markets in Japan, and the other Asian in theirlicensed territory offer a great opportunity to maximize the value of 512 inthose countries.

GSK is also moving forward with plans to initiate clinicaltrials of 512 in more than one neuropathic pain indication in the first quarterof next year. We anticipate disclosure of some of the details of these studiesbefore the enrollment of the first patients. We are also encouraged by theresearch and planning that GSK is conducting for other potential indicationsfor 512.

With respect to 986, we announced in September the preliminaryresults of the multiple-dose ranging placebo-controlled Phase 1 trial of 986 inhealthy subjects. The study examined once- and twice-a-day repeated dosing of atablet formulation of 986. The pharmacokinetic and safety tolerability from thestudy were encouraging and provided a foundation for finalizing our plans forfuture 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 evaluatesymptoms in GERD patients over four weeks of treatment. The study will test 986formulation designated SR3, that we believe maybe suitable for once-a-daydosing.

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

We also plan to initiate a Phase 2 clinical trial of 986 inspinal cord injury patients with spasticity. The trial is designed to evaluate986 as a twice-a-day treatment in a randomized, double-blind,placebo-controlled crossover study, where approximately 36 patients willreceive one of three doses of 986, 10 milligrams, 20 milligrams or 30milligrams dose b.i.d. and placebo. This study will test a 986 formulationdesignated as SR1 that we believe may be suitable for twice-a-day dosing.

Moving on to the GERD study until we have a betterunderstanding of the enrollment of patients in the study, we are notanticipating when we expect results from this study. Our development programs onXP21279 and XP20925 are also making good progress.

We believe we are on track to initiate our first human trialwith 279, our Transported Prodrug of L-Dopa before years' end, and anticipateresults 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 treatmentof migraine, has also begun development activities, and we look forward toproviding guidance as to when we may initiate clinical studies, when we get alittle further along with this program.

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

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

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

We believe that the 510 licensing agreement also is a niceexample of the capabilities of our Transported Prodrug technology, andXenoPort'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 thescenes, and we look forward to updating investors when we have completed ourpatent filings and/or initiated development activities on these projects.

To summarize, the third quarter has been, and the rest of2007 will be, largely spent in executing the blocking and tackling of our drugdevelopment programs. There is a tremendous amount of work there, and I wouldlike to particularly recognize the dedication and hard work of XenoPort'semployees and our business partners.

We believe that 2008 is going to be a year when a lot ofthese efforts will come to fruition. In the first quarter, we expect to havethe results of two pivotal Phase 3 efficacy studies for 512 in RLS, theinitiation of neuropathic pain studies by GSK, and the results of the 279 Phase1 study.

Better review, we expect the filing of the U.S. NDA for 512in RLS and possibly to see the results of Phase 2 studies of 986 in GERD and/orspasticity. We also anticipate that additional data on the completed 512 and986 studies will be presented at medical conferences throughout the year.

We very much appreciate the support of our investors as westrive 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 onthe key items of our financial results for the third quarter of 2007, includingthe continuing impact of revenues from our GSK collaboration. We will then takeyour questions.

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

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

With that as a [prefix], our revenues for the third quarterof 2007 were $35.4 million, compared to $3.1 million for the same period in2006. Our clinical expenses for 512 and clinical and pre-clinical expenses for986 increased in the third quarter, compared to the same period last year, asyou might expect, given their respective stages in development.

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

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

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 incomeper diluted share was $0.60 for the third quarter of 2007, compared to a netloss 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, cashequivalents, and short-term investments of $159.6 million. With that we'll nowopen the call for questions.

Question-and-AnswerSession

Operator

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

Greg Wade - PacificGrowth

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

Ron Barrett

Sure.

Greg Wade - PacificGrowth

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

Ron Barrett

Okay, Greg, thanks for the question. And with regard to thedescription four Phase 3 trials there is no new news here. We have threepivotal efficacy studies 052 which we’ve already reported positive results of. Thetwo studies that I mentioned today are 60 and 053. And then we have a fourthstudy which is the long-term expansion study, patients who come out of 52 and53 are offered the ability to roll over to an Open Label Extension Study, thatstudy is called XT-55. So that is an open-label safety study, but it is a Phase3 study.

Greg Wade - PacificGrowth

Hey, Bill.

Bill Harris

Hi, Greg, it's Bill. Regarding the go-forward run rate onR&D, as you know our policy is to only provide guidance for the cashposition. 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 totrack the, primarily the Phase 3 RLS development program, which is kind of crescendo-ingas we speak and expect to wane in the first half of '08, and underneath that you'llhave 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 addingback the 36 is reasonable.

Ron Barrett

Operator, can we have the next question?

Operator

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

Rachel McMinn - Cowen&Co

Hi, there are a couple of questions. Just to go further onthat R&D expense as you mentioned, you guys are going to be completing thisbig Phase 3 program. So, just philosophically here without asking for specificguidance, 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 aboutthis as a high water mark?

Ron Barrett

Yes. Just to comment--first one--that all the programs nextyear, as I alluded to earlier, we will be ramping up two Phase 2 studies in the986 program, the Phase 1 work on the 279, and we can expect, as well, therewill be additional studies on 279. And then we have the propofol Prodrug thatmay start clinical work next year.

So, that’s the scope of the clinical work, and I thinkyou've accurately, perhaps, described the fact that those studies in total arenot as much work as the Phase 3 program that we've been conducting over thelast year, and which will be in the first half of next year. But I'll let Billtalk 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 thePhase 2s and Phase 1s that we anticipate executing on. So I would anticipateprobably pulling back a bit from where we are when we completed the Phase 3until 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 cashguidance for the year, it looks like you spend somewhat less over the firstthree quarters here, relative to your original cash guidance. Are you stillsticking with the 125 to 135?

Bill Harris

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

Rachel McMinn - Cowen&Co

Okay. So, we should [agree] with a stale guidance not that it'snecessarily, 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 knowyou have mentioned in the past that the in-light portion is complete. Whenshould 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’tintend to give any updates on those studies unless the results would materiallyaffect our plans. And typically, it takes anywhere from four months to ninemonths before you have the results of the study. Obviously, you are gettingupdates along the way. But we don’t intend to announce the results unless therewould be something that would materially change our plans.

Rachel McMinn - Cowen&Co

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

Ron Barrett

I think I'll stick to the statement I made, that unless itwas something that changed our plans we wouldn’t be given a specific disclosureof 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 otherprograms. Do you have a particular sort of section within your company that’sdevoted to like other indications that you might think your technology would bevery suitable for or may be you can describe like how you then came across thisparticular 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 opportunitieslike gabapentin, baclofen the other things in our pipeline that could fit ourstrategic ambition of focusing in the CNS area, but where we do see projectswhere we can apply our technology at relatively little resource cost and comeup with a compound that we think will be an improvement over existingcompounds, we'll certainly do that.

This was a nice example. Our patent applications for thiscompound have been published, and if you look at the chemical structuresinvolved here, you’ll see that there is lot overlap with our gabapentin andbaclofen prodrug programs. So I would say that this is a great example whereknowledge that we built up over the years on one programs, we were able toapply to a new program and align ourselves with the partners who we think willdo 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 talkabout 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 Europeis a compound that is sold through some generic dealers, so its difficult toget a sense of the total sales. But it is fairly commonly used there, and thepeople of Xanodyne are fairly optimistic that they are going to be able tocreate a market in menorrhagia in the United States. As you are probablyaware, they have a Phase 3 compound that they are developing which issustained-release version of tranexamic acid.

And the 510 compound which has allowed composition-of-matterprotection is a very nice lifecycle management opportunity for them. They haveroughly 100 sales reps in the Untied States, the vast majority of them are inthe OB/GYN space. So, women's health is a real focus for them, and so wethought that for the reasons Ron mentioned earlier that this is outside of ourstrategic focus and that Xanodyne was a great partner in the women's healtharea.

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

Operator

(Operator Instructions). There are no further questions atthis time.

Ron Barrett

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

Jackie Cossmon

Operator?

Operator

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

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