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XenoPort Inc. (NASDAQ:XNPT)

Q4 2007 Earnings Call

February 14, 2008 5:00 am ET

Executives

Jackie Cossmon - Director of IR

Ron Barrett - CEO

Bill Harris - SVP of Finance and CFO

Bill Rieflin- President

Analysts

Michael Yee - RBC Capital Market

David Amsellem - Friedman, Billings, Ramsey

Steven Harr - Morgan Stanley

Operator

At this time, I would like to welcome everyone to the XenoPort fourth quarter financial results conference call. (Operator Instructions)

Thank you. I will now turn the call over to Ms. Cossmon. Ma'am, you may begin your conference.

Jackie Cossmon

Thank you, Teresa. 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'd like to note that the information to be discussed on this conference call and webcast, including answers to questions 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 clinical trials and the timing thereof, our partners clinical development plans, the release of additional clinical trial data, financial guidance and future regulatory submissions and the timing thereof.

XenoPort can give no assurance 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.

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

Ron Barrett

Thank you, Jackie, and good morning, everyone. Thank you for joining us on our conference call today. I'll start today's call with an overview of our progress in 2007 and our expected milestones for 2008. Bill Harris will provide highlights of our financial results.

Since the beginning of 2007, XenoPort has experienced continued success in its R&D programs and corporate development activities. We are very pleased to report the positive results from our first two Phase 3 trials and our 512 RLS clinical development program. We expect the results from our last pivotal efficacy trial later this quarter. Our partner, GSK, expects to file the NDA for RLS in the third quarter of this year.

Our partnership with GSK, which we entered into about a year ago, has been transformational to XenoPort. Importantly, we gained access to the breadth of experience and resources of GSK and we believe we'll continue to expand the development of 512. GSK has indicated that it intends to initiate multiple clinical trials with 512 in 2008; including polysomnography studies in RLS patients that could support extended label claims, clinical trials in two neuropathic pain conditions and trials assessing 512 for migraine prophylaxis. GSK is responsible for the conduct and the expenses of the trials, and we look forward to working with GSK as they broaden the potential clinical utility of the commercial opportunity for 512.

Astellas, our partner for 512 in Japan and five other Asian countries, also made good progress in 2007. Phase 2 studies conducted in patients with RLS and painful diabetic neuropathy in Japan are underway, and we look forward to seeing the results of these trials in the future. In addition to expanding the development of 512 far beyond what we could have done on our own, the GSK and Astellas partnerships have had a tremendous positive impact on other aspects of our business.

Bill will review the financials that demonstrate the financial consequences of the GSK and Astellas deal. This increased financial strength combined with the beginnings of the freeing up of resources from the 512 program has allowed us to invest more heavily and broadening the rest of our product candidate pipeline. For 986, we reported last year the development of a new sustained-release tablet formulation, one of which we think may be suitable for once a day dosing.

We initiated separate Phase 2 trials in spinal cord injury patients with spasticity and in GERD patients. These dose ranging studies are designed to evaluate the efficacy and safety of 986 and assist us in defining the optimal dosing for these indications. The results of these two trials will guide our next steps for 986. Depending on enrollment, we may see results from these trials sometime in late 2008.

Our third product candidate, 279, entered human trials for the first time in late 2007. We initiated a Phase 1 single dose cross-over study to evaluate the pharmacokinetic profile of 279 compared to L-Dopa itself. L-Dopa remains the current treatment standard for most Parkinson's patients and we know that important deficiencies of L-Dopa are related to the suboptimal pharmacokinetics. We anticipate reporting the results of this trial later this quarter.

We've also been advancing our other projects that are at a preclinical stage, and we hope to provide more information as these projects mature. In summary, 2007 was a great year for XenoPort and we look forward to an equally busy and exciting year in 2008.

With that, I'll now like to turn the presentation over to Bill to review the financial results.

Bill Harris

Thanks, Ron, and good afternoon. I'll spend a few moments on the key items of our financial results for the fourth quarter of 2007, including the continuing impact of our GSK collaboration on revenues. I'll then update you on our expected cash burn for 2008 after which we will take your questions.

Revenues for the fourth quarter were again positively impacted by the recognition of revenues associated with the upfront milestone payments from our collaboration with GSK. We have now received $32 million of the $65 million of milestone payments that we are eligible to receive from GSK prior to the filing of the RLS NDA, including $11 million milestone payment received in the fourth quarter.

We also received a $6 million payment from Xanodyne upon the execution of our collaboration agreement during the quarter and we will receive an additional $6 million on the 12-month anniversary of the execution date. As a result of the significant increase in collaboration revenues, we were profitable this quarter and may have profitable quarters from time-to-time in the future. However, while the recognition of these revenues resulted in a profitable year for 2007, we continue to expect to incur losses for the next several years.

With that as a preface, our revenues for the fourth quarter were $25.8 million compared to $3.1 million in the same period in 2006. During the fourth quarter, we saw our expenses associated with 512 begin to decrease compared to the same period last year as we transition manufacturing responsibility to GSK for their territory and our Phase 3 RLS program progressed towards its completion. However, personnel costs increased due to increased headcount, offsetting the decrease in development expenses.

General and administrative expenses for the fourth quarter of 2007 increased by approximately $2 million compared to the same period last year. This increase primarily reflects increased personnel and related costs resulting from increased headcount and increased non-cash stock-based compensation.

Net income for the fourth quarter of 2007 was $2.5 million compared to a net loss of $18.6 million for the same period in 2006. Net income per diluted share was $0.09 for the fourth quarter of 2007 compared to a net loss per basic and diluted share of $0.76 for the same period in the prior year. At December 31, 2007, we had cash, cash equivalents and short-term investments of $160.1 million.

Turning to 2008, we expect our operating expenses to continue to increase, primarily due to increasing headcount, investment in our preclinical development programs and 986 development costs, partially offset by decreasing expense for our 512 RLS program. However, at the same time, we expect to receive significant cash payments under our various collaboration agreements. Accordingly, we expect that our net use of cash for 2008 will be in the range of $55 million to $65 million.

With that, we will now open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from the Michael Yee with RBC Capital Market.

Michael Yee - RBC Capital Market

Great. Thanks. A couple questions, Ron. Can you give an update on any of the other studies in RLS that you're working on? Are you going to report this publicly or just submit them as part of the package? And then, from the GSK side, when do you think the earliest we would get data in neuropathic pain would be?

Ron Barrett

Okay. Thanks, Michael, for the questions. We expect to get the results of the XP053 study, the pivotal efficacy study, 12-week study this quarter. We have indicated that we also have a number of other studies that we'll be wrapping up this quarter or next quarter, and will be completed in time to finish the study reports and incorporate them into an NDA in the third quarter filed by GSK.

We don't anticipate giving any updates on those studies. They are primarily safety studies. If we were to see results that we felt were problematic, we would update investors. But at this point, we are working hard towards getting those studies completely and incorporated into the NDA.

With regard to the neuropathic pain studies that GSK will be starting this quarter, they have not indicated any specific guidance with regard to when they will be completed, except for saying that they will be completed in 2009.

Michael Yee - RBC Capital Market

Okay. And the last question on your study in GERD. Can you talk a little bit about your clinical and regulatory strategy assuming we get positive data around the end of the year? How are you thinking about the profile of drug in combination, not in combination, what are you thinking there?

Ron Barrett

Yeah. Let me just review what that study is, and then talk about what the next steps might be. The study that we're currently conducting is a study in which patients who are partial responders or have no previous history of PPI are washed off of their PPI and then entered into a conventional parallel arm study over four weeks. And there are multiple dose groups for 986 as well as placebo. We designed the study that way in order to get the maximal amount of symptom events during those four weeks, so that we could carefully examine the dose response if there is one for 986.

Our next steps will really be dependent on what the results of that study are, but we're currently anticipating that the next study would be in patients who were non-responders or partial responders to PPI in which 986 would be added on top of their existing PPI therapy. That's what we currently believe is the desired product profile. However, we may change our views after seeing the results of this first study.

Michael Yee - RBC Capital Market

Do you think you'd be in some sort of pivotal program in '09? And I think you've mentioned it before, but I assume you did this with a partner then?

Ron Barrett

I'm not going to say whether we'd be in a pivotal study yet. We need to see the results of this study. I think the more likelihood is that we would do a 2b study in the patient population that we think is going to be the patient population for the registration study. It could be a registration quality 2b study, but I don't think we would go right to Phase 3. And your second question?

Michael Yee - RBC Capital Market

It's regarding the partnership implication.

Ron Barrett

Yeah, let Bill take that one.

Bill Rieflin

And I think, Michael, the answer is also going be a function of the data that we see from this study. To the extent that safety profile is very clean and it appears that this could be a potential frontline product that's going to require primary care, we have no ambition to develop that ourselves and so it would be partnered. To the extent that the profile suggests that it may not be exclusively primary care, then we might consider different types of partnering arrangements. Keep in mind that we don't have any ambitions ex-US at this point, and so the possibility of an ex-US partnership always exists.

Michael Yee - RBC Capital Market

Great. Thanks, guys.

Ron Barrett

Thank you.

Operator

Our next question comes from David Amsellem with Friedman, Billings, Ramsey.

David Amsellem - Friedman, Billings, Ramsey

Hi. Thanks for taking my question. Just first on the 512, can you talk about what the Phase 3 in migraine might look like in terms of dosing duration of the study, and also if you were to do and if Glaxo were to do an active comparative study, what that active comparator might be?

Ron Barrett

I can't really speak to the specifics of that program other than to say what GSK has said. And what GSK has said is their plans really are subject to their meeting with the FDA. They have indicated that they will explore the possibility of doing a 12-week study, and also that their studies will be parallel-designed, placebo-controlled studies. Beyond that, GSK needs to talk with the FDA and get agreement on their Phase 3 program. But they have indicated they expect to start migraine prophylaxis studies later this year.

David Amsellem - Friedman, Billings, Ramsey

Okay. And then, just switching gears a bit to 21279. Can you talk about what the next steps will be once you get the Phase 1 readout, and what the next studies would look like and when you might start them?

Ron Barrett

Sure. I just want to remind people that this first study that we're doing is a crossover study in which we compare the pharmacokinetics of 279 to L-Dopa itself. What we do next is really going to be dependent on what those results look like. I think given our experience 512 and 986, we anticipate that we may have to do additional work on the formulation to get the formulation the way that we want to before going into efficacy studies. We think that that would likely occur through the end of this year. And if all of that goes well, we could be possibly doing studies in Parkinson's patients next year.

David Amsellem - Friedman, Billings, Ramsey

Okay. All right. Thanks for taking the questions and congratulations on a good quarter.

Ron Barrett

All right. Thank you.

Operator

Our next question comes from the Steven Harr with Morgan Stanley.

Steven Harr - Morgan Stanley

I just want to understand what the profile as you're looking for out of 279 exactly versus L-Dopa? And what are the data that you're going to give us by the end of 1Q and what will we learn from that if you plan to still continue to work on the formulation between now and the end of the year?

Ron Barrett

So, what we think is the most important thing that will come out of the study is the L-Dopa blood level profile, the time profile. And so, what we will disclose likely in the press release would be a description of the PK parameters compared to L-Dopa itself. What we're looking for is the lengthening of the time of the exposure to L-Dopa and a profile that when stimulated to twice a day dosing, for instance, would have a considerably lower peak/trough ratio than L-Dopa itself.

So, the important thing we're looking for is this extension of L-Dopa exposure beyond what L-Dopa itself provides. It's very well established that if we could do that that it's likely that we would have clinical benefits, particularly on decreasing the amount of off time for patients.

You may be familiar with the products Stalevo of Novartis and Orion in Europe. This is a product that adds entacapone to existing L-Dopa, carbidopa therapy, and there is some modest extension of the exposure of L-Dopa for that product and it has shown some fairly remarkable improvements in this wearing off time. So we would like to be able to do better than Stalevo with regard to the PK profile.

Steven Harr - Morgan Stanley

Okay. And then, maybe you can just give us a little overview -- not an overview, but I just wanted to discuss 512. I think the major remaining issue still is safety. And first of all, when will we see all of the adverse event data from your studies and how comfortable are you right now given where we are with the FDA and its focus on safety that you have a profile that is likely to lead the regulatory approval?

Ron Barrett

Sure. We will be presenting more of the data from the XP052 study at medical meetings this year, the AAN and APSS meeting. Those will likely contain a broader description of the [AEs] than we gave in the press release. So there is nothing in that data that we have concern about. The incidences of things like weight gain, peripheral edema are low. But really the dizziness in somnolence is the most prevalent and we've indicated what those prevalence rates are and the fact that they are transient in mild to moderate.

Your general question about the environment at the FDA with regard to safety, I think, is really a related one. And we think we have two things going for us. One is our own data on 512, which has been fairly spectacular in terms of its safety profile that we've seen to-date. The other thing is the FDA is very familiar with the historical gabapentin's safety profile. And so I do think that that does provide some reassurance with regard to the safety of 512 because our package is only going to be greater than 1,500 patient exposures, but there has literally been tens of millions of exposures of gabapentin.

Steven Harr - Morgan Stanley

Thank you.

Ron Barrett

Thank you, Steve.

Operator

(Operator Instructions)

We have a question from Michael Yee.

Ron Barrett

Hello, Michael.

Operator

Mr. Yee, your line is open.

Michael Yee - RBC Capital Market

Hi, there. Sorry about that.

Ron Barrett

No problem.

Michael Yee - RBC Capital Market

Should we assume that the European filing for 512 is going to be around the same time?

Ron Barrett

No, I don't think we've ever indicated that. We really have not given any guidance with regard to Europe. This is something that we're working on with GSK. As you know, the requirements in Europe are different from the US. And overtime, we hope to be able to disclose what the strategy is for Europe. But at this time, GSK is not disclosing that.

Michael Yee - RBC Capital Market

Okay. Thanks.

Ron Barrett

You're welcome.

Operator

There are no further questions at this time.

Ron Barrett

I'd like to thank you all for joining us today and wish everyone a Happy Valentine's Day. If you have any further questions, please feel free to call us at 408-616-7220. Again, thanks for participating on the call today and have a great day.

Operator

This concludes today conference call. You may now disconnect.

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