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Xenoport, Inc. (NASDAQ:XNPT)

Q1 2008 Earnings Call

May 7, 2008 5:00 pm ET

Executives

Jackie Cossmon - IR

Ron Barrett - CEO

Bill Rieflin - President

Bill Harris- SVP and CFO.

Analysts

Michael Yee - RBC Capital Markets

Rachel Mcminn - Cowen and Company

Katherine Xu - Credit Suisse

Juan Sanchez - Ladenburg Thalmann

Operator

Good afternoon. My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to the XenoPort first 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-answer session. (Operator instructions).

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

Jackie Cossmon

Thank you, Christine. 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 clinical development programs and clinical trials and the timing thereof, our partner's clinical development plan, the release of additional clinical trial data and future regulatory submissions and the timing thereof.

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. 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 in the call today. I'll start today's call within our overview of our progress for the first quarter and an update of our plans for the rest of the year. Bill Harris will then provide a highlight for the financials.

Let me start by saying that Q1 was an exciting and productive quarter particularly for our lead compound 512. We had two successful Phase 3 trials and with the exception of some patients that remain in the open label one-year study, we completed all the remaining clinical studies that will go into the U.S. NDA filing for RLS. This was a tremendous accomplishment for the company, and we thank our business partners, investigators and patients who contributed to the completion of this program.

We are now working daily with GSK to compile the massive amounts of information required for NDA filing, which GSK has said will occur next quarter. As indicated in our press release today, we and GSK have submitted to the FDA the trademark Solzira for 512 in the U.S. This is just one step in a process to assure the successful launch of 512 in the U.S.

Another important step is the addition of a new executive to the XenoPort team. Vince Angotti joined us as Chief Commercialization Officer. We believe that Vince, with his broad experience in sales and marketing, first in Novartis and then at Reliant, will provide significant insights in the near term as we work with GSK to optimize the planned launch of Solzira.

Vince will play an important role in our decision regarding the option in our GSK deal. I'm also particularly excited to have Vince contributing as a member of the executive team as we plan the late stage development of our other product candidates and as we consider a number of business strategies associated with them.

To finish up on the 512 highlights and updates in the press release, we indicated that GSK has initiated three Phase 2 studies in neuropathic pain, two studies in patients with post-herpetic neuralgia, and one study in painful diabetic neuropathy patients. GSK has indicated they expect the result of these studies in 2009. We also indicated in the press release that GSK has modified its plans with regard to Solzira and migraine prophylaxis.

GSK has reported that this program will start this year with a Phase 2b trial that will be designed to assess multiple doses of Solzira. GSK believes that conducting the Phase 2b study will increase the likelihood of a successful clinical program suitable for FDA approval. GSK has also advised us that it expect to comment later this year a Phase 3b polysomnography study of Solzira in RLS patients.

Now turning to XP19986, I am pleased to report that our clinical sites are actively recruiting and enrolling patients for both the GERD study and spasticity study. We now believe that the GERD study will be completed with reporting of the topline data by the end of the year. The spasticity trial has been slower to enroll and we now believe that we will have result sometimes in the first half of 2009. We've taken steps to increase enrollment in this trial and we await the result for these initiatives.

In Q1, we reported a result of a Phase 1 single dose crossover trial to evaluate the pharmacokinetics profile a prototype formulation of 279. We're very pleased to report that 279 produced a more sustained exposure of L-Dopa compared to oral L-Dopa dosed in the same healthy subjects. And it was well-tolerated in this first trial in humans.

These data were very encouraging. We're now working to optimize the formulation and believe that we can begin a clinical trial in Parkinson's disease patients in 2009 after completing additional Phase 1 clinical trials with new formulations later this year.

I'd like to take a step back and reflect on why I believe is important flexion point for the company. XenoPort has been a company that has discovered product candidates and then development them with their own resources. Today, XenoPort has completed five successful Phase 2 and Phase 3 efficacy trials on 512, along with a large of number ancillary preclinical studies and clinical trials that will support the RLS NDA.

With the completing of the U.S. Phase 3 RLS program, we will no longer be utilizing our staff to directly conduct nor will we be financing the development of 512 anywhere in the world. And I should mention this is irrespective of whether we select the U.S. profit share option with GSK. Instead, we will be relying on our partners Astellas and GSK to drive further development of this compound.

To give you a sense of the leverage implicit in these collaborations, our partners are presently conducting five large clinical trials of 512 for the treatment of RLS in naturopathic pain. Within the next year these ongoing trials will enroll over 1,600 patients. Additionally, GSK plans to commence two clinical trials in the second half of this year examine the effects of 512 in sleep in RLS patients and exploy a new indication in prevention of migraine.

Assuming success of these announced trials, Astellas and GSK planned to conduct additional trials to help secure regulatory approval in these indications. And they are also actively considering the development of 512 in a number of new indications. All this will their human and financial resources not Xenoports'. The costs associated with these activities are and will continue to be substantial.

In just a minute, Bill will review the impact of Astellas and GSK milestone payments. More importantly, we've avoided what could have been a substantial drain on the company's human and financial resources to fully exploit the commercial potential of 512. Instead, these resources are now being deployed to help us discover and develop other product candidates while enabling us to build a CNS-focused business that discovers, develops and commercializes innovative products.

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

Bill Harris

Thank you, Ron, and good afternoon. As Ron indicated, we are lining up the 512 Phase 3 RLS programs. So I thought I'd spend a moment reviewing where we stand in terms of the financial aspects of our 512 collaborations with Astellas and GSK.

We have received a total $40 million from Astellas, including $10 million payment upon the initiation of the PIVOT RLS I study in 2006 and a $5 million payment upon its completion last year. We're also eligible to receive up to $45 million in additional clinical and regulatory milestones.

In terms of revenue for this collaboration, we recognized all of the $15 million in milestone revenues during 2006 and 2007, and are recognizing the $25 million upfront payments on a straight line basis over the term of the agreement. Revenues from a future milestone payments will likely be recognized once the milestones are achieved.

Switching the GSK, I am pleased to report that we have now received all of the $65 million in milestone payments that we were eligible to receive prior to the filing of the RLS NDA, including an $8 million payment received in the first quarter and then $25 million payment received in April.

Including the $75 million upfront payment we received last year, we have now received the total of a $140 million under this collaboration and we are eligible to receive up to $210 million in additional clinical and regulatory milestones and up to $290 million in sales milestones.

In terms of the revenue from the GSK collaboration at the end of the first quarter, we have recognized a total over $115 million in revenue including $10 million recognized in the first quarter. We expect to recognize the remaining $25 million in revenue over the next several months, as we complete our obligations under the agreement. Again, if revenues from any future milestones will likely be recognized once the milestones are achieved.

So focusing in on the first quarter results, the $1.6 million decrease in revenues for the first quarter of 2008 compared to the same period in '07 was the result of a decrease in revenues recognized under the GSK and Astellas agreements, given that much of the effort for conducting the Phase 3 RLS program is now complete. These decreases were partially offset by the recognition of revenue under our Xanodyne agreement that was executed in October of 2007.

The $1.5 million increase in the research and development expenses for the first quarter of 2008 compared to the same period in '07, was primarily due to increased expenses associated with the clinical development of 986, increased personnel costs, including non-cash stock-based compensation, and increased facility costs, partially offset by decreased costs for the clinical development of 512.

General and administrative expenses for the first quarter of 2008 increased by $1.2 million compared to the same period in 2007. This increase was primarily due to increased personnel and related costs resulting from an increase in headcount and increased non-cash stock-based compensation.

Net loss for the first quarter of 2008 was $7.3 million compared to a net loss of $3.3 million for the same period in '07. Basic and diluted net loss per share was $0.29 for the first quarter of 2008 compared to $0.14 for the same period in '07. And finally, at March 31, 2008, we had cash, cash equivalents and short-term investments of $144.6 million.

With that we'll now open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from Michael Yee.

Michael Yee - RBC Capital Markets

Hi. Great. Quick questions for you guys. Congratulations on accomplishment so far. And thinking about the GERD study coming up at the end of the year, maybe Ron, can you talk a little bit about handicapping that study? I mean, you have to Phase 2a that was positive, just very significant on both the regulatory endpoint, and then that's the same endpoint in here you're using here. Can you talk about any of the changes in the trial or how you're thinking about this study?

Ron Barrett

Sure. I just want to make a clear that that study that we did previously was a study with a single dose where we measure objectively reflux events. We also monitored heartburn in that study and did see effects on both. But that was a single dose study and the study that we have ongoing is with much larger patient population, a 159 patients in total in this study. And also is administering the drug for four weeks.

With regard to handicapping general -- I don't get into that aspect of it. But I will talk about the results from the previous study that lead us to believe that the chances are good that we'll have a successful study. The first is that during the single dose study that we did with 986 in GERD patients, we actually monitor pharmacokinetic in that study and we have the blood levels that were associated with the efficacy in that study.

And then, we also have Phase I data with this formulation that we're using in the current study, which allowed us to know what the exposures would be at various doses and also know whether those exposures would be well tolerated.

So the doses that we've chosen for this Phase 2 GERD study, that's ongoing, are doses that produce exposures, that were effective in the single dose study, and also doses that were well-tolerated in the healthy subject study. So we look forward to getting those results by the end of the year.

Michael Yee - RBC Capital Markets

Okay. Great. Thanks.

Ron Barrett

You're welcome.

Operator

Your next question is from Rachel Mcminn with Cowen and Company.

Rachel Mcminn - Cowen and Company

Yeah. Thanks very much. A couple of questions. Just a quick on the migraine comment from GSKs. What really drove the change there, was there some specific commentary from FDA or was there revisiting from GSK internally?

And then, secondarily just wanted to understand if you can comment on when you expect to update us on your potential for exercising your co-promote rights fro 512, and if there would be any impact to your cash burn guidance for '08 depending on your decision? Thanks.

Ron Barrett

Okay. I'll take the first one and then Bill and Bill can answer the other one. The first on migraine, GSK has a policy of not commenting on their interactions with the FDA, so in terms of what we're able to disclose, we're saying that the change in plan has really based on their assessment given all the information they have that this approach will lead to a successful program or increase the chances of success for a successful program. And unfortunately, I have to leave it at that.

With regard to when the FDA exercise the co-promote, Bill Rieflin, you take that one and then Bill Harris, you talk about what's in the 2008 projection.

Bill Rieflin

Rachel, at this point, we're not changing the guidance that we're giving regarding timing of exercising the co-promotion option. As we have indicated previously, I think that there is some informational consent in the fact that we did negotiated with GSK to promote two of their product quids in advance of the launch of Solzira. So you can probably conclude from that that we need to make the election prior to the launch of Solzira, but other than that we haven't provided any more granularity there.

As Ron mentioned earlier, we're very excited that Vince Angotti is going to be joining the team as the Chief Commercialization Officer, because we think that his insights are going to be particularly germane to this decision.

Bill Harris

Hi, Rachel, this is Bill. The follow-up part of your question, unfortunately, since we haven't been able to disclose the timing of the co-promote, I really can't answer the impact on our current guidance at this time. I apologize.

Rachel Mcminn - Cowen and Company

Okay. No problem. And one last question and I'll jump back. Ron, can you talk about how many patients are left in the open label study and how many patients you have dosing for one-year and two years? Thanks.

Ron Barrett

Yeah. The open label study allows patients to continue dosing for one year and then that's the end of the study. We have about 580 patients that entered that study. We did a data cut to last December. We have more than a 100 that have completed at least one year of treatment in that study and that data will go into the initial NDA filing. That will then be supplemented with the remaining data from the rest of the subjects that entered that study at the 120 day update to the NDA.

Rachel Mcminn - Cowen and Company

Okay. Thanks very much.

Ron Barrett

Thank you.

Operator

Your next question is from Katherine Xu with Credit Suisse.

Katherine Xu - Credit Suisse

Hi. Good afternoon.

Ron Barrett

Good afternoon, Katherine.

Katherine Xu - Credit Suisse

Ron, could you give us a summary of the long-term tox studies of gabapentin, what we know and what you know and also an update potentially on your long-term tox studies for the 512 compound?

Ron Barrett

Sure. With regard to gabapentin, this is a molecule that has a remarkable preclinical safety profile. Doses in the studies with gabapentin went up to 2 grams per day in rodents and also at very high level in the monkey studies. And really the only chronic toxicology finding that was in those studies was hyaline droplet formation in the kidneys that led to kidney damage and that's a known effect of molecules in the chemical structure class of gabapentin, where the drug binds the alpha-2 microglobulin and gets forms these droplets in the kidneys.

That is a male Wistar rat phenomenon. It doesn't occur in other species and has been deemed to be not relevant to human toxicology. In terms of carcinogenicity, the one finding in gabapentin studies was pancreatic acinar cell tumors in male Wistar rats at the highest dose. And again, the work was done to get the FDA comfortable with that this did not represent a significant risk to humans. It was found only in rats, only in male rats and not in other -- in mice.

With regard to our package, we've done a full clinical or preclinical safety package that included long-term tox as well as two-year carcinogenicity studies in two species. And what we've indicated is that the safety profile is very similar. It's not identical to gabapentin, that we have not uncovered any issues that we believe will affect the NDA timing nor the probability of a successful NDA approval from the preclinical tox side.

Katherine Xu - Credit Suisse

Okay. Great. My next question is with regard to 512 in RLS. Could you help us distinguish the concept between rebound and relapse? And what you have demonstrated so far in addressing these two from the Phase 3 studies as well as the open label?

Ron Barrett

Just let me be sure rebound versus relapse or rebound versus augmentation.

Katherine Xu - Credit Suisse

….versus and or relapse?

Ron Barrett

Say it again, Katherine?

Katherine Xu - Credit Suisse

So basically what I want to understand, clarify the concept between basically rebound versus relapse? And then what kind of studies you have done so far?

Ron Barrett

Sure.

Katherine Xu - Credit Suisse

In your design in the Phase 3, the data presented so far or in the open label that you're hoping to address?

Ron Barrett

Okay. I think I understand your question. So, rebound is a term that's used when you have a short acting drug like a dopamine agonist in which the drug wears off and symptoms reappear in the early morning. So, that's what rebound is when symptoms appear in the morning because that the drug effect has worn off and there still are symptoms there.

Relapse is the term that's used really operationally in a clinical study in which you do a study that has design that's called randomize withdrawal, which both Mirapex and Pramipexole -- sorry, Mirapex and Requip did as well as we did. Relapse refers to meeting a criteria in which the symptoms return after you switch a patient from being on the drug to being off the drug or being on placebo.

And so, that relapse is really an operational term and as we indicated when we discussed the results of our XP060 study, the relapse criteria has differed substantially between studies that Requip did and Mirapex did and we did. Did that help with the question?

Katherine Xu - Credit Suisse

Yeah. And then are you seeing any rebound effects in the Phase (inaudible)?

Ron Barrett

Yeah. That's a great question. No, we're not and we did a 24-hour diary in our clinical studies to look for whether symptoms reappear in the morning and we're not seeing that all. Now that's not unexpected given the attractive pharmacokinetic profile that 512 has where we can dose in the early evening the drug levels come up during the night. But there are still around in the morning as well as during the day. They don't go to zero in the morning or during the day, once you're at steady state.

Katherine Xu - Credit Suisse

So, that you've seen when patients are on the drug for more than a year?

Ron Barrett

Yes. We haven't seen any re-evidence of rebound in all of the studies we've conducted.

Katherine Xu - Credit Suisse

Okay

Ron Barrett

Now, I thought where you were headed was the issue of augmentation, which is a different term and has a different meaning in the context of RLS patients. Augmentation is the occurrence of symptoms with chronic use of dopamine agonists, where the symptoms become more severe, they occur earlier in the day, they spread to other parts of the body. And this is a phenomenon and that's been associated with chronic use of dopamine agonists, and it's believe to be due to that mechanism of action -- although, we didn't specifically study it in our studies, we haven't seen any evidence of it nor would we expect to given the fact that we're working by and entirely different mechanism.

Katherine Xu - Credit Suisse

Great. Thank you.

Ron Barrett

You're welcome.

Operator

(Operator Instructions)

Your next question is Juan Sanchez with Ladenburg Thalmann.

Ron Barrett

Hello, Juan.

Juan Sanchez - Ladenburg Thalmann

Hi, guys. Good afternoon.

Ron Barrett

Good afternoon.

Juan Sanchez - Ladenburg Thalmann

I have a couple of questions. The first one is how that should we think about this $210 million you could receive on development and regulatory milestone from Glaxo? Out of those, I mean, what percentage of them are related to RLS versus other indications? And let's say you file the NDA this Q3 and you get approval next summer what percentage of these payments you should receive in the next year and half with so?

Ron Barrett

No. This is not going to be a very satisfactory answer but we're unable to disclose the triggers for these milestones. But I think in terms of the nature of them these are the things that you mentioned are fairly typical.

Juan Sanchez - Ladenburg Thalmann

Okay. And the second question is what are the real -- I mean more specifics and the reason behind the slow enrollment in the spasticity trial? And if you've seen that you could face the same problems in a potential Phase 3 clinical trials down the road.

Ron Barrett

Yeah. I think this has been something that's been a little surprising to us. We did talk with investigators extensively before we launched the study. I think there is a number of things going on, one -- are not a lot of spinal cord injury patients available for clinical trials. Many of them are on existing drugs and maybe reluctant to enroll in a study.

The crossover design does have some attractiveness in that regard because either patients will get access to drugs, compared to a parallel design, where they would have a chance of getting no drug during the study. Part of it has to do with many of these patients are treated by VA hospitals, and setting up clinical trials for those patients is often more difficult.

We are taking measures to increase enrollments. I don't want to commit to these measures being successful, because they're untested at this point. They're just getting tested. But, I mean this is challenging area, and we are conducting this study in the U.S. I think moving forward, thinking about additional studies, considering whether we can do trials outside the U.S. is something that's on the top of our thinking at this point.

Juan Sanchez - Ladenburg Thalmann

Thank you very much.

Ron Barrett

Yes. You're welcome.

Operator

There no further questions at this time.

Ron Barrett

Okay. Well, I'd like to thank you all for phoning into the call today. And we're really excited about the accomplishments so far this year, but we also look forward to updating you on additional progress as we move along. If you have any additional questions, feel free to call us 408-616-7220. Thanks again for participating in the call, and have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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