Investors Are Coming Back Around On XenoPort

| About: XenoPort, Inc. (XNPT)
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By Jake King

XenoPort (NASDAQ:XNPT) provided an update to investors in mid-January that shed light on possible approval pathways for clinical stage assets while also commenting on progress of in-house commercialization efforts. Although XNPT drastically underperformed the rest of the sector in 2014, and PropThink got the call wrong the first time around, XenoPort's fumaric ester acid pro drug, XP23829 ('829), a novel therapy for the treatment of relapsing remitting multiple sclerosis (RRMS), has investors interested. We previously discussed '829, which is directly targeting Tecfidera's (Biogen Idec (NASDAQ:BIIB)) rapidly growing market share with what could be a once-daily oral approach that exhibits an improved gastrointestinal safety profile. Tecfidera is indicated as a first-line oral therapy for RRMS and burst out of the gates after its March 2013 FDA approval with $876 million in sales to date. Consensus estimates peg peak sales of Tecfidera at $3.8B. We are less excited by XenoPort's developing commercialization efforts for its restless legs syndrome (RLS) drug, HORIZANT, although increased activist/value investor attention could provide catalysts throughout 2014.

Commentary to Date

January was a busy month on many fronts. As we suggested in September, XenoPort threw out a lifeline and tapped the equity markets to fund clinical development of '829 and to further commercialize HORIZANT across 40 key U.S. markets. The company priced 12 million shares at $6.00 for a total of $72 million. XenoPort will file an IND for a moderate to severe plaque psoriasis indication early this year for subsequent initiation of a phase 2 trial during the first half.

XenoPort outlined its ongoing clinical stage strategy in November at the Credit Suisse Healthcare Conference (transcript here). Its first step is to establish '829s efficacy, tolerability and dose response in more cost-effective phase 2 trials for psoriasis rather than in RRMS. Drawing from Tecfidera trials demonstrating appropriate dosing in RRMS patients, phase 2 psoriasis studies will help establish '829s dose response, which will be leveraged in phase 3 RRMS trials. We were surprised the company would pursue this strategy and circumvent '829 dose ranging studies directly in RRMS patients. It seems the FDA is in agreement after the agency encouraged exploration of multiple doses of '829 to assess the potential advantages of higher or lower exposure to metabolites of monomethyl fumarate (MMF) in RRMS patients. XenoPort's phase 2 psoriasis trials are yet unchanged and on track for mid-2014 launch.

Also in January, the FDA provided commentary regarding XenoPort's potential to file a psoriasis and/or RRMS NDA through an expedited 505(b)(2) pathway. Unfortunately, after FDA requests for additional information, CEO Ronald Barrett stated the company will most likely pursue development of these two indications under a 505(b)(1) pathway. We view the off-chance of 505(b)(2) approval as a market-moving catalyst which could bring '829 to market as early as 2016 to play, at minimum, a co-starring role alongside Tecfidera. '829s potentially slower clinical development timeline is currently being priced into shares, which have retraced nearly 14% since the "most likely 505(b)(1)" announcement from Mr. Barrett. We believe shares could find a base in the $5-$6 range given the recent secondary pricing at $6. This is also the level at which shares were trading in December 2013 as the company started to draw activist attention. The Clinton Group has the largest bullhorn and is pushing to oust Mr. Barrett and to scrap HORIZANT commercialization, preferring that the company focus on development of '829 instead.

HORIZANT Success or Failure? Still Too Early to Label

'829 commanded the spotlight in January, but we believe HORIZANT will quickly find its way back for the foreseeable future as its story plays out to an audience yet to be sold on the strategy. HORIZANT's commercialization progress has shown signs of incremental success, but we are squarely focused on one data point - sales only amounted to $3.7 million since separation from Glaxo Smith Kline (NYSE:GSK), which ended its marketing efforts in April 2013. It's still early days for HORIZANT with many unknowns that keep us from jumping to a negative conclusion until further details bubble up. We don't necessarily question management's ability to execute, but do question XenoPort's decision to build out a national sales team from scratch in the first place. We can view this strategy in two ways: 1) the company is either laying the groundwork for future in-house commercialization to reap the greatest rewards from other clinical stage assets; or 2) XenoPort was left with few other resources post-GSK separation. In both cases, XenoPort is fighting an uphill battle. HORIZANT is similarly efficacious across standard RLS endpoints in peer pivotal trials and the time to onset of peak plasma concentration is 5 hours, much slower than that of both Pramipexole (brand name Mirapex) and Ropinirole (brand name Requip) at 2 and 1-2 hours, respectively. The generic pricing environment is an additional headwind with Pramipexole and Ropinirole selling below $50 while HORIZANT is priced at $162. Management is optimistic about its ability to execute cost-effectively and has suggested the company will surpass breakeven to hit a profitability inflection point in late 2015. At the current run rate, HORIZANT sales will need to approximate $55-$60 million annually to cover production costs and company-wide SG&A expenses.

Upcoming Catalysts

XenoPort will be filing an IND for an '829 psoriasis indication in early 2014, thus setting the stage for phase 2 trials in mid-2014. The timeline for FDA feedback on the 505(b)(2) pathway is unknown and hinges upon subsequent data that will be required before the agency hands down a decision. Following management's guidance, we view 505(b)(2) as an unlikely event for both '829 indications and commend leadership for taking a conservative approach to reign in investor expectations. Aside from these two events, XenoPort will release top-line results of its post-marketing study for HORIZANT patients in coming months. We will be focusing on this data to ascertain any points of differentiation in the sea of generics. Additional activist related catalysts could present themselves, although timing is of course a wild card with no evident timeline. XenoPort commented that it will work constructively with shareholders. We take this boilerplate commentary with a grain of salt and don't foresee a situation where management is actively engaged with investors to replace themselves, nor are they focused on halting HORIZANT commercialization at this point in the game. Accordingly, there may be building pressure on management to reverse course and investors would likely welcome constructive developments.

Disclosure: I am long XNPT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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