Xenon Pharmaceuticals: Updates To Thesis, Pipeline Progressing

Summary

  • Shares have risen by 75% since my initial Reader Inquiry article.
  • I provide a recap of the bullish thesis and recent events.
  • Expansion and progression of the pipeline merits a higher valuation, especially considering that 40% of the market capitalization is backed by the cash position.
  • Topline data from the phase 2b study evaluating XEN1101 is expected in the second half of 2020.
  • XENE is a Buy and a pilot position in the near term is merited. This one is perhaps more appropriate for readers with a longer time frame (catalyst is farther out).
  • Looking for a community to discuss ideas with? ROTY features a chat room of like-minded investors sharing investing ideas and strategies. Get started today »

Shares of Xenon Pharmaceuticals (NASDAQ:XENE) rose by as much as 150% a couple quarters after my May 2018 Reader Inquiry piece was published (thanks to ROTY member XavierD for bringing it to my attention). Presently, after pulling back substantially it sports a still respectable 75% gain.

Given the recent rebound and bullish commentary from some members in our Live Chat, I've chosen to revisit this small cap name to determine what we can expect in the year ahead.

Chart

Figure 1: XENE daily advanced chart (Source: Finviz)

Figure 2: XENE 15-minute chart (Source: Finviz)

When looking at charts, clarity often comes from taking a look at distinct time frames in order to determine important technical levels to get a feel for what's going on. In the first chart (daily advanced), we can see a rapid rise in the stock price during the first half of 2018 followed by a steep correction in the second half of the year (along with the rest of the biotech sector). From there, shares have rebounded substantially and the steady uptrend in March looks great to my eyes. In the second chart (15-minute), we can see a pullback from highs (doesn't worry me as the move is following the overall biotech sector). I constantly remind readers to beware when a stock you own shows much weakness relative to the XBI and IBB (e.g. multiple days in the red on above average volume while indices continue to rise).

Overview

In my Reader Inquiry piece, I presented the following keys to the bullish thesis:

  • The company's early stage pipeline was moving forward on multiple fronts, including phase 1 data expected for XEN1101 and initiation of a phase 2 study in adults with focal seizures in the medium term. Other catalysts we looked forward to were phase 1 data for XEN901 and guidance regarding Genentech collaboration with GDC-0310 (this one was subsequently discontinued).
  • For 901, we noted that this highly selective Nav1.6 sodium channel inhibitor had significant potential as a novel treatment for epilepsy (of particular interest in EIEE13, an early infantile epileptic encephalopathy connected with gain-of-function mutations in the SCN8A gene which encodes the Nav1.6 sodium channel). Early data (single ascending and multiple ascending doses in 64 healthy subjects) showed a favorable PK profile that supported twice daily dosing (achieved exposure above the range needed for efficacy while all adverse events were mild or moderate in nature). As efficacy for other sodium channel blockers is often limited by side effects, data for 901 suggested superiority on multiple accounts as compared to phenytoin, carbamezipine, lacosamide, etc. Preclinical data also shined, showing 100-fold improvement in potency in SCN8a gain-of-function transgenic animal models of EIEE13 versus the other three (more validation provided for company's approach of going after this target).
  • For Kv7 potassium channel opener XEN1101, data from a phase 1a pilot transcranial magnetic stimulation study in 8 healthy subjects showed half-life allowing for once-daily dosing and solid safety/tolerability profile (one severe adverse event of vasovagal reaction was observed). Importantly, no urinary retention or hesitation adverse events (observed in historical studies of ezogabine) were observed. All of this is even more impressive in that it was accomplished with a 20 mg dose (1/20th that reported in historical data for ezogabine). I also referred to a Washington Post piece focusing on parents who were depending on the drug Potiga (ezogabine) for treating their kids with this rare form of epilepsy and in need of novel options. Considering that Potiga was originally slated to do $200 million of sales before side effect issues got in the way, this compared very favorably to the valuation at which investors could purchase shares of Xenon Pharmaceuticals.
  • Lastly, two green flags identified were strengthening of the management team (including the addition of Dr. Ernesto Aycardi as their Chief Medical Officer-formerly served at Teva Pharmaceuticals, EMD Serono, Biogen Idec, and Merck) and positioning of key institutional investors (e.g. BVF entering into one-for-one exchange of common shares for Series 1 preferred stock).

Figure 3: Pipeline (Source: corporate presentation)

At first glance, 2019 appears to be a year of execution with shareholders to reap rewards in 2020 with readouts for XEN1101 and studies ongoing for other candidates. I find it attractive that certain indications allow for efficient use of resources, such as phase 3 trial for XEN496 requiring enrollment of only 20 KCNQ2 patients to generate sufficient data for NDA filing and approval. Overall this one appears to still be flying significantly under the radar and I look forward to revisiting and determining how readers can best set themselves up to profit going forward.

Select Recent Developments

On September 6th, the company announced expansion of its ion channel product pipeline with the addition of XEN496 (active ingredient ezogabine, a Kv7 potassium channel modulator for the treatment of epilepsy). The FDA guided that a single phase 3 study enrolling just 20 patients could be sufficient to gain approval, with the company evaluating efficacy for the treatment of KCNQ2 epileptic encephalopathy or EIEE7. Keep in mind that ezogabine was originally approved back in 2011 as an adjunctive treatment for adults with focal seizures with or without secondary generalization. Pursuit of this indication is already validated by case reports by physicians using ezogabine in infants and young children with KCNQ2.EE. One such report (Millichap 2016) showed improvement in seizures and/or development in 3 of 4 infants treated before 6 months of age and 2 of 7 treated later (with no serious adverse effects observed). Another trial (Olson 2017) showed sustained improvement in seizure frequency observed in 5 of 6 patients with at least weekly seizures along with improvements in development or cognition in all 8. Again, the drug candidate was well tolerated with the only adverse event being urinary retention in 3 patients. Readers might recall that ezogabine was marketed by GlaxoSmithKline as Potiga in the US and Torbalt in the EU but withdrew the drug in mid-2017. Interestingly enough, Xenon is also working on a pediatric-specific formulation for XEN496 that may also address certain pigmentation issues associated with ezogabine. The phase 3 trial should get underway by the middle of this year. It is expected that treatment with XEN496 could substantially improve long term outcomes by enhancing transmembrane potassium currents mediated by the Kv7.2/7.3 channels and thus potentially reversing the underlying genetic abnormality of KCNQ2-EE.

On September 10th, Xenon announced it'd signed an agreement with Valeant Pharmaceuticals Luxembourg S.a.r.l. and Valeant Pharmaceuticals Ireland Limited (subsidiaries of Bausch Health Companies) (BHC) to buy out all milestone payments and royalties with respect to XEN1101 (terminates up to $39.6 million in milestones and mid-to-high single digit percentage royalty on commercial sales in exchange for a one time payment of $6 million). Given that the company originally acquired XEN1101 from 1st Order Pharmaceuticals, it still remains on the hook for $0.5 million of development milestones, $6 million in regulatory milestones for multiple indications and $1.5 million in other milestones (no royalty obligations).

On September 17th the company closed the offering of 4.5 million common shares at a price point of $14 per share (nice timing) for gross proceeds of $63 million. Investment banks involved included Jefferies, Stifel and Bloom Burton Securities.

On December 3rd the company provided clinical updates in the form of final phase 1 data for XEN1101 and interim phase 1 results for XEN901. For XEN1101, what stood out was its solid safety profile, reduced corticospinal excitability, as demonstrated by a concentration dependent elevation in resting motor threshold and modulation of TMS-evoked EEG potentials (TEPs) in a pattern consistent with reductions in cortical excitability.

Figure 4: Chronic low daily dosing shown to achieve exposure necessary for preclinical efficacy and TMS (Source: corporate presentation)

Xenon also announced plans for the phase 2 study evaluating XEN1101 to get underway early in 2019. The phase 2 trial will utilize a randomized (2:1:1:2 fashion to 25mg, 20 mg, 10mg or placebo), double-blind, placebo-controlled design and enroll 300 patients aged 18 to 75 years with focal epilepsy. It is designed to show at least 15% difference between the highest active dose and placebo powered at 88% (seems conservative)- specifically, after being screened patients will have 8 weeks of baseline to assess frequency of seizures followed by 8 weeks of treatment and 4-week follow up period. In order to even make the cut to get into the trial patients must already be treated with a stable dose of 1 to 3 allowable anti-epileptic drugs for at least one month prior to screening, during baseline and throughout duration of the study. XEN1101 (or placebo) will be administered once daily in the evening. The primary endpoint is the median percent change in monthly focal seizure frequency from baseline compared to treatment period of active versus placebo, while key secondary endpoints include assessment of patients experiencing greater than or equal to 50% reduction in monthly focal seizure frequency, change from baseline in weekly focal seizure frequency for each week in the double-blind treatment period and clinical & patient global impression of change scores during double-blind treatment period. Importantly, there will be an open-label extension trial for patients who complete the phase 2 study through treatment phase on their assigned study medication. Top-line data is expected in the second half of 2020, but this depends on the rate of enrollment (updates in that regard will be important).

On January 28th the company provided regulatory updates for XEN007 and XEN1101, the first of which has been granted rare pediatric disease designation by the FDA for the treatment of Alternating Hemiplegia of Childhood (AHC). Note that XEN007 (flunarizine) is available in certain countries outside the US but has not been well studied in a randomized, placebo-controlled study for AHC. Published literature and case studies have shown enough evidence to suggest it could be an effective treatment and is well tolerated by AHC patients. As for the market opportunity here, it is estimated that there are up to 3,200 AHC patients in the US. The rare neurological movement disorder is presented in the first 18 months of life and causes lifetime morbidity and increased mortality. Other indications are being explored for evaluating this drug candidate as well.

Other Information

At year-end 2018, the company reported cash and equivalents of $119.3 million as compared to net loss of $34.5 million. Research and development expenses fell slightly to $23.6 million, while G&A rose to $8.4 million. At the time there were just over 25 million common shares outstanding and 1,016,000 Series 1 Preferred Shares (convertible on one-to-one basis).

As for future catalysts of note, for XEN496 filing of IND application should take place in Q3 with phase 3 study to get underway after (assumes testing of new pediatric formulation in healthy adult volunteers will not be required prior to phase 3 trial). For XEN1101, as stated before topline data from the phase 2b study is expected in the second half of 2020. For XEN901, in Q2 the company expects to receive feedback from regulatory agencies on moving it forward in SCN8A-EE patients (pediatric formulation development and juvenile toxicology studies are already underway).

Figure 5: Potential superiority of XEN901 to current agents in terms of efficacy and safety profile (Source: corporate presentation)

For XEN007, the company is considering multiple ways to advance this drug candidate including initiation of phase 2 trial in an orphan neurological indication in 2019.

On the Q4 conference call, management pointed out that an important collaboration was inked with Invitae and others to provide faster genetic testing for infants and young children with epilepsy. Eligibility, previously relegated to 2 to 4 year old children, has been expanded to make no cost genetic testing available for healthcare providers to order testing for infants and children who had an unprovoked seizure from birth up to age 5. This should help the company has more children and infants with KCNQ2 and SCN8A epileptic encephalopathies are likely to be identified for treatment. The company will also be able to identify physicians who have patients with these ultra orphan conditions and build its registry of high priority physicians for later on when it tackles commercialization (should lead to faster enrollment of clinical studies and importantly portend a rapid launch when the time comes).

As for institutional investors of note, Venbio owns over 2.4 million shares (9.5% stake). BVF (5.4%), Adage Capital Partners (5.15% stake) and Vivo Capital (5.6%) all hold decent sized stakes. Insiders have sold 2,470,545 shares over the past 12 months as opposed to 17,337 bought.

Final Thoughts

To conclude, since the last time we looked at this one the pipeline has grown and progressed nicely while management has chosen to stick to a single niche in developing small-molecule ion channel modulators in the CNS for the treatment of neurological conditions. Given the market capitalization of around $260 million and cash position of just above $100 million, the current valuation seems conservative as compared to peak sales potential for XEN1101 alone (consider that Potiga was once thought capable of doing $200 million to $500 million in peak sales).

For readers who are interested in the story and have done their due diligence, I suggest patiently accumulating shares in the near term. Given that data is expected in the second half of 2020, this one could require more patience and be more appropriate for investors with medium to long term time frame.

Risks include dilution in the medium term (i.e. in late 2019 or early 2020), disappointing data, setbacks in the clinic (e.g. delays, slow enrollment of patients, safety concerns), negative regulatory feedback and competition in certain indications (e.g. commonly used AEDs such as phenytoin, levetiracetam, carbamazepine, clobazam, lamotrigine, valproate, oxcarbazepine, topiramate, lacosamide and perampanel). Other AEDs in development are being progressed by Zogenix, GW Pharmaceuticals, Sage Therapeutics, Marinus Pharmaceuticals and others. Given how crowded this market is, if and when commercialization is reached a successful launch could take some time to pull off. On the other hand, consider that the global epilepsy therapeutics market is expected to grow to well over $5 billion in the next five years or so as new options are introduced.

As for downside cushion and elements of derisking, the current cash position accounts for around 40% of the market capitalization. Data generated to date and multiple irons in the fire as contrasted to potential market opportunities being targeted also provides another layer of cushion (perhaps downside potential of 20% to 30% in the event of delays in the clinic or downturn in the biotech sector). As alluded to before, consider that before Potiga was withdrawn from the market due to commercial reasons (had black box label related to risks of retinal abnormalities and vision loss, not to mention side effects of urinary retention and others), it was thought capable of doing up to $500 million or so in peak sales.

For our purposes in ROTY, I'll be keeping this one on my ¨value watchlist¨ as I think it looks cheap and wouldn't be opposed to entering when data looms closer or in the event of observing significant accumulation in the stock.

Other Relevant Links:

This drug helps babies with rare form of epilepsy. But its maker is no longer selling it

XEN1101 AES // Poster 2

XEN901 AES // Poster 2 // Poster 3

KCNQ2 encephalopathy: Features, mutational hot spots, and ezogabine treatment of 11 patients

Potential Questions for Discussion (including aspects of bear thesis):

How much upside potential for this one do you think is possible within the year?

Are there any red flags that stick out to you and why?

Is there an indication the company is pursuing that most excites you and why?

Author's Note: I greatly appreciate you taking the time out of your day to read my material and hope you found it to be helpful in some form or fashion. If you're willing, I look forward to interacting with you in the Comments Section. Whether bull, bear or simply a skeptic, we all typically have something worth saying and feedback (plus community-driven due diligence) is one of the reasons I enjoy writing. Have a good one!

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

This article was written by

Jonathan Faison profile picture
16.13K Followers
Community of Biotech Investors Focused on Value & Clinical Momentum

Founder of ROTY (Runners of the Year), a 500+ member community of biotech investors & traders. Big believer in quality over quantity, my goal is to add value for ALL readers.





Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Commentary presented is NOT individualized investment advice. Opinions offered here are NOT personalized recommendations. Readers are expected to do their own due diligence or consult an investment professional if needed prior to making trades. Strategies discussed should not be mistaken for recommendations, and past performance may not be indicative of future results. Although I do my best to present factual research, I do not in any way guarantee the accuracy of the information I post. I reserve the right to make investment decisions on behalf of myself and affiliates regarding any security without notification except where it is required by law. Keep in mind that any opinion or position disclosed on this platform is subject to change at any moment as the thesis evolves. Investing in common stock can result in partial or total loss of capital. In other words, readers are expected to form their own trading plan, do their own research and take responsibility for their own actions. If they are not able or willing to do so, better to buy index funds or find a thoroughly vetted fee-only financial advisor to handle your account.

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