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Xenoport (XNPT)

Analysts are forecasting triple-digit growth for this biopharma company this year. Our other two recommendations today are sells on stocks that aren’t fulfilling expectations.

Buy: Xenoport (XNPT)
From The Periscope Report

Xenoport (XNPT) is a biopharmaceutical company that focuses on developing a portfolio of product candidates for the treatment of neurological and other disorders.

The main product is HORIZANT (gabapentin enacarbil) which are extended-release tablets for the treatment of moderate-to-severe primary restless legs syndrome (RLS) in adults and for the management of postherpetic neuralgia (PHN) in adults. Management said that it expects HORIZANT net product sales for 2016 to be in the range of $61 - $65 million.

For the 1Q ended March 2016, total revenue increased 99% YoY to $14.1 million, after increasing 99% YoY in the prior quarter. Gross profit increased 104% YoY to $13.5 million, after increasing 103% YoY in the prior quarter. The company generated Net Loss of ($14.6) million, compared to ($20.4) million a year ago. The net loss was ($0.23) per share, compared to ($0.33) per share a year ago.

Cash represents 46% of the current stock price, which alleviates some of the investment risk. (Research Note: The CEO told us he has enough Cash to bring the company to profitability.)

XNPT has long-term debt of $124.4 million, or 1,575% of shareholders’ equity, well above our danger zone of 40%. Debt was flat with the prior quarter.

On the conference call, CEO Vince Angotti said HORIZANT sales continued to accelerate, achieving $13.7 million for the 1Q, a 106% increase over last year. Total HORIZANT prescribed tablets increased 51% over last year. The HORIZANT clinical trial for use in alcohol use disorder (AUD) is on track. The National Institute on Alcohol Abuse and Alcoholism (NIAAA) has enrolled over 75% of approximately 350 patients in its clinical trial and anticipates reporting top-line results of this study in the first half of 2017.

XNPT signed a U.S. license agreement to grant Dr. Reddy’s Laboratories rights to develop and commercialize XP23829 for psoriasis and multiple sclerosis in exchange for a $47.5 million up-front payment, another $2.5 million upon the transfer of clinical trial materials, plus up to $440 million in regulatory and commercial milestones, and up to mid-teens royalties on potential sales of XP23829. The agreement is subject to review by the U.S. Government under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act. Management hopes/expects to get the $47.5 million payment in the 2Q.

Mr. Angotti said he can achieve profitability with current cash resources. In addition, with the anticipated infusion of cash from the Dr. Reddy’s agreement, XNPT is now positioned to accelerate HORIZANT sales growth through additional targeted investments in select underpenetrated regions in the U.S.

HORIZANT sales doubled in the quarter despite wholesaler inventory down by one week for this quarter. More importantly, real demand drove HORIZANT sales growth. According to IMS HEALTH-NPA data, total prescriptions for the 1Q of 2016 increased by 45% and tablet demand grew at a faster pace, increasing 51% over last year.

Currently, 70% of business right now is in commercial and close to 70% of those prescriptions are dispensed as written. Medicare is 20% of business but has much less restricted access and only 50% of the prescriptions are filled as written. There is only one competitive product on the market for HORIZANT, and XNPT charges a slight premium to that product. There has been no pushback on pricing to date. This is because of the value HORIZANT provides to the patient.

HORIZANT will continue to gain exposure for RLS and PHN prescribers from patients. Markets for the potential use of HORIZANT are robust and the RLS market alone is approximately 6.7 million prescriptions per year.

With patent claims that run into 2029, and a composition-of-matter patent that was extended to mid-2025, there is a long commercial life for HORIZANT. The goal for 2016 and beyond is to reach this market quickly in order to maximize sales of HORIZANT.

Mr. Agnotti has focused the company on one product that has a potential market opportunity of $10 billion. The company is hiring more salespeople at a rapid clip, plus the new partnership with Dr. Reddy provides a huge cash infusion. In addition to the core business, the company could gain partners to the other three drugs it has patents on, and one of those drugs is being fully paid for by the NIAAA in clinical trials for the treatment of alcoholism, the biggest disorder in the world. It also makes XNPT an acquisition target. These are all good reasons to invest in XNPT.

Tom Byrne, The Periscope Report, 4025 Sunset Ridge Drive, Canyon Ferry Crossing, Helena, MT 59602, 406-465- 4663, May 2016