NEW YORK, Oct. 15, 2013 /PRNewswire/ -- Clinton Group, Inc.
("Clinton Group"), one of the largest owners of Xenoport, Inc.
(NASDAQ: XNPT) ("Xenoport"), sent a letter to the Chief
Executive Officer of Xenoport, Dr. Ronald
W. Barrett, calling for change in Xenoport's management and
capital allocation.
As indicated in the letter, the full text of which is copied
below, the Clinton Group believes Xenoport's assets are worth
substantially more than the current stock price implies, but that
changes are required for stockholders to realize that value.
Clinton Group believes the fair value for the Company is
$13 to $16 per share.
About Clinton Group, Inc.
Clinton Group, Inc. is a Registered Investment Advisor based
in New York City. The firm has been investing in global
markets since its inception in 1991 with expertise that spans a
wide range of investment styles and asset classes.
[Clinton Group Letterhead]
October 15, 2013
Ronald W. Barrett, Ph.D
Chief Executive Officer
Xenoport, Inc.
3410 Central Expressway
Santa Clara, CA 95051
Re: Capital Allocation and the Importance of Focusing on
829
Dear Dr. Barrett:
I write on behalf of the Clinton Group, Inc., the investment
manager to various funds and partnerships ("Clinton Group") that
collectively own more than 1.3 million shares of the common stock
of Xenoport, Inc. ("Xenoport" or the "Company"). This ownership
stake makes Clinton Group one of the Company's top ten owners,
according to Bloomberg data.
We have been aggressively buying the Company's stock lately
because we believe Xenoport's assets are worth substantially more
than the stock price implies. We believe fair value for the Company
is closer to $13 to $16 per share,
but we are also convinced that some significant changes in capital
allocation and management need to be made for stockholders to
realize this value.
At the moment, we believe the Company is on the wrong course,
with the wrong management team. Having spent $750 million since the inception of the Company,
you have had no commercial success. The capital markets have
assigned an enterprise value to Xenoport of just $195 million (despite the Company having spent
multiples of that amount on research and development) and the stock
is down more than 47% and 86% in the one- and five-year periods
ended Friday. Over the same periods, the NASDAQ Biotechnology Index
is up 42% and 185%, respectively. Investors in the Company's 2005
initial public offering have lost nearly half their investment over
the last eight years.
For stockholders to expect a different outcome in the future,
the Company must change leaders, capital allocation strategy and
direction. We are bullish on the prospects for the stock, if the
Board adopts these suggestions.
Fourteen years into the Company's history, Xenoport is left with
three principal assets: gabapentin enacarbil, the Company's
FDA-approved drug for the treatment of moderate-to-severe primary
restless legs syndrome ("RLS"), known as "Horizant" in the United States; XP23829 ("829"), the
Company's novel fumaric acid ester compound and pro-drug for
monomethyl fumarate (or "MMF"); and cash, which we estimate to be
$70 million. (FN. 1).
Horizant
It appears to us that gabapentin enacarbil (which, for ease of
reference, I will refer to as "Horizant") will not be successful
commercially. We wish it were otherwise: as stockholders we would
certainly benefit if Horizant had developed a strong clinical
following or if it were on a predictable path to commercial success
or lucrative sale. However, we see no objective reasons to be
optimistic.
In the United States, the drug
has been on the market for more than two years and has garnered
aggregate sales of approximately $14
million, according to Morgan Stanley Research. You chose to
partner the drug with Glaxo ("GSK"), which was certainly sensible
at the time given GSK's experience in the RLS market with Requip
and its large neurology sales force. Horizant did not sell, which
you now blame on GSK's approach to the launch. But there is no
evidence that the flaccid launch was solely or even primarily the
result of GSK's approach.
Rather, an equally or more likely thesis is that Horizant (at
$125 per month) is not differentiated
enough from generic gabapentin (available for $11 per month) or the two other generic RLS
treatments (ropinirole and pramipexole, both also available for
$11 per month), other
extended-release versions of gabapentin, such as Gralise (which
admittedly is not labeled for RLS), or other branded RLS
treatments, such as Neupro, Requip XL and Mirapex ER. In a crowded
market for RLS drugs, dominated by three drugs that have gone
generic, the Company chose not to do any head-to-head clinical
studies, leaving doctors and payors without any evidence of
superior efficacy or differentiation. We suspect this lack of
objective, comparative studies is the real cause of Horizant's
tepid reception; GSK's marketing approach likely would not have
mattered.
Evidence from Asia bolsters our
view. In Japan, Xenoport's Asian
partner, Astellas Pharma Inc., has sold just $2 million of the drug in the first 12 months of
availability there. (There is hope that Astellas will achieve a
small increase in run rate as some of the year-one Japanese
regulatory restrictions are lifted, but no one appears very
enthusiastic.) In May, Astellas informed the Company that it does
not want to launch the drug in the five other Asian markets to
which it had rights.
It appears Horizant will never be the commercial success we all
wish it were.
XP23829
XP23829 ("829") is quite a different story. We are extremely
enthusiastic about the prospects for 829. With a pharmacokinetic
profile that nearly matches that of Biogen's Tecfidera (another MMF
prodrug), so-called "formulation 1" of 829 appears very likely to
be developed into an effective treatment for relapsing-remitting
multiple sclerosis ("MS") or psoriasis, or both. The Company's
early studies also suggest formulation 1 of 829 is likely to
produce fewer side effects than Tecfidera. As promising, so-called
"formulation 2" of 829 holds the prospect of superior efficacy
compared with Tecfidera as its time-release formulation may allow
more constant exposure to MMF and improve upon Tecfidera's daily,
dual-peak MMF exposure.
It appears to us that 829 is poised to follow in the footsteps
of other "second generation" biotechnology blockbusters that, even
with just small improvements in efficacy, dosing or side effects,
have proven to be substantial clinical and commercial successes.
Like 829, these second-generation drugs – examples include Abraxane
(which improved upon paclitaxel), Vyvanse (improving upon Adderall)
and Eylea (improving upon Lucentis) – were built around the known
efficacy of chemically related "first generation" drugs (or use the
same mechanism as that parent). Building a product on established
science in this way has proven to be relatively lower risk than the
typical biotechnology endeavor and enormously profitable for
investors as even small improvements can be clinically and
commercially significant.
That is the opportunity – and it is not small – with 829.
Citigroup Research projects that Tecfidera will garner sales of
$5 billion globally in 2019, growing
to more than $8 billion annually by
2027. After just six months on the market, Tecfidera already has
captured 11% market share among MS drugs, according to Credit
Suisse Research, and its commercial launch has been characterized
as having "stellar performance" that makes it the "holy mother of
launches." (FN. 2)
The capital markets have certainly taken note of the MMF
opportunity. Since the time Biogen announced Phase III results of
BG-12 (the compound that became Tecfidera) on April 12, 2011, Biogen's market capitalization
has grown by more than $36 billion.
Most of that growth, in our view, is attributable to Tecfidera's
prospects as the only approved MMF prodrug on the market.
Yet Tecfidera, having proven that MMF is extremely effective in
treating MS, is vulnerable to competition. Reported side effects,
primarily gastrointestinal events and flushing, affect more than
40% of patients, and Tecfidera's dosing pattern and
pharmacokinetics may not be ideal.
Xenoport's 829 – having received just $10
million of research and development support (FN. 3) from the
Company – is positioned to be a second-generation MMF prodrug and
presents the Company with a massive commercial opportunity. Given
its overlapping pharmacokinetic profile with Tecfidera, we believe
the Company's ability to demonstrate efficacy in MS and psoriasis
is a low risk proposition. And the early signs suggest, as noted,
that 829 may well have fewer side effects or, in formulation 2, may
even be superior in efficacy.
Developed correctly and expeditiously, 829 thus has the
opportunity to share in the MMF market with Tecfidera as an
equivalent or superior compound for treating MS. We believe 829
could be approved, and in the market, for MS by 2019 and for
psoriasis by 2017. With Tecfidera protected by patents through at
least 2028 (and 829 protected by non-overlapping
composition-of-matter patents even longer), the two compounds could
split the commercial market for MMF for many years. Even modest
market share for 829 would generate hundreds of millions in cash
flow to Xenoport annually.
The Path Forward
The significant economic prospects for 829 are clearly not fully
priced into the stock. Instead, the capital markets have seemingly
attributed nearly all of the value of MMF as a treatment for MS
(and psoriasis) to Biogen. We think we know why.
We believe the capital markets have largely ignored the
prospects for 829 because Xenoport's operational, strategic and
capital allocation history suggests that Xenoport will not execute
well on this golden opportunity. The stock market is betting
against our management team and strategy, not against our compound.
(Consider, for example, the 2013 class of biotechnology IPO
companies, many of which carry valuations that are multiples of
Xenoport despite having less developed science, a riskier
development path and uncertain end-market dynamics. Nevertheless,
these "fresh" public companies have captured the stock market's
attention because their management teams are well regarded, they
appear focused and they have not yet disappointed
investors.)
I am sorry to say that Xenoport, on the other hand, has given
the market good reason to be skeptical. In its fourteen-year
history, the Company has incurred cumulative losses of $500 million, chasing various markets and drug
prospects, always with enthusiasm, but seemingly without discipline
and never, so far, with commercial success. With the Company's cash
hoard whittled to just $70 million at
the hands of these various failed efforts, the Company again
appears to be distracted from advancing its highest probability
prospect (829) in what we believe will be an unprofitable, and
likely fruitless, effort to salvage Horizant.
As you know, the Company has announced plans to spend as much as
$35 to $40 million of its remaining
cash in an attempt to demonstrate that Horizant is commercially
viable. We are skeptical that it will work, but more importantly,
we are flabbergasted that a small-cap biotech company would chose
to spend some of its last dollars (which are not cheap) to hire a
contract sales force, produce marketing collateral, hold science
talks for doctors, develop sales operations and distribution
capabilities and build other internal capabilities (such as FDA
reporting) that are necessary to be a full commercial enterprise.
This is not the prerogative of $250
million biotech companies. That is especially so when the
Company has an exceptional compound in its lab, just waiting to be
developed.
Indeed, we see these renewed and expensive efforts on Horizant
as little more than a Hail Mary pass, without any objective
evidence to suggest that the effort will be successful. (Query why,
if there were such evidence, another party with more and cheaper
capital has not rushed in to fund the effort in a structure that
would be beneficial for both it and Xenoport.) We are mindful that
you and the Company expended a lot of hard work (and capital and
emotion) in the development of gabapentin enacarbil, in the
hard-won FDA approval, in the initial licensing success and in the
subsequent litigation and settlement with GSK. But sunk costs and
emotion have no place in capital allocation decisions.
The reality is that the drug had a failed launch and it is
nearly unprecedented for a drug re-launch to achieve significantly
different commercial results. We fear the book on Horizant has been
written.
Importantly, the Company also no longer has the luxury of
"excess" capital. It is time for Xenoport to be ruthless about its
portfolio of assets and disciplined in its capital allocation. The
only proper question for the Board and management team now is: how
does the Company maximize the value of its assets for the benefit
of the current stockholders?
The Company is down to its last $70
million. With the stock severely undervalued, doing an
equity capital raise should be off the table. (More on that math
later.) The Board and management team should assume that the
remaining cash is the only cash the Company can invest. Xenoport
needs to put its $70 million to work
in the highest probability-weighted investment projects
available.
We are convinced that the capital can all be put to work, with
extremely high probability adjusted returns, on the further
development of 829. The capital could be used for a Phase 2 study
in MS, or a Phase 2 and Phase 3 study in psoriasis, or some
combination of these. Spending on drug development – the core
mission of the Company – has a much higher expected return than
hiring sales people to pitch doctors. Indeed, our models, which we
are happy to share with you, suggest that spending the $70 million on 829 would advance the science far
enough along to garner a significantly improved partnering deal on
829 or a sale of the entire Company at a significant premium to
today's stock price.
We estimate the net present value of 829 to the existing
stockholders (in the scenario in which the Company moves the
science along further by using substantially all of its cash on
this effort) at approximately $600 to $700
million, or $12.50 to $14.50
per share. The major assumptions used in our model, which we
believe are very conservative, are described in the appendix to
this letter.
By contrast, spending less on 829's development (e.g. so the
Company can hire a contract sales force to market Horizant, as the
current plan calls for) is likely to result in a less advantageous
licensing deal on 829 and a lower premium on the sale of the
Company. Simply put, the science will not be as far along and the
risks and costs will be higher for a partner. When we model those
assumptions, based on as much market data as we can gather, we
conclude that 829 has a net present value to stockholders in this
scenario of $450 to $550 million.
Thus, we believe that were the Company to spend the $30 to $40 million of cash currently earmarked
for Horizant commercialization instead on 829 science, the increase
in value to stockholders would be approximately $150 million (the difference between $650 million and $500 million), or about
$3 per share. We also believe that
the signaling effect of allocating capital properly – and
demonstrating management's confidence in its 829 program – would in
any event lead to a higher stock price, as more of the $650 million in 829 value that we estimate
becomes priced into the stock.
Dr. Barrett, we have heard you say that you believe you can have
it both ways. That essentially you can spend the $30 to $40 million on Horizant and then raise
additional capital to advance the 829 program. We are supportive,
of course, of raising non-dilutive capital, if you can do so before
you spend on Horizant and if doing so will augment the value of the
Company's assets without distracting management. But, given where
the stock trades today, it would be a huge mistake to dilute the
current stockholders' ownership of 829 (which is worth, in our
view, more than three times the total enterprise value of Xenoport)
to raise capital for Horizant commercialization. That is especially
true given that Xenoport has absolutely no experience
commercializing a drug and the returns on spending $30 to $40 million on Horizant are completely
speculative.
The math is relatively simple. Assume that Horizant is worth
$50 to $100 million today
($1 to $2 per share), consistent with
what several sell-side analysts have written. Even if spending an
additional $35 million on Horizant
could be expected to increase Horizant's value by $50 million (color us skeptical), stockholders
would be worse off if that $35
million is taken away from 829 development or raised by
selling equity. And, of course, the math is even worse for existing
stockholders if, as we suspect is likely, Horizant's value is left
unaffected by the $35 million in
spending. See below.
|
|
|
|
Alternatives
|
|
|
|
Description
|
|
Advance 829;
sell
Horizant
|
|
Split existing
capital
between
Horizant
and
829
|
|
Raise
additional
equity and
spend
on 829 and
Horizant
|
|
|
|
|
|
|
|
|
|
Optimistic Case for
Horizant
|
|
|
|
|
|
|
|
Value of
829
|
|
$ 650
|
|
$ 500
|
|
$ 650
|
|
Value of
Horizant
|
|
$ 100
|
|
$ 150
|
|
$ 150
|
|
Total Equity
Value
|
|
$ 750
|
|
$ 650
|
|
$ 800
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
47.7
|
|
47.7
|
|
55.2
|
|
Price Per Share
(a)
|
|
$ 15.72
|
|
$ 13.63
|
|
$ 14.50
|
|
Discount
to Optimal
|
|
|
|
-13.3%
|
|
-7.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Downside Case for
Horizant
|
|
|
|
|
|
|
|
Value of
829
|
|
$ 650
|
|
$ 500
|
|
$ 650
|
|
Value of
Horizant
|
|
$ 50
|
|
$ 50
|
|
$ 50
|
|
Total Equity
Value
|
|
$ 700
|
|
$ 550
|
|
$ 700
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
47.7
|
|
47.7
|
|
55.2
|
|
Price Per Share
(a)
|
|
$ 14.68
|
|
$ 11.53
|
|
$ 12.69
|
|
Discount
to Optimal
|
|
|
|
-21.4%
|
|
-13.7%
|
|
|
|
|
|
|
|
|
(a) $35 mm capital
raise assumed to cost 6%; offering priced at 12.5% discount to
market
|
($ in millions,
except per share prices)
|
The Company, in our view, has sub-optimally deployed stockholder
capital for too long. It is time, in our view, for some focused
efforts and belt tightening. With just 88 employees, we are
befuddled by the cost structure of the Company, which has incurred
"selling, general and administrative" expenses (not including
R&D) of nearly $30 million per
year over the last five years, including more than $2.6 million per year for your services. (We also
note that less than 10% of your bonus last year was dependent on
progress with 829.) And while annual SG&A costs have grown over
those five years, the Company cut its R&D budget nearly in half
during the period. Now the Company spends more on SG&A than it
does on R&D.
Stockholders are much worse off. From 2008 to 2012, while you
collected more than $16 million in
pay, grew SG&A expenses, cut the R&D budget in half and
spent less than $10 million on 829,
the stock dropped 86%. We recognize as well that your interests and
ours as stockholders are not very well aligned. Despite serving as
a co-founder of the Company and its Chief Executive Officer for the
past twelve years, we calculate that your equity stake in Xenoport
is currently worth less than $1.4
million.
Dr. Barrett, we believe the Company needs a new Chief Executive
Officer who will think like an owner, with a mandate to urgently
execute on the Company's best prospects and grow the value of its
most promising asset, 829. We encourage you to step aside and to
ask the Board to search for a new Chief Executive. More
importantly, we urge you to stop your spending on Horizant
immediately and to pursue with exigency the development of 829.
Please know that we believe these changes are critical for
stockholders to realize the full and fair value of the Company's
assets. Accordingly, if you and the Board choose not to move along
this path, we will have no choice but to exercise our various
rights as stockholders to ensure the value of the Company is
preserved and grown.
We are available at any time to discuss these matters with you
or members of the Board of Directors.
Best regards.
//s//
Gregory P. Taxin
President
Appendix
|
|
Valuation Model
Assumptions
|
|
Spend Capital
Exclusively on 829
|
|
|
|
|
|
|
|
|
Formulation
One
|
|
|
|
|
Market
Timing
|
|
2019-2028
|
|
|
Market Share of
MMF
|
|
Slow growth from 2%
to 20%
|
|
|
Pricing
|
|
10% discount to
projected Tecfidera pricing
|
|
|
Royalty
Rates
|
|
15% to 35% as
cumulative sales increase (slightly higher than
Horizant)
|
|
|
Probability
|
|
30%
|
|
|
|
|
|
|
Formulation
Two
|
|
|
|
|
Market
Timing
|
|
2019-2028
|
|
|
Market Share of
MMF
|
|
Slow growth from 5%
to 50%
|
|
|
Pricing
|
|
Same as
Tecfidera
|
|
|
Royalty
Rates
|
|
15% to 22% as
cumulative sales increase
|
|
|
Probability
|
|
10%
|
|
|
|
|
|
|
Psoriasis
|
|
|
|
|
Market
Timing
|
|
2017-2028
|
|
|
Market
Share
|
|
1.5% to 5% of
moderate-to-severe psoriasis patients
|
|
|
Pricing
|
|
Slight discount to
projected biologics pricing
|
|
|
Royalty
Rates
|
|
15% to 35% as
cumulative sales increase (slightly higher than
Horizant)
|
|
|
Probability
|
|
10%
|
|
|
|
|
|
|
Cash Usage
|
|
|
|
|
Cash Used
|
|
$50-60
million
|
|
|
Upfront
Milestone
|
|
$100
million
|
|
|
Timing
|
|
2017
|
|
|
Probability of
Licensing
|
|
50%
|
|
Weighted-average cost
of capital assumed to be 10%
|
Spend Capital on
Horizant and 829
|
|
|
|
|
|
|
|
Formulation
One
|
|
|
|
|
Market
Timing
|
|
2019-2028
|
|
|
Market Share of
MMF
|
|
Slow growth from 2%
to 20%
|
|
|
Pricing
|
|
10% discount to
projected Tecfidera pricing
|
|
|
Royalty
Rates
|
|
15% to 30% as
cumulative sales increase (same as Horizant)
|
|
|
Probability
|
|
30%
|
|
|
|
|
|
|
Formulation
Two
|
|
|
|
|
Market
Timing
|
|
2019-2028
|
|
|
Market Share of
MMF
|
|
Slow growth from 5%
to 50%
|
|
|
Pricing
|
|
Same as
Tecfidera
|
|
|
Royalty
Rates
|
|
10% to 16% as
cumulative sales increase
|
|
|
Probability
|
|
10%
|
|
|
|
|
|
|
Psoriasis
|
|
|
|
|
Market
Timing
|
|
2017-2028
|
|
|
Market Share of
MMF
|
|
1.5% to 5% of
moderate-to-severe psoriasis patients
|
|
|
Pricing
|
|
Discount to projected
biologics pricing
|
|
|
Royalty
Rates
|
|
15% to 30% as
cumulative sales increase (same as Horizant)
|
|
|
Probability
|
|
10%
|
|
|
|
|
|
|
Cash Usage
|
|
|
|
|
Cash Used
|
|
$20 to $30
million
|
|
|
Upfront
Milestone
|
|
$50
million
|
|
|
Timing
|
|
2015
|
|
|
Probability of
Licensing
|
|
50%
|
|
|
|
|
|
Weighted-average cost
of capital assumed to be 10%.
|
Footnotes:
FN. 1: The Company reported $93
million at June 30, 2013.
Consistent with sell-side analysts, we estimate that the Company
has used approximately $23 million in
cash since then.
FN. 2: See "ViewPoints: Tecfidera Streaks Towards
Blockbuster Run Rate, Questions Remain Over European Launch," First
Word Pharma, July 28, 2013.
FN. 3: See Form 10-Q,
June 30, 2013 at 17 and Form 10-K for
December 31, 2012 at 71.
SOURCE Clinton Group, Inc.