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XNPT > SEC Filings for XNPT > Form 10-Q on 25-Oct-2012All Recent SEC Filings

Show all filings for XENOPORT INC

Form 10-Q for XENOPORT INC


25-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are "forward-looking statements" for purposes of these provisions, including any projections or earnings. In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "should," "will," "would" and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading "Risk Factors." Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Overview

We are a biopharmaceutical company focused on developing and commercializing a portfolio of internally discovered product candidates for the potential treatment of neurological disorders. Our innovative product and product candidates are prodrugs that are typically created by modifying the chemical structure of currently marketed drugs, referred to as parent drugs, and are designed to correct limitations in the oral absorption, distribution and/or metabolism of the parent drug. We intend to focus our development and commercialization efforts on potential treatments of diseases with significant unmet medical needs, with an emphasis on neurological disorders. Our marketed product and each of our product candidates are orally available, patented or patentable molecules that address potential markets with clear unmet medical needs.

Our first product is approved in the United States, where it is known as Horizant (gabapentin enacarbil) Extended-Release Tablets, and in Japan, where it is known as Regnite (gabapentin enacarbil) Extended-Release Tablets. Glaxo Group Limited, or GSK, holds commercialization rights and certain development rights for Horizant in the United States. Gabapentin enacarbil is licensed to Astellas Pharma Inc. in Japan and five other Asian countries.

Horizant has been approved by the U.S. Food and Drug Administration, or FDA, for the treatment of moderate-to-severe primary restless legs syndrome, or RLS, in adults and for the management of postherpetic neuralgia, or PHN, in adults. Restless legs syndrome, also known as Willis-Ekbom Disease, is a neurological disorder characterized by an urge to move the legs, usually caused or accompanied by uncomfortable and unpleasant sensations in the legs. PHN is a neuropathic (nerve) pain syndrome that can follow the healing of an outbreak of herpes zoster, commonly known as shingles. Regnite has been approved by the Japanese Ministry of Health, Labor and Welfare, or MHLW, as a treatment for patients with RLS, and Astellas initiated sales in Japan in July 2012. We are entitled to receive percentage-based high-teen royalties on net sales of Regnite in Japan, and the royalties will be recognized when royalty payments are received.

GSK recorded $1.6 million and $4.4 million of net sales of Horizant for the three and nine months ended September 30, 2012, respectively. Under our collaboration agreement with GSK, all allowable expenses and sales of Horizant are accounted for using a joint profit and loss, or P&L, statement, in which we and GSK share in the resulting operating pre-tax profits and losses. Our share of losses from the joint P&L will be forgiven up to a maximum of $10.0 million, of which approximately $9.6 million had been forgiven through September 30, 2012. The payment of our share of additional losses, if any, would be deferred and payable without interest over a four-year period of time following the first quarter in which the joint P&L is profitable. GSK is responsible for the development, including post-marketing commitments, of Horizant for RLS and PHN in the United States.

In January 2012, we provided a notice of dispute and notice of breach and termination, or the Notice, to GSK that provided notice of our belief that, among other matters, GSK has materially breached its contractual obligation to use commercially reasonable efforts to (i) maximize the sales of Horizant in an expeditious manner and (ii) achieve the sales milestones set forth in our collaboration agreement. The Notice provided that the termination of the collaboration agreement would become effective at the end of the 90-day notice period provided under the agreement, or April 24, 2012, unless GSK cured any such breach or default prior to such date.


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On February 23, 2012, GSK filed a complaint, or the GSK Complaint, in the United States District Court for the District of Delaware naming us and other unspecified individuals as defendants. Pursuant to the GSK Complaint, GSK is seeking declaratory judgment that it is not in breach of the collaboration agreement and that we do not have the right to terminate the collaboration agreement as a result of GSK's performance under the agreement to date. Following the expiration of the contractually specified period of time for resolution of the dispute by the requisite officers of the parties, on February 24, 2012, we filed a complaint, or the XenoPort Complaint, in the Superior Court of the State of California in the County of Santa Clara against GSK and its affiliates, GlaxoSmithKline LLC and GlaxoSmithKline Holdings (Americas) Inc., for breach of contract, fraud, breach of fiduciary duty, breach of the covenant of good faith and fair dealing and unfair competition. Pursuant to the XenoPort Complaint, in addition to injunctive and equitable relief, we are seeking damages for lost profits, damage to the value of Horizant and unattained royalties and milestone payments in an amount to be proven at trial, as well as punitive damages and restitution. In March 2012, GSK removed the proceeding in California to the United States District Court for the Northern District of California, which we are opposing. In April 2012, with GSK's legal action challenging our right to terminate the collaboration agreement pending, we provided notice to GSK that, although we believe that GSK's material breaches of its material obligations under the collaboration agreement are ongoing and we reserve the right to terminate the collaboration agreement in the future and exercise all rights in connection with such termination under the collaboration agreement, we were not terminating the collaboration agreement effective April 24, 2012 and that the collaboration agreement remains in effect at this time.

We believe that we have meritorious claims and defenses and intend to defend the GSK Complaint, and prosecute the XenoPort Complaint, vigorously. However, we cannot predict the outcome of the litigation related to the GSK Complaint and the XenoPort Complaint, when or if the collaboration agreement will be terminated or the ultimate timing or terms of any termination of the agreement, any resolution of the dispute or any reversion of the commercialization rights to Horizant to us. In addition, we have incurred and may continue to incur substantial legal fees and costs in connection with this litigation, and may not prevail in either of these legal proceedings. If our collaboration agreement with GSK is terminated, we may not be entitled to any further milestone and contingent event-based payments, royalties or joint P&L loss forgiveness or deferral, and we could be responsible for the cost of additional Horizant commercialization and development activities, including post-marketing commitments, which could accelerate our need for additional capital.

We are evaluating our lead product candidate, arbaclofen placarbil, or AP, as a potential treatment for patients with spasticity. We are conducting a pivotal Phase 3 clinical trial under a Special Protocol Assessment, or SPA, with the FDA, for AP as a potential treatment for spasticity in patients with multiple sclerosis, or MS. If a positive outcome from this trial is achieved, along with supportive data from certain additional studies, we intend to submit a new drug application, or NDA, with the FDA under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, as amended, or FDCA. Section 505(b)(2) of the FDCA allows reference to published literature and/or the FDA's previous finding of safety and effectiveness for baclofen, a drug that has been approved by the FDA for the alleviation of signs and symptoms of spasticity in individuals with MS and may also be of some value in patients with spinal cord injuries and other spinal cord diseases. We anticipate that top-line results of the pivotal Phase 3 clinical trial will be available early in the second quarter of 2013. In addition, among other studies that are intended to be part of a potential NDA filing, we are conducting a six-month, open-label, safety clinical trial of AP for subjects who complete the 13-week pivotal Phase 3 efficacy trial. Based on discussions with the FDA, we have modified the open-label safety trial in an effort to ensure that our development program for AP meets the patient exposure requirements previously established with the FDA. As such, the protocol for the open-label safety trial has been modified to allow patients to directly enter the trial without prior participation in the pivotal Phase 3 trial and be dosed for up to nine months.

We are evaluating our second product candidate, XP21279, for the potential treatment of patients with advanced idiopathic Parkinson's disease. In 2011, we completed a Phase 2 clinical trial of patient-optimized doses of a bi-layer tablet of XP21279/carbidopa compared to patient-optimized doses of Sinemet (levodopa/carbidopa) in patients with Parkinson's disease who experience motor fluctuations. Results of the pharmacokinetic analysis from the trial showed that subjects had significantly higher variation in levodopa blood levels over a 16-hour time period while taking Sinemet as compared to XP21279/carbidopa. However, in the primary analysis of the trial, the improvement with XP21279/carbidopa dosed three times per day was not statistically better than the improvement seen with optimized Sinemet dosed four or five times per day during the double-blind phase of the trial. We have discussed the results of this trial with key experts in Parkinson's disease and with the FDA. We recently conducted an End-of-Phase 2 meeting with the FDA in which we received feedback that a proposed development program for XP21279 could support an NDA submission under Section 505(b)(2) of the FDCA. Based on our discussions with the FDA, we believe that a single, pivotal, Phase 3 clinical trial comparing optimized doses of XP21279 to Sinemet, along with an open-label safety study, could form the basis for an NDA submission as a potential treatment for advanced idiopathic Parkinson's disease. The FDA provided specific guidance on the proposed design of the pivotal trial and confirmed that efficacy and safety data from this study could be included in the product label. We plan to continue development of XP21279 to the extent our resources permit or we enter into a collaboration with a third party.

We are developing our third product candidate, XP23829, for the potential treatment of relapsing-remitting MS, or RRMS. XP23829 is a fumaric acid ester compound and a patented prodrug of monomethyl fumarate, or MMF. Fumaric acid ester compounds have shown immuno-modulatory and neuroprotective effects in cell-based systems and preclinical models of disease. We filed an investigational new drug application, or IND, with the Division of Neurology Products of the FDA to initiate human clinical trials in


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the second quarter of 2012. In October 2012, we reported favorable preliminary results from our first Phase 1 clinical trial in healthy adults designed to assess the pharmacokinetics, or PK, safety and tolerability of single doses of four different formulations of XP23829. The trial was a randomized, double-blind, two-period crossover, food effect comparison clinical trial of XP23829. Sixty subjects were assigned to five cohorts of 12, with each cohort receiving one of four different formulations of XP23829 or placebo. The trial demonstrated that administration of XP23829 resulted in the expected levels of MMF in the blood. As anticipated, the four formulations produced different PK profiles of MMF, including one formulation that could potentially be dosed twice a day and at least one formulation that may be suitable for once-a-day dosing. XP23829 was generally well-tolerated in the trial. All 12 subjects in each cohort completed both dosing periods.

We may also develop XP23829 as a potential treatment for psoriasis. We have evaluated XP23829 in preclinical animal models of psoriasis. In addition, in July 2012, we announced that we were awarded a grant from The Michael J. Fox Foundation to support preclinical studies to explore XP23829 for its potential ability to protect against neurodegeneration in experimental preclinical models of Parkinson's disease.

In addition to our collaboration agreements with GSK for Horizant and with Astellas for Regnite, we plan to enter into other agreements with pharmaceutical companies for our product candidates: (1) when access to a primary care physician sales force is necessary to maximize the commercial potential of our product candidates in the United States; (2) for the development and commercialization of our product candidates outside the United States; or (3) to develop and commercialize product candidates that fall outside our core focus or our core development capabilities.

On July 30, 2012, we completed an underwritten public offering of 7,076,922 shares of our common stock at a price to the public of $6.50 per share, including 923,076 shares representing the exercise in full of the over-allotment option granted to the underwriters. Net cash proceeds from the public offering were $43.1 million, after deducting the underwriting discounts and commissions and offering expenses payable by us.

We believe that our existing capital resources, together with interest thereon, will be sufficient to meet our projected operating requirements into the first quarter of 2014. However, we have based our estimate of cash sufficiency on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition, stock-based compensation, fair value measurements and clinical development costs. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and significant judgments and estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

Three and Nine Months Ended September 30, 2012 and 2011

Revenues

Our collaboration revenue consisted of the recognition of revenues from up-front and milestone payments from our collaboration with Astellas. Our net revenue from unconsolidated joint operating activities consisted of the recognition of revenues from up-front, milestone and contingent event-based payments and the recognition of our share of operating losses resulting from our election to co-promote Horizant in the United States with GSK. In connection with the amendment and restatement of our collaboration agreement with GSK in November 2010, our share of operating losses is forgiven up to a maximum of $10.0 million, of which approximately $9.6 million had been forgiven through September 30, 2012. Pursuant to the agreement, GSK is responsible for recording sales of Horizant in the United States. For the three and nine months ended September 30, 2012, net sales in the United States of Horizant as recorded by GSK were $1.6 million and $4.4 million, respectively.


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                                              Three Months                                     Nine Months
                                           Ended September 30,           Change            Ended September 30,               Change
                                          2012            2011         $        %           2012           2011           $            %
                                                                        (In thousands, except percentages)
Net revenue from unconsolidated joint
operating activities                    $      -        $      -      $ -        -  %    $    10,000     $ 30,000     $ (20,000 )      (67 )%
Collaboration revenue                         379             379       -        -  %         11,137        8,137         3,000         37 %

Total revenues                          $     379       $     379       -        -  %    $    21,137     $ 38,137     $ (17,000 )      (45 )%

The decrease in net revenue from unconsolidated joint operating activities for the nine months ended September 30, 2012 compared to the same period in 2011 was due to the recognition of a $30.0 million contingent payment from GSK in connection with the first shipment of Horizant to a wholesaler in 2011, compared to the recognition of a $10.0 million contingent payment from GSK in connection with the first commercial sale of Horizant for the management of PHN in adults in 2012.

The increase in collaboration revenue for the nine months ended September 30, 2012 compared to the same period in 2011 was due to the recognition of a $10.0 million milestone payment from Astellas in connection with the approval of Regnite in Japan in 2012, compared to the recognition of a $7.0 million milestone payment from Astellas in connection with the Horizant FDA approval in 2011.

We expect revenues to fluctuate in the future primarily depending upon the commercialization and potential further development of Horizant/Regnite/gabapentin enacarbil, the timing of milestone and contingent event-based related activities and future potential royalties under our Astellas and GSK collaboration agreements and the extent to which we enter into new, or modify existing, collaborative agreements. In the event that commercialization rights to Horizant revert to us, we expect revenues to fluctuate in the future depending on our efforts to market and sell Horizant or enter into agreements with third parties to do so.

Research and Development Expenses

Research and development expenses consisted of costs associated with conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings. As a result of our focus on advancement of our later-stage product candidates and in order to reduce expenses, we eliminated our discovery research efforts in 2010. Total "Research and development" expenses reflected the consolidation of "Research" and "Preclinical and clinical development" costs for the three and nine months ended September 30, 2011.

Three Months Nine Months Ended September 30, Change Ended September 30, Change 2012 2011 $ % 2012 2011 $ %

(In thousands, except percentages)

Research and development $ 9,365 $ 11,518 $ (2,153 ) (19 )% $ 32,347 $ 31,276 $ 1,071 3 %

The decrease in research and development expenses in the three months ended September 30, 2012 compared to the same period in 2011 was principally due to the following:

decreased net costs for XP21279 of $0.5 million primarily due to decreased clinical and manufacturing costs;

decreased net costs for XP23829 of $0.2 million primarily due to decreased toxicology and manufacturing costs, partially offset by increased clinical costs;

decreased net personnel costs of $0.7 million primarily due to decreased headcount and decreased non-cash stock-based compensation of $0.3 million; and

decreased office and facilities overhead costs of $0.4 million.

The increase in research and development expenses in the nine months ended September 30, 2012 compared to the same period in 2011 was principally due to the following:

increased net costs for AP of $2.5 million primarily due to increased clinical and consulting costs, partially offset by decreased manufacturing costs; and

increased net costs for XP23829 of $0.9 million primarily due to increased clinical and manufacturing costs, partially offset by decreased toxicology costs; partially offset by

decreased net costs for XP21279 of $1.6 million primarily due to decreased clinical and manufacturing costs; and

decreased office and facilities overhead costs of $1.0 million.


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We expect our research and development expenses to increase in 2012 compared to 2011 levels primarily due to the AP Phase 3 spasticity program. The timing and amount of research and development expenses incurred will primarily depend upon the extent of current or future clinical trials for AP and XP23829, as well as the expenses associated with our development organization, regulatory requirements, advancement of our other development programs and product candidate manufacturing costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consisted principally of salaries and other related costs for personnel in executive, finance, accounting, business development, information technology, legal, sales, marketing and human resources functions. Other selling, general and administrative expenses included facility costs not otherwise included in research and development expenses, patent-related costs and professional fees for legal, consulting and accounting services.

Three Months Nine Months Ended September 30, Change Ended September 30, Change 2012 2011 $ % 2012 2011 $ %

(In thousands, except percentages)

Selling, general and administrative $ 7,833 $ 7,713 $ 120 2 % $ 22,822 $ 23,539 $ (717 ) (3 )%

Our selling, general and administrative expenses in the three and nine months ended September 30, 2012 remained relatively constant compared to the same periods in 2011.

We expect our selling, general and administrative expenses in 2012 to remain relatively constant compared to 2011 levels. Pursuant to our amended and restated collaboration agreement with GSK, we have up to three years to deploy a sales force following the April 2011 approval of Horizant in the United States. If the commercialization rights to Horizant revert to us, however, we may need to build a substantial marketing and sales force with appropriate technical expertise and supporting distribution capabilities or enter into arrangements with third parties to do so. The timing and amount of selling, general and administrative expenses incurred in support of Horizant will primarily depend upon if or when we deploy such sales force in support of the commercialization of Horizant for RLS and/or PHN, whether in the co-promotion arrangement with GSK if the collaboration agreement is not terminated or if the commercialization rights to Horizant revert to us.

Interest Income

Interest income consisted primarily of interest earned on our cash equivalents and short-term investments.

Three Months Nine Months Ended September 30, Change Ended September 30, Change 2012 2011 $ % 2012 2011 $ %

(In thousands, except percentages)

Interest income $ 66 $ 59 $ 7 12 % $ 176 $ 184 $ (8 ) (4 )%

Our interest income in the three and nine months ended September 30, 2012 remained relatively constant compared to the same periods in 2011.


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Liquidity and Capital Resources



                                                          As of                  As of
                                                      September 30,           December 31,
                                                          2012                    2011
                                                                 (In thousands)
Cash and cash equivalents and short-term
investments                                          $       112,861         $       94,442
Working capital                                              104,640                 83,922
Restricted investments                                         1,955                  1,954




                                                         Nine Months Ended September 30,
                                                           2012                     2011
                                                                  (In thousands)
Cash provided by (used in):
Operating activities                                 $        (23,778 )        $       (4,804 )
Investing activities                                          (25,990 )                (5,619 )
Financing activities                                           43,084                     (79 )
. . .
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