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XNPT > SEC Filings for XNPT > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for XENOPORT INC

Form 10-Q for XENOPORT INC


7-Aug-2014

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

XenoPort, Inc. is a biopharmaceutical company focused on developing and commercializing a portfolio of internally discovered product candidates for the potential treatment of neurological and other disorders. We are currently commercializing HORIZANT® (gabapentin enacarbil) Extended-Release Tablets in the United States and developing our novel fumaric acid ester product candidate, XP23829, as a potential treatment for psoriasis and/or relapsing forms of multiple sclerosis, or MS. In addition, REGNITE® (gabapentin enacarbil) Extended-Release Tablets are being marketed in Japan by Astellas Pharma Inc. We currently depend, and may in the future depend, on collaboration, partnership, licensing and other similar forms of arrangements with third parties, collectively referred to as collaboration arrangements.

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. RLS, 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.

We reacquired development and commercialization rights to HORIZANT from Glaxo Group Limited, or GSK, our former collaborator for this product, on May 1, 2013. Since the reacquisition of HORIZANT, we have focused our promotional and sales efforts on specialty doctors in certain geographic territories and have deployed a dedicated sales team through a contract sales organization to promote HORIZANT in these territories. We believe these efforts have provided a scalable template for commercial expansion and we plan to increase the number of sales representatives promoting HORIZANT to approximately 65 representatives. We plan to carry out our expansion of the sales representatives through our contract sales organization. In addition, we plan to hire, as XenoPort employees, the initial sales representatives who are currently employed by our contract sales organization as our XenoPort-employed sales team.

Our future product sales of HORIZANT will be dependent upon the success of our strategies for commercialization, promotion and distribution, as well as our ability to successfully execute on these activities and to comply with applicable laws, regulations and regulatory requirements. Our commercialization efforts may not be successful. In this regard, we rely on third parties to perform a variety of functions related to the sale and distribution of HORIZANT, key aspects of which are out of our direct control. If these third-party service providers fail to comply with applicable laws and regulations, fail to meet expected deadlines or otherwise do not carry out their contractual duties to us, or if HORIZANT encounters physical or natural damage at their facilities, our ability to deliver HORIZANT to meet commercial demand would be significantly impaired.

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. A fumaric acid ester product is approved in Germany for the treatment of psoriasis, and in the United States, a fumaric acid ester compound, known as TECFIDERA (dimethyl fumarate), was approved by the FDA in March 2013 for the treatment of relapsing forms of MS. We have evaluated XP23829 in Phase 1 studies with healthy subjects to determine its safety and pharmacokinetic profile. Based on the favorable preliminary results of XP23829 Phase 1 and toxicology studies, we submitted an Investigational New Drug, or IND, application to the Division of Dermatology and Dental Products of the FDA for XP23829 as a potential treatment for moderate-to-severe chronic plaque-type psoriasis. Following clearance of the IND by the FDA, we initiated in June 2014 a Phase 2 clinical trial of XP23829 in patients with moderate-to-severe chronic plaque-type psoriasis. We intend to evaluate once-a-day and twice-a-day dosing of XP23829 in this trial.


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We also have two other product candidates: arbaclofen placarbil, or AP, which is licensed to Reckitt Benckiser Pharmaceuticals, Inc., and XP21279. With respect to AP, in May 2014, we entered into an exclusive license agreement with Reckitt, which became effective on June 19, 2014. Under the terms of this agreement, we granted to Reckitt exclusive, world-wide rights to develop and commercialize pharmaceutical products containing AP and other prodrugs of baclofen or R-baclofen, or AP Products, for all indications, subject to our right of first negotiation with Reckitt to collaborate to develop and commercialize AP Products for non-addiction indications. In exchange for these rights, we received an upfront, non-refundable cash payment of $20.0 million in June 2014 and also received an additional $5.0 million in July 2014 after delivery of certain materials to Reckitt. We are also eligible to receive aggregate cash payments of up to $120.0 million upon the achievement by Reckitt of certain contingent event-based milestones, of which $70.0 million are regulatory and development-based and $50.0 million are commercialization-based. In addition, we are entitled to receive tiered double-digit royalty payments of up to the mid-teens on a percentage basis on potential future net sales of products in the United States, and high single-digit royalty payments on potential future net sales of products outside the United States. Both the upfront $20.0 million cash payment and the additional $5.0 million payment will be recognized as collaboration revenue upon the transfer of all the related INDs, know-how and other related data, and completion of the supply transition plan, which we believe will occur during the second half of 2014.

XP21279 is a potential treatment for patients with advanced idiopathic Parkinson's disease. We may develop it further, to the extent that our resources permit, or we may enter into collaboration arrangements with third parties for such development.

The potential for gabapentin enacarbil and/or our product candidates could be enhanced through third-party agreement(s) that would further development and/or enhance commercialization efforts of these assets. As such, we plan to enter into collaboration arrangements with pharmaceutical companies for gabapentin enacarbil and/or our product candidates: (1) when access to a primary care physician or an expanded sales force is necessary to maximize the commercial potential of an asset; (2) for the development of an asset outside the United States; or (3) to develop and commercialize an asset for indications that fall outside our core focus or our core development capabilities.

Historically, revenues recognized through May 1, 2013 were primarily comprised of up-front, milestone and contingent event-based payments from our collaboration arrangements. However, as a result of our termination and transition agreement with GSK and the return of the commercialization rights to HORIZANT to us, our revenues for the six months ended June 30, 2014 consisted primarily of revenues from HORIZANT product sales. Likewise, with exception of the collaboration revenues related to Reckitt, we expect the future composition of our revenues to consist primarily of revenues from HORIZANT product sales. Although we are recognizing revenue from HORIZANT product sales in the United States, our relative lack of commercialization experience, as an organization and with respect to HORIZANT product sales, will make future operating results difficult to predict. In this regard, our product sales revenue may vary significantly from period to period as our commercialization efforts progress, and we may be unable to meaningfully increase HORIZANT product sales or otherwise commercialize HORIZANT in a timely manner or at all. We also expect that the expenses of increasing and maintaining our sales and marketing capabilities, including with respect to the establishment of a XenoPort-employed sales force and the planned expansion in the number of overall sales representatives, and maintaining a distribution and supply chain infrastructure will continue to be substantial, and these costs may exceed the revenues that we are able to generate from HORIZANT product sales. We recorded $7.9 million in net sales from HORIZANT for the six months ended June 30, 2014.

Gabapentin enacarbil is licensed to Astellas in Japan. We are entitled to receive percentage-based high-teen royalties on net sales of REGNITE in Japan, and the royalties will be recognized as revenue when royalty payments are received. In the six months ended June 30, 2014, the royalty revenue from net sales of REGNITE in Japan was $0.3 million. We expect royalty revenues from our collaboration with Astellas to fluctuate based on the results of their commercialization, marketing and distribution efforts for REGNITE in Japan. We expect our research and development expenses to decrease in 2014 compared to 2013 levels primarily due to our decision to terminate further investment in AP, which is now licensed to Reckitt, as a potential treatment for spasticity in patients with MS in 2013, which will be partially offset by expected increased development expenses for XP23829, including our Phase 2 clinical trial in patients with moderate-to-severe chronic plaque-type psoriasis initiated in June 2014. The timing and amount of research and development expenses incurred will primarily depend upon the extent of current or future clinical trials for XP23829 as well as the related expenses associated with our development organization, regulatory requirements for our product candidates, product candidate manufacturing costs and our ability to raise additional funds. Our future research and development expenses are subject to numerous assumptions that may prove to be wrong and also are subject to risks related to the difficulty and uncertainty of clinical success and regulatory approvals of our product candidates. While we expect that our research and development expenses will decrease in 2014, we expect our selling, general and administrative expenses to increase compared to 2013 levels primarily due to the full-year effect of expenses incurred in maintaining sales, marketing, distribution and other commercial capabilities for HORIZANT, largely through third-party service providers, as well as our planned sales force expansion.

On January 29, 2014, we completed an underwritten public offering of 12,000,000 shares of our common stock at a price to the public of $6.00 per share. Net cash proceeds from the public offering were $67.3 million, after deducting the underwriting discounts and commissions and offering expenses payable by us. On February 21, 2014, the underwriters exercised in full their option to purchase 1,800,000 additional shares resulting in additional net cash proceeds of $10.1 million, after deducting the underwriting discounts and commissions and offering expenses payable by us.


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We believe that our existing capital resources, together with interest thereon and anticipated product revenue, will be sufficient to meet our projected operating requirements into the fourth quarter of 2016. We have based our cash sufficiency estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. Further, our operating plan may change (for example, our current operating plan does not include any additional development activities for XP23829 beyond the current Phase 2 development program), and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. We have no credit facility or committed sources of capital other than potential contingent event-based and royalty payments that we are eligible to receive under our collaboration arrangements with Astellas and Reckitt. We are responsible for all HORIZANT commercialization and development activities, including all post-marketing requirements and commitments. Such costs could be greater than we anticipate, or sales of HORIZANT may be less than we anticipate, either or both of which could accelerate our need for additional capital. In addition, we do not believe that revenues generated from HORIZANT and REGNITE sales and other revenues generated from our collaborations with Astellas and Reckitt will be sufficient alone to sustain our operations, at least in the near term, and we therefore expect to continue to experience negative cash flows for the foreseeable future as we fund our operating losses and capital expenditures. Additional funds may not be available to us on terms that are acceptable to us, or at all. If adequate funds are not, or we anticipate that they may not be, available on a timely basis, we may be required to, among other things, reduce the amount of resources devoted to medical affairs, advertising, promotion or sales of HORIZANT, curtail or delay further XP23829 development or conduct additional workforce or other expense reductions, any of which could have a material adverse effect on our business and prospects.

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, inventories stock-based compensation, fair value measurements and accrued expenses. 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 filed with the Securities and Exchange Commission on February 28, 2014.

Recent Accounting Pronouncement

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), which creates a single source of revenue guidance under US GAAP for all companies in all industries. The core principle of ASU 2014-09 is that revenue should be recognized in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process in order to achieve this core principle, which may require the use of judgment and estimates. ASU 2014-09 also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used. ASU 2014-09 will be effective for us in the first quarter of fiscal 2017, and early adoption is not permitted. We may adopt ASU 2014-09 either by way of a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. We are currently evaluating the impact that ASU 2014-09 will have on our financial statements and have not yet determined which transition method we will apply.

Results of Operations

Three and Six Months Ended June 30, 2014 and 2013

Revenues

Our net product sales revenue was from the sales of HORIZANT after the transition period ended on April 30, 2013. Our collaboration revenue consisted of the recognition of revenues from up-front and milestone payments from our collaboration with Astellas. Our royalty revenue was also from our collaboration with Astellas and was based on net sales of REGNITE in Japan.


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                                       Three Months                                      Six Months
                                      Ended June 30,              Change               Ended June 30,              Change
                                     2014        2013          $           %          2014        2013          $           %
                                                                (In thousands, except percentages)
Product sales, net                  $ 4,920     $ 1,640     $ 3,280        200 %     $ 7,877     $ 1,640     $ 6,237        380 %
Collaboration revenue                   283         379         (96 )      (25 )%        566         758        (192 )      (25 )%
Royalty revenue                         131          67          64         96 %         266         147         119         81 %

Total revenues                      $ 5,334     $ 2,086     $ 3,248        156 %     $ 8,709     $ 2,545     $ 6,164        242 %

The increase in total revenues for the three and six months ended June 30, 2014 compared to the same periods in 2013 was primarily due to increased HORIZANT sales since the acquisition of the HORIZANT business on May 1, 2013 and our first commercial sales in the second quarter of 2013.

As a result of our termination and transition agreement with GSK and the return of the HORIZANT commercialization rights to us, with exception of the collaboration revenue related to Reckitt, we expect the future composition of our revenues to consist primarily of revenues from HORIZANT product sales. We expect our HORIZANT product sales to increase in 2014 compared to 2013 levels and that they will be dependent upon the success of our strategies for commercialization, promotion, manufacturing and distribution, as well as our ability to successfully execute on these activities and to comply with applicable laws, regulations and regulatory requirements. We expect royalty revenues from our collaboration with Astellas to fluctuate based on the results of their commercialization, marketing and distribution efforts for REGNITE in Japan. We believe the Reckitt agreement will result in collaboration revenue increasing over 2013 levels by the second quarter of 2015.

Cost of Product Sales

Cost of product sales consisted of the direct and indirect costs to manufacture product sold, including tableting, packaging, storage, shipping and handling costs related to our product sales of HORIZANT. Cost of product sales also included raw materials, specifically gabapentin enacarbil, as acquired from GSK as part of the acquisition of the HORIZANT business and recorded at fair value. The fair value of the inventory acquired from GSK represents a lower cost than if new raw materials were purchased at current third-party costs.

Three Months Six Months Ended June 30, Change Ended June 30, Change 2014 2013 $ % 2014 2013 $ %

(In thousands, except percentages)

Cost of product sales $ 599 $ 249 $ 350 141 % $ 1,029 $ 249 $ 780 313 %

Cost of product sales increased in the three and six months ended June 30, 2014 compared to the same periods in 2013 due to HORIZANT product sales that commenced by us in May 2013.

We expect cost of product sales for HORIZANT to remain relatively constant as a percentage of product sales for the remainder of the year.

Research and Development Expenses

Research and development expenses consisted of costs associated with conducting preclinical studies and clinical trials, manufacturing development efforts for clinical trials and activities related to development-related regulatory filings.

Three Months Six Months Ended June 30, Change Ended June 30, Change 2014 2013 $ % 2014 2013 $ %

(In thousands, except percentages)

Research and development $ 5,203 $ 10,236 $ (5,033 ) (49 )% $ 9,860 $ 23,589 $ (13,729 ) (58 )%

The decrease in research and development expenses in the three months ended June 30, 2014 compared to the same period in 2013 was principally due to the following:

• decreased net costs for AP of $3.1 million primarily due to decreased clinical and manufacturing costs as a result of the termination of further development of AP as a potential treatment for spasticity in patients with MS in 2013, and


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• decreased personnel costs of $1.1 million primarily due to decreased headcount and decreased non-cash stock-based compensation.

The decrease in research and development expenses in the six months ended June 30, 2014 compared to the same period in 2013 was principally due to the following:

• decreased net costs for AP of $7.7 million primarily due to decreased clinical and manufacturing costs as a result of the termination of further development of AP as a potential treatment for spasticity in patients with MS in 2013;

• decreased net costs for XP23829 of $1.4 million primarily due to decreased clinical and manufacturing costs; and

• decreased personnel costs of $2.4 million primarily due to decreased headcount and decreased non-cash stock-based compensation.

We expect our research and development expenses to decrease in 2014 compared to 2013 levels primarily due to our decision to terminate further investment in AP as a potential treatment for spasticity in patients with MS as a result of the negative results obtained in our pivotal Phase 3 clinical trial of AP for such treatment, which will be partially offset by expected increased development expenses for XP23829, including the cost of our Phase 2 clinical trial in patients with moderate-to-severe chronic plaque-type psoriasis that we initiated in June 2014. The timing and amount of research and development expenses incurred will primarily depend upon the extent of current or future clinical trials for XP23829 as well as the related expenses associated with our development organization, regulatory requirements for our product candidates and product candidate manufacturing costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consisted primarily of compensation for executive, sales, marketing, finance, legal, compliance and administrative personnel. Other sales, general and administrative expenses included facility costs not otherwise included in research and development expenses, the cost of market research activities, legal and accounting services, other professional services and consulting fees.

Three Months Six Months Ended June 30, Change Ended June 30, Change 2014 2013 $ % 2014 2013 $ %

(In thousands, except percentages)

Selling, general and administrative $ 18,865 $ 15,788 $ 3,077 19 % $ 37,636 $ 26,523 $ 11,113 42 %

The increase in selling, general and administrative expenses in the three months ended June 30, 2014 compared to the same period in 2013 was principally due to costs related to the commercialization and promotion of HORIZANT; specifically, increased professional fees of $0.9 million, which included contract sales force costs, marketing costs of $0.7 million and personnel costs of $0.6 million.

The increase in selling, general and administrative expenses in the six months ended June 30, 2014 compared to the same period in 2013 was principally due to costs related to the commercialization and promotion of HORIZANT; specifically, increased professional fees of $3.3 million, which included contract sales force costs, marketing costs of $4.9 million and personnel costs of $1.7 million.

Since May 1, 2013, we have been responsible for the commercialization and promotion of HORIZANT in the United States. Accordingly, we expect continued increases in selling, general and administrative expenses in 2014 compared to 2013 levels due to the full-year-effect of expenses incurred in maintaining sales, marketing, distribution and other commercial capabilities largely through third-party service providers, as well as expenses arising from our planned sales force expansion through our contract sales organization.

Interest Income/Expense

Interest income consisted primarily of interest earned on our cash equivalents and short-term investments, and interest expense consisted primarily of the accretion of our other noncurrent liability.


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Three Months Six Months Ended June 30, Change Ended June 30, Change 2014 2013 $ % 2014 2013 $ % . . .
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