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Xenoport - A Shaking Ham Hock

February 07, 2010 | About:
wax

Wax

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We noticed an article last week about Xenoport, Inc. (Nasdaq: XNPT) , a company in the Biotechnology Industry.

As is typical for us, we simply are not interested in biotechnology companies since they almost never have earnings, and are normally majority owned by large pharmaceutical firms.

The article we read said that Xenoport had submitted an application to the FDA for approval of a new drug that helps with restless leg syndrome. As we learned it was GSK (GlaxoSmithKline), one of Xenoport's collaborators, that submitted the new drug application.

What pushed us to look into the company was that we know folks that have restless leg syndrome, and they treat it by putting a bar of Palmolive soap near their feet at bedtime. Problem solved.

So assuming the worst that could happen is we would end up with a few extra bars of soap, we attempted once again, to follow the many twists and turns of yet another biotech company.

Basis

Financial information contained in this report is based on the company's most recent Form 10-K filing for fiscal year ending December 31, 2008 as filed with the with the Securities and Exchange Commission on February 26, 2009.

What They Do

XenoPort, Inc. is a biopharmaceutical company focused on developing a portfolio of internally discovered product candidates that utilize the body's natural nutrient transport mechanisms to improve the therapeutic benefits of existing drugs.

The company is developing its lead product candidate known as XP13512 in partnership with Astellas Pharma Inc. and GlaxoSmithKline, for use in the treatment of moderate-to-severe primary restless legs syndrome.

GlaxoSmithKline has filed with the U.S. Food and Drug Administration a new drug application for this product candidate.

The company recently announced that if approved by the FDA, the new drug would be known in the United States as Horizant, and that the goal date for approval of the New Drug Application (NDA) was February 9, 2010.

In addition, the company's product candidates are also being studied in conjunction with the company's partners for the potential treatment of gastroesophageal reflux disease, migraine headaches, neuropathic pain, RLS (in Japan), spasticity related to spinal chord injury, acute back spasms and Parkinson's disease.

Short-Term Investment

The stock closed recently at $28.33, with overhead resistance at $28.33, a 49% increase from its recent close, and first support at $18.90, a 1% decline from its recent close. So on the surface, it would appear that a short-term investment would be the order of the day.

While we realize that most traders are not strangers when it comes to risk, and the upside reward potential seems almost to good to pass up at 49%, we hope short-term traders will pay attention to the fundamental trend indicators as well as the FDA approval date, when considering a short-term investment in this stock.

Long-Term (5 Year Hold) Investment

Simply put, we have about as much interest in this stock as hog has in the hereafter.

We have long held that the vast majority of biotechnology companies simply make poor investments. Massive amounts of capital are needed to fund the research required to develop a new drug, and even more capital is required to push these new drugs through all of the stages of clinical trials in order to gain new drug approval from the FDA.

Hence the need for large, well established pharmaceutical companies to collaborate in the development of these new drugs. Xenoport certainly fits the mold in this regard.

The company has several potential drug candidates in the development stage targeting such maladies as migraine headaches, acute back spasms, and acid reflux. But the candidate that investors seem to be willing to bet the farm on, at least at the moment is Horizant, the restless leg syndrome drug.

Final Thoughts

Regardless of whether Horizant is approved as a new drug, we simply don't believe that investors will be as rewarded as they may be anticipating. The company has said in its SEC filings that, if approved, the new drug would compete with generic gabapentin.

The company has also said they believe that it is unlikely that a health care provider would require the use of gabapentin in preference to Horizant since Horizant is approved and gabapentin is not approved.

How ignorant. What the company should be saying is we have developed a new drug that will keep a person's ham hock from shaking when they sleep and we think it will be a huge money maker for us because the drug insurance companies should pay for it.

In the end (pun intended) we think pharmacies will continue to offer gabapentin as an alternative, leaving investors to kick their collective posteriors as they realize that once again they have overpaid for a biotech company, a biotech company we think would be fairly valued in the $3-$5 range.

Wax

For the Wax Ink Xenoport Raw Value worksheet, please click here.

About the author:

Wax
Wax Ink is a baseline equity research company not licensed or registered with any government agency

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