Arbor's Bid For XenoPort Likely Driven By Effort To Grow Horizant

With minimal unencumbered pipeline assets to offer, XenoPort's value to Arbor apparently lies in positive sales trends for the modest-selling restless legs and postherpetic neuralgia drug.

At first glance, it's hard to ascertain why privately held Arbor Pharmaceuticals Inc. is paying a 60% premium to acquire troubled XenoPort Inc., which offers a thin pipeline and a modestly selling drug, Horizant (gabapentin enacarbil), with two approved indications.

It appears that Arbor, which is focused on the cardiovascular, hospital and pediatric markets, is betting on its ability to grow sales of Horizant, perhaps boosted by a Phase II program to add alcohol abuse disorder to the label.

XenoPort offered investors a story of sales growth during the company's first quarter earnings call on May 5 for the restless legs syndrome and post-herpetic neuralgia drug, which brought in $13.7m during the first quarter, more than doubling sales year-over-year from $6.6m in the first quarter of 2015. CEO Vince Angotti spoke about increasing the commercial effort behind Horizant, while looking forward to a cash infusion from the out-licensing of its Phase III-ready multiple sclerosis and psoriasis candidate XP23829 to India's Dr. Reddy's Laboratories Ltd., with up to $250m in post-commercial milestones and tiered double-digit sales royalties. (Also see "Dr Reddy's Infuses Life Into XenoPort's Psoriasis Drug " - Scrip, 29 Mar, 2016.)

Angotti talked about using the $50m upfront cash from that deal to continue growing XenoPort's neurological health marketing team, which then stood at 135 sales representatives. He also did not rule out targeted business development if a modestly priced asset that would complement Horizant was available, but there was no speculation about a sale of the company or out-licensing of its lead product.

Come May 23, however, Atlanta-based Arbor – one of hedge fund Deerfield Management's life science company launches – announced a tender to buy out XenoPort for $7.03 per share. That price amounts to a 60% premium over XenoPort's closing share price on May 20, and a total dollar value of roughly $467m. With XP23829, a monomethyl fumarate prodrug, licensed to Dr. Reddy's, the only advanced clinical asset the California biotech had to offer was XP21279, a levodopa prodrug in Phase II for Parkinson's disease. (Also see "XenoPort's PD drug disappoints, failing next to Sinemet" - Scrip, 6 Dec, 2011.)

XenoPort also is developing gabapentin enacarbil, a different formulation of active ingredient in Horizant, for alcohol abuse disorder under a clinical trial agreement with NIH's National Institute of Alcohol Abuse and Alcoholism. It licensed another compound, arbaclofen placarbil – a prodrug of selective GABA-B agonist baclofen, to Indivior PLC in 2014 for the same indication.

Arbor declined to comment on the transaction, but CEO Ed Schutter in a statement said that XenoPort had done "an excellent job growing Horizant" and that Arbor looked forward to helping the existing XenoPort sales team maintain the momentum behind the product. Meanwhile, Angotti said the deal would provide "immediate and substantial" value for XenoPort shareholders and expressed confidence that Arbor could provide the resources needed to expand sales of Horizant.

Arbor has a sales staff of about 500 that promotes products to physicians, hospitals and pharmacists. Its portfolio consists of 20 marketed products – both branded drugs and generics – with a mixed pipeline of 35 candidates.

The deal has been agreed to unanimously by the boards of directors of both companies, and while it remains subject to a tender of more than 50% of the existing shares in XenoPort, the companies said they expect the transaction to close during the third quarter of this year.

Deal Price Seen As Reasonable In Specialty Field

Despite the thin pipeline and modest sales offered by XenoPort, Jefferies Equity Research analyst David Steinberg said in a same-day note that the deal's price seemed appropriate in the context of recent M&A activity in the specialty pharmaceuticals sector. He said the deal should go through, although other bidders might emerge.

"We have thought for some time that XenoPort would be an attractive acquisition target to a company with a larger sales organization that could fully maximize the value of flagship neurology drug Horizant," he said. "Competitive bids are possible, but likely lower probability in our view."

Horizant was approved for restless legs syndrome in 2011, at which time XenoPort was partnered with GlaxoSmithKline PLC on commercialization. (Also see "Sun finally shines on Horizant, as FDA OK’s GSK-XenoPort RLS drug" - Scrip, 7 Apr, 2011.) However, GSK terminated the partnership in 2012, after postherpetic neuralgia was added to the label, while also making a $20m equity investment in XenoPort. (Also see " XenoPort, GSK gain US FDA nod for Horizant in shingles pain " - Scrip, 7 Jun, 2012.) (Also see "GSK gives up on Horizant as XenoPort decides to go it alone" - Scrip, 8 Nov, 2012.)

Jefferies' Steinberg asserted that Arbor is better positioned to succeed with the drug than either GSK or XenoPort, which is limited in its reach at present.

"Given limited resources, XenoPort has done a very good job to date in driving Horizant sales and demonstrating the drug’s promotional sensitivity following GSK’s original 'botched' initial launch five years ago," the analyst said. "That said, with an incrementally growing promotional effort (135 person team as of 1Q16), XenoPort’s sales force was still suboptimal in our view given that the company could only detail to less than 30% of Horizant’s prescriber base. Arbor looks to have significantly more firepower with 500 sales representatives targeting the cardiovascular, hospital and pediatric markets."

Coming out of XenoPort's first quarter earnings call, Alethia Young of Credit Suisse rated the company "underperform" and said its future success might rest of Dr. Reddy's performance in bringing XP23829 to market in MS. She projected Horizant sales of $93m in 2017, against operating expenses of $128m, even though total prescriptions for the drug had increased 45% year-over-year as of the end of the first quarter.

XenoPort CEO Angotti pointed out during the company's May 5 earnings call that "the number of unique reported prescribers increased by about 38% over the same period last year, which we believe is a continued testament to the wider adoption of Horizant as we expand its exposure to health care professionals." That and the year-over-year sales trend may point to the reasoning behind Arbor's enthusiasm for XenoPort and its drug.

Sagient Research is not bullish on the regulatory prospects for two of the programs in XenoPort's pipeline, whether partnered or unencumbered, but the analyst firm's BioMedTracker database gives most other assets a fair chance of success compared with competing programs. Sagient gives XP23829 a 10% chance of approval in MS, and an 18% likelihood in psoriasis, which is an average likelihood of approval for MS therapies in similar stages of development and a below average chance of success compared with other psoriasis candidates.

Parkinson's candidate XP21279 is given a 17% probability of approval, which is an average rating compared to the drug's competition, while both of its alcohol abuse candidates are seen as having a 12% chance of success, which puts Horizant and arbaclofen placarbil on equal footing with other alcohol dependence treatments in the mid-stage pipeline.