|Shares Out. (in M):||35||P/E||N/A||N/A|
|Market Cap (in $M):||454||P/FCF||N/A||N/A|
|Net Debt (in $M):||16||EBIT||-28||-38|
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Xenon Pharmaceuticals (XENE)
XENE is a clinical-stage biopharma company that, although has dabbled in multiple therapeutic areas (i.e. acne, pain) in the past with little success (see chart below), never truly strayed away from its true calling as an up-and-coming ion-channel expertise powerhouse. XENE is not only looking to revitalize the once-promising Potiga (ezogabine) franchise but also improve upon it. XENE is currently spearheading the clinical development of several ion-channel based antiepileptic (AED) therapeutics, including several key assets (XEN-1101, XEN-496) related to potassium ion channel modulation, a relatively novel yet proven target of MOA (as validated by Potiga approval in 2011) in the treatment of various common and rare epilepsies.
Key XENE Events since IPO:
Background on XENE
XENE was founded in 1996 in BC, Canada and is currently led by Mr. Pimstone, the head honcho who has also served in a dual President/CEO role at XENE since Jan 2003. As the XENE story evolved over the years, so did its clinical development focus and strategies, which narrowed from a somewhat mixed bag of opportunities into a more fully and deeply vested neurology-centered R&D platform based on various ion-channel therapeutics. As a sign of commitment to this end, in March 2018, Dr. Ernest Aycardi, a neurologist with years of neurology R&D experience stemming from days at both Teva and Biogen, was brought onboard as XENE’s Chief Medical Officer. Further signaling XENE’s commitment to its neurology-transformation was the departure of long-time SVP of Clinical Development Dr. Paul Goldberg, who has championed XENE’s previous basket of assets such as XEN-402 and XEN-801, which unfortunately did not pan out as expected.
Successful strategic collaborations and asset acquisitions have also been an integral part of XENE’s core strategy, allowing for efficient expansion beyond its internal capabilities and pipelines and broadening its scope of therapeutic targets, all the while generating additional streams of non-dilutive financings that have collectively amounted to ~$130M since company inception.
Here are several key near-term catalysts that should drive the stock for the next 6 to 12 months.
Brief History of Ezogabine (Potiga)
Potiga (ezogabine), originally developed by Valeant and subsequently out-licensed to GSK, gained FDA approval in 2011 after demonstrating solid placebo-adjusted seizure reduction of up to 25% in adult epilepsy patients refractory to other AEDs. Nearly 30% of patients on ezogabine experienced seizure frequency reduction of more than 60%, mirroring those seen in rivals Briviact and Aptiom. Epileptologist expected the drug to see significant use based on a novel mechanism of action (Kv7 potassium channel modulation) and strong efficacy profile in the highly-refractory adult epilepsy patients but the commercial potential was limited by the three-times-a-day (TID) dosing, further exacerbated the drug's heavy bag of AEs (dizziness, sedation, blurred vision) and significant safety and tolerability issues, including a post-approval black box warning (BBW) for retinal abnormalities and potential vision loss that called for increased vision exams and prompt discontinuations. Long-term use was also associated with bluish skin discoloration and urinary retention, the latter of which had a REMS requirement component at approval but was subsequently removed in 2015, which was a bit too late to say the least. Despite the skin and retinal discoloration proving out to be reversible and cosmetic in nature, the damage done to the Potiga brand was significant over the years. GSK withdrew Potiga from the market in 2017 citing commercial reasons stemming from the product's limited use.
XEN-1101: A Next-Gen Potassium Ion Channel Modulator
First, XEN-1101 confers potential long-term cosmetic safety advantages based on its unique chemistry that minimizes the potential for dimerization when metabolized, thereby avoiding the blue dyspigmentations and discolorations of skin and eye. This benefit, along with the proposed once-daily dosing regimen in the evening (vs. tid for ezogabine), should improve patient compliance, considering most patients are multiple AEDs.
Second, XEN-1101 shares a similar, proven MOA as ezogabine in modulating the Kv7.2/Kv7.3 potassium channels. In fact, XEN-1101 is up to 60x more potent (top chart: EC50 of ~27nM) in potentiating the activity of Kv7.2/Kv7.3 channels than ezogabine (bottom chart: EC50 of 1.6uM, or 1600 nM), which theoretically should limit the drug’s overall exposure and potential CNS and organ-related AEs. Additionally, based on superior potency, XEN-1101 is being evaluated in X-TOLE at much lower daily doses (10mg, 20mg and 25mg) than the FDA-approved ezogabine doses (600mg to 1200mg per day). XEN-1101’s lower dosages have the potential to further allow for improvements in its tolerability and safety profile through potentially limited off-target effects on other Kv7 channels such as Kv7.4 (bladder, retina) and Kv7.5 (vasculature).
Source: XENE Eilat XIV Meeting 2018 (Top); Gunthorpe, et al. Epilepsia. Jan 2012. PMID: 22220513 (Bottom)
Third, XEN-1101 has proven in two separate Ph 1 TMS studies its ability to reduce cortical excitability and increase RMT, both of which are indicative of neuronal activity inhibition and demonstrate the potential for antiepileptic effects. 20mg of XEN-1101 produced an RMT improvement of 4.3% at 4 hrs in the Ph 1a TMS trial, which compares favorably to 400mg of ezogabine (RMT improvement of 2.4% at 2 hrs). XEN-1101’s effect on RMT was again demonstrated in a subsequent Ph 1b TMS trial where 20mg of XEN-1101 led to an RMT improvement of 4.9% (p<0.01) vs pbo at 6 hrs. Statistically significant modulation/decrease of TMS-evoked EEG potentials (TEPs) were also noted, further corroborating its impact on reduction of cortical excitability. We also note that XEN-1101 has a longer time to Cmax (6 hrs) than ezogabine (2 hrs), consistent with the potential to be dosed once-daily instead of tid.
Quick Focal Epilepsy Background
Epilepsies are generally divided into two categories: focal (aka partial-onset) or generalized, based on the mode of onset. Focal epilepsies account for approximately 60% of seizures, making them the most common type of seizures, and approximately 33% are considered resistant to current treatments. While the pathology surrounding the electrical activity occurs localized and limited in an area within the brain, these focal seizures can also spread to the rest of the brain and lead to secondary generalized seizures. The treatment of focal seizures is focused on reduction of seizure frequency, with an ultimate goal of attaining seizure freedom. While broad-spectrum AEDs (i.e. topiramate, valproate, levetiracetam) can treat both focal and generalized epilepsies, most of the narrow-spectrum AEDs (i.e. Vimpat) are also effective for localized focal epilepsies. In terms of AED selection, there is no single drug that is the most effective or best tolerated, and patient treatment plans are typically formulated based on multiple factors including the types of seizure, drug-interactions of CYP inducers/inhibitors and CYP substrates, drug AE profile, dosing frequency, comorbid conditions (i.e. anxiety, depression), and cost of therapy.
While the advancement and success in the development of novel antiepileptic therapies in the past 2 decades have largely revolved around development of AEDs with better safety and tolerability profile than the older agents (i.e. phenytoin, phenobarbital, carbamazepine, primidone, valproate), efforts at attaining meaningful and incrementally better seizure reductions have been modest at best. About a third of epilepsy patients continue to become treatment-resistant to current AEDs (typically having failed at least 3 AEDs), highlighting the necessity for not only safer and more tolerable therapies but also more effective ones, especially considering the fact that seizure-freedom attainment decreases dramatically with each successive AED used (1st, 2nd, and 3rd AED tried contributes to diminishing return on seizure-freedom in 47%, 13%, and 1% of patients, respectively).
Current Branded AED Market Dynamics (TRx and Revenues)
For sake of comparison purposes, we will limit discussions only to several of the recently-approved branded AEDs for focal epilepsies against which XEN-1101’s success will be measured, since the first- and second-line therapies will almost always consist of the tried-and-true 1st-gen AEDs that have been generic for decades (i.e. phenytoin, phenobarbital, carbamazepine, valproate, gabapentin, etc), and the mixed bag of branded and generic 2nd-gen AEDs (i.e. Lamictal/lamotrigine, Topamax/topiramate, Keppra/levetiracetam, Trileptal/oxcarbazepine, Vimpat, Fycompa, Aptiom, etc).
XEN-1101’s clinical uptake will not only be dictated by the drug’s efficacy levels and safety/tolerability profile but also be subject to the “mix and match” nature of the seizure treatment paradigm where different AEDs will be tried until the best agent is found (i.e. least amount of tolerability issues while maintaining acceptable efficacy levels). Based on ~3.4M US patients with active seizures, I estimate ~280k to ~720k refractory patients to be the potential range of total addressable market (TAM) for XEN-1101, supported by IQVIA TRx volume trends for several branded AEDs launched in recent years for the treatment of focal epilepsies, which have a combined TRx of ~500k in 2019 (my base-case TAM). This is also consistent with XENE’s own estimates of 460k adult and 70k pediatric focal epilepsy patients addressable by XEN-1101 (2019 10-k, page 3).
Source: IQVIA (data as of May 2020).
Belgian juggernaut UCB has been at the forefront of creating several successful AED franchises over the past few decades, starting with Keppra (peak sales ~$1.5B in 2008), followed by Vimpat (~$1.4B in 2019), and now the 2016-approved Briviact, which is quickly gaining grounds in both revenue and TRx vs Aptiom ($221M Briviact vs $275M Aptiom, 2019; ~150k TRx Briviact vs ~200k TRx Aptiom, 2019), despite the latter having a 3-year head start.
Briviact’s stat-sig seizure reduction benefit demonstrated in as early as Day 7 is likely contributing to its strong success and uptake, much like the Keppra launch (also by UCB) back in the days. Of note, Keppra also similarly demonstrated a Day-7 stat-sig seizure reduction benefit. Based on UCB’s internal guidance, Briviact is expected to reach ~$700M in peak sales by 2026 (at 10 yrs post-product launch), which likely represents the reach-case revenue proxy for XEN-1101, given the increasing number of competition in the branded AED space, resources needed to ensure a successful product launch, and the fact that all the recently approved brand AEDs are supported by deep-pocket players such as UCB (Keppra, Vimpat, Briviact), Eisai (Fycompa), and Sunovion (Aptiom). The newest approval Xcopri was launched by SK Life sciences, the US subsidiary of SK Biosciences, which is a part of SK Group, the 2nd largest company in South Korea. The most ideal scenario for XEN-1101 would be a potential partnership or collaboration which would increase the probability of a successful launch post-approval. At the other end of the spectrum, despite solid efficacies, both Fycompa (by Eisai) and Potiga (by GSK) have been plagued by rather unattractive BBWs (serious psychiatric and behavioral reactions for Fycompa; retinal abnormalities and potential vision loss for Potiga), leading to lackluster sales (sub-$300M for Aptiom) and an outright market withdrawal in 2017 (Potiga). Xcopri just launched in May 2020 and is equipped with an impressive 30%+ placebo-adjusted seizure reductions and a 50%+ responder rates of 40%-60%, the latter of which is the best among all recently approved AEDs.
Although the focal epilepsy market has become increasingly more crowded over the last 10 years, R&D and innovation efforts continue in this field in search for a better molecule, as no single AED agent is considered a cure-all for all types of seizures or epilepsy disorders and about a third of epilepsy patients continue to remain refractory to currently available AEDs.
Source: EvaluatePharma; Company earnings
What Does It Mean for XEN-1101?
Given the current AEDs’ absolute seizure reduction efficacies in focal seizures range from mid-20% to high-50%, XEN-1101’s efficacy readout in X-TOLE would likely need to clear a 25%-35% seizure reductions hurdle in order to establish any clinical relevance, putting it on par with the likes of Potiga (up to ~25%), Briviact (up to 26%), Aptiom (up to 27%), and Xcopri (up to 34%). A homerun scenario would be a high-30% - 50% efficacy level, putting it on par among the elites like Trileptal (up to 40%), Vimpat (up to 49% pooled), Lyrica (up to 51%), and Topamax (up to 59%). Any efficacy levels in the low-mid 20% like Fycompa (up to 21%), or any signs of retinal/skin abnormalities or unexpected AEs leading to BBWs (i.e. Fycompa, Potiga), especially in a scenario without superior, clinically meaningful efficacy levels, would likely make investors head for the exits.
Assuming XENE is able to partner up prior to launch and get a 4-5 yrs of solid commercialization based on a 2024 approval, my base-case estimate of XEN-1101 peak sales is at ~$170M based on relatively modest efficacies (45% POS, 25%-35% seizure reduction, 50%+ responder rates of 30% range) that show no real clear advantage over other branded AEDs, leading to $4/sh. A bull-case estimate of ~$250M in peak sales is based on best-in-class efficacies (60% POS, high-30%-high 40% seizure reduction, 50%+ responder rates of 40% range) leading to $8/sh, while a bear-case estimate of ~$95M in peak sales is based on suboptimal product profile (25% POS, <25% seizure reduction with borderline statistical significance, 50%+ responder rates in the 20%s or less) leading to $1/sh. Any signs of severe/unexpected AEs likely requiring REMS or BBWs would likely mean a niche role, consistent with a bear-case scenario. My base-case TAM assumption of 500k TRx expands to ~720k in the bull-case scenario and contracts to ~280k in the bear-case scenario, reflecting potential clinical utilization. TRx was used as the basis of my estimation since assumptions based on TRx numbers are more accurate than number of patients, which require additional layers of assumptions such as compliance, dosing schedule, diagnosis rate, etc. My XEN-1101 valuation is based on 2028 estimates, further adjusted by scenario-based TAM TRx, a 4.5x peak sales multiple and an 11% WACC.
One long-term overhang in the out-years for XEN-1101 is the patent expiration that could occur in as early as 2029, effectively allowing for only several years of commercial opportunity based on my assumption of a 2024 approval in adult focal epilepsy. The management is aware of this caveat and is confident it can extend XEN-1101 exclusivity into and beyond 2030s using various Orange Book patent strategies, including a food effect patent based on an increased plasma absorption of XEN-1101 in the fed state.
Another short/medium-term wildcard is the ongoing Covid pandemic on X-TOLE patient enrollment, which has already put a dent on the readout timeline by at least 6 months (2H20 to 1H21), and could potentially continue to bring uncertainty in the coming months.
XEN-496, A Potential Upside to XENE Valuation
I believe at XENE’s current market price of ~$13/sh, XEN-496 does present a “free” potential upside that may not yet be appreciated by many buysiders. While my valuation of XEN-496 reflect an additional $4/sh upside potential on a base-case scenario, ezogabine (active ingredient of XEN-496) has yet to demonstrate any proof-of-concept data in the KCNQ2-DEE population, so I understand the reasoning behind excluding the program from valuation. In fact, the upcoming planned ph 3 trial expected to begin in 2H20 represents the first piece of well-controlled, proof-of-concept data of XEN-496 in the KCNQ2-DEE population. Nevertheless, ZGNX’s successful late-June FDA approval of Fintepla (fenfluramine) in DS should bode well for XENE as it pursues a similar comeback strategy for ezogabine in a rare epilepsy indication.
KCNQ2-DEE Market Potential
Based on scarce literature and published data, triangulating the TAM for XEN-496 in KCNQ2-DEE is more art than science. According to Rarediseases.org, “Dravet syndrome (DS) affects an estimated 1:15,700 individuals in the U.S., or 0.0064% of the population (Wu 2015). Approximately 80-90% of those, or 1:20,900 individuals, have both an SCN1A mutation and a clinical diagnosis of DS,” or roughly ~18,000 DS patients. SCN1A gene mutation is the main cause of DS. According to Lindy AS, et al. (doi: 10.1111/epi.14074), the molecular diagnostic rate of KNCQ2 gene (13.2%) is roughly ~53% of that of SCN1A gene (24.8%), roughly equaling to ~9,500 KCNQ2-DEE patients in US. According to KCNQ2cure.org, it estimates the prevalence of KCNQ2-DEE at ~10% of patients with epileptic encephalopathy (EE), and based on DS accounting for ~35% of all EEs (doi:10.1155/2012/205131), it roughly leads to ~5,100 KCNQ2-DEE patients in US. XENE recently guided for 2k-3k KCNQ2-DEE addressable patients in the US (“We estimate around 2,000 to 3,000 children” per Simon Pimstone; Piper Sandler Conference Dec 2019). Since Potiga has historically been used off-label for KCNQ2-DEE patients as suggested by case reports (Millichap, 2016; Olso 2017), a peak Potiga TRx of ~8,100 (IQVIA) in 2015 reflects that no more than a few thousand KCNQ2-DEE patients likely exist in the US.
Based on a conservative KCNQ2-DEE TAM population range assumption of ~4k patients, a peak sales multiple of 4.5x and a WACC of 11%, my bull-case scenario (55% POS based on strong stat-sig efficacy leading to strong commercial uptake) leads to a valuation of $6/sh, while a base-case scenario (35% POS based on modestly stat-sig efficacy) leads to a $4/sh, and a bear-case scenario (15% POS based on ~3k pts based on borderline stat-sig efficacy) leads to a $2/sh. Any signs of severe/unexpected AEs likely requiring REMS or BBWs would likely mean a niche role, consistent with a bear-case scenario. My valuation/sh above is based on XEN-496’s peak sales estimation in KCNQ2-DEE of ~$190M. As a point of reference, EvaluatePharma estimates Fintepla could generate ~$369M in DS indication in 2026 (6 yrs post-launch), in-line with my base-case peak sales assumption of $190M (7 yrs post-launch), which also reflects the ~53% molecular diagnosis rate difference between SCN1A and KCNQ2 genes.
What Does It Mean for XEN-496?
I would look to incorporate XEN-496 valuation into the model once the XEN-496 ph 3 trial in KCNQ2-DEE successfully initiates in 2H20 and additional clarity on trial design and protocol becomes available. It is key to note that XENE has expanded the enrollment age from 4 to 6 and the size population from 20 to 40, potentially to improve patient enrollment and statistical powering, although this was never confirmed by company management’s 1Q20 update call when asked. A single, randomized, double-blind, placebo-controlled trial is expected to be sufficient for registration assuming clinically meaningful benefits and no new safety signals. Thus far, in a PK study of healthy adult volunteers, aside from 2 subjects experiencing possible drug-related severe TEAEs (syncope and depressed mood) which have also been observed in the original ezogabine trials, XEN-496 has been relatively safe and well-tolerated. No QT prolongation or urinary retention was observed. Overall, ezogabine’s ability to potently and precisely target and modulate Kv7.2 potassium channel ultimately bode well mechanistically for XEN-496 in KCNQ2-DEE, a condition caused by the loss-of-function mutation of KCNQ2 gene that expresses defective Kv7.2 potassium channels.
One potential regulatory risk is whether XENE’s expectation that a strategy of training families to count seizures accurately using VEEG (i.e. diaries) to mitigate the need to use VEEG directly as the method to assess primary outcome in a KCNQ2-DEE antiseizure medicine treatment trial, is acceptable for the FDA.
Few Words on Additional Assets (XEN-901, XEN-007, XEN-402)
Without going into too much detail, XENE has essentially secured committed R&D capital from NBIX for the development of XEN-901, effectively extending XENE’s cash runway into at least 2022 and potentially beyond, assuming successful collections of additional developmental and regulatory milestone payments worth up to $325M for XEN-901 in the coming years. My NBIX partnership/collaboration valuation is currently based on probability-adjusted milestone revenues based on the IND acceptance and completion of Ph 2 trial, while excluding those tied to Ph 3 trial success, regulatory acceptance, or any potential sales-based royalty payments. I have also excluded XENE’s co-fund option for the ph 3 trial in exchange for higher royalties, pending the success of a ph 2 trial readout.
I assign no value to XEN-007 as the compound flunarizine is approved ex-US outside of epilepsies for migraine prophylaxis and vestibular vertigo. No proof-of-concept data has been generated in epilepsy to-date. We await the ph 2 results from open-label trial in pediatric treatment-resistant childhood absence epilepsy (CAE) patients in 2020 for additional clarity and guidance. Current treatment options of absence seizures include ethosuxamide (1st-line), valproate and lamotrigine.
I assign no value to FLXN’s XEN-402/FX-301 preclinical program for nerve block post-op pain since Nav1.7 inhibition has proven to be a doubtful MOA for pain control at best, including XEN-402 which failed in OA pain and PHN, proving it to be a relatively difficult target in achieving effective pain control (see “Nav1.7 withholds its pain potential” in Nature; doi: 10.1038/d41573-019-00065-0).
XEN-1101, XEN-901, XEN-496 and cash (TOP); Without XEN-496 (BOTTOM)