Xenoport Soothes Investors' Restless Hearts

Xenoport (Nasdaq: XNPT  ) soothed investors' restless hearts on Wednesday by releasing positive results in a late-stage clinical trial of XP13512 for the treatment of primary restless leg syndrome. The company's lead drug candidate demonstrated statistically significant improvements compared with placebo on both of the co-primary endpoints of the trial and was well tolerated.

The results are not surprising, since this drug candidate is an improved version of Pfizer's (NYSE: PFE  ) Neurontin -- which is now available as generic gabapentin and used for a variety of conditions ranging from seizures to nerve pain to hot flashes. Xenoport's unique formulation of gabapentin studied in this trial is designed to improve absorption of the drug, resulting in less frequent dosing requirements and more consistent drug levels.

Despite current optimism in the shares of Xenoport, it may be getting ahead of itself with a market cap now exceeding $1 billion -- a fourfold increase since its IPO debut about two years ago. It remains to be seen whether XP13512 will capture leading market share, if or when the drug is ultimately approved, given that gabapentin will provide a cheaper alternative for pharmacy benefit managers.

Since many medication treatment decisions are now made based largely on cost savings, assuming similar safety and effectiveness profiles, I would like to see a direct comparison of XP13512 versus gabapentin in clinical trials instead of just comparing it with a placebo. Two ongoing phase 3 trials of the drug by Xenoport also compare the drug with placebo, and full results from the recently announced study will be presented later this year at a medical conference.

However, with just less than five bucks a share in cash, virtually zero debt, potential future milestone payments of $565 million, and the possibility of future royalties from GlaxoSmithKline (NYSE: GSK  ) , shares of Xenoport don't warrant taking an aggressive short position. Instead, it may be prudent to either take some profits off the table after the massive 40% one-day gain if you already own it, or wait for a pullback in the stock to establish a new position.

Pfizer is an Inside Value pick, while GlaxoSmithKline is an Income Investor selection. Either service is available for a free 30-day sneak peek.

Fool contributor Mike Havrilla, R.Ph., B.S., Pharm.D., is a Rite Aid pharmacist who lives and works in the small Pennsylvania town of Portage. He invites your comments and feedback.