Take Long View

What: After reporting mid stage trial results for its psoriasis drug XP23829, shares in XenoPort (NASDAQ:XNPT) tumbled by 25% earlier today

So what: Initially, investors applauded news that XP23829 outperformed placebo in both psoriasis area and severity, but a closer look at XenoPort's data may indicate that XP23829 isn't as good as investors had hoped.

The two doses that pass muster in achieving statistically significant better outcomes versus placebo were a single 800 mg dose and a twice daily 400 mg dose. A 400 mg dose once-daily didn't meet the primary endpoint of the trial, suggesting that the company will no longer attempt to develop it.

Unfortunately, relying on the higher dose cohorts for a phase 3 trial raises some questions over safety. Diarrhea was common, occurring in up to 40% of patients. Other adverse events include vomiting and nausea, and two patients developed serious conditions that may have been associated with the drug. One had acute cholecystitis and the other enterocolitis; however, both patients recovered.

Because investors were thinking that XP23829 would be easier on a patient's GI than similar competing therapies, but this study has shown evidence to the contrary, investors are ratcheting down expectations.

Now what: XP23829 is a fumaric acid ester compound that converts into monomethyl fumarate after it's taken. Fumarates have been used for decades in the treatment of psoriasis and multiple sclerosis, and if XP23829 can overcome obstacles and succeed in phase 3 trials, then it could serve as a welcome alternative therapy.

However, a lot of work remains to be done before investors get clarity into whether or not XP23829 is a clinical success and is commercially viable; therefore, investors ought to approach XenoPort carefully.

XenoPort only markets one drug currently, and sales of that drug, Horizant, are tracking south of the company's quarterly expenses, so losses are likely to mount as XP23829 moves into more expensive phase 3 trials. XenoPort expects Horizant sales to eclipse $39 million this year; however, the company spent $25.6 million on selling, general, and administrative expenses and $6.2 million on R&D in the second quarter alone. Given a crowded marketplace and uncertainty tied to the upcoming phase 3 trial, I'll be staying on the sidelines on this one. 

 

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.