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Source: U.S. Food and Drug Administration.

No one ever said that discovering and developing a drug was easy.

According to statistics from Medscape, just one in every 5,000 to 10,000 therapies tested in preclinical studies will ever make it to pharmacy shelves. Developing a new drug is a time consuming and costly process for biotech and pharmaceutical companies. If a drug fails in the discovery stage, or in preclinical or clinical trials, there are no guarantees that a drug developer will ever recoup those costs.

But if a company can get a drug approved by the Food and Drug Administration, the rewards can be enormous. Think about Gilead Sciences, which ponied up what seemed like an astronomical $11 billion for Pharmasset in 2011 to get its hands on sofosbuvir, or what's now known as Sovaldi. Today, Sovaldi and Harovni (a Sovladi-based cocktail therapy) generate better than $10 billion per year in sales as treatments for hepatitis C. That's a pretty substantial return for the investment considering the length of time both drugs will be protected from generic competition, and it more than offsets the losses from previously unsuccessful studies.

Two key components for the drug development process
Developing a drug requires proving two key components: safety and efficacy. The latter is what the vast majority of investors tend to focus on, because we simply assume that for an experimental drug to be better it has to demonstrate improved disease- or disorder-fighting efficiency relative to the current standard of care.

However, safety will often play a monumental role with the FDA. In fact, if you've never taken a close look at the protocol of the drug development process, there isn't a single stage where safety isn't at minimum a co-primary focus. If a drug isn't believed to be safe, or if it offers a considerably worse safety profile than existing therapies on the market, its prospects for approval or success are often limited.

That is, unfortunately, what XenoPort's (NASDAQ:XNPT) shareholders learned firsthand this week.

Safety trumps efficacy
On Tuesday morning, XenoPort announced positive midstage study results for one of its leading compounds, XP23829, an oral prodrug being targeted as a treatment for psoriasis and relapsing forms of multiple sclerosis. The midstage study release focused on results from the psoriasis study.

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"QD" means once daly, "BID" means twice daily. Source: XenoPort.

The study examined XP23829's effect on patients with moderate-to-severe plaque psoriasis between baseline (the start of the trial) and week 12. The results were measured using the Psoriasis Area and Severity Index, or PASI score. Both the 400 mg and 800 mg once-daily dose, as well as the twice-daily 400 mg dose, handily outperformed the placebo. Whereas the placebo produced a mean PASI reduction of 25% at week 12, the 400 mg once-daily dose produced a 38.1% mean reduction, the 800 mg once-daily dose delivered a mean 48.2% PASI score reduction, and the twice-daily administration led to a 50.7% mean PASI score reduction.

Considering that approximately 2% of the global population has psoriasis, including some 6 million people in the U.S., this positive data could be a major step in the right direction for XenoPort.

The key word there is "could," because XP23829's efficacy only tells half the story.

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Source: XenoPort.

Looking at the tolerability and safety profile of XP23829, things weren't as peachy. Although instances of flushing were similar between both cohorts, gastrointestinal issues were worse for patients receiving XP23829. Diarrhea-based adverse events ranged between 22% and 40%, which is consistent with fumaric acid ester class drugs, but it was notably higher than the 15% recorded by the placebo group. Furthermore, XenoPort admitted in a conference call that close to a third of its patients in the twice-daily XP23829 cohort had to drop out due to the side effects (14 of 48 patients). Two serious adverse events were also reported -- acute cholecystitis and enterocolitis -- that may be linked to XP23829, though both patients recovered.

The adverse events profile hasn't deterred XenoPort, which plans to present more data on its study later this month and move forward with a phase 3 study.

Celgene shareholders have to be relieved
On the flipside, Celgene (NASDAQ:CELG) and its shareholders are likely relieved by the safety concerns surrounding XP23829.

An important component of Celgene's long-term growth plan is oral PDE-4 inhibitor Otezla, which is an anti-inflammatory drug that Celgene is hoping to gain more than a half-dozen label approvals for. Currently, the drug is approved by the FDA for psoriatic arthritis and psoriasis. Following its launch last year, Celgene has witnessed sales of Otezla ramp up to $90 million in the second-quarter. By 2017, Celgene anticipates Otezla could be generating $1.5 billion, or more, in annual sales.

While Otezla also had a low single-digit percentage of serious adverse events pop up in its phase 3 clinical studies leading to approval, Otezla's gastrointestinal side effects profile in multiple phase 3 studies was considerably better than XenoPort's experimental drug in its phase 2 trial.

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Source: XenoPort.

Additionally, in terms of efficacy Otezla appears to work a little quicker than XP23829. At week 16, Otezla delivered a PASI-75 score (i.e., a reduction in PASI score of at least 75%) in 30% of moderate-to-severe plaque patients. Comparatively, XP23829 demonstrated a PASI-75 in just 21.7% of patients at week 12 for the twice-daily dose. XenoPort's management was clear that over longer periods of time its therapy is expected to be quite competitive with existing standards of care, although further studies will be needed to determine if that is indeed the case.

Ultimately, XenoPort may be fighting an uphill battle that it can't win. Without a superior safety profile, and with a relatively similar efficacy profile to that of Celgene's Otezla, XP23829 may have difficulty differentiating itself if approved by the FDA as a psoriasis treatment.

Sometimes that's just the way the cookie crumbles in the biotech sector: one company's pain is the other's gain.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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