Clinton Group Calls on Xenoport to Hire a New CEO and Focus on Promising Drug in its Pipeline

Clinton Group Calls on Xenoport to Hire a New CEO and Focus on Promising Drug
                               in its Pipeline

PR Newswire

NEW YORK, Oct. 15, 2013

NEW YORK, Oct. 15, 2013 /PRNewswire/ -- Clinton Group, Inc. ("Clinton Group"),
one of the largest owners of Xenoport, Inc. (NASDAQ: XNPT)("Xenoport"), sent
a letter to the Chief Executive Officer of Xenoport, Dr. Ronald W. Barrett,
calling for change in Xenoport's management and capital allocation.

As indicated in the letter, the full text of which is copied below, the
Clinton Group believes Xenoport's assets are worth substantially more than the
current stock price implies, but that changes are required for stockholders to
realize that value. Clinton Group believes the fair value for the Company is
$13 to $16 per share.

About Clinton Group, Inc.

Clinton Group, Inc. is a Registered Investment Advisor based inNew York City.
The firm has been investing in global markets since its inception in 1991 with
expertise that spans a wide range of investment styles and asset classes.

[Clinton Group Letterhead]

October 15, 2013

Ronald W. Barrett, Ph.D
Chief Executive Officer
Xenoport, Inc.
3410 Central Expressway
Santa Clara, CA 95051

Re:Capital Allocation and the Importance of Focusing on 829

Dear Dr. Barrett:

I write on behalf of the Clinton Group, Inc., the investment manager to
various funds and partnerships ("Clinton Group") that collectively own more
than 1.3 million shares of the common stock of Xenoport, Inc. ("Xenoport" or
the "Company"). This ownership stake makes Clinton Group one of the Company's
top ten owners, according to Bloomberg data.

We have been aggressively buying the Company's stock lately because we believe
Xenoport's assets are worth substantially more than the stock price implies.
We believe fair value for the Company is closer to $13 to $16 per share, but
we are also convinced that some significant changes in capital allocation and
management need to be made for stockholders to realize this value.

At the moment, we believe the Company is on the wrong course, with the wrong
management team. Having spent $750 million since the inception of the Company,
you have had no commercial success. The capital markets have assigned an
enterprise value to Xenoport of just $195 million (despite the Company having
spent multiples of that amount on research and development) and the stock is
down more than 47% and 86% in the one- and five-year periods ended Friday.
Over the same periods, the NASDAQ Biotechnology Index is up 42% and 185%,
respectively. Investors in the Company's 2005 initial public offering have
lost nearly half their investment over the last eight years.

For stockholders to expect a different outcome in the future, the Company must
change leaders, capital allocation strategy and direction. We are bullish on
the prospects for the stock, if the Board adopts these suggestions.

Fourteen years into the Company's history, Xenoport is left with three
principal assets: gabapentin enacarbil, the Company's FDA-approved drug for
the treatment of moderate-to-severe primary restless legs syndrome ("RLS"),
known as "Horizant" in the United States; XP23829 ("829"), the Company's novel
fumaric acid ester compound and pro-drug for monomethyl fumarate (or "MMF");
and cash, which we estimate to be $70 million. (FN. 1).

Horizant

It appears to us that gabapentin enacarbil (which, for ease of reference, I
will refer to as "Horizant") will not be successful commercially. We wish it
were otherwise: as stockholders we would certainly benefit if Horizant had
developed a strong clinical following or if it were on a predictable path to
commercial success or lucrative sale. However, we see no objective reasons to
be optimistic.

In the United States, the drug has been on the market for more than two years
and has garnered aggregate sales of approximately $14 million, according to
Morgan Stanley Research. You chose to partner the drug with Glaxo ("GSK"),
which was certainly sensible at the time given GSK's experience in the RLS
market with Requip and its large neurology sales force. Horizant did not sell,
which you now blame on GSK's approach to the launch. But there is no evidence
that the flaccid launch was solely or even primarily the result of GSK's
approach.

Rather, an equally or more likely thesis is that Horizant (at $125 per month)
is not differentiated enough from generic gabapentin (available for $11 per
month) or the two other generic RLS treatments (ropinirole and pramipexole,
both also available for $11 per month), other extended-release versions of
gabapentin, such as Gralise (which admittedly is not labeled for RLS), or
other branded RLS treatments, such as Neupro, Requip XL and Mirapex ER. In a
crowded market for RLS drugs, dominated by three drugs that have gone generic,
the Company chose not to do any head-to-head clinical studies, leaving doctors
and payors without any evidence of superior efficacy or differentiation. We
suspect this lack of objective, comparative studies is the real cause of
Horizant's tepid reception; GSK's marketing approach likely would not have
mattered.

Evidence from Asia bolsters our view. In Japan, Xenoport's Asian partner,
Astellas Pharma Inc., has sold just $2 million of the drug in the first 12
months of availability there. (There is hope that Astellas will achieve a
small increase in run rate as some of the year-one Japanese regulatory
restrictions are lifted, but no one appears very enthusiastic.) In May,
Astellas informed the Company that it does not want to launch the drug in the
five other Asian markets to which it had rights.

It appears Horizant will never be the commercial success we all wish it were.

XP23829

XP23829 ("829") is quite a different story. We are extremely enthusiastic
about the prospects for 829. With a pharmacokinetic profile that nearly
matches that of Biogen's Tecfidera (another MMF prodrug), so-called
"formulation 1" of 829 appears very likely to be developed into an effective
treatment for relapsing-remitting multiple sclerosis ("MS") or psoriasis, or
both. The Company's early studies also suggest formulation 1 of 829 is likely
to produce fewer side effects than Tecfidera. As promising, so-called
"formulation 2" of 829 holds the prospect of superior efficacy compared with
Tecfidera as its time-release formulation may allow more constant exposure to
MMF and improve upon Tecfidera's daily, dual-peak MMF exposure.

It appears to us that 829 is poised to follow in the footsteps of other
"second generation" biotechnology blockbusters that, even with just small
improvements in efficacy, dosing or side effects, have proven to be
substantial clinical and commercial successes. Like 829, these
second-generation drugs – examples include Abraxane (which improved upon
paclitaxel), Vyvanse (improving upon Adderall) and Eylea (improving upon
Lucentis) – were built around the known efficacy of chemically related "first
generation" drugs (or use the same mechanism as that parent). Building a
product on established science in this way has proven to be relatively lower
risk than the typical biotechnology endeavor and enormously profitable for
investors as even small improvements can be clinically and commercially
significant.

That is the opportunity – and it is not small – with 829. Citigroup Research
projects that Tecfidera will garner sales of $5 billion globally in 2019,
growing to more than $8 billion annually by 2027. After just six months on the
market, Tecfidera already has captured 11% market share among MS drugs,
according to Credit Suisse Research, and its commercial launch has been
characterized as having "stellar performance" that makes it the "holy mother
of launches." (FN. 2)

The capital markets have certainly taken note of the MMF opportunity. Since
the time Biogen announced Phase III results of BG-12 (the compound that became
Tecfidera) on April 12, 2011, Biogen's market capitalization has grown by more
than $36 billion. Most of that growth, in our view, is attributable to
Tecfidera's prospects as the only approved MMF prodrug on the market.

Yet Tecfidera, having proven that MMF is extremely effective in treating MS,
is vulnerable to competition. Reported side effects, primarily
gastrointestinal events and flushing, affect more than 40% of patients, and
Tecfidera's dosing pattern and pharmacokinetics may not be ideal.

Xenoport's 829 – having received just $10 million of research and development
support (FN. 3) from the Company – is positioned to be a second-generation MMF
prodrug and presents the Company with a massive commercial opportunity. Given
its overlapping pharmacokinetic profile with Tecfidera, we believe the
Company's ability to demonstrate efficacy in MS and psoriasis is a low risk
proposition. And the early signs suggest, as noted, that 829 may well have
fewer side effects or, in formulation 2, may even be superior in efficacy.

Developed correctly and expeditiously, 829 thus has the opportunity to share
in the MMF market with Tecfidera as an equivalent or superior compound for
treating MS. We believe 829 could be approved, and in the market, for MS by
2019 and for psoriasis by 2017. With Tecfidera protected by patents through at
least 2028 (and 829 protected by non-overlapping composition-of-matter patents
even longer), the two compounds could split the commercial market for MMF for
many years. Even modest market share for 829 would generate hundreds of
millions in cash flow to Xenoport annually.

The Path Forward

The significant economic prospects for 829 are clearly not fully priced into
the stock. Instead, the capital markets have seemingly attributed nearly all
of the value of MMF as a treatment for MS (and psoriasis) to Biogen. We think
we know why.

We believe the capital markets have largely ignored the prospects for 829
because Xenoport's operational, strategic and capital allocation history
suggests that Xenoport will not execute well on this golden opportunity. The
stock market is betting against our management team and strategy, not against
our compound. (Consider, for example, the 2013 class of biotechnology IPO
companies, many of which carry valuations that are multiples of Xenoport
despite having less developed science, a riskier development path and
uncertain end-market dynamics. Nevertheless, these "fresh" public companies
have captured the stock market's attention because their management teams are
well regarded, they appear focused and they have not yet disappointed
investors.)

I am sorry to say that Xenoport, on the other hand, has given the market good
reason to be skeptical. In its fourteen-year history, the Company has incurred
cumulative losses of $500 million, chasing various markets and drug prospects,
always with enthusiasm, but seemingly without discipline and never, so far,
with commercial success. With the Company's cash hoard whittled to just $70
million at the hands of these various failed efforts, the Company again
appears to be distracted from advancing its highest probability prospect (829)
in what we believe will be an unprofitable, and likely fruitless, effort to
salvage Horizant.

As you know, the Company has announced plans to spend as much as $35 to $40
million of its remaining cash in an attempt to demonstrate that Horizant is
commercially viable. We are skeptical that it will work, but more importantly,
we are flabbergasted that a small-cap biotech company would chose to spend
some of its last dollars (which are not cheap) to hire a contract sales force,
produce marketing collateral, hold science talks for doctors, develop sales
operations and distribution capabilities and build other internal capabilities
(such as FDA reporting) that are necessary to be a full commercial enterprise.
This is not the prerogative of $250 million biotech companies. That is
especially so when the Company has an exceptional compound in its lab, just
waiting to be developed.

Indeed, we see these renewed and expensive efforts on Horizant as little more
than a Hail Mary pass, without any objective evidence to suggest that the
effort will be successful. (Query why, if there were such evidence, another
party with more and cheaper capital has not rushed in to fund the effort in a
structure that would be beneficial for both it and Xenoport.) We are mindful
that you and the Company expended a lot of hard work (and capital and emotion)
in the development of gabapentin enacarbil, in the hard-won FDA approval, in
the initial licensing success and in the subsequent litigation and settlement
with GSK. But sunk costs and emotion have no place in capital allocation
decisions.

The reality is that the drug had a failed launch and it is nearly
unprecedented for a drug re-launch to achieve significantly different
commercial results. We fear the book on Horizant has been written.

Importantly, the Company also no longer has the luxury of "excess" capital. It
is time for Xenoport to be ruthless about its portfolio of assets and
disciplined in its capital allocation. The only proper question for the Board
and management team now is: how does the Company maximize the value of its
assets for the benefit of the current stockholders?

The Company is down to its last $70 million. With the stock severely
undervalued, doing an equity capital raise should be off the table. (More on
that math later.) The Board and management team should assume that the
remaining cash is the only cash the Company can invest. Xenoport needs to put
its $70 million to work in the highest probability-weighted investment
projects available.

We are convinced that the capital can all be put to work, with extremely high
probability adjusted returns, on the further development of 829. The capital
could be used for a Phase 2 study in MS, or a Phase 2 and Phase 3 study in
psoriasis, or some combination of these. Spending on drug development – the
core mission of the Company – has a much higher expected return than hiring
sales people to pitch doctors. Indeed, our models, which we are happy to share
with you, suggest that spending the $70 million on 829 would advance the
science far enough along to garner a significantly improved partnering deal on
829 or a sale of the entire Company at a significant premium to today's stock
price.

We estimate the net present value of 829 to the existing stockholders (in the
scenario in which the Company moves the science along further by using
substantially all of its cash on this effort) at approximately $600 to $700
million, or $12.50 to $14.50 per share. The major assumptions used in our
model, which we believe are very conservative, are described in the appendix
to this letter.

By contrast, spending less on 829's development (e.g. so the Company can hire
a contract sales force to market Horizant, as the current plan calls for) is
likely to result in a less advantageous licensing deal on 829 and a lower
premium on the sale of the Company. Simply put, the science will not be as far
along and the risks and costs will be higher for a partner. When we model
those assumptions, based on as much market data as we can gather, we conclude
that 829 has a net present value to stockholders in this scenario of $450 to
$550 million.

Thus, we believe that were the Company to spend the $30 to $40 million of cash
currently earmarked for Horizant commercialization instead on 829 science, the
increase in value to stockholders would be approximately $150 million (the
difference between $650 million and $500 million), or about $3 per share. We
also believe that the signaling effect of allocating capital properly – and
demonstrating management's confidence in its 829 program – would in any event
lead to a higher stock price, as more of the $650 million in 829 value that we
estimate becomes priced into the stock.

Dr. Barrett, we have heard you say that you believe you can have it both ways.
That essentially you can spend the $30 to $40 million on Horizant and then
raise additional capital to advance the 829 program. We are supportive, of
course, of raising non-dilutive capital, if you can do so before you spend on
Horizant and if doing so will augment the value of the Company's assets
without distracting management. But, given where the stock trades today, it
would be a huge mistake to dilute the current stockholders' ownership of 829
(which is worth, in our view, more than three times the total enterprise value
of Xenoport) to raise capital for Horizant commercialization. That is
especially true given that Xenoport has absolutely no experience
commercializing a drug and the returns on spending $30 to $40 million on
Horizant are completely speculative.

The math is relatively simple. Assume that Horizant is worth $50 to $100
million today ($1 to $2 per share), consistent with what several sell-side
analysts have written. Even if spending an additional $35 million on Horizant
could be expected to increase Horizant's value by $50 million (color us
skeptical), stockholders would be worse off if that $35 million is taken away
from 829 development or raised by selling equity. And, of course, the math is
even worse for existing stockholders if, as we suspect is likely, Horizant's
value is left unaffected by the $35 million in spending. See below.

                                        Alternatives
                                        Split existing      Raise additional
                        Advance 829;    capital
Description             sell                                equity and spend
                                        between Horizant
                        Horizant                            on 829 and
                                        and 829             Horizant
Optimistic Case for
Horizant
Value of 829            $ 650           $ 500               $ 650
Value of Horizant       $ 100           $ 150               $ 150
Total Equity Value      $ 750           $ 650               $ 800
Shares Outstanding      47.7            47.7                55.2
Price Per Share (a)     $ 15.72         $ 13.63             $ 14.50
 Discount to                          -13.3%              -7.8%
Optimal
Downside Case for
Horizant
Value of 829            $ 650           $ 500               $ 650
Value of Horizant       $ 50            $ 50                $ 50
Total Equity Value      $ 700           $ 550               $ 700
Shares Outstanding      47.7            47.7                55.2
Price Per Share (a)     $ 14.68         $ 11.53             $ 12.69
 Discount to                          -21.4%              -13.7%
Optimal
(a) $35 mm capital raise assumed to cost 6%; offering priced at 12.5% discount
to market
($ in millions, except per share prices)

The Company, in our view, has sub-optimally deployed stockholder capital for
too long. It is time, in our view, for some focused efforts and belt
tightening. With just 88 employees, we are befuddled by the cost structure of
the Company, which has incurred "selling, general and administrative" expenses
(not including R&D) of nearly $30 million per year over the last five years,
including more than $2.6 million per year for your services. (We also note
that less than 10% of your bonus last year was dependent on progress with
829.) And while annual SG&A costs have grown over those five years, the
Company cut its R&D budget nearly in half during the period. Now the Company
spends more on SG&A than it does on R&D.

Stockholders are much worse off. From 2008 to 2012, while you collected more
than $16 million in pay, grew SG&A expenses, cut the R&D budget in half and
spent less than $10 million on 829, the stock dropped 86%. We recognize as
well that your interests and ours as stockholders are not very well aligned.
Despite serving as a co-founder of the Company and its Chief Executive Officer
for the past twelve years, we calculate that your equity stake in Xenoport is
currently worth less than $1.4 million.

Dr. Barrett, we believe the Company needs a new Chief Executive Officer who
will think like an owner, with a mandate to urgently execute on the Company's
best prospects and grow the value of its most promising asset, 829. We
encourage you to step aside and to ask the Board to search for a new Chief
Executive. More importantly, we urge you to stop your spending on Horizant
immediately and to pursue with exigency the development of 829.

Please know that we believe these changes are critical for stockholders to
realize the full and fair value of the Company's assets. Accordingly, if you
and the Board choose not to move along this path, we will have no choice but
to exercise our various rights as stockholders to ensure the value of the
Company is preserved and grown.

We are available at any time to discuss these matters with you or members of
the Board of Directors.

Best regards.

//s//

Gregory P. Taxin
President

Appendix
Valuation Model Assumptions
Spend Capital Exclusively on
829
  Formulation One
    Market Timing             2019-2028
    Market Share of MMF       Slow growth from 2% to 20%
    Pricing                   10% discount to projected Tecfidera pricing
    Royalty Rates             15% to 35% as cumulative sales increase
                              (slightly higher than Horizant)
    Probability               30%
  Formulation Two
    Market Timing             2019-2028
    Market Share of MMF       Slow growth from 5% to 50%
    Pricing                   Same as Tecfidera
    Royalty Rates             15% to 22% as cumulative sales increase
    Probability               10%
  Psoriasis
    Market Timing             2017-2028
    Market Share              1.5% to 5% of moderate-to-severe psoriasis
                              patients
    Pricing                   Slight discount to projected biologics pricing
    Royalty Rates             15% to 35% as cumulative sales increase
                              (slightly higher than Horizant)
    Probability               10%
  Cash Usage
    Cash Used                 $50-60 million
    Upfront Milestone         $100 million
    Timing                    2017
    Probability of Licensing  50%
Weighted-average cost of capital assumed to be 10%

Spend Capital on Horizant and 829
   Formulation One
      Market Timing               2019-2028
      Market Share of MMF         Slow growth from 2% to 20%
      Pricing                     10% discount to projected Tecfidera pricing
      Royalty Rates               15% to 30% as cumulative sales increase
                                  (same as Horizant)
      Probability                 30%
   Formulation Two
      Market Timing               2019-2028
      Market Share of MMF         Slow growth from 5% to 50%
      Pricing                     Same as Tecfidera
      Royalty Rates               10% to 16% as cumulative sales increase
      Probability                 10%
   Psoriasis
      Market Timing               2017-2028
      Market Share of MMF         1.5% to 5% of moderate-to-severe psoriasis
                                  patients
      Pricing                     Discount to projected biologics pricing
      Royalty Rates               15% to 30% as cumulative sales increase
                                  (same as Horizant)
      Probability                 10%
   Cash Usage
      Cash Used                   $20 to $30 million
      Upfront Milestone           $50 million
      Timing                      2015
      Probability of Licensing    50%
Weighted-average cost of capital assumed to be 10%.

Footnotes:

FN. 1: The Company reported $93 million at June 30, 2013. Consistent with
sell-side analysts, we estimate that the Company has used approximately $23
million in cash since then.

FN. 2: See "ViewPoints: Tecfidera Streaks Towards Blockbuster Run Rate,
Questions Remain Over European Launch," First Word Pharma, July 28, 2013.

FN. 3: See Form 10-Q, June 30, 2013 at 17 and Form 10-K for December 31, 2012
at 71.

SOURCE Clinton Group, Inc.

Website: http://www.clinton.com
Contact: Connie Laux, +1-212-825-0400
 
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