Of all the names in our coverage universe Xenon (Nasdaq: XENE) has been the most resilient during one of the bleakest biotech tapes in history. After shooting up 100% off the convincing Ph2b X-TOLE epilepsy data in Oct 2021, XENE has held steady between $27-$33 over the last 9 months, while the XBI has fallen 40%. Perhaps even more impressive than the stock’s resilience has been the company’s success in raising capital during this biotech nuclear winter. Over the past 9-months XENE raised $632mm through two follow-on offerings, giving it an estimated $750mm in treasury today. XENE is clearly well financed to execute on its ambitious clinical plans for lead asset XEN1101, but the recent financings have also pushed the share count to 65mm giving it a substantial market cap of approximately $2b. XENE arguably has one of the most active CNS pipelines in the SMID biotech universe, with four Ph3 and two Ph2 studies either ongoing or planned to start shortly, but without visibility towards a clinical catalyst in the near-term, what can investors look towards to break XENE out of its current range-bound status?
XENE has laid out an ambitious Ph3 epilepsy program for XEN1101 that includes two Ph3s in focal onset seizures (FOS) and one in primary generalized tonic clonic seizures (PGTCS). The first of these Ph3s is scheduled to start this year and we are assuming the earliest data would be available is 2024. In our conversations with XENE investors, there is a high degree of confidence in XEN1101’s success in FOS, given the robust data from the Ph2b X-TOLE study. But with a $2b valuation, there is an argument that success in FOS is increasingly getting priced in, and with data 2 years away, how much additional upside is there in the near term from the FOS program? Clearly, some big investors felt there was additional near-term upside when they funded the company just a few weeks ago to the tune of $287mm at $30.50/share. In our opinion, this money didn’t come in to just patiently wait for the Ph3 XEN1101 epilepsy data in 2+ years. For now, we believe XEN1101 in epilepsy should be viewed as downside protection – a late-stage program with an above-average chance of success but with timelines that are far on the horizon. Instead, we believe investors who own XENE today are, or at least should be, focused on XEN1101 for major depressive disorder (MDD) for their near(er)-term upside.
A quick reminder that XEN1101 is a 2nd generation potassium channel opener that was originally discovered and developed by Valeant to improve upon some of the known liabilities of their FDA-approved 1st generation product, ezogabine. We provide this reminder because the rationale for XENE pursuing MDD with XEN1101 comes from independent data recently generated with ezogabine. Investigators at Mount Sinai ran a small 45-patient proof of concept study demonstrating statistically significant improvements with ezogabine vs placebo across a number of depression scales.
These impressive data were the impetus for XENE initiating their own Ph2 150-patient MDD study with XEN1101. XENE has guided that top-line MDD data should be available in 2023, and we would expect them to sharpen this guidance before YE22. In our opinion, these MDD data are important for XENE for a number of reasons; (1) we expect MDD top-line data to be XENE’s next meaningful clinical catalyst (2) MDD success gives XENE another blockbuster indication to pursue with XEN1101 (3) MDD success, albeit only Ph2, could be a meaningful source of differentiation for XEN1101 as a commercial epilepsy asset (4) MDD success for reasons 2 & 3 should broaden the potential M&A suitors for XENE.
MDD is the most common psychiatric comorbidity in patients with epilepsy. In a highly competitive epilepsy market, where patients generally step through generic drugs before being offered a branded product, differentiation is key. If successful in FOS, XEN1101 would become the only FDA-approved potassium channel opener (ezogabine is no longer available), a nice source of differentiation on its own, but couple that with proven efficacy in managing MDD, a common comorbidity, and the path towards XEN1101 becoming the largest branded anti-epileptic drug in the U.S. becomes all the more plausible. So Ph2 success with XEN1101 in MDD could have enormous benefits to its adoption among epilepsy prescribers, long before the company completes Ph3 MDD development and potentially achieves an expanded label. In our opinion, this is what the smart money biotech funds are making a bet on – XEN1101’s success in MDD in 2023, the halo-effect that positive MDD data could have on XEN1101 as a commercial epilepsy asset, and then a few years further down the line, the potential for a new indication / label-expansion for XEN1101 into MDD. Again investors likely feel emboldened to make this XEN1101 MDD bet because there is confidence in XEN1101’s Ph3 epilepsy success in 2024 and beyond.
Our assumption is that Ph2 XEN1101 MDD top-line data is the next meaningful clinical catalyst on XENE’s horizon, however, there is a possibility that Ph3 XEN496 data in children with KCNQ2 epilepsy could arrive sooner. XENE has currently guided the “anticipated completion” of the Ph3 KCNQ2 study for 2023, juxtapose that with their Ph2 MDD guidance of “topline results anticipated” in 2023, and we’re left wondering what exactly does “completion” mean? This ambiguous guidance for XEN496 leads us to assume that XENE isn’t confident that KCNQ2 Ph3 top-line data will be available in 2023. Perhaps we are reading too much into the difference in XENE’s guidance language here, nonetheless, our assumption is that investors will see Ph2 MDD data before Ph3 KCNQ2 data. Regardless of the timing of data, there is little debate around the weighting investors, and the company, place on the two assets, with XEN496 a distant second to XEN1101. The narrative around XEN496 could change, especially once XENE sharpens its guidance on the timing of top-line data, but for the time being, we believe investors are focused on XEN1101.
We will conclude with a quick comment on XENE and the potential for M&A. XEN1101 for FOS would certainly have appeal to the likes of UCB and Lundbeck, two of the largest branded epilepsy companies, but is it appealing enough to incentivize other CNS companies, like a Biogen, to step up and use XEN1101 as a beachead to enter the heavily genericized adult epilepsy market? Again, this is where success for XEN1101 in Ph2 MDD could impact the likelihood for XENE M&A. We fully acknowledge that depression, like epilepsy, is a genericized market, but a branded drug, that could play in both markets should widen the field for potential suitors and increase the probability of M&A in our opinion.