Xenon Pharmaceuticals (NASDAQ:XENE)

Xenon is yet another of the myriad biopharma IPO's since 2013 that I've tried to ignore because I simply haven't had time to add them to my database. In the case of Xenon, that's probably fortunate because I finally reviewed the company today and decided I like the pipeline and valuation quite a bit. I have no doubt that I probably would have felt the same way at a much higher share price had I looked at the stocks a few months ago.

The impetus for my belated analysis of the stock today was the news of a failure in Xenon's pipeline. Collaborator Teva announced that their phase IIb trial of topical Nav1.7 inhibitor TV-45070 for pain from knee osteoarthritis had failed to meet the primary endpoint. The stock was down quite a lot but my reaction to the news was to scratch my head. A topical preparation for knee joint pain? That made no sense to me at all. The knee joint is a deep structure that is separated from the skin by several dense layers of tissue. Knee joint pain is mediated by nerve endings in the periostea of the femur and tibia, not by cutaneous nerves that would be accessed by a topical. Either I didn't understand knee anatomy or Xenon and Teva management weren't selecting their targets very carefully.

When I saw the severity of decline in the share price and took a quick look at Xenon's market cap of 135M, cash of 75M, and deep pipeline it seemed like there was a good chance of a rebound. On the other hand, my recent attempts at catching knives have resulted in severe palmar lacerations so I held back pending a more detailed analysis. Naturally, the share price rose from 7.5 when I looked at the stock to 9.5 at the close.

If one forgives Xenon and Teva for an apparent poor choice of a goal in their first clinical trial, Xenon looks quite attractive at the current valuation. A failure in knee joint pain doesn't impeach Nav1.7 blockade as an effective therapy for appropriate pain conditions, and in fact a phase IIb trial of TV-45070 for post-herpetic neuralgia is in progress with topline data expected in H2 2016. There are two problems here - one is that 12-18 months is quite a long time in biotech and the second is that I'm not convinced that PHN is such a great target for a topical agent either. It can be difficult to determine where a pain signal originates and it is very possible that neuropathic pain originates in sensory ganglia far from the skin, which is why most approved medications for neuropathies like anticonvulsants and antidepressants act systemically or centrally. However, anticipation of positive results for a highly remunerative indication like PHN could exert substantial upward pressure on Xenon's share price some time in the next year.

Xenon has also licensed an oral Nav1.7 blocker to Genentech, with a phase I trial expected to complete enrollment this year. Xenon has an unpartnered SCD1 inhibitor XEN801 which will likely begin clinical development for acne later this year. SCD1 knockout mice are deficient in sebaceous glands, but the assumption that somehow an SCD1 inhibitor will prevent acne in teenagers with established sebaceous glands seems to be somewhat of a leap of faith. Given that Xenon tried to block knee joint pain with a cutaneous topical, I'm not giving them benefit of the doubt on this one. The company also intends to file an IND for a Nav1.6 sodium channel blocker for Dravet syndrome in 2016. I don't know much about this, but the orphan epileptic disorder Dravet seems to have become a popular target of late. Finally, it is important to remember that Xenon had an important role in developing Glybera, which was brought to the EU market by UniQure although it remains to be seen if it generates significant royalties for Xenon.

Glybera brings me to my final question regarding Xenon. Why does this company seem to have difficulty converting their apparently considerable discovery capabilities into a respected biopharma pipeline? They practically gave away Glybera to another small biotech instead of partnering up with big pharma. Despite having apparently discovered the Nav1.7 mechanism in 2007 (http://www.ncbi.nlm.nih.gov/pubmed/17470132), they are only in midstage clinical development eight years later. The tiny biotech Icagen scooped them in 2010 with a Nav1.7 blocker that they parlayed into a buyout by Pfizer. I'm not sure if Pfizer took this anywhere, but Biogen Idec is now in the Nav1.7 game as well thanks to their acquisition of privately held Convergence Pharmaceuticals earlier this year.

Despite the fact that I'm nosing around Xenon here, I'm fully aware that I'm on the opposite side of a position I frequently find myself in: watching others get excited about a great buying opportunity that I bought into months ago when it was a great buying opportunity at double the price. There's a good reason why this stock is trading at all time lows even if I'm not astute enough to pick up on it. Nevertheless, I've had some good luck with stumblers like Tracon and Aldeyra of late so I might pick up a thousand shares soon if the share price remains stable below 10.