XenoPort: Long-Term Upside

We highlight XenoPort, Inc. (XNPT - Analyst Report) and GlaxoSmithKline, plc (GSK - Analyst Report).

We consider XP-13512, to be called Solzira in the U.S., to be a potential blockbuster opportunity with a full label -- including restless leg syndrome (RLS), neuropathic pain (PHN / PDN) and migraine prophylaxis. As for now, we are holding off on modeling sales in neuropathic pain and migraine until we see more (or perhaps any positive) data.

However, what we have seen so far in RLS looks highly encouraging, and we are pleased to see the NDA back under review. We believe that if XenoPort (XNPT - Analyst Report) can see Solzira to commercialization, it will improve the future partnering plans for other compounds such as XP-19986, and allow management to move forward with other candidates such as XP-21279.

XenoPort's stock is down some 65% over the past twelve months due to a string of negative announcements. These include: the failure of XP-13512 by Astellas in PDN in Japan, the withdrawal and subsequent delay in approval of Solzira by Glaxo (GSK - Analyst Report) in the U.S., the recently failure of XP-19986 in a phase II GERD program, and most recently the failure of XP-13512 by Glaxo in PDN.

However, we consider all of the above hiccups only minor, with very little if any impact on the long-term future profitability of the company. What management is really focusing on now is the Solzira NDA (currently under review) and the building of a 50 to 100 person sales force for co-promotion.

Plus, the option to co-promote Solzira in the U.S. has the potential to transform the company from a research driven biotech to a fully-integrated specialty pharmaceutical company. This is where the true upside exists.

Our current rating is Hold with a $16 target. We think the company can earn $0.80 in 2012 and potentially $3.72 in EPS in 2013. Our $16 target is based on a 20x multiple on our 2012 EPS estimate, discounted back to present day at 20%.

We will become significantly more bullish on XenoPort after the approval of Solzira. In the meantime, we believe investors can be patient with the name.