To me, the main challenge in today’s biotech market is finding good quality assets with attractive valuations. There are definitely a lot of promising programs out there but valuations are often hard to justify as they reflect limited development risk and unrealistic commercial potential. From a risk/reward standpoint, it is hard to get excited about valuations of >$0.5B for companies before clinical proof of concept and $2-5B for clinically validated programs.

From that perspective, Xenon (XENE) is a market anomaly, with two promising clinical stage programs, a robust discovery platform and a market cap of just under $100M. Its two epilepsy programs, XEN1101 (Kv7 opener) and XEN901 (Nav1.6 inhibitor), are still in P1 but at the current levels the upside potential is too significant to ignore.

Not the typical CNS programs

XEN1101 and XEN901 do not have the typical risk profile seen with other P1 CNS programs, they are de-risked on multiple fronts:

• Genetic validation in humans – Mutations in Kv7.2 and Nav1.6 are associated with severe forms of epilepsy in humans
• Pharmacologic validation in humans – There are approved anti-epileptic drugs that have overlapping MOAs with XEN1101 and XEN901
• “Precision medicine” regulatory route – XEN1101 and XEN901 may be pursued in biomarker-defined populations which represent a fast route to market with a high likelihood of success

Selectivity and safety profile as key differentiators  

XEN1101 was designed based on clinical experience with ezogabine (Potiga), an FDA approved Kv7 opener with proven clinical efficacy that was withdrawn from the market due to safety concerns. XEN1101 is more potent and does not seem to dimerize or bind melanin (seen as the primary liability with ezogabine as it leads skin and eye pigmentation). It also has a better PK profile that should support daily dosing vs. thrice daily with ezogabine.

For XEN901, the primary differentiation from older Nav blockers lies in the selectivity towards Nav1.6, which is thought to be a primary driver of seizures. XEN901’s potency and selectivity led to a dramatically improved therapeutic window in mice (see figure below), which will hopefully translate to the clinic. According to Xenon, XEN901 is the only Nav1.6-selective molecule in development.

P1 data further provide more de-risking

Earlier this month, Xenon presented P1 data for XEN1101 and XEN901. The drugs appear safe, have a favorable PK profile, and exposure is at the predicted efficacy range at relatively low doses.

For XEN1101, there are even hints of biological activity using brain imaging tests that had been reported with ezogabine. Interestingly and with the caveat of cross-trial comparisons, XEN1101 demonstrated a stronger imaging signal than what is reported with ezogabine at 20-fold lower dose. The company plans to present imaging data for additional healthy volunteers as well as safety data for repeated dosing. Assuming no safety issues arise, an efficacy P2 is expected to start towards the end of the year.

Potential utility for XEN1101 in ALS

Kv7 is garnering attention as a target for ALS, following the launch of QurAlis, which is also developing a next-gen Kv7 opener. QurAlis’s scientific founders identified Kv7 as a potential target in patient-derived cells (published here) and used ezogabine to demonstrate their hypothesis (see figure below).  Data on QurAlis’s Kv7 opener are limited but Xenon appears to be 2-3 years ahead and could pursue ALS as a second indication.

Source: Cell Rep. 2014 Apr 10; 7(1): 1–11.

Upside potential

As a small cap biotech, Xenon comes with all the usual risks (no clinical proof of concept, long timelines, high rate of cash burn etc.) but at a valuation of $100M these are risks I am happy to take. Commercial potential for a new anti-epileptic drug with a favorable safety profile is in the $400M-$500M range, not including the orphan indications that could add additional ~$150M per indication. If safety data for XEN1101 and XEN901 continue to look clean (long term safety data is expected by YE18), it is hard for me to envision Xenon staying independent at these levels.

Portfolio updates

I am adding a third position in Xenon following the recent P1 data and the imaging signal. I am also adding Endocyte (ECYT) and selling Avexis (AVXS) following the Novartis acquisition.

Portfolio holdings – May 28, 2018