XENE action: Xenon has a great story but too high a price

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Xenon Pharmaceuticals Inc. (NASDAQ:XENE) is a biotech stock that has nearly doubled in the past month. This is a definition of hot stock in the biotech industry, which can be very volatile and heavily influenced by news related factors. According to Market surveillance, “Xenon’s products include XEN496, XEN1101, XEN901 and XEN007”. And the big news that has been pushing prices up lately for XENE stock concerns XEN1101, a drug for the treatment of epilepsy.

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The XENE share can provide us with a valuable lesson in the stock market.

On October 14, 2021, XENE stock hit a 52-week high of $ 34.87. Data from Yahoo! Finances show that the 52-week range for this biotech stock is $ 9.32 to $ 34.87. The closing price of XENE stock on October 15, 2021 was $ 33.66. The lesson I’m referring to is about different approaches to investing in stocks – choosing either expectation or reality (i.e. fundamentals).

Most of the time, one of these two investment philosophies determines the stock price and the two rarely point in the same direction. But when the two ways of picking stocks are in harmony, then that’s called the sweet spot, the best of both worlds.

XENE action: expectations are high to fight against epilepsy

Xenon Pharmaceuticals is a “clinical-stage biopharmaceutical company committed to developing innovative therapies to improve the lives of patients. patients with neurological disorders.”The focus is on epilepsy, so when positive news broke on October 4 about the clinical trial results for XEN1101, XENE stock doubled, closing at $ 31.50.

The company issued a press release that showed the following key findings:

  • “The main objective of the study was to assess the dose-response trend of XEN1101 in reducing the monthly frequency of focal seizures, based on a classified ANCOVA model. The median percent reduction in monthly focal seizure frequency was 52.8% in the XEN1101 25 mg group, 46.4% in the XEN1101 20 mg group, and 33.2% in the XEN1101 10 mg group compared to at 18.2% in the placebo group.
  • “XEN1101 was generally well tolerated in this study with adverse events (AEs) consistent with other ASMs. The incidence of treatment-related adverse events (TREs) was higher in the treatment groups than in the placebo group, with 62.3% of patients in the placebo group, 67.4% of patients in the XEN1101 10 mg group, 68 , 6% of patients in the XEN1101 10 mg group, the XEN1101 20 mg group, and 85.1% of patients in the XEN1101 25 mg group presenting at least one TSE.

These positive clinical trial results will help Xenon Pharmaceuticals continue clinical development on the path to commercialization of XEN1101. This is the part about high expectations.

A report on the global epilepsy market says global demand for epilepsy drugs was $ 4.6 billion last year and is expected to reach $ 5.8 billion by 2027, “at a CAGR of 3.3%.” The US market was around $ 1.3 billion in 2020, and he noted China, Japan, and Canada as other growth opportunities in this sector.

Investors now expect Xenon Pharmaceuticals to gain a significant share of this global epilepsy drug market. But what if the expectations don’t materialize? Competition in the pharmaceutical industry is very intense. So while we are optimistic about Xenon Pharmaceuticals’ top line growth, do we still need to look at its fundamentals?

Net losses and public offering to support research

The main factors that move stocks are expected earnings and real growth; business risk; and macroeconomic factors such as interest rates, unemployment rate, employment and economic growth.

The Xenon Pharmaceuticals Annual Report 2020 reported revenue growth to reach $ 32.1 million for 2020, up from $ 6.8 million for 2019. Most analysts see it as a growing business.

I note, however, that research and development expenses have increased for 2020 to $ 50.5 million from $ 38.8 million in 2019. The operating result is negative, and the majority of the cash is provided only by fundraising activities such as last public offering of $ 345 million.

Ironically, this decision to develop and fund clinical trials of all of the company’s products appears to be more efficient and cheaper for Xenon Pharmaceuticals, as issuing shares is considered cheaper than issuing debt. But what is good for the company is not good for the shareholders because of the dilution of the shares.

The financial report for the second quarter of 2021 showed for the six-month period ended June 30, 2021, revenue was $ 6.58 million, significantly lower than the reported revenue of $ 20.46 million for the six-month period ended June 30 June 2020. The net loss per common share widened to 94 cents for 2021 from a net loss of 22 cents for 2020. My take, it is still too early to be optimistic based on actual financial metrics .

This is the reality factor. Most of the biotech companies like Xenon Pharmaceuticals are burning money and until they really go into commercialization they are trading at high valuations. Xenon Pharmaceuticals is no exception to this rule.

In one of my previous articles, I wrote that even going from phase 2 to phase 3 clinical trials and seeing positive results can take years, not months. I want Xenon Pharmaceuticals to be successful, but the current reality does not support very high expectations. Watch out for XENE stock, but buying it at this price is too bold, too risky, and unwarranted based on true financial performance. Additionally, other stock offerings may take place to support development and clinical trials, and that won’t be good news.

As of the publication date, Stavros Georgiadis, CFA does not have (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.

Stavros Georgiadis is a CFA Chartered Equity Research Analyst and Economist. He focuses on US stocks and has his own stock blog at thestockmarketontheinternet.com/. He has written various articles for other publications in the past and can be contacted at Twitter and on LinkedIn.


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