Catalyst: PDUFA 2011-04-06 (in 2 weeks!!!!!)
Product candidate: Horizant (gabapentin enacarbil)
Indication: Restless leg syndrome
Recent movement:
The expected run-up to the PDUFA, usually taking place 1-3 months before, did not happen for Xenoport. Most investors are disappointed by this, some even moving their funds out of the stock in advance of the major FDA announcement. Adding to this, today Xenoport announced negative results from the phase II trial of their other drug, arbaclofen placarbil, intended for heartburn or gastroesophageal reflux disease (GERD). Without meeting the endpoint, the drug was immediately removed from Xenoport's drug development program. Xenoport's share price tumbled and dropped more 12% on the news as traders overreacted to the announcement.
How is this an opportunity?
While most people look at the drop in Xenoport's stock price as a downside, I actually think that this presents a perfect opportunity. Here is why:
1) the negative data from the Phase II trial have nothing to do with the drug being assessed by the FDA right now (Horizant) and should not affect Horizant's odds of approval,
2) overreactions such as one seen today are usually corrected within a short time,
3) a 6% recovery from the trough of the drop had already taken place (suggesting high investor confidence), and
4) a major catalyst is just around the corner (2011-04-06).
1) the negative data from the Phase II trial have nothing to do with the drug being assessed by the FDA right now (Horizant) and should not affect Horizant's odds of approval,
2) overreactions such as one seen today are usually corrected within a short time,
3) a 6% recovery from the trough of the drop had already taken place (suggesting high investor confidence), and
4) a major catalyst is just around the corner (2011-04-06).
What to do now?
Purchase and hold Apr $7 call options @ $1.25 until just before the catalyst. Sell before the PDUFA to avoid excessive risk. Keep in mind that options are more profitable than actual stock shares as they react more dramatically to market news; however, with high reward also comes high risk. So, purchasing the stock outright may be a better choice for risk adversed investors. XNPT is currently trading at $6.26.
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