Clinton Group Calls on Xenoport to Hold Annual Elections for All Directors

Dec 16, 2013, 11:40 ET from Clinton Group, Inc.

NEW YORK, Dec. 16, 2013 /PRNewswire/ -- Clinton Group, Inc. ("Clinton Group"), one of the largest owners of Xenoport, Inc. (NASDAQ: XNPT) ("Xenoport"), sent a letter to the Lead Director of Xenoport, Dr. John G. Freund, following a recent meeting with Dr. Freund and Dennis Fenton, another independent director of Xenoport.

In the meeting, the Clinton Group reiterated its view that Xenoport should be solely focused on the development of its novel fumaric acid ester compound (known as "829"), which the Clinton Group believes has the prospect of being a blockbuster drug with a relatively low risk development path. While the directors defended the current capital allocation approach – and the test marketing of gabapentin enacarbil in 40 US markets – they also expressed recognition that the shareholders own Xenoport and that the Chief Executive Officer and directors should be held accountable.

In the meeting, and again in today's letter, the Clinton Group called upon the directors to allow shareholders to vote on each of the directors each year, as is the practice at a majority of public companies in the United States, starting in 2014.

"Xenoport's stock is down more than 35% this year while the Nasdaq Biotechnology Index has soared more than 50%," said Gregory P. Taxin, President of Clinton Group. "And yet, Xenoport may well have one of the most clinically and commercially significant compounds in its labs. We believe shareholders are unhappy that Xenoport has not exclusively focused on 829 and fear further dilution in their ownership of 829 because of the decisions of the Chief Executive and the Board. While we appreciate that the directors expressed a willingness to be held accountable to shareholders, Xenoport's charter protects the Board from real accountability by giving each director a three-year term. These directors have the power to change that. We call upon the directors to put themselves (and their strategy, decisions and track record) on the ballot in 2014, so shareholders can have an up-or-down vote on this Board's stewardship."

The Clinton Group believes that the best path forward for Xenoport is to hire a new, accomplished Chief Executive who will act like an owner and focus entirely on the development of 829. The Clinton Group would support the current Board at the 2014 Annual Meeting of Shareholders if the directors move swiftly to identify and hire such a Chief Executive and focus the Company's efforts on 829.

The complete text of the letter is copied below. 

About Clinton Group, Inc.

Clinton Group, Inc. is a Registered Investment Advisor based in New York City. The firm has been investing in global markets since its inception in 1991 with expertise that spans a wide range of investment styles and asset classes.

December 16, 2013

Dr. John G. Freund Lead Director Xenoport, Inc. 3410 Central Expressway Santa Clara, CA  95051 

     Re:     Follow Up From Our Discussion on Friday

Dear Dr. Freund:

I write on behalf of the Clinton Group, Inc., the investment manager to various funds and partnerships ("Clinton Group") that collectively own more than 1.3 million shares of the common stock of Xenoport, Inc. ("Xenoport" or the "Company"). This ownership stake makes Clinton Group one of the Company's top ten owners, according to Bloomberg data.

We appreciate the time that you and Dennis Fenton spent with us on Friday. While we seemingly have numerous disagreements – especially with respect to the capital allocation decisions of the Board and the continued employment of Mr. Barrett as Chief Executive Officer – we were encouraged to hear that the Board is focused on the creation of shareholder value and is willing to be held accountable to shareholders. We also appreciate that you welcome the direct input of other Xenoport shareholders.

As we expressed, we believe the Company has an extremely valuable compound in XP23829 ("829"). Indeed, as we expressed in our letter to the Chief Executive Officer, Dr. Ronald Barrett, on October 15, 2013, we believe that the value of 829 far exceeds the market capitalization of the Company. The development of 829, which is a comparatively low-risk process with a comparatively high clinical and market potential, should be, in our view, the sole project pursued by the Company with its limited capital. We believe that if the Company would dedicate its resources to the development of 829, the Company would be significantly more valuable to its shareholders and the stock would rally to a price closer to the probability-weighed, net present value of the 829 opportunity, in the $12.50 to $14.50 range.

Based on today's stock price (and its rapid decline this year in an otherwise buoyant biotechnology market), it is clear that shareholders have no faith in Dr. Barrett, believe capital has been misallocated to the Horizant marketing test and that they will likely suffer dilution in their ownership of 829 to pay for these mistakes. We agree. We again urge you to replace Dr. Barrett and to put an end to the Horizant market test or to disclose significantly more data on its progress and results so that shareholders can decide for themselves whether this use of capital is a good one.

In all events, the Board should agree, as we discussed, to be held accountable to shareholders. We believe the Board should immediately declassify and that each director should be subject to annual shareholder ratification, beginning with the 2014 annual meeting of shareholders, rather than having three-year terms. As you know, most companies in the S&P 500 have such one-year director terms and more than 80 of those companies have moved to annual elections in the past two years alone.

There can be no doubt that annual accountability of directors is basic, good corporate governance. That is especially true at a Company whose stock has been a perennial under-performer, like Xenoport, and in companies in which the directors own very little stock themselves, also like Xenoport.

Moreover, we are nearly certain that your positions as fiduciaries for shareholders would be safe if the Board would move swiftly to hire a new, accomplished Chief Executive Officer and adopt the capital allocation approach we believe is clearly supported by shareholders: a focused effort on developing 829 with no premature dilution. The Board therefore need not fear annual elections; it just needs to move quickly to correct the mistakes of the past. Those mistakes, after all, have caused the shareholders to lose more than $1 billion in market capitalization since the beginning of 2008.

We appreciate your willingness to consider putting the entire Board in front of shareholders this Spring for a vote. If you chose to continue the off-market approach of long, unaccountable director terms, the clear message you will send to shareholders is that you do not believe they should have a meaningful say in how their capital is allocated or in overseeing your efforts as their fiduciary.

We look forward to hearing from the Board on this topic and to receiving additional data on the progress of the Horizant test marketing program, or (better yet) to hearing that you have decided to adopt the strategy supported by shareholders of focusing the entirety of the Company's efforts on the extremely promising 829 program.

We are available at any time to discuss these matters further.

Best regards.


Gregory P. Taxin President

SOURCE Clinton Group, Inc.