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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
     
 
FORM 10-Q
 
 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended September 30, 2014
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
  For the transition period from _________________ to _______________________
 
Commission file number: 001-36687
 
XENON PHARMACEUTICALS INC.
(Exact name of registrant as specified in its charter)
 
Canada
 
98-0661854
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
200-3650 Gilmore Way
Burnaby, British Columbia V5G 4W8
Canada
(Address of principal executive offices)
 
(604) 484-3300
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
The number of registrant’s common shares outstanding as of November 30, 2014 was 14,181,333
 
 
 

 
XENON PHARMACEUTICALS INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2014
TABLE OF CONTENTS
 
     
PAGE
       
PART I. FINANCIAL INFORMATION  
  Item 1:
   
   
   
   
   
   
  Item 2:
  Item 3:
  Item 4:
PART II. OTHER INFORMATION  
  Item 1:
  Item 1A: 
  Item 2:
  Item 6:
SIGNATURES  
EXHIBIT INDEX  

 
 
 
 
1

 
PART I. FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
Xenon Pharmaceuticals Inc.
Balance Sheets
(Unaudited)
(Expressed in thousands of U.S. dollars except share data)
 

 
 
 
December 31,
   
September 30,
 
   
2013
   
2014
 
             
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 37,950     $ 33,731  
Marketable securities
    11,326       14,205  
Accounts receivable
    440       162  
Prepaid expenses and other current assets
    153       171  
Total current assets
    49,869       48,269  
                 
Deferred financing fees
    2,739       3,876  
Property, plant and equipment, net
    1,879       1,999  
                 
Total assets
  $ 54,487     $ 54,144  
                 
Liabilities and Shareholders’ Deficit
               
Current liabilities:
               
Accounts payable and accrued expenses (note 7)
    2,283       2,821  
Deferred revenue
    15,920       13,522  
        Total current liabilities
    18,203       16,343  
Deferred revenue, less current portion
    11,886       2,603  
Deferred tenant inducements
    282       219  
                 
Total liabilities
  $ 30,371     $ 19,165  
                 
Collaboration agreements (note 9)
               
Contingencies (note 10)
               
Subsequent events (note11)
               
                 
Redeemable convertible preferred shares:
               
Series A Convertible Preferred shares, without par value; 1,205,761 authorized and 1,151,468 issued and outstanding at December 31, 2013 and September 30, 2014, respectively
    2,939       2,939  
Series B Convertible Preferred shares, without par value; 1,028,806 authorized and 994,885 issued and outstanding at December 31, 2013, and September 30, 2014, respectively
    8,683       8,683  
Series E Convertible Preferred shares, without par value; 4,370,920 authorized and 4,322,126 issued and outstanding at December 31, 2013, and September 30, 2014, respectively
    90,866       90,866  
Total redeemable convertible preferred shares
    102,488       102,488  
                 
Shareholders’ deficit:
               
Common shares, without par value; unlimited shares authorized; 1,344,627 and 1,349,591 issued and outstanding at  December 31, 2013 and September 30, 2014, respectively
    6,147       6,198  
Additional paid-in capital
    29,722       30,242  
Accumulated deficit
    (116,752 )     (104,958 )
Accumulated comprehensive income
    2,511       1,009  
                 
Total shareholders’ deficit
  $ (78,372 )   $ (67,509 )
Total liabilities, shareholders’ deficit and redeemable convertible preferred shares
  $ 54,487     $ 54,144  
 
The accompanying notes are an integral part of these financial statements.

 
2

 
Xenon Pharmaceuticals Inc.
Statements of Operations
(Unaudited)
(Expressed in thousands of U.S. dollars except share and per share data)
 

 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2014
   
2013
   
2014
 
                         
Revenue:
                       
Collaboration revenue
  $ 10,786     $ 13,192     $ 21,771     $ 23,489  
Royalties
    2       1       2       3  
      10,788       13,193       21,773       23,492  
Operating expenses:
                               
Research and development
    2,577       3,216       9,560       8,315  
General and administrative
    1,692       1,316       4,520       4,106  
Total operating expenses
    4,269       4,532       14,080       12,421  
                                 
Income from operations
    6,519       8,661       7,693       11,071  
Other income (expense):
                               
Interest income
    117       138       193       416  
Interest expense
    (15 )     -       (56 )     -  
Foreign exchange gain (loss)
    (243 )     392       1,677       307  
Gain on write-off and disposal of assets
    -       -       11       -  
Net income
    6,378       9,191       9,518       11,794  
                                 
Net income attributable to participating securities
    5,059       5,596       8,199       8,199  
                                 
Net income attributable to common shareholders
  $ 1,319     $ 3,595     $ 1,319     $ 3,595  
                                 
Net income per share attributable to common shareholders:
                               
Basic
  $ 0.99     $ 2.67     $ 0.99     $ 2.67  
Diluted
  $ 0.63     $ 1.69     $ 0.74     $ 1.71  
                                 
Weighted-average shares outstanding:
                               
Basic
    1,337,028       1,348,417       1,334,905       1,346,989  
                                 
Effects of dilutive securities:
                               
Stock options
    728,687       763,949       445,314       749,967  
Subscription rights
    14,353       10,400       12,813       11,447  
Diluted
    2,080,068       2,122,766       1,793,032       2,108,403  
 
The accompanying notes are an integral part of these financial statements.
 
 
3

 
Xenon Pharmaceuticals Inc.
Statements of Comprehensive Income
(Unaudited)
(Expressed in thousands of U.S. dollars)
 

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2014
   
2013
   
2014
 
                                 
Net income
  $ 6,378     $ 9,191     $ 9,518     $ 11,794  
Other comprehensive income (loss):
                               
Foreign currency translation adjustment
    332       (1,512 )     (458 )     (1,502 )
Comprehensive income
  $ 6,710     $ 7,679     $ 9,060     $ 10,292  
 
The accompanying notes are an integral part of these financial statements.
 
 

 
4

 
Xenon Pharmaceuticals Inc.
Statement of Changes in Redeemable Convertible Preferred Shares and Shareholders’ Deficit
(Unaudited)
(Expressed in thousands of U.S. dollars except per share data)
 

 
   
Series A convertible
preferred shares
   
Series B convertible
preferred shares
   
Series E convertible
preferred shares
   
Common shares
   
Additional
paid-in
capital
   
Accumulated
deficit
   
Accumulated 
comprehensive
income
   
Total
Shareholder's
deficit
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
                         
                                                                                                 
Balance as of December 31, 2012
    1,151,468     $ 2,939       994,885     $ 8,683       4,322,126     $ 90,866       1,330,696     $ 6,008       29,164     $ (128,784   $ 3,747     $ (89,865 )
Net income for the year
                                                                            12,032               12,032  
Cumulative translation adjustment
                                                                                    (1,236 )     (1,236 )
Stock option compensation expense
                                                                    575                       575  
Subscription rights
                                                                    73                       73  
Issuance of common shares on conversion of subscription rights
                                                    5,602       45       (45 )                     -  
Issued pursuant to exercise of stock options
                                                    8,329       94       (45                     49  
Balance as of December 31, 2013
    1,151,468     $ 2,939       994,885     $ 8,683       4,322,126     $ 90,866       1,344,627     $ 6,147     $ 29,722     $ (116,752   $ 2,511     $ (78,372
Net income for the period
                                                                            11,794               11,794  
Cumulative translation adjustment
                                                                                    (1,502 )     (1,502 )
Stock option compensation expense
                                                                    561                       561  
Issuance of common shares on conversion of subscription rights
                                                    3,164       32       (32 )                     -  
Issued pursuant to exercise of stock options
                                                    1,800       19       (9 )                     10  
Balance as of September 30, 2014
    1,151,468     $ 2,939       994,885     $ 8,683       4,322,126     $ 90,866       1,349,591     $ 6,198     $ 30,242     $ (104,958 )   $ 1,009     $ (67,509 )
 
The accompanying notes are an integral part of these financial statements.
 
 
5

 
Xenon Pharmaceuticals Inc.
Statements of Cash Flows
(Unaudited)
(Expressed in thousands of U.S. dollars)


   
Nine Months Ended September 30,
 
   
2013
   
2014
 
             
Operating activities:
           
Net income
  $ 9,518     $ 11,794  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    531       533  
Gain on write-off and disposal of assets
    (11 )     -  
Stock-based compensation
    413       561  
Non-cash compensation on issuance of subscription rights
    54       -  
Interest accrued on note payable
    35       -  
Deferred tenant inducements
    133       (50 )
Foreign exchange loss (gain)
    23       52  
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,022 )     267  
Prepaid expenses, and other current assets
    (81 )     (27 )
Accounts payable and accrued expenses
    2,145       614  
Deferred revenue
    (12,374 )     (10,527 )
Net cash provided by (used in) operating activities
    (636 )     3,217  
                 
Investing activities:
               
Purchases of property, plant and equipment
    (115 )     (753 )
Sale of property, plant and equipment
    10       -  
Purchase of marketable securities
    (9,513 )     (15,334 )
Proceeds from marketable securities
    -       11,803  
Net cash used in investing activities
    (9,618 )     (4,284 )
                 
Financing activities:
               
Note payable
    (1,701 )     -  
Deferred financing costs
    (2,713 )     (1,305 )
Proceeds from issuance of common shares
    14       10  
Net cash used in financing activities
    (4,400 )     (1,295 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (1,897 )     (1,857 )
                 
Decrease in cash and cash equivalents
    (16,551 )     (4,219 )
                 
Cash and cash equivalents, beginning of period
    60,162       37,950  
                 
Cash and cash equivalents, end of period
  $ 43,611     $ 33,731  
                 
Supplemental information:
               
Non-cash transactions:
               
Fair value of stock options transferred from additional paid-in capital to share capital on exercise
  $ 36     $ 9  
Issuance of common shares on conversion of subscription rights
    19       32  
Interest paid
    (35 )     -  
 
The accompanying notes are an integral part of these financial statements.
 
 
6

 
Xenon Pharmaceuticals Inc.
Notes to Financial Statements
(Unaudited)
 
1.    Nature of the business:
 
Xenon Pharmaceuticals Inc. (the “Company”), incorporated in 1996 under the British Columbia Business Corporations Act and continued federally in 2000 under the Canada Business Corporation Act, is a clinical-stage biopharmaceutical company discovering and developing a pipeline of differentiated therapeutics for orphan indications that it intends to commercialize on its own, and for larger market indications that it intends to partner with global pharmaceutical companies.
 
On October 1, 2014, the Company effected a 1 for 4.86 reverse share split of its common and Series A, B and E redeemable convertible preferred shares. All of the share numbers, share prices, and exercise prices in these financial statements have been adjusted, on a retroactive basis, to reflect this 1 for 4.86 reverse share split (note 11a(i)).
 
On November 10, 2014, the Company completed an initial public offering (“IPO”) of 4,600,000 of its common shares at a price to the public of $9.00 per share (note 11b). On November 10, 2014, the Company also completed a private placement, in which the Company issued and sold 495,000 of its common shares to an affiliate of Genentech, Inc. (“Genentech”) at a price of $9.00 per share (note 11b). Immediately prior to the closing of the IPO, all outstanding convertible preferred shares were converted into 7,725,924 common shares and 10,200 outstanding subscription rights were converted into 10,200 common shares (note 11a(ii)). Following the IPO, there were no preferred shares or subscription rights outstanding. The accompanying unaudited interim financial statements, including share and per share amounts, do not reflect the IPO.
 
2.    Basis of Presentation:
 
These financial statements are presented in U.S. dollars.
 
The accompanying unaudited interim financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the audited financial statements and notes included in the prospectus that forms a part of the Company’s Registration Statement on Form S-1 (File No. 333-198666), which prospectus was filed with the SEC pursuant to Rule 424 promulgated under the Securities Act of 1933 on November 5, 2014 and the prospectus, dated November 4, 2014, filed with the securities commissions in British Columbia, Alberta and Ontario.
 
These unaudited interim financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods presented. The results of operations for the three and nine month periods ended September 30, 2014 and 2013 are not necessarily indicative of results that can be expected for a full year.
 
3.    Changes in significant accounting policies:
 
In July 2013, the Financial Accounting Standards Board (“FASB”) issued amendments on income tax matters to include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, when the uncertain tax position would reduce the net operating loss carryforward, a similar tax loss, or a tax credit carryforward under the tax law of the applicable jurisdiction, and when the entity intends to use the deferred tax asset for that purpose. These amendments were effective prospectively for fiscal years beginning after December 15, 2013. On January 1, 2014, the Company adopted these amendments. The adoption of these amendments did not have a material impact on the Company’s financial position or results of operations.
 
 
7

 
 
4.     Future changes in accounting policies:
 
In May 2014, the FASB issued amendments to clarify the principles of recognizing revenue and to develop a common revenue standard that would remove inconsistencies in revenue requirements, leading to improved comparability of revenue recognition practices across entities and industries. The amendments stipulate that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosure will also be required about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. These amendments will be effective for public entities for reporting periods beginning after December 15, 2016. The Company is in the process of evaluating the impact of the adoption of the amendments on the Company’s financial position, results of operations and cash flows.
 
In August 2014, the FASB issued amendments requiring management to assess an entity’s ability to continue as a going concern. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. These amendments will be effective for public entities for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The adoption of these amendments in fiscal 2017 is not expected to have a material impact on the Company’s financial statements.
 
5.     Net income per share:
 
For the three and nine months ended September 30, 2014, outstanding stock options of 205,182 (three months ended September 30, 2013 - 42,592) and 201,411 (nine months ended September 30, 2013 - 144,196) were excluded from the calculation of net income per share attributable to common shareholders because their inclusion would be anti-dilutive.
 
6.     Fair value of financial instruments:
 
The Company’s Level 1 assets include cash and cash equivalents and marketable securities with quoted prices in active markets. The carrying amount of accounts receivables, accounts payable and accrued expenses approximates fair value due to the nature and short-term of those instruments.
 
 
8

 
7.     Accounts payable and accrued expenses:
 
Accounts payable and accrued expenses consisted of the following:
 
   
December 31,
   
September 30,
 
   
2013
   
2014
 
                 
Trade payables
  $ 391     $ 511  
Employee compensation, benefits, and related accruals
    520       840  
Consulting and contracted research
    412       293  
Professional fees
    694       804  
Other
    266       373  
Total
  $ 2,283     $ 2,821  
 
8.     Stock option plan:

The following table presents stock option activity for the period:
 
    Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2014
   
2013
   
2014
 
                                 
Outstanding, beginning of period
    1,304,441       1,442,741       1,128,437       1,333,099  
Granted
    42,592       6,273       292,417       163,504  
Exercised
    (3,086 )     (1,028 )     (4,115 )     (1,800 )
Forfeited  and expired
    (876 )     (4,411 )     (73,668 )     (51,228 )
Outstanding, end of period
    1,343,071       1,443,575       1,343,071       1,443,575  
Exercisable, end of period
    898,894       1,078,009       898,894       1,078,009  
 
The fair value of each option issued to employees and non-employees is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

    Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
   
2013
   
2014
   
2013
   
2014
 
                                 
Average risk-free interest rate
    1.82 %     1.95 %     1.03 %     1.97 %
Average expected term (in years)
    6.00       6.25       6.20       6.20  
Expected volatility
    70 %     74 %     70 %     74 %
Expected dividend yield
    0.00 %     0.00 %     0.00 %     0.00 %
Estimated forfeiture rate
    0.00 %     0.00 %     0.00 %     0.00 %
 
9.     Collaboration agreements:
 
The Company has entered into a number of collaboration agreements with multiple deliverables under which it may have received non-refundable upfront payments. The Company generally recognizes revenue from upfront payments ratably over the term of its estimated period of performance of research under its collaboration agreements in the event that such arrangements represent a single unit of accounting. The collaborations may also include contractual milestone payments, which relate to the achievement of pre-specified research, development, regulatory and commercialization events. The milestone events coincide with the progression of product candidates from research and development, to regulatory approval and through to commercialization. The process of successfully discovering a new product candidate, having it selected by the collaborator for development and having it approved and ultimately sold for a profit is highly uncertain. As such, the milestone payments that the Company may earn from its collaborators involve a significant degree of risk to achieve.
 
 
9

 
In March 2014, the Company entered into a new agreement with Genentech for pain genetics, using the Company’s Extreme Genetics discovery platform to focus on identifying genetic targets associated with rare phenotypes where individuals have an inability to perceive pain or where individuals have non-precipitated spontaneous severe pain. Pursuant to the terms of this agreement, any intellectual property arising out of the collaboration will be jointly owned by the Company and Genentech. The Company also granted Genentech a time-limited, exclusive right of first negotiation on a target-by-target basis to form joint drug discovery collaborations. Under the terms of this agreement, Genentech paid an upfront payment of $1,500. The Company is eligible for an additional $2,000 in milestone payments. At the option of the Company, a Genentech affiliate invested $4,455 in a private placement concurrent with the IPO (note 11b).
 
The Company identified several deliverables under this agreement with Genentech, including non-exclusive licenses to certain intellectual property controlled by the Company, a commitment to participate in a joint steering committee and collaborative research services to be performed by the Company. The Company concluded that the licenses did not have stand-alone value to Genentech without the Company’s technical expertise and joint steering committee participation during the initial two year period. Therefore, the Company has determined that the various deliverables should be considered as a single unit of accounting. As such the Company determined that the $1,500 upfront payment should be recognized as revenue ratably over the expected period of performance, being the two-year period ending March 18, 2016.
 
The Company believes that the potential milestone payments under this agreement are substantive and at risk at inception of this agreement, and, as such, expects that these future milestone payments will be recognized as revenue in the period that each milestone is achieved. As of September 30, 2014, no such milestone payments have been recognized.
 
In August 2014, pursuant to an existing collaborative research and license agreement with Genentech entered into in 2011, the Company received an $8,000 milestone payment for the approval of the GDC-0276 Clinical Trial Application by Health Canada. This milestone payment was recognized as revenue in the third quarter of 2014.
 

 
10

 
The following table is a summary of the revenue recognized from the Company’s collaborations for the three and nine months ended September 30, 2013 and 2014:

    Three months ended
September 30,
 
 
Nine months ended
September 30,
 
    2013     2014     2013     2014  
                         
uniQure:
                       
Milestone payment
  $ 267     $ 14     $ 267     $ 14  
Teva:
                               
Recognition of upfront payment
    3,284       3,132       9,891       9,252  
Research funding
    169       84       463       251  
Genentech:
                               
Recognition of upfront payment
    824       981       2,483       2,736  
Research funding
    1,128       994       3,385       3,249  
       Milestone payment
    5,093       7,987       5,093       7,987  
Genome BC:
                               
Research funding
    21       -       189       -  
Total collaboration revenue
  $ 10,786     $ 13,192     $ 21,771     $ 23,489  
 
10.   Contingencies:
 
The Company has entered into license and research agreements with third parties that include indemnification provisions that are customary in the industry. These indemnification provisions generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party claims or damages arising from these transactions.
 
The maximum amount of potential future indemnification is unlimited; however, the Company currently holds commercial and product liability insurance. This insurance limits the Company’s exposure and may enable it to recover a portion of any future amounts paid. Historically, the Company has not made any indemnification payments under such agreements and the Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.
 
11.   Subsequent events:

(a) Share consolidation:
 
(i) On October 1, 2014, the Company effected a 1 for 4.86 reverse share split of its common and Series A, B and E redeemable convertible preferred shares. At the time of the consolidation, there were no outstanding Series C and D preferred shares and therefore such series were not included in the consolidation. Accordingly, (i) every 4.86 common shares have been combined into one common share, (ii) every 4.86 redeemable Series A, B and E convertible preferred shares have been combined into one redeemable convertible preferred share, (iii) the number of common shares into which each outstanding subscription right is exchangeable into common shares have been proportionately decreased on a 1 for 4.86 basis, (iv) the number of common shares into which each outstanding option to purchase common shares is exercisable have been proportionately decreased on a 1 for 4.86 basis, and (v) the exercise price for each such outstanding option to purchase common shares has been proportionately increased on a 1 for 4.86 basis. All of the share numbers, share prices, and exercise prices in these financial statements have been adjusted, on a retroactive basis, to reflect this 1 for 4.86 reverse share split.
 
 
11

 
(ii) Immediately prior to the closing of the Company’s IPO, all outstanding Series A and B redeemable convertible preferred shares were converted into common shares on a 1 for 1 basis and Series E redeemable convertible preferred shares were converted into common shares on a 1 for 1.20 basis, subject to certain adjustments (notes 1 and 11b). These adjustments differ for some of the Company’s outstanding Series E preferred shares depending on the date of issue, resulting in different conversion ratios for different Series E preferred shares.

   
Preferred Shares
Outstanding
   
Conversion
into Common
Shares upon
Initial Public
Offering
 
                 
Series A
    1,151,468       1,151,468  
Series B
    994,885       994,885  
Series E
    4,322,126       5,579,571  
Total
    6,468,479       7,725,924  
 
(b) Initial public offering and concurrent private placement:
 
On November 10, 2014, the Company completed an IPO of 4,600,000 of its common shares at a price to the public of $9.00 per share. On November 10, 2014, the Company also completed a private placement, in which the Company issued and sold 495,000 of its common shares to an affiliate of Genentech at a price of $9.00 per share (note 1). As of November 10, 2014, after completion of the IPO and concurrent private placement, the Company had a total of 14,181,333 common shares outstanding.
 
 
12

 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This section should be read in conjunction with our unaudited financial statements and related notes included in Part I, Item 1 of this report and our audited consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2013 included in the prospectus that forms a part of our Registration Statement on Form S-1 (File No. 333-198666), which prospectus was filed with the SEC pursuant to Rule 424 promulgated under the Securities Act of 1933 on November 5, 2014 and the prospectus, dated November 4, 2014, filed with the securities commissions in British Columbia, Alberta and Ontario.
 
Forward-Looking Statements
 
Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended and Canadian Securities laws.  The words or phrases “would be,” “will allow,” “intends to,” “may,” “believe,” “plan,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.”  You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to:
 
 
·
our ability to identify additional products or product candidates using our Extreme Genetics discovery platform;
 
·
the initiation, timing, cost, progress and success of our research and development programs, preclinical studies and clinical trials;
 
·
our ability to advance product candidates into, and successfully complete, clinical trials;
 
·
our ability to recruit sufficient numbers of patients for our future clinical trials for orphan or more common indications;
 
·
our ability to achieve profitability;
 
·
our ability to obtain funding for our operations, including research funding;
 
·
our ability to receive milestones, royalties and sublicensing fees under our collaborations, and the timing of such payments;
 
·
the implementation of our business model and strategic plans;
 
·
our ability to develop and commercialize product candidates for orphan and niche indications independently;
 
·
our commercialization, marketing and manufacturing capabilities and strategy;
 
·
our ability to find families to support our Extreme Genetics discovery platform;
 
·
our ability to discover genes and drug targets;
 
·
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
 
·
our expectations regarding federal, state and foreign regulatory requirements;
 
·
the therapeutic benefits, effectiveness and safety of our product candidates;
 
·
the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products and product candidates;
 
·
the rate and degree of market acceptance and clinical utility of Glybera and future products, if any;
 
·
the timing of and our and our collaborators’ ability to obtain and maintain regulatory approvals for our product candidates;
 
·
our ability to maintain and establish collaborations;
 
·
our use of proceeds from this offering and the concurrent private placement;
 
·
our expectations regarding market risk, including interest rate changes and foreign currency fluctuations;
 
·
our belief in the sufficiency of our cash flows to meet our needs for at least the next 12 to 24 months;
 
·
our ability to engage and retain the employees required to grow our business;
 
·
our future financial performance and projected expenditures;
 
·
developments relating to our competitors and our industry, including the success of competing therapies that are or become available; and
 
·
estimates of our expenses, future revenue, capital requirements and our needs for additional financing.
 
These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A — “Risk Factors,” and elsewhere in this report. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. In this report, “we,” “our,” “us,” “Xenon,” and “the Company” refer to Xenon Pharmaceuticals Inc.
 
 
13

 
Overview
 
We are a clinical-stage biopharmaceutical company discovering and developing a pipeline of differentiated therapeutics for orphan indications that we intend to commercialize on our own, and for larger market indications that we intend to partner with global pharmaceutical companies. We have built a core enabling discovery platform for the discovery of validated drug targets by studying rare human diseases with extreme traits, including diseases caused by mutations in ion channels, known as channelopathies. We have an integrated platform that includes in-house capabilities for human genetics, small molecule drug discovery, as well as preclinical and clinical development.
 
Our business was founded on our proprietary discovery platform, which we refer to as Extreme Genetics. Extreme Genetics involves the study of families where individuals exhibit inherited severe traits, or phenotypes. By identifying and characterizing single-gene defects responsible for these phenotypes, we gain insights into human disease biology to better select targets for therapeutic intervention. Our Extreme Genetics discovery platform has yielded the first approved gene therapy product in the European Union, or the EU, and a broad development pipeline and multiple pharmaceutical partnerships. We believe that our Extreme Genetics discovery platform enhances the likelihood of discovering a drug target that has a major effect in humans. From these discoveries, we can gain an improved understanding of how a drug that modulates the target might act when given to a human.
 
Our pharmaceutical partners include Teva Pharmaceutical Industries, Ltd., or Teva (through its subsidiary, Ivax International GmbH), Genentech, Inc., or Genentech, and Merck & Co., Inc., or Merck (through its affiliate, Essex Chemie AG). Our pharmaceutical collaborations have generated in aggregate over $150.0 million in non-equity funding to date with the potential to provide us with over $1.0 billion in future milestone payments, as well as royalties and co-promotion income on product sales.
 
To date, our Extreme Genetics discovery platform has yielded:
 
 
·
Glybera, developed by our licensee uniQure Biopharma B.V., or uniQure, the first, and currently the only, gene therapy approved in the EU for the treatment of the orphan disorder lipoprotein lipase deficiency, or LPLD. We believe that uniQure’s commercialization partner, Chiesi Farmaceutici S.p.A., or Chiesi, plans to launch Glybera in the fourth quarter of 2014 or the first quarter of 2015;
 
 
·
TV-45070 (formerly XEN402), a product candidate with four Phase 2 proof-of-concept clinical trials completed. Our partner Teva is conducting a 300-patient, randomized Phase 2b clinical trial in osteoarthritis, or OA, of the knee and is planning a Phase 2b clinical trial in patients with postherpetic neuralgia, or PHN, that is expected to start in the first half of 2015;
 
 
·
GDC-0276, a product candidate being developed in collaboration with Genentech for the treatment of pain. In September 2014, Genentech initiated a Phase 1 clinical trial for GDC-0276; and
 
 
·
proprietary preclinical programs, including a sodium channel inhibitor for the orphan disorder Dravet Syndrome, or DS, and XEN801, a stearoyl Co-A desaturase, or SCD1, inhibitor for the treatment of acne. We anticipate filing an investigational new drug application, or IND, for XEN801 in the first half of 2015 and an IND for our DS program in 2016.
 
We have funded our operations primarily through payments received from our pharmaceutical collaborators and government funding as well as through the sale of convertible preferred shares in various financing transactions. For the three and nine months ended September 30, 2014, we recognized revenues, consisting primarily of funding from our collaborators of approximately $13.2 million and $23.5 million, respectively. This compared to $10.8 million and $21.8 million for the three and nine months ended September 30, 2013.

Though our revenue from our collaboration and license agreements has resulted in net income of $9.2 million and $11.8 million for the three and nine months ended September 30, 2014 and $6.4 million and $9.5 million for the three and nine months ended September 30, 2013, we do not expect to have sustained profitability for the foreseeable future. We had an accumulated deficit of $105.0 million as of September 30, 2014, from expenses incurred in connection with our research programs and from general and administrative costs associated with our operations.

 
14

 
We have not generated any royalty revenue or other revenue from product sales, and we expect that our revenue in the near term will be substantially dependent on our collaboration agreements. Given the uncertain nature of clinical development of our current and future product candidates and the commercialization of current and future products, we cannot predict when or whether we will receive further milestone payments under our current or future collaboration agreements or whether we will be able to report either revenue or net income in future years.

We expect to continue to incur significant expenses and operating losses for at least the next 12 to 24 months.  We anticipate that our expenses will increase substantially as we:
 
 
·
continue our research and preclinical and clinical development of our product candidates;
 
 
·
seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical trials;
 
 
·
make milestone and other payments under our in-license agreements;
 
 
·
maintain, protect and expand our intellectual property portfolio;
 
 
·
attract, hire and retain skilled personnel; and
 
 
·
create additional infrastructure to support our operations as a public company and otherwise.

Recent Developments
 
On October 1, 2014 we completed a 1 for 4.86 reverse share split of our common and Series A, B and E redeemable convertible preferred shares. At the time of the consolidation, there were no outstanding Series C and D preferred shares and therefore such series were not included in the consolidation. Accordingly, (i) every 4.86 common shares have been combined into one common share, (ii) every 4.86 redeemable Series A, B and E convertible preferred shares have been combined into one redeemable convertible preferred share, (iii) the number of common shares into which each outstanding subscription right is exchangeable into common shares have been proportionately decreased on a 1 for 4.86 basis, (iv) the number of common shares into which each outstanding option to purchase common shares is exercisable have been proportionately decreased on a 1 for 4.86 basis, and (v) the exercise price for each such outstanding option to purchase common shares has been proportionately increased on a 1 for 4.86 basis. All of the share numbers, share prices, and exercise prices in these financial statements have been adjusted, on a retroactive basis, to reflect this 1 for 4.86 reverse share split.
 
On November 10, 2014, we completed an initial public offering, or IPO, of 4,600,000 of our common shares at a price to the public of $9.00 per share.  On November 10, 2014, we also completed a private placement, in which we sold 495,000 of our common shares to an affiliate of Genentech at a price of $9.00 per share. As of November 10, 2014, after the completion of our IPO and concurrent private placement, we had a total of 14,181,333 common shares outstanding.

 
15

 
Financial Operations Overview
 
Revenue
 
To date, our revenue has been primarily derived from collaboration and licensing agreements as well as, to a lesser extent, government funding. In addition, we have received nominal royalties from a diagnostic license. To date, we have not generated any royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales other than from sales of Glybera under our license to uniQure for the foreseeable future, if ever.

The following table is a summary of revenue recognized from our current collaboration and licensing agreements for the three and nine months ended September 30, 2013 and 2014 (in thousands):
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2013
   
2014
   
2013
   
2014
 
                         
uniQure:
                       
       Milestone payment
  $ 267     $ 14     $ 267     $ 14  
Teva:
                               
       Recognition of upfront payment
    3,284       3,132       9,891       9,252  
       Research funding
    169       84       463       251  
Genentech:
                               
       Recognition of upfront payment
    824       981       2,483       2,736  
       Research funding
    1,128       994       3,385       3,249  
       Milestone payment
    5,093       7,987       5,093       7,987  
Genome BC:
                               
       Research funding
    21       -       189       -  
Total collaboration revenue
  $ 10,786     $ 13,192     $ 21,771     $ 23,489  
 
Through September 30, 2014, we had recognized upfront fees and milestone payments totaling CAD$1.1 million, pursuant to our sublicense and research agreement with uniQure. We are eligible to receive certain additional milestone payments of less than CAD$1.0 million for Glybera and for each subsequent product, if any, developed pursuant to the agreement.
 
Pursuant to the terms of our collaborative development and license agreement with Teva, we received an upfront payment of $41.0 million. We determined that the various deliverables under this agreement should be considered as a single unit of accounting. As such, the $41.0 million upfront payment is being recognized as revenue ratably over the expected period of research performance of pre-commercial activities, which is the three-year period from December 2012 through December 2015.
 
Pursuant to the terms of our December 2011 collaborative research and license agreement with Genentech, we received an upfront payment of $10.0 million. We determined that the various deliverables under this agreement should be considered as a single unit of accounting. As such, the $10.0 million upfront payment is being recognized as revenue ratably over the expected period of research performance, which is the three-year period from December 2011 through December 2014. In September 2013, we received a $5.0 million milestone payment for the selection of a compound for good laboratory practices, or GLP, toxicology studies. We recognized the milestone payment upon achievement in August 2013. In August 2014, we received an $8.0 million milestone payment for the approval of the GDC-0276 Clinical Trial Application by Health Canada. We recognized the milestone payment upon achievement in August 2014.
 
 
16

 
Pursuant to the terms of our March 2014 agreement with Genentech, we received an upfront payment of $1.5 million. We determined that the various deliverables under this agreement should be considered as a single unit of accounting. As such, the $1.5 million upfront payment is being recognized as revenue ratably over the expected period of research performance, which is the two-year period from March 2014 to March 2016.
 
As our other internal and partnered products are in various stages of clinical and preclinical development, we do not expect to generate any revenue from product sales other than from our share of revenue related to our agreement with uniQure for at least the next several years. We expect that revenue for the next several years will be derived from our agreement with uniQure and our eligibility to receive a share of the compensation received by uniQure relating to the technology or products licensed by us, and full-time equivalents, or FTEs, and milestone payments under our current collaboration agreements and any additional collaboration agreements that we may enter into in the future. We cannot provide any assurance as to the extent or timing of future milestone payments or royalty payments or that we will receive any future payments at all.
 
We expect that any revenue we generate will fluctuate quarter to quarter as a function of the timing and amount of milestones and other payments from our existing collaborations and any future collaborations.
 
The following table is a summary of our deferred revenue for our collaboration and licensing agreements as of December 31, 2013 and September 30, 2014 (in thousands):
 
   
December 31, 2013
   
September 30, 2014
 
                 
    Teva
  $ 24,691     $ 14,332  
    Genentech
    3,115       1,793  
Total deferred revenue
  $ 27,806     $ 16,125  
 
We expect such deferred revenue remaining as of September 30, 2014 to be recognized as revenue in the applicable fiscal years ending December 31, 2014, 2015 and 2016 based on our accounting policy for revenue recognition for each collaboration agreement.
 
Operating Expenses
 
The following table summarizes our operating expenses for the three and nine months ended September 30, 2013 and 2014 (in thousands):
 
   
Three months ended
 September 30,
   
Nine months ended
September 30,
 
   
2013
   
2014
   
2013
   
2014
 
                                 
Research and development
  $ 2,577     $ 3,216     $ 9,560     $ 8,315  
General and administrative
    1,692       1,316       4,520       4,106  
Total operating expenses
  $ 4,269     $ 4,532     $ 14,080     $ 12,421  
 
 
17

 
Research and Development Expenses
 
Research and development expenses represent costs incurred to conduct research on our product candidates in collaboration with Teva and Genentech, as well as further research and development of our other proprietary product candidates.
 
Research and development expenses consist of costs incurred in performing research and development activities, including salary, related benefits and share-based compensation for employees engaged in scientific research and development, third-party contract costs relating to research, formulation, manufacturing, preclinical studies and clinical trial activities, third-party license and collaboration fees, laboratory consumables and allocated facility-related costs.
 
Project-specific expenses reflect costs directly attributable to our clinical development candidates and our preclinical candidates once nominated and selected for further development. All remaining research and development expenses are reflected in early-stage discovery programs. At any given time, we have several active early-stage research and drug discovery programs. Our personnel and infrastructure are typically deployed over multiple projects and are not directly linked to any individual internal early-stage research or drug discovery program. Therefore, we do not maintain financial information for our internal early-stage research and internal drug discovery programs on a project-specific basis.
 
We expense all research and development costs as incurred. We expect that our research and development expenses will increase in the future as we advance our proprietary product candidates into clinical development, conduct our development activities under our agreements with Teva and Genentech, advance our internal drug discovery programs into preclinical development and continue our early-stage research. The increase in expense will likely include added personnel and third-party contracts related to research, formulation, manufacturing, preclinical studies and clinical trial activities as well as third-party license and collaboration fees and laboratory consumables.
 
Clinical development timelines, likelihood of regulatory approval and commercialization and associated costs are uncertain and difficult to estimate and can vary significantly. We anticipate determining which research and development projects to pursue as well as the level of funding available for each project based on the scientific research and preclinical and clinical results of each product candidate and related regulatory action. We expect our research and development expenses to continue to represent our largest category of operating expense for at least the next 12 to 24 months.
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of salary, related benefits and share-based compensation of our executive, finance, business development and administrative functions, travel expenses, allocated facility-related costs not otherwise included in research and development expenses, and professional fees for auditing, tax and legal services, including legal expenses for intellectual property protection.
 
We expect that general and administrative expenses will increase in the future as we expand our operating activities to support increased research and development activities, and build our commercial infrastructure for the potential option for co-promotion of TV-45070 in the U.S., if and when regulatory approval is received.
 
We also anticipate incurring additional general and administrative expenses as a public company, including costs of additional personnel, additional professional fees for audit, accounting and legal services, director fees, enhanced business and accounting systems, costs related to investor relations and increased premiums for directors’ and officers’ liability insurance.
 
 
18

 
Other Income (Expense)
 
Interest Income. Interest income consists of income earned on our cash and investment balances. Our interest income has not been significant due to the levels of cash and investment balances and low interest earned on such balances. We anticipate that our interest income will continue to fluctuate depending on timing of payments from collaborative partners, our cash and investment balances, and interest rates.
 
Interest Expense. Interest expense consists of interest incurred on the note payable held by Isis Pharmaceuticals, Inc., or Isis, related to our collaboration agreement for XEN701. As we fully repaid the note payable to Isis in June 2013 and now have no other debts outstanding, we expect to have little or no interest expense in the future. In the fourth quarter of 2013, we discontinued development of XEN701 as the preclinical data did not support its continued advancement. In the first quarter of 2014, we provided formal notice of termination of the agreement to Isis.
 
Foreign Exchange Gain (Loss). Our functional currency is the Canadian dollar. For presentation purposes, our assets and liabilities are translated to U.S. dollars at exchange rates at the reporting date. Any resulting exchange gains and losses resulting from the translation of U.S. denominated transactions are recorded in current operations.
 
Critical Accounting Policies and Significant Judgments and Estimates
 
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in conformity with generally accepted accounting principles in the U.S., or U.S. GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the revenue and expenses incurred during the reported periods. We base estimates on our historical experience, known trends and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
There have been no significant and material changes in our critical accounting policies during the three and nine months ended September 30, 2014, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Critical Accounting Policies and Significant Judgments and Estimates” included in the prospectus that forms a part of our Registration Statement on Form S-1 (File No. 333-198666), which prospectus was filed with the SEC pursuant to Rule 424 promulgated under the Securities Act of 1933 on November 5, 2014 and the prospectus, dated November 4, 2014, filed with the securities commissions in British Columbia, Alberta and Ontario.  We believe that the accounting policies discussed in such prospectuses are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
 
 
19

 
Results of Operations
 
Comparison of Three and Nine Months Ended September 30, 2013 and 2014
 
The following table summarizes the results of our operations for the three and nine months ended September 30, 2013 and 2014, together with changes in those items (in thousands):
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2014
   
Change
   
2013
   
2014
   
Change
 
                                                 
Collaboration revenue
  $ 10,786     $ 13,192     $ 2,406     $ 21,771     $ 23,489     $ 1,718  
Royalties
    2       1       (1 )     2       3       1  
Research and development expenses
    2,577       3,216       639       9,560       8,315       (1,245 )
General and administrative expenses
    1,692       1,316       (376 )     4,520       4,106       (414 )
Other:
                                               
Interest income
    117       138       21       193       416       223  
Interest (expense)
    (15 )     -       15       (56 )     -       56  
Foreign exchange gain (loss)
    (243 )     392       635       1,677       307       (1,370 )
Gain on write-off and disposal of assets
    -       -               11       -       (11 )
                                                 
Net income
  $ 6,378     $ 9,191     $ 2,813     $ 9,518     $ 11,794     $ 2,276  
 
Revenue
 
We recognized revenue of $13.2 million for the three months ended September 30, 2014 compared to $10.8 million for the three months ended September 30, 2013. The increase of $2.4 million was primarily attributable to an $8.0 million milestone payment received in August 2014 from Genentech partially offset by a $5.1 million milestone payment received in September 2013 from Genentech.
 
We recognized revenue of $23.5 million for the nine months ended September 30, 2014 compared to $21.8 million for the nine months ended September 30, 2013. The increase of $1.7 million was primarily attributable to an $8.0 million milestone payment received in August 2014 from Genentech and recognition of $0.5 million of an upfront payment received from Genentech for the pain genetics collaboration entered into in March 2014, partially offset by a $5.1 million milestone payment received in September 2013 from Genentech and $1.4 million decrease resulting from the change in the foreign exchange rate between the U.S. and Canadian dollar.
 
Research and Development Expenses
 
The following table summarizes our research and development expenses for the three and nine months ended September 30, 2013 and 2014, together with changes in those items (in thousands):
 
 
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       Three Months Ended
September 30,
     
Nine Months Ended
September 30,
 
     
2013
     
2014
     
Change
     
2013
     
2014
     
Change
 
                                                 
Teva collaboration (TV-45070) expenses
  $ 203     $ 510     $ 307     $ 685     $ 1,044     $ 359  
Genentech collaboration (GDC-0276 and Genetics) expenses
    1,237       1,250       13       3,595       3,821       226  
Other collaboration expenses
    35       -       (35 )     124       -       (124 )
Preclinical and discovery program expenses
    1,102       1,456       354       5,156       3,450       (1,706 )
                                                 
Total research and development expenses
  $ 2,577     $ 3,216     $ 639     $ 9,560     $ 8,315     $ (1,245 )
 
Research and development expenses for the three months ended September 30, 2014 were $3.2 million, compared to $2.6 million for the same period in 2013. The increase of $0.6 million was primarily attributable to increased expenses associated with our Teva collaboration as well as increased preclinical and discovery program expenses.

Research and development expenses were $8.3 million for the nine months ended September 30, 2014 as compared to $9.6 million for the nine months ended September 30, 2013. The decrease of $1.3 million was primarily attributable to a $1.7 million decrease in preclinical and discovery program expenses as XEN701 was discontinued in late 2013, partially offset by an increase in spending for our other early stage research programs.
 
General and Administrative Expenses
 
The following table summarizes our general and administrative expenses for the three and nine months ended September 30, 2013 and 2014, together with changes in those items (in thousands):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2014
   
Change
   
2013
   
2014
   
Change
 
                                                 
General and administrative expenses
  $ 1,692     $ 1,316     $ (376 )   $ 4,520     $ 4,106     $ (414 )
 
General and administrative expenses were $1.3 million for the three months ended September 30, 2014 as compared to $1.7 million for the three months ended September 30, 2013, a decrease of $0.4 million, primarily as a result of a reduction in intellectual property expenses.

General and administrative expenses were $4.1 million for the nine months ended September 30, 2014 as compared to $4.5 million for the nine months ended September 30, 2013, a decrease of $0.4 million, primarily as a result of a reduction in overhead expenses.
 
Other Income (Expense)
 
The following table summarizes our other income (expense) for the three and nine months ended September 30, 2013 and 2014, together with changes in those items (in thousands):
 
 
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Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2014
   
Change
   
2013
   
2014
   
Change
 
                                                 
Other income (expenses)
  $ (141 )   $ 530     $ 671     $ 1,825     $ 723     $ (1,102 )
 
Other income was $0.5 million for the three months ended September 30, 2014, compared to other expense of $0.1 million for the three months ended September 30, 2013. The increase of $0.7 million was due to the change in the foreign exchange rate between the U.S. and Canadian dollar.

Other income was $0.7 million for the nine months ended September 30, 2014, compared to $1.8 million for the nine months ended September 30, 2013.  The decrease of $1.1 million was due to the change in the foreign exchange rate between the U.S. and Canadian dollar, partially offset by an increase in interest income attributable to an increase in interest rates and balances of savings accounts.
 
Liquidity and Capital Resources

To date, we have financed our operations primarily through funding received from collaboration and license agreements and private placements of our common and preferred shares, as well as through the receipt of government funding.  Through September 30, 2014, we have received an aggregate of approximately $273.6 million to fund our operations, of which approximately $154.1 million was non-equity funding pursuant to collaboration and license agreements, approximately $17.0 million was pursuant to government funding, and approximately $102.5 million was pursuant to the sale of our preferred shares.  As of September 30, 2014, we had cash and cash equivalents and marketable securities of $47.9 million. We received $38.5 million of proceeds, net of underwriting discounts and commissions but before offering expenses, from our initial public offering and $4.1 million of proceeds, net of underwriters’ fees but before offering expenses, from the concurrent private placement to an affiliate of Genentech.  Our initial public offering and concurrent private placement each closed in November 2014 and, accordingly, such proceeds are not reflected in our cash and cash equivalents and marketable securities at September 30, 2014.

We have incurred significant operating losses since inception.  Although we had $11.8 million in net income for the nine months ended September 30, 2014, we had an accumulated deficit of $105.0 million from inception through September 30, 2014.  We expect to continue to incur significant expenses in excess of our revenue and expect to incur operating losses over the next several years.  Our net losses may fluctuate significantly from quarter to quarter and year to year.  We expect to continue to incur significant expenses and operating losses for the foreseeable future as we continue our research and preclinical and clinical development of our product candidates; expand the scope of our current studies for our product candidates; initiate additional preclinical, clinical or other studies for our product candidates, including under our collaboration agreements; change or add additional manufacturers or suppliers; seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical studies; seek to identify and validate additional product candidates; acquire or in-license other product candidates and technologies; make milestone or other payments under our in-license agreements including, without limitation, our agreements with the University of British Columbia, or UBC, and the Memorial University of Newfoundland, or MUN; maintain, protect and expand our intellectual property portfolio; attract and retain skilled personnel; establish a sales, marketing and distribution infrastructure to commercialize any products for which we or one of our collaborators may obtain marketing approval, and maintain commercial rights; create additional infrastructure to support our operations as a public company and our product development and planned future commercialization efforts; and experience any delays or encounter issues with any of the above.

 
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Until such time as we can generate substantial product revenue, if ever, we expect to finance our cash needs through a combination of collaboration agreements and equity or debt financings.  Except for any obligations of our collaborators to reimburse us for research and development expenses or to make milestone payments under our agreements with them, we do not have any committed external sources of capital.  To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common shareholders.  If we raise additional funds through collaboration agreements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us.  If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our future capital requirements are difficult to forecast and will depend on many factors, including:
 
 
·
whether our existing collaborations continue to generate research funding, milestone payments and royalties to us;
 
 
·
the number and stage of development of future product candidates that we choose to pursue;
 
 
·
the scope, progress, results and costs of research and development of our future product candidates independently, and conducting preclinical research and clinical studies;
 
 
·
the timing and costs involved in obtaining regulatory approvals for any future product candidates we develop independently;
 
 
·
the cost associated with exercising our co-promotion option for TV-45070 in the U.S., should the opportunity arise and we choose to do so;
 
 
·
the cost of commercialization activities, if any, of any future product candidates we develop independently that are approved for sale, including marketing, sales and distribution costs;
 
 
·
the cost of manufacturing our future product candidates and any products we successfully commercialize independently;
 
 
·
our ability to maintain existing collaborations and to establish new collaborations, licensing or other arrangements and the financial terms of such arrangements;
 
 
·
the costs of preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome of such litigation; and
 
 
·
the timing, receipt and amount of sales, or royalties on Glybera, TV-45070, GDC-0276, and our future product candidates, if any.
 
Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cash and cash equivalents and marketable securities as of the date of this 10-Q, the net proceeds from our initial public offering and concurrent private placement and research funding that we expect to receive under our existing collaborations, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 to 24 months.  We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect.  Additionally, the process of testing drug candidates in clinical trials is costly, and the timing of progress in these trials remains uncertain.
 
 
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Cash Flows
 
The following table shows a summary of our cash flows for the nine months ended September 30, 2013 and 2014 (in thousands):

   
Nine Months Ended September 30,
 
   
2013
   
2014
 
                 
Net cash provided by (used in) operating activities
  $ (636 )   $ 3,217  
Net cash used in investing activities
    (9,618 )     (4,284 )
Net cash used in financing activities
    (4,400 )     (1,295 )
 
Operating Activities
 
During the nine months ended September 30, 2014, net cash provided by operating activities totaled $3.2 million, compared to net cash used in operating activities of $0.6 million for the same period in 2013. The change was driven primarily by an increase in net income of $2.3 million and changes in deferred revenue, unrealized foreign exchange gains and losses, and operating assets, partially offset by changes in timing of cash payments of trade payables.
 
Investing Activities
 
During the nine months ended September 30, 2014, net cash used in investing activities totaled $4.3 million, compared to net cash used in investing activities of $9.6 million for the same period in 2013. The change was driven primarily by a decrease in net investment in marketable securities, partially offset by an increase in the purchase of property, plant and equipment.
 
Financing Activities
 
During the nine months ended September 30, 2014, net cash used in financing activities totaled $1.3 million, compared to net cash used in financing activities of $4.4 million for the same period in 2013. The change was driven primarily by a decrease in deferred financing costs compared to the prior year and in 2013, we repaid the note we issued to Isis in connection with our collaboration agreement.
 
Contractual Obligations and Commitments
 
Our future significant contractual obligations as of June 30, 2014 were reported in our prospectus that forms a part of our Registration Statement on Form S-1 (File No. 333-198666), which prospectus was filed with the SEC pursuant to Rule 424 promulgated under the Securities Act of 1933 on November 5, 2014 and the prospectus, dated November 4, 2014, filed with the securities commissions in British Columbia, Alberta and Ontario. There have been no other material changes from the contractual commitments previously disclosed in those prospectuses.
 
 
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Inflation
 
We do not believe that inflation has had a material effect on our business, financial condition or results of operations in the last three fiscal years.
 
Off-Balance Sheet Arrangements
 
We do not engage in any off-balance sheet financing activities.  We do not have any interest in entities referred to as variable interest entities, which include special purposes entities and other structured finance entities.
 
Recent Accounting Pronouncements
 
In July 2013, the Financial Accounting Standards Board (“FASB”) issued amendments on income tax matters to include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, when the uncertain tax position would reduce the net operating loss carryforward, a similar tax loss, or a tax credit carryforward under the tax law of the applicable jurisdiction, and when the entity intends to use the deferred tax asset for that purpose. These amendments were effective prospectively for fiscal years beginning after December 15, 2013. On January 1, 2014, we adopted these amendments. The adoption of these amendments did not have a material impact on our financial position or results of operations.
 
In May 2014, the FASB issued amendments to clarify the principles of recognizing revenue and to develop a common revenue standard that would remove inconsistencies in revenue requirements, leading to improved comparability of revenue recognition practices across entities and industries. The amendments stipulate that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosure will also be required about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. These amendments will be effective for public entities for reporting periods beginning after December 15, 2016. We are in the process of evaluating the impact of the adoption of the amendments on our financial position, results of operations and cash flows.
 
In August 2014, the FASB issued amendments requiring management to assess an entity’s ability to continue as a going concern. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. These amendments will be effective for public entities for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The adoption of these amendments in fiscal 2017 is not expected to have a material impact on our financial statements.
 
The Jumpstart Our Business Startups Act of 2012, or JOBS Act, provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards.  This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.  However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
 
 
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
We are exposed to various market risks in the ordinary course of our business, including changes in interest rates and currency exchange rates.  Market risk is the potential loss arising from adverse changes in interest rates and exchange rates.
 
Foreign Currency Exchange Risk
 
The principal market risk we face is foreign currency exchange rate risk.  We face this risk, in part, as a result of entering into transactions denominated in currencies other than Canadian dollars, particularly those denominated in U.S. dollars and Euros.  We also hold non-Canadian dollar denominated cash and cash equivalents, accounts receivable and accounts payable, which are primarily denominated in U.S. dollars.
 
Changes in foreign currency exchange rates can create significant foreign exchange gains or losses to us.  Our current foreign currency risk is primarily with the U.S. dollar as a majority of our non-Canadian dollar denominated expenses are denominated in U.S. dollars.  To limit our exposure to volatility in currency markets, we estimate our anticipated expenses that will be denominated in currencies other than the Canadian dollar and then purchase a corresponding amount of the relevant foreign currency at the current spot rate.  Once these estimated expense amounts are acquired, we do not hedge our exposure and thus assume the risk of future gains or losses on the amounts of foreign currency held.  The impact of an adverse change in foreign exchange rates may be offset in the event we receive a milestone payment from a foreign collaborator.  At September 30, 2014, we held cash and cash equivalents of $6.3 million denominated in U.S. dollars.  A hypothetical 10% increase (decrease) in the value of the U.S. dollar would result in a foreign exchange gain (loss) of $0.6 million being recorded in the Statement of Operations on the translation of these U.S. dollar cash and cash equivalent balances into the Canadian dollar functional currency.
 
Interest Rate Risk
 
An additional market risk we face is interest rate risk.  We had cash and cash equivalents and marketable securities of $47.9 million as of September 30, 2014.  The goals of our investment policy are liquidity and capital preservation; we do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate exposure.  We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short term nature of our cash and cash equivalents and marketable securities.  Declines in interest rates, however, would reduce future investment income.  A 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.  Such interest-earning instruments carry a degree of interest rate risk.  We had no outstanding debt as of September 30, 2014.
 
Item 4. Controls and Procedures
 
(a) Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) prior to the filing of this quarterly report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were, in design and operation, effective.
 
 
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(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Inherent limitation on the effectiveness of internal control.
 
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
 
 
PART II. OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, in the opinion of our management, would reasonably be expected to have a material adverse effect on our business, financial condition, operating results or cash flows if determined adversely to us. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
 
Item 1A.  Risk Factors
 
You should carefully consider the following risk factors, in addition to the other information contained in this report, including the section of this report captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. If any of the events described in the following risk factors and the risks described elsewhere in this report occurs, our business, operating results and financial condition could be seriously harmed. This report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.
 
Risks Related to Our Financial Condition and Capital Requirements
 
We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.
 
We are a clinical-stage biotechnology company and, other than the year ended December 31, 2013 and the nine months ended September 30, 2014, we have recorded net losses in each reporting period since inception in 1996, and we do not expect to have sustained profitability for the foreseeable future. We had net losses of $12.0 million and $4.3 million for the years ended December 31, 2011 and 2012, respectively, and had an accumulated deficit of $105.0 million as of September 30, 2014.
 
 
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We have devoted most of our financial resources to research and development, including our clinical and preclinical development activities. To date, we have financed our operations through the sale of equity securities and funding received from our licensees and collaborators. We have not generated any royalty revenue from product sales and our product candidates will require substantial additional investment before they will provide us with any product royalty revenue.
 
We expect to incur significant expenses and increasing operating losses for the foreseeable future as we:
 
   
continue our research and preclinical and clinical development of our product candidates;
 
   
expand the scope of our clinical studies for our current and prospective product candidates;

   
initiate additional preclinical, clinical or other studies for our product candidates, including under our collaboration agreements;

   
change or add additional manufacturers or suppliers;

   
seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical studies;

   
seek to identify and validate additional product candidates;

   
acquire or in-license other product candidates and technologies;

   
make milestone or other payments under our in-license agreements including, without limitation, our agreements with the University of British Columbia, or UBC, and the Memorial University of Newfoundland;

   
maintain, protect and expand our intellectual property portfolio;

   
establish a sales, marketing and distribution infrastructure to commercialize any products for which we or one of our collaborators may obtain marketing approval, and for which we have maintained commercial rights;

   
create additional infrastructure to support our operations as a public company and our product development and planned future commercialization efforts; and

   
experience any delays or encounter issues with any of the above.
 
Our expenses could increase beyond expectations for a variety of reasons, including if we are required by the U.S. Food and Drug Administration, or FDA, the European Medicines Agency, or EMA, or other regulatory agencies, domestic or foreign, to perform clinical and other studies in addition to those that we currently anticipate. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our shareholders’ equity.
 
We have not generated any royalty revenue from product sales and may never become profitable on a U.S. GAAP basis.
 
Our ability to generate meaningful revenue and achieve profitability on a U.S. GAAP basis depends on our ability, alone or with strategic collaborators, to successfully complete the development of, and obtain the regulatory approvals necessary to commercialize, our product candidates. Substantially all of our revenue since inception has consisted of upfront and milestone payments associated with our collaboration and license agreements. Revenue from these agreements is dependent on successful development of our product candidates by us or our collaborators. To date, we have not generated any royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales other than from sales of Glybera under our license to uniQure Biopharma B.V., or uniQure, for the foreseeable future, if ever. If any of our product candidates fail in clinical trials or do not gain regulatory approval, or if Glybera or any of our future products, if any, once approved, fails to achieve market acceptance or adequate market share, we may never become profitable. Although we were profitable for the year ended December 31, 2013 and the nine months ended September 30, 2014, we may not be able to sustain profitability in subsequent periods. Our ability to generate future revenue from product sales depends heavily on our success, and the success of our collaborators, in:
 
 
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completing research, preclinical and clinical development of our product candidates;

   
seeking and obtaining regulatory and marketing approvals for product candidates for which we complete clinical studies;
 
   
commercializing products for which we obtain regulatory and marketing approval, either with a collaborator or, if launched independently, by establishing sales, marketing and distribution infrastructure;
 
   
negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter;
 
   
obtaining market acceptance of products for which we obtain regulatory and marketing approval as therapies;
 
   
addressing any competing technological and market developments;
 
   
establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate (in amount and quality) products and services to support clinical development and the market demand for any approved products in the future;
 
   
developing a sustainable, scalable, reproducible, and transferable manufacturing processes for any of our products approved in the future;
 
   
maintaining, protecting, expanding and enforcing our portfolio of intellectual property rights, including patents, trade secrets and know-how;
 
   
implementing additional internal systems and infrastructure, as needed; and
 
   
attracting, hiring and retaining qualified personnel.
 
The scope of our future revenue will also depend upon the size of any markets in which our product candidates receive approval and the availability of insurance coverage and the availability and amount of reimbursement from third-party payers for Glybera and future products, if any. If we are unable to achieve sufficient revenue to become profitable and remain so, our financial condition and operating results will be negatively impacted, and our trading price might be harmed.
 
We will likely need to raise additional funding, which may not be available on acceptable terms, if at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.
 
Since our inception, we have dedicated most of our resources to the discovery and development of our proprietary preclinical and clinical product candidates, and we expect to continue to expend substantial resources doing so for the foreseeable future. These expenditures will include costs associated with research and development, manufacturing of product candidates and products approved for sale, conducting preclinical experiments and clinical trials and obtaining and maintaining regulatory approvals, as well as commercializing any products later approved for sale. During the nine months ended September 30, 2014, we incurred approximately $8.3 million of costs associated with research and development, exclusive of costs incurred by our collaborators in developing our current product and product candidates.
 
 
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Our current cash and cash equivalents and marketable securities and the net proceeds from our initial public offering and concurrent private placement are not expected to be sufficient to complete clinical development of any of our product candidates and prepare for commercializing any product candidate which receives regulatory approval. Accordingly, we will likely require substantial additional capital to continue our clinical development and potential commercialization activities. Our future capital requirements depend on many factors, including but not limited to:
 
   
the number and characteristics of the future product candidates we pursue;
 
   
the scope, progress, results and costs of independently researching and developing any of our future product candidates, and conducting preclinical research and clinical trials;
 
   
whether our existing collaborations continue to generate substantial milestone payments and, ultimately, royalties on future products for us;
 
   
the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates we develop independently;
 
   
the cost of future commercialization activities, including activities required pursuant to our option to co-promote TV-45070, if exercised by us, and the cost of commercializing any future products we develop independently that are approved for sale;
 
   
the cost of manufacturing our future products, if any;
 
   
our ability to maintain existing collaborations and to establish new collaborations, licensing or other arrangements and the financial terms of such agreements;
 
   
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome of such litigation; and
 
   
the timing, receipt and amount of sales of, or royalties on, Glybera, and our future products, if any.
 
We are unable to estimate the funds we will actually require to complete research and development of our product candidates or the funds required to commercialize any resulting product in the future.
 
Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cash and cash equivalents and marketable securities as of the date of this report, the net proceeds from our initial public offering and concurrent private placement and research funding that we expect to receive under our existing collaborations, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 to 24 months.
 
Our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. Raising funds in the future may present additional challenges and future financing may not be available in sufficient amounts or on terms acceptable to us, if at all.
 
 
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Raising additional capital may cause dilution to our existing shareholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
 
The terms of any financing arrangements we enter into may adversely affect the holdings or the rights of our shareholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our shareholders. The incurrence of indebtedness would result in increased fixed payment obligations and, potentially, the imposition of restrictive covenants. Those covenants may include limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborators or otherwise at an earlier stage than otherwise would be desirable resulting in the loss of rights to some of our product candidates or other unfavorable terms, any of which may have a material adverse effect on our business, operating results and prospects. In addition, any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates.
 
Unstable market and economic conditions may have serious adverse consequences on our business and financial condition.
 
Global credit and financial markets experienced extreme disruptions at various points over the last decade, characterized by diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. If another such disruption in credit and financial markets and deterioration of confidence in economic conditions occurs, our business may be adversely affected. If the equity and credit markets were to deteriorate significantly in the future, it may make any necessary debt or equity financing more difficult to complete, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and share price and could require us to delay or abandon development or commercialization plans. In addition, there is a risk that one or more of our current collaborators, service providers, manufacturers and other partners would not survive or be able to meet their commitments to us under such circumstances, which could directly affect our ability to attain our operating goals on schedule and on budget.
 
We are subject to risks associated with currency fluctuations, and changes in foreign currency exchange rates could impact our results of operations.
 
As of September 30, 2014, approximately 13% of our cash and cash equivalents was denominated in U.S. dollars. Historically, a portion of our operating expenses and a substantial portion of our revenue has been denominated in U.S. dollars. Because our functional currency is the Canadian dollar, changes in the exchange rate between the Canadian dollar and the U.S. dollar could materially impact our reported results of operations and distort period to period comparisons. In particular, because of the difference in the amount of our revenue and expenses that are in U.S. dollars relative to Canadian dollars, depreciation in the U.S. dollar relative to the Canadian dollar could result in a material increase in reported expenses relative to revenue, and therefore could cause our operating income (expense) to appear to decline materially, particularly relative to prior periods. The converse is true if the U.S. dollar were to appreciate relative to the Canadian dollar. Fluctuations in foreign currency exchange rates also impact the reporting of our receivables and payables in non-Canadian currencies. Translation gains or losses related to the translation of our net assets from our Canadian functional currency into the U.S. reporting currency are included as a component of accumulated comprehensive income on our balance sheet. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our common shares could be adversely affected.
 
 
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From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. For example, we maintain a natural currency hedge against fluctuations in the U.S./Canadian foreign exchange rate by matching the amount of U.S. dollar and Canadian dollar investments to the expected amount of future U.S. dollar and Canadian dollar obligations, respectively. Any hedging technique we implement may fail to be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on the trading price of our common shares.
 
Risks Related to Our Business
 
We, or our collaborators, may fail to successfully develop our product candidates.
 
Our product candidates, including TV-45070 and GDC-0276 and compounds in our preclinical and discovery pipeline, are in varying stages of development and will require substantial clinical development, testing and regulatory approval prior to commercialization. It may be several more years before these product candidates or any of our other product candidates receive marketing approval, if ever. If any of our product candidates fail to become approved products, our business, growth prospects, operating results and financial condition may be adversely affected and a decline of our common share price could result. For example, in June 2013, we paid Isis Pharmaceuticals, Inc., or Isis, an option exercise fee of $2.0 million to obtain an exclusive license to develop, manufacture and commercialize antisense products under our collaboration and license agreement with Isis; however, in the fourth quarter of 2013, we discontinued development of product candidates under this program as the preclinical data did not support the continued advancement of any product candidates.
 
Our near-term operating revenue is partially dependent upon the regulatory and marketing efforts of uniQure, or its sublicensee, for the development and commercialization of Glybera.
 
Under the terms of our license agreement with uniQure, we rely on uniQure, or its sublicensees, to market Glybera and to obtain regulatory approval of Glybera. In July 2013, uniQure announced that it had granted to Chiesi Farmaceutici, S.p.A., or Chiesi, an Italian pharmaceutical firm, an exclusive license to commercialize Glybera in the European Union, or the EU, and certain other countries outside of North America and Japan. Despite the efforts of uniQure and Chiesi, Glybera may not gain market acceptance among physicians, patients, healthcare payers and the medical community. The commercial success of Glybera will depend on a number of factors, including:
 
 
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establishment and demonstration of clinical efficacy and safety and acceptance of the same by the medical community;
 
   
commercialization of competing products;
 
   
sufficient commercial supply of Glybera;
 
   
cost-effectiveness of Glybera;
 
   
the availability of coverage and adequate reimbursement from third parties, including governmental payers, managed care organizations, and private health insurers;
 
   
the relative cost, safety and efficacy of therapies that exist now or may be developed in the future;
 
   
whether the product can be manufactured in commercial quantities at acceptable cost;
 
   
marketing and distribution support for Glybera;
 
   
the effect of current and future healthcare laws;
 
   
the acceptance of gene therapies as a class of treatment; and
 
   
any market or regulatory exclusivities applicable to the product.
 
To date, the FDA has never approved any gene therapy product as a treatment for any indication in the U.S. and the FDA may never approve Glybera. Any failure of uniQure or its sublicensee to successfully commercialize Glybera could have a material adverse effect on our business, growth prospects, operating results and financial condition and could result in a substantial decline in the price of our common shares.
 
We and our collaborators face substantial competition in the markets for our product candidates, which may result in others discovering, developing or commercializing products before us or doing so more successfully than we or our collaborators do.
 
The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We face potential competition in target discovery and product development from many different approaches and sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research institutions. Any product candidates that we or our collaborators successfully develop and commercialize will compete with existing products and any new products that may become available in the future.
 
The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their efficacy, safety, convenience and price; the effectiveness of alternative products; the level of generic competition; and the availability of coverage and adequate reimbursement from government and other third-party payors.
 
With respect to target discovery activities, competitors and other third parties, including academic and clinical researchers, may access rare families and identify novel targets for drug development before we do.
 
 
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Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we, or our collaborators, do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaboration arrangements with large and established companies.
 
Our commercial opportunities could be redu