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EX-31.2 - EX-31.2 - Xenon Pharmaceuticals Inc.xene-ex312_10.htm

 

 

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 March 31, 2016

OR

o

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  x    No  ¨

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

x

 

 

 

 

 

Non-accelerated filer

¨

(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 May 6, 2016 was 14,403,866

 

 

 

 

 


 

XENON PHARMACEUTICALS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2016

TABLE OF CONTENTS

 

 

Page

 

PART I. FINANCIAL INFORMATION

2

 

Item 1. Financial Statements

2

 

Balance Sheets as of March 31, 2016 and December 31, 2015

2

 

Statements of Operations and Comprehensive Loss for the three months ended March 31, 2016 and 2015

3

 

Statement of Shareholders’ Equity for the three months ended March 31, 2016

4

 

Statements of Cash Flows for the three months ended March 31, 2016 and 2015

5

 

Notes to Financial Statements

6

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

10

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

19

 

Item 4. Controls and Procedures

20

 

PART II. OTHER INFORMATION

21

 

Item 1. Legal Proceedings

21

 

Item 1A. Risk Factors

21

 

Item 6. Exhibits

56

 

SIGNATURES

57

 

EXHIBIT INDEX

58

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Xenon,” and “the Company” refer to Xenon Pharmaceuticals Inc. “Xenon,” the Xenon logo and “Extreme Genetics” are the property of Xenon Pharmaceuticals Inc. and are registered in the United States and used or registered in various other jurisdictions. This report contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this report may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

-i-


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

XENON PHARMACEUTICALS INC.

Balance Sheets

(Unaudited)

(Expressed in thousands of U.S. dollars except share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

56,064

 

 

$

58,651

 

Accounts receivable

 

 

386

 

 

 

315

 

Prepaid expenses and other current assets

 

 

1,818

 

 

 

1,900

 

 

 

 

58,268

 

 

 

60,866

 

Prepaid expenses, long term

 

 

1,094

 

 

 

1,094

 

Property, plant and equipment, net

 

 

1,790

 

 

 

1,989

 

Total assets

 

$

61,152

 

 

$

63,949

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses (note 6)

 

 

2,872

 

 

 

2,625

 

Deferred revenue

 

 

 

 

 

157

 

 

 

 

2,872

 

 

 

2,782

 

Deferred tenant inducements

 

 

117

 

 

 

133

 

 

 

$

2,989

 

 

$

2,915

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common shares, without par value; unlimited shares authorized; issued and

  outstanding: 14,401,582 (December 31, 2015 - 14,385,336)

 

 

148,728

 

 

 

148,634

 

Additional paid-in capital

 

 

33,381

 

 

 

33,083

 

Accumulated deficit

 

 

(122,956

)

 

 

(119,693

)

Accumulated other comprehensive loss

 

 

(990

)

 

 

(990

)

 

 

$

58,163

 

 

$

61,034

 

Total liabilities and shareholders’ equity

 

$

61,152

 

 

$

63,949

 

 

 

 

 

 

 

 

 

 

Collaboration agreements (note 8)

 

 

 

 

 

 

 

 

Commitments and contingencies (note 9)

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

-2-


 

XENON PHARMACEUTICALS INC.

Statements of Operations and Comprehensive Loss

(Unaudited)

(Expressed in thousands of U.S. dollars except share and per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

Collaboration revenue (note 8)

 

$

569

 

 

$

4,010

 

Royalties

 

 

32

 

 

 

 

 

 

 

601

 

 

 

4,010

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

4,364

 

 

 

3,427

 

General and administrative

 

 

1,895

 

 

 

6,720

 

 

 

 

6,259

 

 

 

10,147

 

Loss from operations

 

 

(5,658

)

 

 

(6,137

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

99

 

 

 

152

 

Foreign exchange gain (loss)

 

 

2,296

 

 

 

(3,171

)

Net loss and comprehensive loss

 

 

(3,263

)

 

 

(9,156

)

Net loss per common share (note 4):

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.23

)

 

$

(0.64

)

Weighted-average shares outstanding (note 4):

 

 

 

 

 

 

 

 

Basic and diluted

 

 

14,394,000

 

 

 

14,212,579

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

-3-


 

XENON PHARMACEUTICALS INC.

Statement of Shareholders’ Equity

(Unaudited)

(Expressed in thousands of U.S. dollars except share amounts)

 

 

Common shares

 

 

Additional

paid-in

capital

 

 

Accumulated deficit

 

 

Accumulated other

comprehensive

income (loss)

 

 

Total shareholders'

equity

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of

   December 31, 2014

 

 

14,181,333

 

 

$

147,157

 

 

$

30,346

 

 

$

(103,734

)

 

$

(990

)

 

$

72,779

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,752

)

 

 

 

 

 

 

(15,752

)

Stock option compensation

   expense

 

 

 

 

 

 

 

 

 

 

2,077

 

 

 

 

 

 

 

 

 

 

 

2,077

 

Issued pursuant to exercise

   of stock options

 

 

204,003

 

 

 

1,477

 

 

 

(992

)

 

 

(207

)

 

 

 

 

 

 

278

 

Fair value adjustment upon

   reclassification of stock options

 

 

 

 

 

 

 

 

 

 

1,652

 

 

 

 

 

 

 

 

 

 

 

1,652

 

Balance as of December 31,

   2015

 

 

14,385,336

 

 

$

148,634

 

 

$

33,083

 

 

$

(119,693

)

 

$

(990

)

 

$

61,034

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,263

)

 

 

 

 

 

 

(3,263

)

Stock option compensation

   expense

 

 

 

 

 

 

 

 

 

 

634

 

 

 

 

 

 

 

 

 

 

 

634

 

Fair value adjustment upon

   reclassification of stock options

 

 

 

 

 

 

 

 

 

 

(286

)

 

 

 

 

 

 

 

 

 

 

(286

)

Issued pursuant to exercise

   of stock options

 

 

16,246

 

 

 

94

 

 

 

(50

)

 

 

 

 

 

 

 

 

 

 

44

 

Balance as of March 31,

   2016

 

 

14,401,582

 

 

$

148,728

 

 

$

33,381

 

 

$

(122,956

)

 

$

(990

)

(1)

$

58,163

 

(1)

At March 31, 2016, our accumulated other comprehensive loss is entirely related to historical cumulative translation adjustments from the application of U.S. dollar reporting when the functional currency of the Company was the Canadian dollar.

The accompanying notes are an integral part of these financial statements.

 

 

-4-


 

 

 

XENON PHARMACEUTICALS INC.

Statements of Cash Flows

(Unaudited)

(Expressed in thousands of U.S. dollars)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(3,263

)

 

$

(9,156

)

Items not involving cash:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

282

 

 

 

207

 

Stock-based compensation

 

 

592

 

 

 

5,219

 

Deferred tenant inducements

 

 

(16

)

 

 

(16

)

Unrealized foreign exchange (gain) loss

 

 

(2,260

)

 

 

3,140

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(60

)

 

 

(996

)

Prepaid expenses, and other current assets

 

 

82

 

 

 

220

 

Accounts payable and accrued expenses

 

 

(144

)

 

 

(1,110

)

Deferred revenue

 

 

(157

)

 

 

(3,055

)

Net cash used in operating activities

 

 

(4,944

)

 

 

(5,547

)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(83

)

 

 

(84

)

Proceeds from marketable securities

 

 

 

 

 

1,575

 

Net cash provided by (used in) investing activities

 

 

(83

)

 

 

1,491

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common shares

 

 

44

 

 

 

127

 

Net cash provided by financing activities

 

 

44

 

 

 

127

 

Effect of exchange rate changes on cash and cash equivalents

 

 

2,396

 

 

 

(2,180

)

Decrease in cash and cash equivalents

 

 

(2,587

)

 

 

(6,109

)

Cash and cash equivalents, beginning of period

 

 

58,651

 

 

 

72,026

 

Cash and cash equivalents, end of period

 

$

56,064

 

 

$

65,917

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Interest received

 

$

112

 

 

$

121

 

Supplemental disclosures of non-cash transactions:

 

 

 

 

 

 

 

 

Fair value of options exercised on a cashless basis

 

 

 

 

 

69

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

-5-

 

 


 

 

 

XENON PHARMACEUTICALS INC.

Notes to Financial Statements

(Unaudited)

(Expressed in thousands of U.S. dollars except share and per share amounts)

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.

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 for the year ended December 31, 2015 and included in the Company’s 2015 Annual Report on Form 10-K filed with the SEC on March 8, 2016.

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 month periods ended March 31, 2016 and 2015 are not necessarily indicative of results that can be expected for a full year. These unaudited interim financial statements follow the same significant accounting policies as those described in the notes to the audited financial statements of the Company included in the Company’s 2015 Annual Report on Form 10-K for the year ended December 31, 2015.

3.

Future changes in accounting policies:

In May 2014, the Financial Accounting Standards Board (“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. In August 2015, the FASB issued an update deferring the effective date of the new revenue standard by one year. The new guidance will be effective for public entities for fiscal years beginning after December 15, 2017 instead of the originally contemplated effective date of December 15, 2016.  In March and April 2016, the FASB issued amendments to the new revenue standard to clarify the implementation guidance on principal versus agent considerations and identifying performance obligations and licensing with the same effective date as the new revenue standard. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s financial statements.

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 2016 is not expected to have a material impact on the Company’s financial statements.

 

-6-

 

 


 

 

 

In February 2016, the FASB issued amendments to lease accounting requiring the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. The new guidance retains a distinction between finance leases and operating leases, with cash payments from operating leases classified within operating activities in the statement of cash flows. These amendments will be effective for public entities for fiscal years beginning after December 15, 2018. The adoption of these amendments in fiscal 2019 is not expected to have a material impact on the Company’s financial statements.

In March 2016, the FASB issued amendments to stock-based compensation accounting to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of the statement of cash flows. The amendments stipulate (a) all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the statement of operations and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur, (b) excess tax benefits should be classified along with other tax cash flows as an operating activity, (c) an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur, (d) the threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions, and (e) cash paid by an employee when directly withholding shares for tax withholding purposes should be classified as financing activity. These amendments will be effective for public entities for fiscal years beginning after December 15, 2016. The adoption of these amendments in fiscal 2017 is not expected to have a material impact on the Company’s financial statements.

4.

Net income (loss) per common share:

Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share is computed by adjusting net income (loss) to reallocate undistributed earnings based on the potential impact of dilutive securities.

As the Company reported a net loss for the three month periods ended March 31, 2016 and 2015, all stock options were anti-dilutive and were excluded from the diluted weighted average common shares outstanding for those periods.

5.

Fair value of financial instruments:

We measure certain financial instruments and other items at fair value.

To determine the fair value, we use the fair value hierarchy for inputs used to measure fair value of financial assets and liabilities. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 (highest priority), Level 2, and Level 3 (lowest priority).

 

·

Level 1 - Unadjusted quoted prices in active markets for identical instruments.

 

·

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

·

Level 3 - Inputs are unobservable and reflect the Company’s assumptions as to what market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

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.

 

-7-

 

 


 

 

 

6.

Accounts payable and accrued expenses: 

Accounts payable and accrued expenses consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Trade payables

 

$

1,023

 

 

$

1,088

 

Employee compensation, benefits, and related accruals

 

 

440

 

 

 

762

 

Consulting and contracted research

 

 

1,209

 

 

 

506

 

Professional fees

 

 

167

 

 

 

214

 

Other

 

 

33

 

 

 

55

 

Total

 

$

2,872

 

 

$

2,625

 

 

7.

Stock option plan:

The following table presents stock option activity for the period:

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Outstanding, beginning of period

 

 

1,721,472

 

 

 

1,484,218

 

Granted

 

 

233,950

 

 

 

346,964

 

Exercised(1)

 

 

(16,246

)

 

 

(44,656

)

Forfeited and expired

 

 

(4,442

)

 

 

(1,090

)

Outstanding, end of period

 

 

1,934,734

 

 

 

1,785,436

 

Exercisable, end of period

 

 

1,151,853

 

 

 

1,146,383

 

 

 

(1)

During the three months ended March 31, 2016, 16,246 stock options were exercised for the same number of common shares for cash (three months ended March 31, 2015 – 26,910). In the same period, the Company did not issue any common shares (three months ended March 31, 2015 – 14,032) for the cashless exercise of stock options (three months ended March 31, 2015 – 17,746).

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 March 31,

 

 

 

2016

 

 

2015

 

Average risk-free interest rate

 

 

1.64

%

 

 

1.71

%

Average expected term (in years)

 

 

6.25

 

 

 

6.25

 

Expected volatility

 

 

75

%

 

 

75

%

Expected dividend yield

 

 

0.00

%

 

 

0.00

%

 

The weighted-average fair value of options granted during the three months ended March 31, 2016 was $4.95 (three months ended March 31, 2015 – $11.84) per option.

8.

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.

 

-8-

 

 


 

 

 

The collaborations may also include contractual milestone payments, which relate to the achievement of prespecified 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.

The following table is a summary of the revenue recognized from the Company’s collaborations for the three months ended March 31, 2016 and 2015:

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Teva:

 

 

 

 

 

 

 

 

Recognition of upfront payment

 

 

 

 

 

2,876

 

Research funding

 

 

29

 

 

 

45

 

Genentech:

 

 

 

 

 

 

 

 

Recognition of upfront payment

 

 

157

 

 

 

179

 

Research funding

 

 

383

 

 

 

910

 

Total collaboration revenue

 

$

569

 

 

$

4,010

 

 

9.

Commitments and contingencies:

 

(a)

Priority access agreement with Medpace Inc. (“Medpace”):

In August 2015, the Company entered into a priority access agreement with Medpace for the provision of certain clinical development services. Under the terms of the agreement, the Company has committed to using Medpace non-exclusively for clinical development services over the five year term of the agreement.  In consideration for priority access to Medpace resources and preferred service rates, the Company has committed to $7,000 of services over the term of the agreement, $3,000 of which was paid in the year ended December 31, 2015. Of the amounts paid by the Company in 2015 in connection with the priority access agreement, $1,060 has been recorded as expenses to date for services rendered, $846 has been recorded as current prepaid expenses (December 31, 2015 – $1,010) and $1,094 as long-term prepaid expenses (December 31, 2015 – $1,094) for the provision of future services as at March 31, 2016.  

 

(b)

Guarantees and indemnifications:

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.

10.

Related Parties:

Dr. August J. Troendle, an officer and director of Medpace, which provides clinical development services to the Company, is a beneficial owner of more than 5% of the Company’s common shares. The Company incurred $373 of clinical development service fees under its priority access agreement and a master services agreement with Medpace for the three months ended March 31, 2016 (three months ended March 31, 2015 - nil). Additionally, the Company has recorded $2,150  of prepaid expenses as of March 31, 2016 (December 31, 2015 – $2,314) for future clinical development services under such agreements with Medpace.

 

 

 

-9-

 

 


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This section should be read in conjunction with our unaudited interim financial statements and related notes included in Part I, Item 1 of this report and our audited 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, 2015 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 8, 2016 and with the securities commissions in British Columbia, Alberta and Ontario on March 8, 2016.

 

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 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;

 

-10-


 

 

·

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 I, 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, except as required by law. In this report, “we,” “our,” “us,” “Xenon,” and “the Company” refer to Xenon Pharmaceuticals Inc. Unless otherwise noted, all dollar amounts in this report are expressed in United States dollars.

 

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 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 $155.0 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.

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. 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 Extreme Genetics discovery platform has yielded the first approved gene therapy product in the European Union, or the EU, and we are advancing a broad proprietary development pipeline and multiple pharmaceutical partnerships, which include:

 

·

Glybera, developed by our licensee uniQure Biopharma B.V., or uniQure, the first, and currently the only, gene therapy product approved in the EU for the treatment of the orphan disorder lipoprotein lipase deficiency, or LPLD. The first patient treated with Glybera as a commercially-available gene therapy was announced by uniQure in November 2015 and enabled by its commercialization partner in the EU, Chiesi Farmaceutici S.p.A., or Chiesi, which has sole control over commercialization in the EU;

 

·

TV-45070 (formerly XEN402), a product candidate being developed in collaboration with Teva for the treatment of pain. Teva is currently conducting a randomized, double-blind, placebo-controlled Phase 2b clinical trial in patients with post-herpetic neuralgia, or PHN, with results expected in the first half of 2017. TV-45070 is a topically applied small-molecule inhibitor of the sodium channel Nav1.7 and other sodium channels, including those that are expressed in the pain-sensing peripheral nervous system;

 

·

GDC-0276 and GDC-0310, which are both oral, selective Nav1.7 small-molecule inhibitors being developed in collaboration with Genentech for the potential treatment of pain. Phase 1 clinical trials for GDC-0276 and GDC-0310 are ongoing, and pending a full assessment of the results, Genentech intends to initiate a Phase 2 clinical trial in 2016. Xenon and Genentech also have an active research collaboration focused on other orally selective small molecule inhibitors of Nav1.7;

 

·

XEN801, a stearoyl Co-A desaturase-1, or SCD1, inhibitor being developed for the treatment of acne. SCD1 is an enzyme involved in lipid synthesis that is expressed in sebaceous glands in the skin. We have completed a Phase 1 clinical trial for XEN801 and initiated a Phase 2 clinical trial in February 2016 in patients with moderate to severe facial acne. We anticipate topline results in the fourth quarter of 2016; and

 

-11-


 

 

·

Additional proprietary preclinical programs, including a Nav1.6 sodium channel inhibitor for the treatment of rare childhood epilepsy disorders, such as Dravet Syndrome, an orphan disease of severe childhood epilepsy. We expect to identify a development candidate in 2016 and file an investigational new drug, or IND, application for our Nav1.6 inhibitor in the first half of 2017. 

 

We have funded our operations through the sale of equity securities, funding received from our licensees and collaborators and, to a lesser extent, government funding. For the three months ended March 31, 2016, we recognized revenues, consisting primarily of funding from our collaborators of approximately $0.6 million. This compares to $4.0 million for the three months ended March 31, 2015.

Though our revenue from our collaboration and license agreements resulted in net income of $13.0 million for the year ended December 31, 2014 and $12.0 million for the year ended December 31, 2013, we do not expect to have sustained profitability for the foreseeable future. We had net losses of $3.3 million for the three months ended March 31, 2016 and an accumulated deficit of $123.0 million as of March 31, 2016, from expenses incurred in connection with our research programs and from general and administrative costs associated with our operations.

Other than royalties we are eligible to receive from sales of Glybera under our license to uniQure, which we do not expect to be significant in the near-term, we have not generated any royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales for the foreseeable future, if ever. 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

In March 2016, we amended our collaborative research and license agreement with Genentech, and its affiliate, F. Hoffman-La Roche Ltd., to use the work performed in our ongoing Nav1.7 pain collaboration. Pursuant to the amendment, we obtained a royalty free, non-exclusive license to make, use and test certain collaboration compounds developed under the Nav1.7 collaboration for internal research purposes during the term of the collaboration. The license is not sublicensable or transferable. In addition, the research term for Xenon’s second collaboration with Genentech, which is centered on pain genetics, was extended for another year until March 2017.

 

In April 2016, we announced the hiring of Dr. Raymond J. Winquist as our Head, Translational Research. Dr. Winquist is responsible for the identification and selection of drug discovery and development programs and will support biology and pharmacology efforts at Xenon through preclinical development.

 

 

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 sales of Glybera under our license to uniQure as well as a diagnostic license. Other than royalties we are eligible to receive from sales of Glybera, which we do not expect to be significant in the near-term, we have not generated any royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales for the foreseeable future, if ever.

 

-12-


 

The following table is a summary of revenue recognized from our current collaboration agreements for the three months ended March 31, 2016 and 2015 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Teva:

 

 

 

 

 

 

 

 

Recognition of upfront payment

 

 

 

 

 

2,876

 

Research funding

 

 

29

 

 

 

45

 

Genentech:

 

 

 

 

 

 

 

 

Recognition of upfront payment

 

 

157

 

 

 

179

 

Research funding

 

 

383

 

 

 

910

 

Total collaboration revenue

 

$

569

 

 

$

4,010

 

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 was recognized as revenue ratably over the expected period of research performance of pre-commercial activities, which was the three-year period from December 2012 through December 2015.

Pursuant to the terms of our December 2011 collaborative development 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 was recognized as revenue ratably over the expected period of research performance, which was the three-year period from December 2011 through December 2014. In August 2013, we recognized a $5.1 million milestone payment for the selection of a compound for good laboratory practices, or GLP, toxicology studies. In August 2014, we recognized a $7.9 million milestone payment for the approval of the GDC-0276 Clinical Trial Application by Health Canada.

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 was recognized as revenue ratably over the expected period of research performance, which was the two-year period from March 2014 to March 2016. In September 2015, we recognized a $0.25 million milestone payment for the identification of a novel pain target under this agreement.

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, which we do not expect to be significant in the near-term, 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 to uniQure; full-time equivalents, or FTE, funding from current and future collaboration agreements; 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 March 31, 2016 and December 31, 2015 (in thousands):

 

 

 

March 31, 2016

 

 

December 31, 2015

 

Genentech - deferred revenue

 

$

 

 

$

157

 

As of March 31, 2016, we have recognized all deferred revenues from upfront payments received under our collaboration and licensing agreements.

 

-13-


 

Operating Expenses

The following table summarizes our operating expenses for the three months ended March 31, 2016 and 2015 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Research and development

 

$

4,364

 

 

$

3,427

 

General and administrative

 

 

1,895

 

 

 

6,720

 

Total operating expenses

 

$

6,259

 

 

$

10,147

 

Research and Development Expenses

Research and development expenses represent costs incurred to further research and development of our proprietary product candidates, as well as to conduct research on our product candidates in collaboration with Teva and Genentech.

Research and development expenses consist of costs incurred in performing research and development activities, including salary, related benefits and stock-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 through clinical development, 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 stock-based compensation of our executive, finance, legal, business development and administrative functions, travel expenses, allocated facility-related costs not otherwise included in research and development expenses, director compensation, director’s and officer’s insurance premiums, investor relations costs and professional fees for auditing, tax and legal services, including legal expenses for intellectual property protection.

General and administrative expenses for the three months ended March 31, 2015 also include fair value adjustments upon the reclassification of stock option awards granted to directors and certain consultants to liability classification in the first quarter of 2015. We had a subsequent reclassification of those stock options back to equity in September 2015, due to a change in the denomination of pay of directors and certain consultants in the third quarter.

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 the potential build of commercial infrastructure for our option for co-promotion of TV-45070 in the U.S., if and when regulatory approval is received.

 

-14-


 

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.

Foreign Exchange Gain (Loss). Net foreign exchange gains and losses consisted of gains and losses from the impact of foreign exchange fluctuations on our monetary assets and liabilities that are denominated in currencies other than the U.S. dollar (principally the Canadian dollar). See “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Exchange Risk” below for additional information.

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.

Critical accounting policies and significant judgments and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and significant estimates include those related to:

 

·

revenue recognition;

 

·

research and development costs; and

 

·

stock-based compensation.

There have been no material changes in our critical accounting policies and significant judgements and estimates during the three months ended March 31, 2016, 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 our 2015 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, or SEC, on March 8, 2016. We believe that the accounting policies discussed in the Annual Report are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

 

 

Results of Operations

Comparison of Three Months Ended March 31, 2016 and 2015

The following table summarizes the results of our operations for the three months ended March 31, 2016 and 2015 together with changes in those items (in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

2016 vs. 2015

 

 

 

2016

 

 

2015

 

 

Increase/(Decrease)

 

Collaboration revenue

 

$

569

 

 

$

4,010

 

 

$

(3,441

)

Royalties

 

 

32

 

 

 

 

 

 

32

 

Research and development expenses

 

 

4,364

 

 

 

3,427

 

 

 

937

 

General and administrative expenses

 

 

1,895

 

 

 

6,720

 

 

 

(4,825

)

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

99

 

 

 

152

 

 

 

(53

)

Foreign exchange gain (loss)

 

 

2,296

 

 

 

(3,171

)

 

 

5,467

 

Net loss

 

$

(3,263

)

 

$

(9,156

)

 

$

5,893

 

 

 

-15-


 

Revenue

We recognized revenue of $0.6 million for the three months ended March 31, 2016 compared to $4.0 million for the three months ended March 31, 2015, a decrease of $3.4 million. In 2015, we recognized revenues relating to the upfront payment from the collaborative agreement with Teva which was fully recognized by December 2015. The remaining decrease as compared to the same period in 2015 was due to less FTE funding from Genentech and Teva as we shifted resources from supporting our collaborations to our proprietary programs.

Research and Development Expenses

The following table summarizes research and development expenses for the three months ended March 31, 2016 and 2015 together with changes in those items (in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

2016 vs. 2015

 

 

 

2016

 

 

2015

 

 

Increase/(Decrease)

 

Collaboration expenses

 

$

289

 

 

$

863

 

 

$

(574

)

XEN801 expenses

 

 

1,160

 

 

 

832

 

 

 

328

 

Preclinical and discovery program expenses

 

 

2,915

 

 

 

1,732

 

 

 

1,183

 

Total research and development expenses

 

$

4,364

 

 

$

3,427

 

 

$

937

 

 

Research and development expenses were $4.4 million for the three months ended March 31, 2016 compared to $3.4 million for the three months ended March 31, 2015.  The increase of $0.9 million was primarily attributable to increased spending on our preclinical and discovery programs, mostly related to our Nav 1.6 sodium channel inhibitor program, as well as additional expenses for our XEN801 program which entered Phase 2 clinical development in February 2016. These increases were partially offset by a decrease in Genentech collaboration expenses.

General and Administrative Expenses

The following table summarizes general and administrative expenses for the three months ended March 31, 2016 and 2015 together with changes in those items (in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

2016 vs. 2015

 

 

 

2016

 

 

2015

 

 

Increase/(Decrease)

 

General and administrative expenses

 

$

1,895

 

 

$

6,720

 

 

$

(4,825

)

 

General and administrative expenses were $1.9 million for the three months ended March 31, 2016 compared to $6.7 million for the three months ended March 31, 2015, a decrease of $4.8 million. In the quarter ended March 31, 2015, we recognized a $4.9 million expense due to the fair value adjustment upon reclassification of stock option awards granted to directors and certain consultants to liability classification.

Other Income (Expense)

The following table summarizes our other income (expense) for the three months ended March 31, 2016 and 2015 together with changes in those items (in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

2016 vs. 2015

 

 

 

2016

 

 

2015

 

 

Increase/(Decrease)

 

Other income (expense):

 

$

2,395

 

 

$

(3,019

)

 

$

5,414

 

 

Other income was $2.4 million for the three months ended March 31, 2016 as compared to other expense of $3.0 million for the three months ended March 31, 2015.  The change of $5.4 million was primarily driven by the change in foreign exchange gain (loss). We recorded a foreign exchange gain of $2.3 million for the three months ended March 31, 2016, which was primarily unrealized gains arising largely from the translation of $39.2 million of cash and cash equivalents denominated in Canadian dollars to U.S. dollars and a 7% increase in the value of the Canadian dollar during the three month period. During the same period in 2015, we recorded a foreign exchange loss of $3.2 million largely due to an 8% decrease in the value of the Canadian dollar during the three month period.

 

-16-


 

Liquidity and Capital Resources

To date, we have financed our operations primarily through funding received from collaboration and license agreements, private placements of our common and preferred shares and our initial public offering, or IPO, as well as through the receipt of government funding. As of March 31, 2016, we had cash and cash equivalents of $56.1 million. We received $38.5 million of proceeds, net of underwriting discounts and commissions but before offering expenses, from our IPO 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 IPO and concurrent private placement each closed in November 2014.

We have incurred significant operating losses since inception. We had a $3.3 million net loss for the three months ended March 31, 2016 and an accumulated deficit of $123.0 million from inception through March 31, 2016. 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.

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:

 

·

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, including conducting preclinical research and clinical trials;

 

·

whether our existing collaborations continue to generate substantial milestone payments and, ultimately, royalties on future approved 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 product candidates and 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.

 

-17-


 

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 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.

Cash Flows

The following table shows a summary of our cash flows for the three months ended March 31, 2016 and 2015 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Net cash used in operating activities

 

$

(4,944

)

 

$

(5,547

)

Net cash provided by (used in) investing activities

 

 

(83

)

 

 

1,491

 

Net cash provided by financing activities

 

 

44

 

 

 

127

 

Operating Activities

For the three months ended March 31, 2016, net cash used by operating activities totaled $4.9 million, compared to net cash used in operating activities of $5.5 million for the same period in 2015. The change was primarily related to the timing of cash payments of trade payables, partially offset by a decrease in FTE funding and an increase in operating expenses.  

Investing Activities

For the three months ended March 31, 2016, net cash used in investing activities totaled $0.1 million, compared to net cash provided by investing activities of $1.5 million for the same period in 2015. The change was driven primarily by the redemption of marketable securities in the three months ended March 31, 2015 which did not occur in the three months ended March 31, 2016.

Financing Activities

For the three months ended March 31, 2016, net cash provided by financing activities did not change significantly as compared to the same period in 2015 and consisted exclusively of proceeds from the issuance of common shares from the exercise of stock options for both periods.

Contractual Obligations and Commitments

Our future significant contractual obligations as of December 31, 2015 were reported in our Annual Report on Form 10-K, filed with the SEC on March 8, 2016.

As of March 31, 2016, there have been no material changes from the contractual commitments previously disclosed in the Annual Report on Form 10-K.

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.

Outstanding Share Data

As of May 6, 2016, we had 14,403,866 common shares issued and outstanding and outstanding options to purchase an additional 1,975,057 common shares.

 

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Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or 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. In August 2015, the FASB issued an update deferring the effective date of the new revenue standard by one year. The new guidance will be effective for public entities for fiscal years beginning after December 15, 2017 instead of the originally contemplated effective date of December 15, 2016.  In March and April 2016, the FASB issued amendments to the new revenue standard to clarify the implementation guidance on principal versus agent considerations and identifying performance obligations and licensing with the same effective date as the new revenue standard. We are currently evaluating the new guidance to determine the impact it will have on our financial statements.

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 2016 is not expected to have a material impact on our financial statements.

In February 2016, the FASB issued amendments to lease accounting requiring the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. The new guidance retains a distinction between finance leases and operating leases, with cash payments from operating leases classified within operating activities in the statement of cash flows. These amendments will be effective for public entities for fiscal years beginning after December 15, 2018. The adoption of these amendments in fiscal 2019 is not expected to have a material impact on our financial statements.

In March 2016, the FASB issued amendments to stock-based compensation accounting to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of the statement of cash flows. The amendments stipulate (a) all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the statement of operations and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur, (b) excess tax benefits should be classified along with other tax cash flows as an operating activity, (c) an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur, (d) the threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions, and (e) cash paid by an employee when directly withholding shares for tax withholding purposes should be classified as financing activity. These amendments will be effective for public entities for fiscal years beginning after December 15, 2016. The adoption of these amendments in fiscal 2017 is not expected to have a material impact on our financial statements.

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 U.S. dollars, particularly those denominated in Canadian dollars. We also hold non-U.S. dollar denominated cash and cash equivalents, marketable securities, accounts receivable and accounts payable, which are denominated in Canadian dollars.

 

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Changes in foreign currency exchange rates can create significant foreign exchange gains or losses to us. Our current foreign currency risk is with the Canadian dollar, as a majority of our non-U.S. dollar denominated expenses are denominated in Canadian dollars and the majority of our cash and cash equivalents and marketable securities are held in Canadian dollars. To limit our exposure to volatility in currency markets, we estimate our anticipated expenses that will be denominated in Canadian and U.S. dollars and then purchase a corresponding amount of Canadian or U.S. dollars 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 Canadian dollars held. At March 31, 2016, we held cash and cash equivalents of $39.2 million denominated in Canadian dollars. A hypothetical 10% increase (decrease) in the value of the Canadian dollar would result in a foreign exchange gain (loss) of $3.9 million being recorded in the Statement of Operations on the translation of these Canadian dollar cash and cash equivalent balances into the U.S. dollar functional currency.

Interest Rate Risk

An additional market risk we face is interest rate risk. We had cash and cash equivalents of $56.1 million as of March 31, 2016. 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 March 31, 2016.

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) as of the end of the period covered by 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 effective, in design and operation.

(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2016 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.

 

 

 

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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 years ended December 31, 2014 and 2013, we have recorded net losses in each annual reporting period since inception in 1996, and we do not expect to have sustained profitability for the foreseeable future. We had net losses of $3.3 million for the three months ended March 31, 2016 and an accumulated deficit of $123.0 million as of March 31, 2016, which were driven by expenses incurred in connection with our research programs and from general and administrative costs associated with our operations.

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, funding received from our licensees and collaborators and, to a lesser extent, government funding. Other than royalties we are eligible to receive from sales of Glybera under our license to uniQure Biopharma B.V., or uniQure, 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.

 

-21-


 

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.

Other than royalties we are eligible to receive from sales of Glybera, 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. Other than royalties we are eligible to receive from sales of Glybera under our license to uniQure, we have not generated any royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales for the foreseeable future, if ever. Commercial sales of Glybera commenced in November 2015, but we do not expect to receive significant revenue in the near-term from these sales. 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, fail to achieve market acceptance or adequate market share, we may never become profitable. Although we were profitable for the years ended December 31, 2014 and 2013, 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:

 

·

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 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 three months ended March 31, 2016, we incurred approximately $4.4 million of costs associated with research and development, exclusive of costs incurred by our collaborators in developing our product candidates.

 

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Our current cash and cash equivalents and marketable securities 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, including conducting preclinical research and clinical trials;

 

·

whether our existing collaborations continue to generate substantial milestone payments and, ultimately, royalties on future approved 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 product candidates and 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 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.

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 common 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.

 

-23-


 

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 common 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 which could impact our results of operations.

As of March 31, 2016, approximately 70% of our cash and cash equivalents and marketable securities was denominated in Canadian dollars. Historically, the majority of our operating expenses have been denominated in Canadian dollars and the majority of our revenue has been denominated in U.S. dollars and we expect this trend to continue.

Prior to December 31, 2014, our functional currency was the Canadian dollar. On January 1, 2015, our functional currency changed from the Canadian dollar to the U.S. dollar based on our analysis of the changes in the primary economic environment in which we operate. As a result, 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, to the extent that foreign currency-denominated (i.e., non-U.S. dollar) monetary assets do not equal the amount of our foreign currency denominated monetary liabilities, foreign currency gains or losses could arise and materially impact our financial statements. 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.

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, GDC-0276, GDC-0310 and XEN801, 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 July 2015, we and our partner Teva Pharmaceutical Industries Ltd., or Teva, announced top line results from a Phase 2b study designed to evaluate the safety and efficacy of topically applied TV-45070 in patients with chronic pain due to osteoarthritis, or OA, of the knee. Results from this trial showed that TV-45070 did not demonstrate statistically significant difference from placebo in efficacy endpoints of reductions in pain due to OA and neither we nor Teva have plans for further development of TV-45070 in OA, although clinical development of TV-45070 in post-herpetic neuralgia, or PHN, continues.

 

-24-


 

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 and maintain 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. Commercial sales of Glybera commenced in November 2015. 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:

 

·

establishment and demonstration of clinical efficacy and safety and acceptance of the same by the medical community and regulatory authorities;

 

·

commercialization of competing products;

 

·

sufficient commercial supply of Glybera;

 

·

cost-effectiveness of Glybera;

 

·

regulatory authorities’ final assessment of the benefit-risk analysis 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;

 

·

cost of post-approval obligations in the EU including a post-approval clinical trial and market surveillance activities;

 

·

maintaining the marketing approval under exceptional circumstances in the EU;

 

·

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.

Glybera is approved in the EU under exceptional circumstances and full approval may never be granted or the existing approval under exceptional circumstances could be revoked. As a condition to approval of Glybera, uniQure is required to complete a post-approval clinical trial and is required to implement a disease registry as well as implement risk management procedures, distribute educational materials to healthcare professionals and patients, implement an additional manufacturing process step, comply with certain notification obligations and undergo annual reassessment, any negative outcome of which could potentially lead to a withdrawal of marketing approval for Glybera.

Any failure of uniQure or its sublicensee to successfully commercialize Glybera or revocation of Glybera’s marketing approval in the EU could have an adverse effect on our business, growth prospects, operating results and financial condition and could result in a 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 and safety of alternative products; the level of generic competition; and the availability of coverage and adequate reimbursement from government and other third-party payers.

 

-25-


 

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.

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 reduced or eliminated if our competitors develop and commercialize products or therapies that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA, EMA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected by decisions made by insurers or other third party payers.

To the extent that we are unable to compete effectively against one or more of our competitors in these areas, our business will not grow and our financial condition, results of operations and common share price may suffer.

There are no approved gene therapies currently on the market for lipoprotein lipase deficiency, or LPLD, in the U.S. The current management of LPLD consists of strict adherence to an extremely low-fat diet, but compliance with such a diet is challenging. Lipid-lowering drugs are generally not effective for treating LPLD. We are not aware of any other drugs or therapies currently in development that treat LPLD by using the lipoprotein lipase, or LPL, sequence containing the LPLS447X genetic variant or otherwise.

Drug discovery and development for various pain applications is intensely competitive. There are a large number of approved products for neuropathic pain, inflammatory pain and other pain indications. These approved products include capsaicin, celecoxib, lidocaine, narcotic analgesics and pregabalin. We are also aware of clinical-stage development programs at several pharmaceutical and biotechnology companies that are developing Nav1.7 inhibitors or other sodium channel inhibitors for the treatment of pain, including Biogen Inc., Dainippon Sumitomo Co., Ltd., Eli Lilly and Company, Merck & Co., Inc., or Merck, NeuroQuest Inc., and Vertex Pharmaceuticals Inc. Moreover, we are aware of various other product candidates in development that target other mechanisms of action to treat various pain indications, including calcium channel inhibitors, nerve growth factor inhibitors and P2X purinoceptor 3 inhibitors.

If XEN801 were approved for the treatment of acne, we anticipate it would compete with other approved prescription acne products including topical retinoids, oral hormonal therapies, topical and oral antimicrobials, and oral isotretinoin. In addition to approved prescription therapies, there are a wide range of over-the-counter, or OTC, treatments targeted at treating acne. Additionally, there are a number of prescription products that are used “off-label” for the treatment of acne. We are also aware of several products in clinical development that could potentially compete with XEN801, including products in development from Allergan PLC, AOBiome LLC, Braintree Laboratories Inc., Cassiopea SpA, Dermira Inc., Foamix Pharmaceuticals Ltd., Galderma SA, Mimetica Pty Ltd, Novan Therapeutics, Phosphagenics Ltd, Valeant Pharmaceuticals, and XBiotech Inc.

The novelty of gene therapy products and their lack of a commercial track record may hinder market acceptance of Glybera among physicians, patients, healthcare payers and the medical community.

Glybera is the first gene therapy product approved in the EU, and no gene therapy product has been approved in the U.S. Because Glybera is the first gene therapy to be marketed in the EU, gaining market acceptance and overcoming any safety or efficacy concerns may be more challenging than for a more traditional therapy. Glybera’s commercial success will depend, in part, on the success of efforts to educate the market regarding gene therapy products. In particular, the success of Glybera will depend upon physicians who treat patients with LPLD, prescribing Glybera. With respect to Glybera and any other gene therapy products we or a collaborator may develop, public perception may be influenced by claims that gene therapy is unsafe, and, if so, gene therapy may not gain the acceptance of the public or the medical community.

 

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We have no marketed products and have not yet advanced a product candidate beyond Phase 2 clinical trials, which makes it difficult to assess our ability to develop our future product candidates and commercialize any resulting products independently.

We have no experience in Phase 3 and later stage clinical development, and related regulatory requirements or the commercialization of products. uniQure controls and has been responsible for the development and commercialization of Glybera; Teva is responsible for the on-going clinical development of TV-45070; and Genentech Inc., or Genentech, is responsible for the on-going clinical development of GDC-0276 and GDC-0310. Accordingly, we have not yet demonstrated our ability to independently and repeatedly conduct clinical development after Phase 2, obtain regulatory approval and commercialize therapeutic products. We will need to develop such abilities if we are to execute on our business strategy to selectively develop and independently commercialize product candidates for orphan and niche indications. To execute on our business plan for the development of independent programs, we will need to successfully:

 

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execute our clinical development plans for later-stage product candidates;

 

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obtain required regulatory approvals in each jurisdiction in which we will seek to commercialize products;

 

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build and maintain appropriate sales, distribution and marketing capabilities;

 

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gain market acceptance for our future products, if any; and

 

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manage our spending as costs and expenses increase due to clinical trials, regulatory approvals and commercialization activities.

If we are unsuccessful in accomplishing these objectives, we would not be able to develop and commercialize any future orphan and niche disease product candidates independently, and could fail to realize the potential advantages of doing so.

If we are not successful in leveraging our Extreme Genetics discovery platform to discover product candidates in addition to TV-45070, GDC-0276, GDC-0310 and XEN801, our ability to expand our business and achieve our strategic objectives may be impaired.

We rely on our Extreme Genetics discovery platform to identify validated drug targets and develop new product candidates. To date, our Extreme Genetics discovery platform has yielded one approved product, Glybera, and four clinical development candidates TV-45070, GDC-0276, GDC-0310 and XEN801. Use of our discovery platform requires substantial technical, financial and human resources, regardless of whether we identify any novel drug targets. Our Extreme Genetics discovery platform may initially show promise in identifying additional potential product candidates, yet fail to yield viable product candidates for clinical development or commercialization. Such failure may occur for many reasons, including the following: any product candidate may, on further study, be shown to have serious or unexpected side effects or other characteristics that indicate it is unlikely to be safe or otherwise does not meet applicable regulatory criteria; and any product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all.

If we are unable to identify additional product candidates suitable for clinical development and commercialization, we may not be able to obtain product revenue in future periods, which likely would result in significant harm to our financial position and adversely impact our trading price.

Our approach to drug discovery is unproven, and we do not know whether we will be able to develop any products of commercial value.

Our Extreme Genetics discovery platform may not reproducibly or cost-effectively result in the discovery of product candidates and development of commercially viable products that safely and effectively treat human disease.

There are various challenges in utilizing our Extreme Genetics discovery platform to successfully identify novel drug targets, including locating families suffering from rare disorders and severe phenotypes, entering into agreements with foreign collaborators, complying with various domestic and foreign privacy laws, accessing required technologies in a timely manner and transporting DNA across national borders.

To date, only Glybera has been both developed using our Extreme Genetics discovery platform and approved for commercial sale. If the use of our Extreme Genetics discovery platform fails to identify novel targets for drug discovery, or such targets prove to be unsuitable for treating human disease, or we are unable to develop product candidates with specificity and selectivity for such targets, we will fail to develop viable products. If we fail to develop and commercialize viable products, we will not achieve commercial success.

 

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We may encounter difficulties in managing our growth, including headcount, and expanding our operations successfully.

Our business strategy involves continued development and, where development is successful, commercialization of select successfully developed product candidates for orphan and niche indications independently. In order to execute on this strategy, we will need to build out a regulatory, sales, manufacturing, distribution and marketing infrastructure and expand our development capabilities or contract with third parties to provide these capabilities and infrastructure for us. To achieve this, we will need to identify, hire and integrate personnel who have not worked together as a group previously. We anticipate that we may need to hire additional accounting, legal and financial staff with appropriate public company experience and technical accounting and other knowledge to address the added burdens of operating as a newly public company. There are likely to be infrastructure costs associated with public company compliance as well.

As our operations expand, we expect that we will need to manage additional relationships with various strategic collaborators, suppliers and other third parties.

Drs. Simon Pimstone and Y. Paul Goldberg each devote a small amount of their time to clinical work outside of their duties at our company, conducting, generally, two to three outpatient clinics per month. Future growth will impose significant added responsibilities on members of management, and our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities.

If we are to effectively manage our growth, our expenses may increase more than expected, our ability to generate and grow revenue could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.

If we fail to attract and retain senior management and key personnel, we may be unable to successfully develop our product candidates, perform our obligations under our collaboration agreements, conduct our clinical trials and commercialize our product candidates.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel.

We could experience difficulties attracting and retaining qualified employees as competition for qualified personnel in the biotechnology and pharmaceutical field is intense. We are highly dependent upon our senior management, particularly Dr. Pimstone, our Chief Executive Officer and President; Mr. Ian Mortimer, our Chief Financial Officer and Chief Operating Officer; and Dr. Goldberg, our Vice President, Clinical Development, as well as other employees. In the near future, the loss of services of any of these individuals or one or more of our other members of senior management could materially delay or even prevent the successful development of our product candidates.

In addition, we will need to hire additional personnel as we expand our clinical development activities and develop commercial capabilities, including a sales infrastructure to support our independent commercialization efforts. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for individuals with similar skill sets. The inability to recruit or loss of the services of any executive or key employee may impede the progress of our research, development and commercialization objectives.

Our employees, collaborators and other personnel may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of fraud or other misconduct by our employees, collaborators, vendors, principal investigators, consultants and commercial partners. Misconduct by these parties could include intentional failures to comply with the regulations of the FDA, EMA and other non-U.S. regulators, provide accurate information to the FDA, EMA and other non-U.S. regulators, comply with data privacy and security and healthcare fraud and abuse laws and regulations in the U.S. and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. Additionally, laws regarding data privacy and security, including the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, as well as comparable laws in non-U.S. jurisdictions, may impose obligations with respect to safeguarding the privacy, use, security and transmission of individually identifiable health information such as genetic material or information we obtain through our direct-to-patient web-based recruitment approach for identifying patients with rare or extreme phenotypes.

 

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Various laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Any misconduct could also involve the improper use of information obtained in the course of clinical studies, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of conduct applicable to all of our employees, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

Our business and operations could suffer in the event of system failures.

Computer system, network or telecommunications failures due to events such as damage from malware, unauthorized access, terrorism, war, or natural disasters could interrupt our internal or partner operations. For example, the loss of preclinical trial data or data from completed or ongoing clinical trials for our product candidates could result in delays in our regulatory filings and development efforts and significantly increase our costs. To the extent that any disruption or security breach were to result in a loss of or damage to our data, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the development of our product candidates could be delayed. While we have implemented security measures and, to date, have not detected a cyber security breach nor experienced a material system failure, our internal computer systems and those of our contractors and consultants are vulnerable to damage from these events.

A variety of risks associated with international operations could materially adversely affect our business.

Glybera has been approved for commercial sale in the EU by the EMA, subject to uniQure’s compliance with certain post-approval reporting and monitoring obligations. Our collaborator for TV-45070, Teva, is based in Israel and a significant portion of the research and development activities under our collaboration with Teva are performed outside of North America. If we continue to engage in significant cross-border activities, we will be subject to risks related to international operations, including:

 

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different regulatory requirements for maintaining approval of drugs and biologics in foreign countries;

 

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