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UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10‑Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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 July 29, 2016 was 14,426,370

 

 

 

 


 

XENON PHARMACEUTICALS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2016

TABLE OF CONTENTS

 

 

Page

 

PART I. FINANCIAL INFORMATION

2

 

Item 1. Financial Statements

2

 

Balance Sheets as of June 30, 2016 and December 31, 2015

2

 

Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2016 and 2015

3

 

Statement of Shareholders’ Equity for the six months ended June 30, 2016

4

 

Statements of Cash Flows for the six months ended June 30, 2016 and 2015

5

 

Notes to Financial Statements

6

 

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

11

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

20

 

Item 4. Controls and Procedures

21

 

PART II. OTHER INFORMATION

22

 

Item 1. Legal Proceedings

22

 

Item 1A. Risk Factors

22

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

56

 

Item 6. Exhibits

57

 

SIGNATURES

58

 

EXHIBIT INDEX

59

 

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)

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,210

 

 

$

58,651

 

Marketable securities

 

 

15,528

 

 

 

 

Accounts receivable

 

 

658

 

 

 

315

 

Prepaid expenses and other current assets

 

 

1,996

 

 

 

1,900

 

 

 

 

53,392

 

 

 

60,866

 

Prepaid expenses, long term

 

 

632

 

 

 

1,094

 

Property, plant and equipment, net

 

 

1,663

 

 

 

1,989

 

Total assets

 

$

55,687

 

 

$

63,949

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses (note 6)

 

 

2,929

 

 

 

2,625

 

Deferred revenue

 

 

 

 

 

157

 

 

 

 

2,929

 

 

 

2,782

 

Deferred tenant inducements

 

 

101

 

 

 

133

 

 

 

$

3,030

 

 

$

2,915

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

  outstanding: 14,415,347 (December 31, 2015 - 14,385,336)

 

 

148,867

 

 

 

148,634

 

Additional paid-in capital

 

 

33,752

 

 

 

33,083

 

Accumulated deficit

 

 

(128,972

)

 

 

(119,693

)

Accumulated other comprehensive loss

 

 

(990

)

 

 

(990

)

 

 

$

52,657

 

 

$

61,034

 

Total liabilities and shareholders’ equity

 

$

55,687

 

 

$

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 Income (Loss)

(Unaudited)

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration revenue (note 8)

 

$

412

 

 

$

4,044

 

 

$

981

 

 

$

8,054

 

Royalties

 

 

1

 

 

 

2

 

 

 

33

 

 

 

2

 

 

 

 

413

 

 

 

4,046

 

 

 

1,014

 

 

 

8,056

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

5,103

 

 

 

3,669

 

 

 

9,467

 

 

 

7,096

 

General and administrative

 

 

1,676

 

 

 

178

 

 

 

3,571

 

 

 

6,898

 

 

 

 

6,779

 

 

 

3,847

 

 

 

13,038

 

 

 

13,994

 

Income (loss) from operations

 

 

(6,366

)

 

 

199

 

 

 

(12,024

)

 

 

(5,938

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

123

 

 

 

163

 

 

 

222

 

 

 

315

 

Foreign exchange gain (loss)

 

 

227

 

 

 

806

 

 

 

2,523

 

 

 

(2,365

)

Net income (loss) and comprehensive income (loss)

 

 

(6,016

)

 

 

1,168

 

 

 

(9,279

)

 

 

(7,988

)

Net income (loss) per common share (note 4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.42

)

 

$

0.08

 

 

$

(0.64

)

 

$

(0.56

)

Diluted

 

$

(0.42

)

 

$

(0.07

)

 

$

(0.65

)

 

$

(0.56

)

Weighted-average common shares outstanding (note 4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,408,108

 

 

 

14,241,827

 

 

 

14,401,054

 

 

 

14,227,203

 

Diluted

 

 

14,434,602

 

 

 

15,129,978

 

 

 

14,428,160

 

 

 

14,227,203

 

 

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

loss (1)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,279

)

 

 

 

 

 

 

(9,279

)

Stock option compensation

   expense

 

 

 

 

 

 

 

 

 

 

1,106

 

 

 

 

 

 

 

 

 

 

 

1,106

 

Issued pursuant to exercise

   of stock options

 

 

30,011

 

 

$

233

 

 

 

(151

)

 

 

 

 

 

 

 

 

 

 

82

 

Fair value adjustment upon

   reclassification of stock options

 

 

 

 

 

 

 

 

 

 

(286

)

 

 

 

 

 

 

 

 

 

 

(286

)

Balance as of

   June 30, 2016

 

 

14,415,347

 

 

$

148,867

 

 

$

33,752

 

 

$

(128,972

)

 

$

(990

)

 

$

52,657

 

(1)

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)

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(9,279

)

 

$

(7,988

)

Items not involving cash:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

531

 

 

 

492

 

Stock-based compensation

 

 

1,006

 

 

 

3,446

 

Deferred tenant inducements

 

 

(32

)

 

 

(32

)

Unrealized foreign exchange (gain) loss

 

 

(2,508

)

 

 

2,353

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(333

)

 

 

31

 

Prepaid expenses, and other current assets

 

 

366

 

 

 

221

 

Accounts payable and accrued expenses

 

 

33

 

 

 

(350

)

Deferred revenue

 

 

(157

)

 

 

(6,144

)

Net cash used in operating activities

 

 

(10,373

)

 

 

(7,971

)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(205

)

 

 

(190

)

Purchase of marketable securities

 

 

(15,300

)

 

 

 

Proceeds from marketable securities

 

 

 

 

 

1,818

 

Net cash provided by (used in) investing activities

 

 

(15,505

)

 

 

1,628

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common shares

 

 

82

 

 

 

213

 

Net cash provided by financing activities

 

 

82

 

 

 

213

 

Effect of exchange rate changes on cash and cash equivalents

 

 

2,355

 

 

 

(1,550

)

Decrease in cash and cash equivalents

 

 

(23,441

)

 

 

(7,680

)

Cash and cash equivalents, beginning of period

 

 

58,651

 

 

 

72,026

 

Cash and cash equivalents, end of period

 

$

35,210

 

 

$

64,346

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Interest received

 

$

204

 

 

$

268

 

Supplemental disclosures of non-cash transactions:

 

 

 

 

 

 

 

 

Fair value of options exercised on a cashless basis

 

 

4

 

 

 

189

 

 

 

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 and six month periods ended June 30, 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 and interim periods within those years, beginning after December 15, 2017 instead of the originally contemplated effective date of December 15, 2016. 

In March, April and May 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 as well as to address certain narrow-scope improvements and practical expedients at transition 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 and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the new guidance to determine the impact it will have 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 and interim periods within those years, beginning on or after December 15, 2016 and early adoption is permitted. The Company has early adopted all of the provisions of this update effective January 1, 2016. The Company has elected to recognize forfeitures as they occur and the impact of that change in accounting policy as well as the impact of the remaining provisions did not 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 the numerator and denominator of the basic net income (loss) per share calculation for the potential impact of dilutive securities.

For the three and six month periods ended June 30, 2016, 1,934,452 and 1,841,096 stock options, respectively, were excluded from the calculation of diluted net income per common share as their inclusion would be anti-dilutive (three months ended June 30, 2015 - 389,283). For the six months ended June 30, 2015, all stock options were anti-dilutive and were excluded from the diluted weighted average common shares outstanding for the period.

The following is a reconciliation of the numerators and denominators of basic and diluted net income (loss) per common share:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) used to compute net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(6,016

)

 

$

1,168

 

 

$

(9,279

)

 

$

(7,988

)

Adjustment for change in fair value of liability classified stock options

 

 

(58

)

 

 

(2,244

)

 

 

(100

)

 

 

 

Diluted

 

$

(6,074

)

 

$

(1,076

)

 

$

(9,379

)

 

$

(7,988

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,408,108

 

 

 

14,241,827

 

 

 

14,401,054

 

 

 

14,227,203

 

Adjustment for dilutive effect of stock options

 

 

26,494

 

 

 

888,151

 

 

 

27,106

 

 

 

 

Diluted

 

 

14,434,602

 

 

 

15,129,978

 

 

 

14,428,160

 

 

 

14,227,203

 

Net income (loss) per common share - basic

 

$

(0.42

)

 

$

0.08

 

 

$

(0.64

)

 

$

(0.56

)

Net loss per common share - diluted

 

$

(0.42

)

 

$

(0.07

)

 

$

(0.65

)

 

$

(0.56

)

 

 

-7-

 

 


 

 

 

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. Liability classified stock options have been valued using a Black-Scholes pricing model to estimate fair value using Level 3 inputs as defined above, as quoted prices are not readily available.

6.

Accounts payable and accrued expenses:

Accounts payable and accrued expenses consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Trade payables

 

$

655

 

 

$

1,088

 

Employee compensation, benefits, and related accruals

 

 

763

 

 

 

762

 

Consulting and contracted research

 

 

1,218

 

 

 

506

 

Professional fees

 

 

246

 

 

 

214

 

Other

 

 

47

 

 

 

55

 

Total

 

$

2,929

 

 

$

2,625

 

 

-8-

 

 


 

 

 

 

7.

Stock option plan:

The following table presents stock option activity for the period:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Outstanding, beginning of period

 

 

1,934,734

 

 

 

1,785,436

 

 

 

1,721,472

 

 

 

1,484,218

 

Granted

 

 

65,450

 

 

 

33,474

 

 

 

299,400

 

 

 

380,438

 

Exercised(1)

 

 

(14,283

)

 

 

(55,155

)

 

 

(30,529

)

 

 

(99,811

)

Forfeited and expired

 

 

(2,227

)

 

 

(18,737

)

 

 

(6,669

)

 

 

(19,827

)

Outstanding, end of period

 

 

1,983,674

 

 

 

1,745,018

 

 

 

1,983,674

 

 

 

1,745,018

 

Exercisable, end of period

 

 

1,195,883

 

 

 

1,126,629

 

 

 

1,195,883

 

 

 

1,126,629

 

 

 

(1)

During the six months ended June 30, 2016, 29,270 stock options were exercised for the same number of common shares for cash (six months ended June 30, 2015 – 53,442). In the same period, the Company issued 741 common shares (six months ended June 30, 2015 – 32,399) for the cashless exercise of 1,259 stock options (six months ended June 30, 2015 – 46,369).

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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Average risk-free interest rate

 

 

1.44

%

 

 

1.71

%

 

 

1.60

%

 

 

1.71

%

Average expected term (in years)

 

 

6.14

 

 

 

6.04

 

 

 

6.23

 

 

 

6.23

 

Expected volatility

 

 

74

%

 

 

75

%

 

 

75

%

 

 

75

%

Expected dividend yield

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

The weighted-average fair value of options granted during the six months ended June 30, 2016 was $4.90 (six months ended June 30, 2015 – $11.96) 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.

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.

 

-9-

 

 


 

 

 

The following table is a summary of the revenue recognized from the Company’s collaborations for the three and six months ended June 30, 2016 and 2015:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Teva:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognition of upfront payment

 

$

 

 

$

2,908

 

 

$

 

 

$

5,784

 

Research funding

 

 

29

 

 

 

45

 

 

 

58

 

 

 

90

 

Genentech:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognition of upfront payment

 

 

 

 

 

181

 

 

 

157

 

 

 

360

 

Research funding

 

 

383

 

 

 

910

 

 

 

766

 

 

 

1,820

 

Total collaboration revenue

 

$

412

 

 

$

4,044

 

 

$

981

 

 

$

8,054

 

 

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, $1,215 has been recorded as expenses to date for services rendered, $1,153 has been recorded as current prepaid expenses (December 31, 2015 – $1,010) and $632 as long-term prepaid expenses (December 31, 2015 – $1,094) for the provision of future services as at June 30, 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 $568 and $941 of clinical development service fees under its priority access agreement and a master services agreement with Medpace for the three and six months ended June 30, 2016 (three and six months ended June 30, 2015 – $55). Additionally, the Company has recorded $1,996  of prepaid expenses as of June 30, 2016 (December 31, 2015 – $2,314) for future clinical development services under such agreements with Medpace.

 

 

 

-10-

 

 


 

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;

 

-11-


 

 

·

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 late 2016 or early 2017. 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 first quarter of 2017; and

 

-12-


 

 

·

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 six months ended June 30, 2016, we recognized revenues, consisting primarily of funding from our collaborators of approximately $1.0 million. This compares to $8.1 million for the six months ended June 30, 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 $9.3 million for the six months ended June 30, 2016 and an accumulated deficit of $129.0 million as of June 30, 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.

 

 

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.

The following table is a summary of revenue recognized from our current collaboration agreements for the three and six months ended June 30, 2016 and 2015 (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Teva:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognition of upfront payment

 

$

 

 

$

2,908

 

 

$

 

 

$

5,784

 

Research funding

 

 

29

 

 

 

45

 

 

 

58

 

 

 

90

 

Genentech:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognition of upfront payment

 

 

 

 

 

181

 

 

 

157

 

 

 

360

 

Research funding

 

 

383

 

 

 

910

 

 

 

766

 

 

 

1,820

 

Total collaboration revenue

 

$

412

 

 

$

4,044

 

 

$

981

 

 

$

8,054

 

 

-13-


 

 

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 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 June 30, 2016 and December 31, 2015 (in thousands):

 

 

 

June 30, 2016

 

 

December 31, 2015

 

Genentech - deferred revenue

 

$

 

 

$

157

 

As of June 30, 2016, we have recognized all deferred revenues from upfront payments received under our existing collaboration and licensing agreements.

Operating Expenses

The following table summarizes our operating expenses for the three and six months ended June 30, 2016 and 2015 (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Research and development

 

$

5,103

 

 

$

3,669

 

 

$

9,467

 

 

$

7,096

 

General and administrative

 

 

1,676

 

 

 

178

 

 

 

3,571

 

 

 

6,898

 

Total operating expenses

 

$

6,779

 

 

$

3,847

 

 

$

13,038

 

 

$

13,994

 

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.

 

-14-


 

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 also include fair value adjustments of certain liability classified stock option awards.

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.

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;

 

-15-


 

 

·

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 six months ended June 30, 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 criti