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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10‑Q

 

(Mark One)

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

For the quarterly period ended March 31, 2017

OR

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

For the transition period from                            to                         

Commission File Number: 001-36687

 

XENON PHARMACEUTICALS INC.

(Exact name of Registrant as Specified in its Charter)

 

 

Canada

98-0661854

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

200-3650 Gilmore Way

Burnaby, British Columbia, Canada

V5G 4W8

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (604) 484-3300

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.    

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of May 5, 2017, the registrant had 17,996,680 common shares, without par value, outstanding.

 

 

 

 

 


 

XENON PHARMACEUTICALS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2017

TABLE OF CONTENTS

 

 

Page

 

PART I. FINANCIAL INFORMATION

1

 

Item 1. Financial Statements

1

 

Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

1

 

Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2017 and 2016

2

 

Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2017

3

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016

4

 

Notes to Consolidated Financial Statements

5

 

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

10

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

18

 

Item 4. Controls and Procedures

19

 

PART II. OTHER INFORMATION

20

 

Item 1. Legal Proceedings

20

 

Item 1A. Risk Factors

20

 

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. and its subsidiary. “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.

Consolidated Balance Sheets

(Unaudited)

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,160

 

 

$

17,095

 

Marketable securities

 

 

37,867

 

 

 

47,051

 

Accounts receivable

 

 

189

 

 

 

200

 

Prepaid expenses and other current assets

 

 

925

 

 

 

1,329

 

 

 

 

59,141

 

 

 

65,675

 

Prepaid expenses, long term

 

 

269

 

 

 

408

 

Property, plant and equipment, net

 

 

1,376

 

 

 

1,404

 

Total assets

 

$

60,786

 

 

$

67,487

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses (note 6)

 

 

3,591

 

 

 

3,586

 

 

 

$

3,591

 

 

$

3,586

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

  outstanding: 17,996,680 (December 31, 2016 - 17,930,590) (note 7a)

 

 

173,829

 

 

 

173,246

 

Additional paid-in capital

 

 

34,557

 

 

 

34,326

 

Accumulated deficit

 

 

(150,201

)

 

 

(142,681

)

Accumulated other comprehensive loss

 

 

(990

)

 

 

(990

)

 

 

$

57,195

 

 

$

63,901

 

Total liabilities and shareholders’ equity

 

$

60,786

 

 

$

67,487

 

 

 

 

 

 

 

 

 

 

Collaboration agreements (note 8)

 

 

 

 

 

 

 

 

Commitments and contingencies (note 9)

 

 

 

 

 

 

 

 

Subsequent event (note 11)

 

 

 

 

 

 

 

 

 

 

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

 

 

-1-


 

XENON PHARMACEUTICALS INC.

Consolidated 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,

 

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

Collaboration revenue (note 8)

 

$

15

 

 

$

569

 

Royalties

 

 

1

 

 

 

32

 

 

 

 

16

 

 

 

601

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

5,903

 

 

 

4,364

 

General and administrative

 

 

2,100

 

 

 

1,895

 

 

 

 

8,003

 

 

 

6,259

 

Loss from operations

 

 

(7,987

)

 

 

(5,658

)

Other income:

 

 

 

 

 

 

 

 

Interest income

 

 

149

 

 

 

99

 

Foreign exchange gain

 

 

321

 

 

 

2,296

 

Net loss and comprehensive loss

 

 

(7,517

)

 

 

(3,263

)

Net loss per common share (note 4):

 

 

 

 

 

 

 

 

Basic

 

$

(0.42

)

 

$

(0.23

)

Diluted

 

$

(0.43

)

 

$

(0.23

)

Weighted-average common shares outstanding (note 4):

 

 

 

 

 

 

 

 

Basic

 

 

17,946,209

 

 

 

14,394,000

 

Diluted

 

 

17,974,469

 

 

 

14,394,000

 

 

 

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

 

 

 

-2-


 

XENON PHARMACEUTICALS INC.

Consolidated 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, 2015

 

 

14,385,336

 

 

$

148,634

 

 

$

33,083

 

 

$

(119,693

)

 

$

(990

)

 

$

61,034

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,997

)

 

 

 

 

 

 

(22,997

)

Issuance of common shares,

   net of issuance costs

 

 

3,450,000

 

 

$

23,832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,832

 

Stock option compensation

   expense

 

 

 

 

 

 

 

 

 

 

2,186

 

 

 

 

 

 

 

 

 

 

 

2,186

 

Issued pursuant to exercise

   of stock options

 

 

95,254

 

 

 

780

 

 

 

(657

)

 

 

9

 

 

 

 

 

 

 

132

 

Fair value adjustment upon

   reclassification of stock options

 

 

 

 

 

 

 

 

 

 

(286

)

 

 

 

 

 

 

 

 

 

 

(286

)

Balance as of

   December 31, 2016

 

 

17,930,590

 

 

$

173,246

 

 

$

34,326

 

 

$

(142,681

)

 

$

(990

)

 

$

63,901

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,517

)

 

 

 

 

 

 

(7,517

)

Stock option compensation

   expense

 

 

 

 

 

 

 

 

 

 

637

 

 

 

 

 

 

 

 

 

 

 

637

 

Issued pursuant to exercise

   of stock options

 

 

66,090

 

 

$

583

 

 

 

(406

)

 

 

(3

)

 

 

 

 

 

 

174

 

Balance as of

   March 31, 2017

 

 

17,996,680

 

 

$

173,829

 

 

$

34,557

 

 

$

(150,201

)

 

$

(990

)

 

$

57,195

 

(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.

 

 

-3-


 

 

 

XENON PHARMACEUTICALS INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Expressed in thousands of U.S. dollars)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,517

)

 

$

(3,263

)

Items not involving cash:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

165

 

 

 

282

 

Stock-based compensation

 

 

478

 

 

 

592

 

Unrealized foreign exchange gain

 

 

(326

)

 

 

(2,260

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

11

 

 

 

(60

)

Prepaid expenses, and other current assets

 

 

404

 

 

 

82

 

Prepaid expenses, long term

 

 

139

 

 

 

 

Accounts payable and accrued expenses

 

 

186

 

 

 

(160

)

Deferred revenue

 

 

 

 

 

(157

)

Net cash used in operating activities

 

 

(6,460

)

 

 

(4,944

)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(137

)

 

 

(83

)

Proceeds from marketable securities

 

 

9,384

 

 

 

 

Net cash provided by (used in) investing activities

 

 

9,247

 

 

 

(83

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Issuance of common shares pursuant to exercise of stock options

 

 

174

 

 

 

44

 

Net cash provided by financing activities

 

 

174

 

 

 

44

 

Effect of exchange rate changes on cash and cash equivalents

 

 

104

 

 

 

2,396

 

Increase (decrease) in cash and cash equivalents

 

 

3,065

 

 

 

(2,587

)

Cash and cash equivalents, beginning of period

 

 

17,095

 

 

 

58,651

 

Cash and cash equivalents, end of period

 

$

20,160

 

 

$

56,064

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Interest received

 

$

55

 

 

$

112

 

Supplemental disclosures of non-cash transactions:

 

 

 

 

 

 

 

 

Fair value of options exercised on a cashless basis

 

 

19

 

 

 

 

 

 

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

 

 

 

-4-

 

 


 

XENON PHARMACEUTICALS INC.

Notes to Consolidated 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 consolidated financial statements are presented in U.S. dollars.

The Company has one wholly-owned subsidiary as at March 31, 2017, Xenon Pharmaceuticals USA Inc. which was incorporated in Delaware on December 2, 2016.

These unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated on consolidation.

The accompanying unaudited interim consolidated 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 consolidated financial statements do not include all of the information and footnotes required for complete consolidated financial statements and should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2016 and included in the Company’s 2016 Annual Report on Form 10-K filed with the SEC and with the securities commissions in British Columbia, Alberta and Ontario on March 8, 2017.

These unaudited interim consolidated 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, 2017 and 2016 are not necessarily indicative of results that can be expected for a full year. These unaudited interim consolidated financial statements follow the same significant accounting policies as those described in the notes to the audited consolidated financial statements of the Company included in the Company’s 2016 Annual Report on Form 10-K for the year ended December 31, 2016. Certain comparative figures have been reclassified to conform to the consolidated financial statement presentation adopted for the current period.

3.

Future changes in accounting policies:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (ASC 606) 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 standard, as subsequently amended, stipulates 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. The new guidance will be effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2017. The Company has begun its evaluation and identified two significant collaboration agreements with respect to revenue, the collaborative development and license agreements with Teva Pharmaceutical Industries, Ltd. and Genentech, a member of the Roche Group, described in notes 9(a) and (b), respectively, to the audited consolidated financial statements of the Company included in the Company’s 2016 Annual Report on Form 10-K for the year ended December 31, 2016. The Company is evaluating the new guidance as it applies to revenue previously recognized as well as milestone payments the Company is eligible to receive in future periods under these agreements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Recognition and Measurement of Financial Assets and Financial Liabilities. The update requires 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 consolidated financial statements.

 

-5-


 

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 months ended March 31, 2017, 1,943,508 stock options were excluded from the calculation of diluted net income per common share as their inclusion would be anti-dilutive. For the three months ended March 31, 2016, 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 loss per common share:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

Net loss used to compute net loss per common share:

 

 

 

 

 

 

 

 

Basic

 

$

(7,517

)

 

$

(3,263

)

Adjustment for change in fair value of liability classified stock options

 

 

(133

)

 

 

 

Diluted

 

$

(7,650

)

 

$

(3,263

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

Basic

 

 

17,946,209

 

 

 

14,394,000

 

Adjustment for dilutive effect of stock options

 

 

28,260

 

 

 

 

Diluted

 

 

17,974,469

 

 

 

14,394,000

 

Net loss per common share - basic

 

$

(0.42

)

 

$

(0.23

)

Net loss per common share - diluted

 

$

(0.43

)

 

$

(0.23

)

 

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. As quoted prices for the liability classified stock options, included in the consolidated balance sheet as accounts payable and accrued expenses, are not readily available, the Company has used a Black-Scholes pricing model to estimate fair value using Level 3 inputs as defined above.

 

-6-


 

6.

Accounts payable and accrued expenses:

Accounts payable and accrued expenses consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Trade payables

 

$

1,165

 

 

$

1,463

 

Employee compensation, benefits, and related accruals

 

 

530

 

 

 

872

 

Consulting and contracted research

 

 

1,495

 

 

 

1,029

 

Professional fees

 

 

305

 

 

 

93

 

Other

 

 

96

 

 

 

129

 

Total

 

$

3,591

 

 

$

3,586

 

7.

Share Capital

 

(a)

Financing:

On September 13, 2016, the Company completed an underwritten public offering of 3,450,000 of its common shares at a public offering price of $7.50 per common share. The Company received approximately $24.3 million of proceeds, net of underwriting discounts and commissions but before offering expenses.

 

(b)

Stock-based compensation:

The following table presents stock option activity for the period:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Outstanding, beginning of period

 

 

1,910,823

 

 

 

1,721,472

 

Granted

 

 

416,750

 

 

 

233,950

 

Exercised(1)

 

 

(67,921

)

 

 

(16,246

)

Forfeited and expired

 

 

(1,415

)

 

 

(4,442

)

Outstanding, end of period

 

 

2,258,237

 

 

 

1,934,734

 

Exercisable, end of period

 

 

1,293,367

 

 

 

1,151,853

 

 

 

(1)

During the three months ended March 31, 2017, 62,397 stock options were exercised for the same number of common shares for cash (three months ended March 31, 2016 – 16,246). In the same period, the Company issued 3,693 common shares (three months ended March 31, 2016 – nil) for the cashless exercise of 5,524 stock options (three months ended March 31, 2016 – nil).

The fair value of each option granted 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,

 

 

 

2017

 

 

2016

 

Average risk-free interest rate

 

 

2.44

%

 

 

1.64

%

Expected volatility

 

 

81

%

 

 

75

%

Average expected term (in years)

 

 

7.47

 

 

 

6.25

 

Expected dividend yield

 

 

0.00

%

 

 

0.00

%

 

The weighted-average fair value of options granted during the three months ended March 31, 2017 was $6.34 (three months ended March 31, 2016 – $4.95) 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 non-refundable 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.

 

-7-


 

The collaborations may also include contractual milestone payments, which relate to the achievement of pre-specified research, development, regulatory and commercialization events. The milestone events coincide with the progression of product candidates from research and development, to regulatory approval and through to commercialization. The process of successfully discovering a new product candidate, having it selected by the collaborator for development and having it approved and ultimately sold for a profit is highly uncertain. As such, the milestone payments that the Company may earn from its collaborators involve a significant degree of risk to achieve.

The following table is a summary of the revenue recognized from the Company’s collaborations for the three months ended March 31, 2017 and 2016:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Teva:

 

 

 

 

 

 

 

 

Research funding

 

$

15

 

 

$

29

 

Genentech:

 

 

 

 

 

 

 

 

Recognition of upfront payment

 

 

 

 

 

157

 

Research funding

 

 

 

 

 

383

 

Total collaboration revenue

 

$

15

 

 

$

569

 

 

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, $2,608 has been recorded as expenses to date for services rendered, $123 has been recorded as current prepaid expenses (December 31, 2016 – $392) and $269 as long-term prepaid expenses (December 31, 2016 – $408) for the provision of future services as at March 31, 2017.

 

(b)

License, manufacture and supply agreement:

In March 2017, the Company entered into a license, manufacture and supply agreement with a pharmaceutical contract manufacturing organization for the access and use of certain regulatory documents as well as for the manufacture and supply of clinical and commercial drug product. Under the terms of the agreement, the Company was required to pay an upfront payment of $500 CAD and will be required to pay a low single-digit percentage royalty on net sales of any products developed and commercialized under the agreement.

 

(c)

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, was a beneficial owner of more than 5% of the Company’s common shares during 2016. The Company incurred $432 of clinical development service fees under its priority access agreement and a master services agreement with Medpace for the three months ended March 31, 2017 (three months ended March 31, 2016 – $373).

 

-8-


 

11.

Subsequent Event:

In April 2017, the Company acquired XEN1101 (previously known as 1OP2198) from 1st Order Pharmaceuticals, Inc. (“1st Order”) pursuant to an asset purchase agreement. 1st Order previously acquired 1OP2198 from an affiliate of Valeant Pharmaceuticals International, Inc. (“Valeant”), and the Company will assume certain financial responsibilities under that agreement. Near term upfront and milestone consideration to be paid in 2017 is expected to total approximately $1,100. Future potential payments to both 1st Order and Valeant include $1,000 in clinical development milestones, up to $13,000 in regulatory milestones, and up to approximately $33,600 in sales-based and other milestones, which includes a $1,500 milestone that may be payable pre-commercially, plus a mid-to-high single digit percentage royalty on commercial sales.

 


 

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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 consolidated financial statements and related notes included in Part I, Item 1 of this report and our audited consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2016 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 8, 2017 and with the securities commissions in British Columbia, Alberta and Ontario on March 8, 2017.

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 either from our internal research efforts or though acquiring or in-licensing other product candidates or technologies;

 

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 current and 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 timing and magnitude of potential milestone payments under our product acquisition and in-licensing agreements;

 

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 any future products;

 

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;

 

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our ability to engage and retain the employees required to grow our business;

 

our future financial performance and projected expenditures;

 

developments relating to our competitors and our industry, including the success of competing therapies that are or become available; and

 

estimates of our expenses, future revenue, capital requirements and our needs for additional financing.

These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part 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. and its subsidiary. Unless otherwise noted, all dollar amounts in this report are expressed in United States dollars.

Overview

We are a clinical stage biopharmaceutical company focused on developing innovative therapeutics to improve the lives of patients with neurological disorders. Building upon our vast knowledge of human genetics and diseases caused by mutations in ion channels, known as channelopathies, we are advancing a novel neurology-focused product pipeline of ion channel modulators to address therapeutic areas of high unmet medical need, such as pain and epilepsy.

Our pharmaceutical partners include Teva Pharmaceutical Industries, Ltd., or Teva (through its subsidiary, Ivax International GmbH), Genentech, a member of the Roche Group, and Merck & Co., Inc. (through its affiliate, Essex Chemie AG). Our pharmaceutical collaborations have generated in aggregate over $160.0 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 proprietary development pipeline and pharmaceutical partnerships include:

 

Our collaborator Teva is developing TV-45070, which is a topical sodium channel inhibitor for the treatment of neuropathic pain. Teva is currently conducting a randomized, double-blind, placebo-controlled Phase 2b clinical trial of TV-45070 in patients with post-herpetic neuralgia. Enrollment is complete with topline results expected in mid-2017;

 

Our collaborator Genentech has completed a Phase 1 clinical trial for GDC-0310, which is an oral, selective Nav1.7 small-molecule inhibitor. Pending a full assessment of the Phase 1 clinical results and ongoing in vivo studies, Genentech anticipates initiating a Phase 2 clinical trial in 2017 for the potential treatment of pain;

 

In April 2017, we acquired worldwide development and commercialization rights to XEN1101 from 1st Order Pharmaceuticals, Inc., or 1st Order, for the potential treatment of epilepsy. XEN1101 is a next-generation Kv7 potassium channel opener that preclinically demonstrated improved pharmacokinetics, selectivity, and pharmacology from a new chemical platform over first-generation potassium channel modulators, such as ezogabine. Xenon anticipates filing an investigational new drug, or IND, or IND equivalent, application to initiate a Phase 1 first-in-man clinical trial in the fourth quarter of 2017;

 

XEN901 is a potent, selective Nav1.6 inhibitor being developed for the treatment of rare infantile epileptic encephalopathies and other forms of epilepsy. We expect to file an IND, or IND equivalent, application in the fourth quarter of 2017; and

 

Our licensee uniQure Biopharma B.V., or uniQure, has developed Glybera for the treatment of the orphan disorder lipoprotein lipase deficiency. Glybera was the first gene therapy product approved in the European Union, or the EU. In November 2015, the first patient treated with Glybera as a commercially available gene therapy was announced by uniQure and enabled by its commercialization partner in the EU, Chiesi Farmaceutici S.p.A. which has sole control over commercialization in the EU. In April 2017, uniQure announced that it will not pursue the renewal of the Glybera marketing authorization in Europe, which is scheduled to expire on October 25, 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, 2017, we recognized revenue, consisting primarily of funding from our collaborators of approximately $0.02 million. This compares to $0.6 million for the three months ended March 31, 2016.

 

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We had a net loss of $7.5 million for the three months ended March 31, 2017 and an accumulated deficit of $150.2 million as of March 31, 2017, from expenses incurred in connection with our research programs and from general and administrative costs associated with our operations and we do not expect to have sustained profitability for the foreseeable future.

Other than royalties we are eligible to receive from sales of Glybera under our license to uniQure, which have not been significant to date and which we expect to cease in October 2017 following expiration of Glybera’s marketing authorization, 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 as we:

 

continue our research and preclinical and clinical development of our product candidates either from our internal research efforts or through acquiring or in-licensing other product candidates or technologies;

 

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

 

make milestone and other payments under our product acquisition and 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 and otherwise.

Recent Developments

In April 2017, we acquired XEN1101 (previously known as 1OP2198) from 1st Order pursuant to an asset purchase agreement. 1st Order previously acquired 1OP2198 (previously known as VRX621698) from an affiliate of Valeant Pharmaceuticals International, Inc., or Valeant, and we will assume certain financial responsibilities under that agreement. Near term upfront and milestone consideration to be paid in 2017 is expected to total approximately $1.1 million. Future potential payments to both 1st Order and Valeant include $1 million in clinical development milestones, up to $13 million in regulatory milestones, and up to approximately $33.6 million in sales-based and other milestones, which includes a $1.5 million milestone that may be payable pre-commercially, plus a mid-to-high single digit percentage royalty on commercial sales.

 

 

Financial Operations Overview

Revenue

To date, our revenue has been primarily derived from collaboration and licensing agreements as well as, to a lesser extent, government funding. In addition, we have received nominal royalties from a diagnostic license and from sales of Glybera. Other than royalties we are eligible to receive from sales of Glybera under our license to uniQure, which have not been significant to date and which we expect to cease in October 2017 following expiration of Glybera’s marketing authorization, 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 months ended March 31, 2017 and 2016 (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Teva:

 

 

 

 

 

 

 

 

Research funding

 

$

15

 

 

$

29

 

Genentech:

 

 

 

 

 

 

 

 

Recognition of upfront payment

 

 

 

 

 

157

 

Research funding

 

 

 

 

 

383

 

Total collaboration revenue

 

$

15

 

 

$

569

 

 

-12-


 

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.

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 have not been significant to date and which we expect will cease in October 2017 following expiration of Glybera’s marketing authorization, for at least the next several years. We expect that revenue for the next several years will be derived from 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.

As of March 31, 2017, we have recognized all deferred revenue from upfront payments received under our existing collaboration and licensing agreements.

Operating Expenses

The following table summarizes our operating expenses for the three months ended March 31, 2017 and 2016 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Research and development

 

$

5,903

 

 

$

4,364

 

General and administrative

 

 

2,100

 

 

 

1,895

 

Total operating expenses

 

$

8,003

 

 

$

6,259

 

Research and Development Expenses

Research and development expenses represent costs incurred to conduct research and development of our proprietary product candidates including any acquired or in-licensed product candidates or technology, as well as to support research and development of 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 acquisition, license and collaboration fees, laboratory consumables and allocated facility-related and information technology costs.

Project-specific expenses reflect costs directly attributable to our clinical development candidates and our preclinical candidates once nominated and selected for further development including preclinical and discovery costs supporting a development candidate. 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.

 

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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 and information technology 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 consist 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 consolidated 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 consolidated 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, 2017, 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 2016 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, or SEC, and with the securities commissions in British Columbia, Alberta and Ontario, or the Canadian Securities Commissions, on March 8, 2017. 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.

 

 

 

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Results of Operations

Comparison of Three Months Ended March 31, 2017 and 2016

The following table summarizes the results of our operations for the three months ended March 31, 2017 and 2016 together with changes in those items (in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

2017 vs. 2016

 

 

 

2017

 

 

2016

 

 

Increase/(Decrease)

 

Collaboration revenue

 

$

15

 

 

$

569

 

 

$

(554

)

Royalties

 

 

1

 

 

 

32

 

 

 

(31

)

Research and development expenses

 

 

5,903

 

 

 

4,364

 

 

 

1,539

 

General and administrative expenses

 

 

2,100

 

 

 

1,895

 

 

 

205

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

149

 

 

 

99

 

 

 

50

 

Foreign exchange gain

 

 

321

 

 

 

2,296

 

 

 

(1,975

)

Net loss

 

$

(7,517

)

 

$

(3,263

)

 

$

(4,254

)

 

Revenue

We recognized revenue of $0.02 million for the three months ended March 31, 2017 compared to $0.6 million for the three months ended March 31, 2016, a decrease of $0.6 million. For the three months ended March 31, 2016, we recognized revenue relating to the upfront payment from the March 2014 collaborative agreement with Genentech which was fully recognized by March 2016. The remaining decrease as compared to the same period in 2016 was mainly due to the expiration of FTE funding from Genentech in 2017 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, 2017 and 2016 together with changes in those items (in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

2017 vs. 2016

 

 

 

2017

 

 

2016

 

 

Increase/(Decrease)

 

Collaboration expenses

 

$

70

 

 

$

289

 

 

$

(219

)

XEN801 expenses

 

 

1,449

 

 

 

1,160

 

 

 

289

 

XEN901 and Nav1.6 preclinical and discovery expenses

 

 

2,514

 

 

 

2,121

 

 

 

393

 

Preclinical and discovery program expenses

 

 

1,870

 

 

 

794

 

 

 

1,076

 

Total research and development expenses

 

$

5,903

 

 

$

4,364

 

 

$

1,539

 

 

Research and development expenses were $5.9 million for the three months ended March 31, 2017 compared to $4.4 million for the three months ended March 31, 2016. The increase of $1.5 million was primarily attributable to increased spending on our internal preclinical and discovery programs, our XEN901 product candidate and our XEN801 product candidate, which is no longer being developed. The increase was partially offset by a decrease in collaboration expenses.

General and Administrative Expenses

The following table summarizes general and administrative expenses for the three months ended March 31, 2017 and 2016 together with changes in those items (in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

2017 vs. 2016

 

 

 

2017

 

 

2016

 

 

Increase/(Decrease)

 

General and administrative expenses

 

$

2,100

 

 

$

1,895

 

 

$

205

 

 

General and administrative expenses were $2.1 million for the three months ended March 31, 2017 compared to $1.9 million for the three months ended March 31, 2016. The increase of $0.2 million was primarily attributable to increased costs for business development and salaries and benefits, partially offset by the fair value adjustment on our liability classified stock options.

 

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Other Income

The following table summarizes our other income for the three months ended March 31, 2017 and 2016 together with changes in those items (in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

2017 vs. 2016

 

 

 

2017

 

 

2016

 

 

Increase/(Decrease)

 

Other income:

 

$

470

 

 

$

2,395

 

 

$

(1,925

)

 

Other income was $0.5 million for the three months ended March 31, 2017, compared to $2.4 million for the three months ended March 31, 2016. The change of $1.9 million was primarily driven by the change in foreign exchange gains arising largely from the translation of cash and cash equivalents and marketable securities denominated in Canadian dollars to U.S. dollars. We recorded a foreign exchange gain of $0.3 million for the three months ended March 31, 2017, compared to $2.3 million foreign exchange gain for the comparative period, largely due to a 1% and 7% increase in the value of the Canadian dollar for the three months ended March 31, 2017 and 2016, respectively.

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 public offerings of our common shares and, to a lesser extent, through the receipt of government funding. As of March 31, 2017, we had cash and cash equivalents and marketable securities of $58.0 million. In September 2016, we completed an underwritten public offering of 3,450,000 of our common shares at a public offering price of $7.50 per common share. We received approximately $24.3 million of proceeds, net of underwriting discounts and commissions but before offering expenses.

We have incurred significant operating losses since inception. We had a $7.5 million net loss for the three months ended March 31, 2017 and an accumulated deficit of $150.2 million from inception through March 31, 2017. 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 product acquisition and in-license agreements including, without limitation, our agreements with the University of British Columbia, the Memorial University of Newfoundland, 1st Order, Valeant and other third parties; 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 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 either from our internal research efforts or through acquiring or in-licensing other product candidates or technologies;

 

the scope, progress, results and costs of independently researching and developing any of our future product candidates, including conducting preclinical research and clinical trials;

 

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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, if any, 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 arrangements;

 

the costs of preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome of such litigation; and

 

the timing, receipt and amount of sales of, or royalties on, Glybera or our collaborators’ product candidates, and our future products, if any.

Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cash and cash equivalents and marketable securities as of the date of this 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, 2017 and 2016 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Net cash used in operating activities

 

$

(6,460

)

 

$

(4,944

)

Net cash provided by (used in) investing activities

 

 

9,247

 

 

 

(83

)

Net cash provided by financing activities

 

 

174

 

 

 

44

 

Operating Activities

For the three months ended March 31, 2017, net cash used in operating activities totaled $6.5 million, compared to $4.9 million for the same period in 2016. The change was primarily related to a $1.4 million increase in research and development expenses and a $0.6 million decrease in revenue, partially offset by working capital changes.

Investing Activities

For the three months ended March 31, 2017, net cash provided by investing activities totaled $9.2 million, compared to net cash used in investing activities of $0.1 million for the same period in 2016. The change was driven primarily by the redemption of marketable securities in the three months ended March 31, 2017.

Financing Activities

For the three months ended March 31, 2017, net cash provided by financing activities did not change significantly as compared to the same period in 2016 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, 2016 were reported in our Annual Report on Form 10-K, filed with the SEC and the Canadian Securities Commissions on March 8, 2017.

 

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As of March 31, 2017, there have been no material changes from the contractual commitments previously disclosed in the Annual Report on Form 10-K other than entering into a license, manufacture and supply agreement with a pharmaceutical contract manufacturing organization for the access and use of certain regulatory documents as well as for the manufacture and supply of clinical and commercial drug product. Under the terms of the agreement, we were required to pay an upfront payment of $500 CAD and will be required to pay a low single-digit percentage royalty on net sales of any products developed and commercialized under the agreement.

In April 2017, we acquired XEN1101 (previously known as 1OP2198) from 1st Order pursuant to an asset purchase agreement.  For additional information regarding potential milestone payments and royalties we may be obligated to pay pursuant to the terms of the 1st Order asset purchase agreement, see “—Recent Developments” above.

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 5, 2017, we had 17,996,680 common shares issued and outstanding and outstanding stock options to purchase an additional 2,258,737 common shares.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers (ASC 606) 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 standard, as subsequently amended, stipulates 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. The new guidance will be effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2017. We have begun our evaluation and identified two significant collaboration agreements with respect to revenue, the collaborative development and license agreements with Teva and Genentech, described in notes 9(a) and (b), respectively, to our audited consolidated financial statements included in our 2016 Annual Report on Form 10-K for the year ended December 31, 2016. We are evaluating the new guidance as it applies to revenue previously recognized as well as milestone payments we are eligible to receive in future periods under these agreements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Recognition and Measurement of Financial Assets and Financial Liabilities. The update requires 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. We are currently evaluating the new guidance to determine the impact it will have on our consolidated 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 a significant portion 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, 2017, we held cash and cash equivalents and marketable securities of $24.7 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 $2.5 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 and marketable securities of $58.0 million as of March 31, 2017. 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, 2017.

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, at the reasonable assurance level.

(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during the period ended March 31, 2017 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 $7.5 million for the three months ended March 31, 2017 and an accumulated deficit of $150.2 million as of March 31, 2017, 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, which have not been significant to date, 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. In April 2017, uniQure announced that it will not seek marketing authorization renewal for Glybera in Europe, which authorization is scheduled to expire in October 2017. As a result, we expect Glybera royalties to cease following the expiration of such marketing authorization.

 

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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, the Memorial University of Newfoundland, 1st Order Pharmaceuticals, Inc., an affiliate of Valeant Pharmaceuticals International, Inc. and other third parties;

 

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 and our product development and planned future commercialization efforts; and

 

experience any delays or encounter issues with any of the above.

Our expenses could increase beyond expectations for a variety of reasons, including if we are required by the U.S. Food and Drug Administration, or FDA, the European Medicines Agency, or EMA, or other regulatory agencies, domestic or foreign, to perform clinical and other studies in addition to those that we currently anticipate. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our shareholders’ equity.

 

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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, which have not been significant to date and which we expect to cease in October 2017 following expiration of Glybera’s marketing authorization, 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. If any of our product candidates fail in clinical trials or do not gain regulatory approval, or if 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 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 the market price of our common shares might be adversely impacted.

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, potential milestone payments to third parties, 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, 2017, we incurred approximately $5.8 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 either from our internal research efforts or through acquiring or in-licensing other product candidates or technologies;

 

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 timing and magnitude of potential milestone payments under our product acquisition and in-license agreements;

 

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, 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. For example, in September 2016, we sold 3,450,000 of our common shares at a price to the public of $7.50 per common share pursuant to our existing shelf registration statement on Form S-3 and corresponding Canadian base shelf prospectus. 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.

 

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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, 2017, approximately 43% 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.

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 market 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 market price of our common shares.

Risks Related to Our Business

We, or our collaborators, may fail to successfully develop our product candidates.

Our clinical product candidates, which include TV-45070, GDC-0310, along with XEN1101, XEN901, and other 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 March 2017, we announced topline results from a Phase 2 study designed to evaluate the efficacy, safety, tolerability and systemic exposure of XEN801 for the treatment of moderate to severe facial acne. Results from this trial showed that XEN801 did not demonstrate a statistically significant diff