Attached files

file filename
EX-32.2 - EX-32.2 - Xenon Pharmaceuticals Inc.xene-ex322_9.htm
EX-32.1 - EX-32.1 - Xenon Pharmaceuticals Inc.xene-ex321_11.htm
EX-31.2 - EX-31.2 - Xenon Pharmaceuticals Inc.xene-ex312_8.htm
EX-31.1 - EX-31.1 - Xenon Pharmaceuticals Inc.xene-ex311_10.htm

 

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 September 30, 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 November 3, 2017, the registrant had 17,998,420 common shares, without par value, outstanding.

 

 

 

 


 

XENON PHARMACEUTICALS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS

 

 

Page

 

PART I. FINANCIAL INFORMATION

1

 

Item 1. Financial Statements

1

 

Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

1

 

Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016

2

 

Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, 2017

3

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 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

19

 

Item 4. Controls and Procedures

20

 

PART II. OTHER INFORMATION

20

 

Item 1. Legal Proceedings

20

 

Item 1A. Risk Factors

20

 

Item 6. Exhibits

55

 

SIGNATURES

56

 

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)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,688

 

 

$

17,095

 

Marketable securities

 

 

29,084

 

 

 

47,051

 

Accounts receivable

 

 

129

 

 

 

200

 

Prepaid expenses and other current assets

 

 

1,086

 

 

 

1,329

 

 

 

 

44,987

 

 

 

65,675

 

Prepaid expenses, long term

 

 

218

 

 

 

408

 

Property, plant and equipment, net

 

 

1,154

 

 

 

1,404

 

Total assets

 

$

46,359

 

 

$

67,487

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses (note 6)

 

 

3,058

 

 

 

3,586

 

 

 

$

3,058

 

 

$

3,586

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

   outstanding: 17,998,420 (December 31, 2016 - 17,930,590) (note 7a)

 

 

173,841

 

 

 

173,246

 

Additional paid-in capital

 

 

35,773

 

 

 

34,326

 

Accumulated deficit

 

 

(165,323

)

 

 

(142,681

)

Accumulated other comprehensive loss

 

 

(990

)

 

 

(990

)

 

 

$

43,301

 

 

$

63,901

 

Total liabilities and shareholders’ equity

 

$

46,359

 

 

$

67,487

 

 

 

 

 

 

 

 

 

 

Collaboration agreements (note 8)

 

 

 

 

 

 

 

 

Commitments and contingencies (note 9)

 

 

 

 

 

 

 

 

 

 

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration revenue (note 8)

 

$

264

 

 

$

412

 

 

$

294

 

 

$

1,393

 

Royalties

 

 

 

 

 

1

 

 

 

1

 

 

 

34

 

 

 

 

264

 

 

 

413

 

 

 

295

 

 

 

1,427

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,164

 

 

 

5,965

 

 

 

19,176

 

 

 

15,432

 

General and administrative

 

 

1,744

 

 

 

1,779

 

 

 

5,643

 

 

 

5,350

 

 

 

 

8,908

 

 

 

7,744

 

 

 

24,819

 

 

 

20,782

 

Loss from operations

 

 

(8,644

)

 

 

(7,331

)

 

 

(24,524

)

 

 

(19,355

)

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

124

 

 

 

114

 

 

 

382

 

 

 

336

 

Foreign exchange gain (loss)

 

 

778

 

 

 

(497

)

 

 

1,503

 

 

 

2,026

 

Net loss and comprehensive loss

 

 

(7,742

)

 

 

(7,714

)

 

 

(22,639

)

 

 

(16,993

)

Net loss per common share (note 4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.43

)

 

$

(0.51

)

 

$

(1.26

)

 

$

(1.16

)

Diluted

 

$

(0.43

)

 

$

(0.51

)

 

$

(1.27

)

 

$

(1.16

)

Weighted-average common shares outstanding (note 4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,998,420

 

 

 

15,268,964

 

 

 

17,980,608

 

 

 

14,690,357

 

Diluted

 

 

18,009,979

 

 

 

15,268,964

 

 

 

18,000,066

 

 

 

14,690,357

 

 

 

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-based 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,639

)

 

 

 

 

 

 

(22,639

)

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

1,862

 

 

 

 

 

 

 

 

 

 

 

1,862

 

Issued pursuant to exercise

   of stock options

 

 

67,830

 

 

 

595

 

 

 

(415

)

 

 

(3

)

 

 

 

 

 

 

177

 

Balance as of

   September 30, 2017

 

 

17,998,420

 

 

$

173,841

 

 

$

35,773

 

 

$

(165,323

)

 

$

(990

)

 

$

43,301

 

(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)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(22,639

)

 

$

(16,993

)

Items not involving cash:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

502

 

 

 

698

 

Stock-based compensation

 

 

1,643

 

 

 

1,642

 

Unrealized foreign exchange gain

 

 

(1,585

)

 

 

(2,011

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

77

 

 

 

(272

)

Prepaid expenses, and other current assets

 

 

243

 

 

 

636

 

Prepaid expenses, long term

 

 

190

 

 

 

615

 

Accounts payable and accrued expenses

 

 

(319

)

 

 

945

 

Deferred revenue

 

 

 

 

 

(157

)

Net cash used in operating activities

 

 

(21,888

)

 

 

(14,897

)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(252

)

 

 

(251

)

Purchase of marketable securities

 

 

(22,281

)

 

 

(15,365

)

Proceeds from marketable securities

 

 

41,024

 

 

 

 

Net cash provided by (used in) investing activities

 

 

18,491

 

 

 

(15,616

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Issuance of common shares pursuant to exercise of stock options

 

 

177

 

 

 

84

 

Issuance of common shares, net of issuance costs (note 7a)

 

 

 

 

 

23,832

 

Net cash provided by financing activities

 

 

177

 

 

 

23,916

 

Effect of exchange rate changes on cash and cash equivalents

 

 

813

 

 

 

2,081

 

Decrease in cash and cash equivalents

 

 

(2,407

)

 

 

(4,516

)

Cash and cash equivalents, beginning of period

 

 

17,095

 

 

 

58,651

 

Cash and cash equivalents, end of period

 

$

14,688

 

 

$

54,135

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Interest received

 

$

544

 

 

$

261

 

Supplemental disclosures of non-cash transactions:

 

 

 

 

 

 

 

 

Fair value of options exercised on a cashless basis

 

 

25

 

 

 

168

 

 

 

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 September 30, 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 and nine month periods ended September 30, 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. ASC 606 may be adopted using one of two methods: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. The Company anticipates the adoption of the standard under the modified retrospective approach on January 1, 2018. 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 continuing to evaluate the new guidance as it applies to revenue previously recognized, milestone payments the Company is eligible to receive in future periods under these agreements, as well as financial statement disclosures.

 

-5-


 

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.

4.

Net income (loss) per common share:

Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share is computed by adjusting the numerator and denominator of the basic net income (loss) per share calculation for the potential impact of dilutive securities.

For the three and nine month periods ended September 30, 2017 , 2,214,110 and 2,128,751 stock options, respectively, were excluded from the calculation of diluted net income per common share as their inclusion would be anti-dilutive. For the three and nine months ended September 30, 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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss used to compute net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(7,742

)

 

$

(7,714

)

 

$

(22,639

)

 

$

(16,993

)

Adjustment for change in fair value of liability classified stock options

 

 

(20

)

 

 

 

 

 

(182

)

 

 

 

Diluted

 

$

(7,762

)

 

$

(7,714

)

 

$

(22,821

)

 

$

(16,993

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,998,420

 

 

 

15,268,964

 

 

 

17,980,608

 

 

 

14,690,357

 

Adjustment for dilutive effect of stock options

 

 

11,559

 

 

 

 

 

 

19,458

 

 

 

 

Diluted

 

 

18,009,979

 

 

 

15,268,964

 

 

 

18,000,066

 

 

 

14,690,357

 

Net loss per common share - basic

 

$

(0.43

)

 

$

(0.51

)

 

$

(1.26

)

 

$

(1.16

)

Net loss per common share - diluted

 

$

(0.43

)

 

$

(0.51

)

 

$

(1.27

)

 

$

(1.16

)

 

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.

 

-6-


 

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 the Black-Scholes pricing model to estimate fair value using Level 3 inputs as defined above.

6.

Accounts payable and accrued expenses:

Accounts payable and accrued expenses consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Trade payables

 

$

809

 

 

$

1,463

 

Employee compensation, benefits, and related accruals

 

 

911

 

 

 

872

 

Consulting and contracted research

 

 

1,052

 

 

 

1,029

 

Professional fees

 

 

223

 

 

 

93

 

Other

 

 

63

 

 

 

129

 

Total

 

$

3,058

 

 

$

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Outstanding, beginning of period

 

 

2,276,897

 

 

 

1,983,674

 

 

 

1,910,823

 

 

 

1,721,472

 

Granted

 

 

1,050

 

 

 

22,044

 

 

 

447,550

 

 

 

321,444

 

Exercised(1)

 

 

 

 

 

(42,012

)

 

 

(71,006

)

 

 

(72,541

)

Forfeited and expired

 

 

(70,567

)

 

 

(4,753

)

 

 

(79,987

)

 

 

(11,422

)

Outstanding, end of period

 

 

2,207,380

 

 

 

1,958,953

 

 

 

2,207,380

 

 

 

1,958,953

 

Exercisable, end of period

 

 

1,417,660

 

 

 

1,200,614

 

 

 

1,417,660

 

 

 

1,200,614

 

 

 

(1)

During the nine months ended September 30, 2017, 63,425 stock options were exercised for the same number of common shares for cash (nine months ended September 30, 2016 – 30,176). In the same period, the Company issued 4,405 common shares (nine months ended September 30, 2016 – 27,421) for the cashless exercise of 7,581 stock options (nine months ended September 30, 2016 – 42,365).

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Average risk-free interest rate

 

 

1.99

%

 

 

1.33

%

 

 

2.41

%

 

 

1.58

%

Expected volatility

 

 

81

%

 

 

75

%

 

 

81

%

 

 

75

%

Average expected term (in years)

 

 

6.50

 

 

 

6.19

 

 

 

7.48

 

 

 

6.22

 

Expected dividend yield

 

 

0

%

 

 

0

%

 

 

0

%

 

 

0

%

 

The weighted-average fair value of options granted during the nine months ended September 30, 2017 was $6.10 (nine months ended September 30, 2016 – $4.93) per option.

 

-7-


 

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.

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 and nine months ended September 30, 2017 and 2016:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Teva:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research funding

 

$

14

 

 

$

29

 

 

$

44

 

 

$

87

 

Genentech:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognition of upfront payment

 

 

 

 

 

 

 

 

 

 

 

157

 

Research funding

 

 

 

 

 

383

 

 

 

 

 

 

1,149

 

Milestone payment

 

 

250

 

 

 

 

 

 

250

 

 

 

 

Total collaboration revenue

 

$

264

 

 

$

412

 

 

$

294

 

 

$

1,393

 

 

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, an aggregate of $2,714 has been recorded as expenses to date for services rendered, $68 has been classified as current prepaid expenses (December 31, 2016 – $392) and $218 has been classified as long-term prepaid expenses December 31, 2016 – $408) for the provision of future services as at September 30, 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 to support the development of a potential product candidate. Under the terms of the agreement, the Company paid an upfront fee 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)

Asset purchase agreement with 1st Order Pharmaceuticals, Inc. (“1st Order”):

In April 2017, the Company acquired XEN1101 (previously known as 1OP2198) from 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 has assumed certain financial responsibilities under that agreement. Under the terms of the agreement, the Company paid an upfront fee of $350, which we expensed as research and development, and expects to pay an additional $700 in milestones in 2017. 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.

 

-8-


 

 

(d)

License agreement

In July 2017, the Company entered into a license agreement with a pharmaceutical company for the access and use of certain regulatory documents to support the development of a potential product candidate. Under the terms of the agreement, the Company paid an upfront fee of $1,000, which we expensed as research and development. Future potential payments include $2,000 in clinical development milestones, up to $7,000 in regulatory milestones, which includes $1,000 expected to be paid in late 2017 or early 2018, plus a low-to-mid single-digit percentage royalty on net sales of any products developed and commercialized under the agreement.

 

(e)

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.

  

 

 


 

-9-


 

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

 

This section should be read in conjunction with our unaudited interim 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, pre-clinical 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;

 

-10-


 

 

our belief in the sufficiency of our cash flows to meet our needs for at least the next 12 months;

 

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

 

our future financial performance and projected expenditures;

 

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

 

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

These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part 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 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:

 

XEN1101 is a next-generation Kv7 potassium channel opener for the potential treatment of epilepsy. Pre-clinically, XEN1101 has demonstrated improved pharmacokinetics, selectivity, potency and efficacy over ezogabine, an earlier generation potassium channel modulator. In October 2017, we initiated a Phase 1 first-in-human clinical trial to evaluate the safety, tolerability and pharmacokinetics of both single ascending doses and multiple ascending doses of XEN1101 in healthy subjects. The XEN1101 Phase 1 clinical trial includes a pharmacodynamic read-out incorporating a transcranial magnetic stimulation, or TMS, model, which is designed to demonstrate delivery of XEN1101 into the central nervous system by observing a change in activity through an EEG (otherwise known as an electroencephalogram) or an EMG (otherwise known as an electromyogram) reading. Following completion of the Phase 1 clinical trial, and if supported by the data, a Phase 2 proof-of-concept trial evaluating XEN1101’s efficacy as a treatment for adult focal seizures is anticipated to begin in the third quarter of 2018, with a parallel plan to advance XEN1101 as soon as feasible thereafter into rare, pediatric forms of epilepsy, such as EIEE7, an early infantile epileptic encephalopathy associated with mutations in the KCNQ2 gene and loss-of-function in the Kv7.2 potassium channel;

 

XEN901 is a potent, selective Nav1.6 sodium channel inhibitor for the potential treatment of epilepsy, including adult focal seizures and rare, pediatric forms of epilepsy, such as EIEE13, an early infantile epileptic encephalopathy associated with mutations in the SCN8A gene and gain-of-function in the Nav1.6 sodium channel. XEN901 has demonstrated efficacy against seizures in an animal model of Nav1.6 gain-of-function epilepsy as well as animal models that support the treatment of adult focal seizures. We expect to file an investigational new drug equivalent application in the fourth quarter of 2017;

 

Our collaborator, Genentech, has completed a Phase 1 clinical trial for GDC-0310, which is an oral, selective Nav1.7 small-molecule inhibitor. Based on new data from ongoing pre-clinical toxicology studies, Genentech has indicated that GDC-0310 will not enter a Phase 2 clinical trial in the first quarter of 2018, as previously guided. Guidance around the future clinical development of GDC-0310 will be updated once these pre-clinical studies are completed and the final results are analyzed.  Genentech and Xenon will continue their collaboration focused on developing novel inhibitors of Nav1.7 for the treatment of pain, as well as a second collaboration centered on pain genetics; and

 

-11-


 

 

Our collaborator, Teva, is responsible for the development of TV-45070, which is a topical sodium channel inhibitor for the treatment of neuropathic pain. In June 2017, we, along with Teva, announced topline results from a Phase 2b clinical trial that evaluated the efficacy and safety of TV-45070 in patients with post-herpetic neuralgia. TV-45070 did not meet the primary or secondary endpoints in the study. We and Teva are discussing next steps for TV-45070.

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 nine months ended September 30, 2017, we recognized revenue, consisting primarily of funding from our collaborators of approximately $0.3 million. This compares to $1.4 million for the nine months ended September 30, 2016.

We had a net loss of $22.6 million for the nine months ended September 30, 2017 and an accumulated deficit of $165.3 million as of September 30, 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 were eligible to receive from sales of Glybera under our license to uniQure BioPharma B.V., or uniQure, which have not been significant to date and which ceased 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 pre-clinical 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.

 

 

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 were eligible to receive from sales of Glybera under our license to uniQure, which have not been significant to date and which ceased 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 and nine months ended September 30, 2017 and 2016 (in thousands):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Teva:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research funding

 

$

14

 

 

$

29

 

 

$

44

 

 

$

87

 

Genentech:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognition of upfront payment

 

 

 

 

 

 

 

 

 

 

 

157

 

Research funding

 

 

 

 

 

383

 

 

 

 

 

 

1,149

 

Milestone payment

 

 

250

 

 

 

 

 

 

250

 

 

 

 

Total collaboration revenue

 

$

264

 

 

$

412

 

 

$

294

 

 

$

1,393

 

 

-12-


 

Pursuant to the terms of our March 2014 genetics collaborative agreement with Genentech, we received an upfront payment of $1.5 million. We determined that the various deliverables under this agreement should be considered as a single unit of accounting. As such, the $1.5 million upfront payment was recognized as revenue ratably over the expected period of research performance, which was the two-year period from March 2014 to March 2016. In July 2017, we received a $0.25 million milestone payment for the identification of a second novel pain target under this agreement. We recognized the milestone payment upon achievement in July 2017.

As our other internal and partnered products are in various stages of clinical and pre-clinical development, we do not expect to generate any revenue from product sales 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 September 30, 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 and nine months ended September 30, 2017 and 2016 (in thousands):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Research and development

 

$

7,164

 

 

$

5,965

 

 

$

19,176

 

 

$

15,432

 

General and administrative

 

 

1,744

 

 

 

1,779

 

 

 

5,643

 

 

 

5,350

 

Total operating expenses

 

$

8,908

 

 

$

7,744

 

 

$

24,819

 

 

$

20,782

 

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, pre-clinical 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 pre-clinical candidates once nominated and selected for further development, including pre-clinical and discovery costs supporting a development candidate. All remaining research and development expenses are reflected in pre-clinical, discovery and other program expenses. 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 pre-clinical 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, pre-clinical studies and clinical trial activities as well as third-party acquisition, license and collaboration fees and laboratory consumables.

 

-13-


 

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 pre-clinical and clinical results of each product candidate and related regulatory action. We expect our research and development expenses to continue to represent our largest category of operating expense for at least the next 12 to 24 months.

General and Administrative Expenses

General and administrative expenses consist primarily of salary, related benefits and stock-based compensation of our executive, finance, legal, business development and administrative functions, travel expenses, allocated facility-related 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 nine months ended September 30, 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.

 

 

 

-14-


 

Results of Operations

Comparison of Three and Nine Months Ended September 30, 2017 and 2016  

The following table summarizes the results of our operations for the three and nine months ended September 30, 2017 and 2016 together with changes in those items (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Change

2017