Xenon(XENE) - 2020 Q4 - Annual Report

PART I Forward-Looking Statements This report contains forward-looking statements involving future expectations, projections of operational or financial conditions, and other forward-looking information, based on management's beliefs and assumptions but subject to various risks and uncertainties that could cause actual results to differ materially from expectations - Forward-looking statements cover various aspects including identifying new products, R&D project progress, clinical trial success rates, patient recruitment capabilities, COVID-19 impact, profitability, financing, milestone payments, commercialization strategies, intellectual property protection, regulatory requirements, product efficacy and safety, market size estimates, market acceptance, partnerships, market risks, and future financial performance[11][12] - The company explicitly states these forward-looking statements are subject to risks and uncertainties discussed in the 'Risk Factors' section, which may cause actual results to differ materially from expectations, and the company undertakes no obligation to update or revise these statements[13] Risks Factor Summary This section outlines the company's main risks, including sustained losses, financing needs, clinical development uncertainties, regulatory approval risks, commercialization challenges, reliance on partners, third-party manufacturing risks, intellectual property protection, information security incidents, pandemic impacts, and stock price volatility - The company has incurred significant losses since inception and expects to continue incurring losses, potentially requiring additional financing[17] - Clinical drug development is a lengthy and expensive process with uncertain outcomes, potentially leading to commercialization delays or failures; clinical trials may not adequately demonstrate the safety and efficacy of product candidates[17] - The regulatory approval process is lengthy and unpredictable, and failure to obtain timely approval would severely harm the company's business; the company relies on third parties for preclinical studies and clinical trials, and their failure to perform could harm the business[17][20] - The company may not obtain or maintain adequate patent protection, and information security incidents (such as cyberattacks) or health epidemics (such as COVID-19) could have a material adverse effect on its business, financial condition, and results of operations[20] Business Xenon Pharmaceuticals Inc. is a clinical-stage biopharmaceutical company focused on developing innovative therapies for neurological disorders, particularly epilepsy, advancing proprietary and partnered programs to become a fully integrated and profitable biopharmaceutical company - The company is dedicated to developing innovative therapies for neurological disorders, particularly epilepsy, with a proprietary product pipeline and collaborations with Neurocrine Biosciences, Flexion Therapeutics, and Genentech[18] - The company's strategic goal is to build a fully integrated and profitable biopharmaceutical company by leveraging genomics, proprietary biology, and medicinal chemistry assets, advancing science-driven clinical development, and selectively forming partnerships to expand capabilities and market opportunities[19][21] Our Product Candidates The company is advancing three proprietary product candidates: XEN1101 (Kv7 potassium channel modulator for epilepsy), XEN496 (pediatric formulation of Kv7 modulator for KCNQ2-DEE), and XEN007 (CNS-acting calcium channel modulator for drug-resistant childhood absence epilepsy) - XEN1101, a Kv7 potassium channel modulator for epilepsy and other neurological disorders, has completed Phase I clinical trials and is currently in a Phase IIb X-TOLE clinical trial for focal epilepsy, with top-line data expected in the third quarter of 2021[22][24][26] - XEN496, a pediatric formulation of ezogabine for KCNQ2-DEE, has received FDA Fast Track and Orphan Drug designations and has initiated a Phase III EPIK clinical trial, enrolling approximately 40 pediatric patients aged 1 month to under 6 years[28][29][31] - XEN007 (active ingredient flunarizine), a CNS-acting Cav2.1 and T-type calcium channel modulator, is undergoing a physician-initiated Phase II proof-of-concept study for drug-resistant childhood absence epilepsy (CAE), with top-line results from a larger dataset expected in the second half of 2021[33] New Pipeline Opportunities The company leverages its drug discovery expertise to identify ion channel targets for developing novel modulators for epilepsy and other CNS-related indications, expanding its pipeline through internal research, acquisitions, or external licensing - The company focuses on identifying ion channel targets to develop innovative modulators for epilepsy and other CNS-related indications[35] - Pipeline expansion will be achieved through internal research, acquisitions, or external licensing of product candidates[35] Our Partnered Programs The company partners with Neurocrine Biosciences for NBI-921352 (Nav1.6 sodium channel inhibitor for epilepsy), Flexion Therapeutics for FX301 (Nav1.7 inhibitor for post-operative pain), and Genentech for discovering Nav1.7 selective inhibitors for pain - NBI-921352 (formerly XEN901), a selective Nav1.6 sodium channel inhibitor developed by Neurocrine Biosciences, is for SCN8A developmental and epileptic encephalopathy (SCN8A-DEE) and adult focal epilepsy, with a Phase II clinical trial for SCN8A-DEE adolescent patients expected to start in the third quarter of 2021[36][37] - FX301 (formerly XEN402), a Nav1.7 inhibitor developed by Flexion Therapeutics, is for post-operative pain control; the FDA has approved its IND, and Flexion expects to initiate a Phase Ib proof-of-concept clinical trial in the first half of 2021[38] - The company collaborates with Genentech to discover and develop Nav1.7 selective oral inhibitors for pain treatment, based on discoveries from congenital insensitivity to pain[39] Collaborations, Commercial and License Agreements This section details the company's collaboration, commercial, and license agreements with Neurocrine Biosciences, Flexion Therapeutics, 1st Order Pharmaceuticals, and Genentech, covering licensing scope, financial terms, exclusivity, governance, and termination conditions - The collaboration agreement with Neurocrine Biosciences includes an exclusive license for XEN901 (NBI-921352), an exclusive license for preclinical compounds, and a multi-year research collaboration. Neurocrine Biosciences paid a $50 million upfront payment ($30 million cash, $20 million equity investment) and may pay up to $325 million in development and regulatory milestones and up to $150 million in sales milestones[40][41][49][50] - The asset purchase agreement with Flexion Therapeutics for XEN402 (FX301) involved a $3 million upfront payment and a $0.5 million milestone payment. The company is eligible for up to $7 million in additional milestones (up to Phase II clinical trial initiation), subsequent clinical development and global regulatory approval milestones up to $40.75 million, commercialization milestones up to $75 million, and mid-to-low double-digit percentage sales royalties[60][61] - The agreement with 1st Order Pharmaceuticals for the acquisition of XEN1101 involved an upfront payment of approximately $0.4 million and $0.7 million in clinical development milestone payments. Future potential payments include up to $1.2 million in clinical development milestones, $6 million in regulatory milestones, and $0.5 million in other milestones, with no royalty obligations[63][65] - The collaboration agreement with Genentech for the discovery and development of Nav1.7 inhibitors included a $10 million upfront payment and $5 million and $8 million milestone payments. The company is eligible for up to $613 million in additional milestones (including preclinical, clinical, regulatory, and sales milestones) and mid-to-low single-digit percentage sales royalties[66][67] Intellectual Property The company protects its competitive position through patent applications, trade secrets, and know-how, holding 32 granted US patents, approximately 21 pending US patent applications, and 227 global pending and granted corresponding applications as of December 31, 2020 - The company develops, maintains, and protects its competitive position through patent applications, trade secrets, internal know-how, and third-party agreements[71] - Intellectual Property Overview as of December 31, 2020 | Type | Quantity | Description | Estimated Expiration (without extensions) | | :--- | :--- | :--- | :--- | | Granted US Patents | 32 | Covering drug targets, novel compounds, methods of preparation and use, therapeutic formulations | - | | Pending US Patent Applications | ~21 | Including provisional and non-provisional applications | - | | Global Pending and Granted Corresponding Applications | 227 | Including national validations of 20 European patents | - | | XEN1101 Related Patents | 2 (US granted) | Methods of preparation and use for XEN1101 and related compounds | 2028-2029 | | XEN496 Related Patents | 1 (US non-provisional pending) | XEN496 (ezogabine pediatric formulation) and related formulations and methods of use | 2040 | | XEN007 Related Patents | 1 (US provisional pending) | Methods of using XEN007 for treating certain pediatric epilepsy disorders | 2041 | | XEN901 (NBI-921352) Related Patents | 3 (US granted) | Methods of preparation and use for XEN901 and related compounds | 2037-2041 | | Nav1.6 and/or Nav1.2 Selective Inhibitor Related Patents | 2 (US granted) | Certain selective Nav1.6 and/or Nav1.2 inhibitors and their methods of preparation and use | 2037-2039 | | Nav1.7 Inhibitor Related Patents (Co-owned with Genentech) | 9 (US granted) | Nav1.7 inhibitors and their methods of preparation and use | 2034-2037 | Competition The biotechnology and pharmaceutical industry is highly competitive, with the company facing rivals from large pharmaceutical and biotech firms and academic institutions, competing on factors like product efficacy, safety, convenience, price, and reimbursement - The biotechnology and pharmaceutical industry is highly competitive, characterized by rapid technological advancements and a strong emphasis on proprietary products[79] - Key competitive factors include product efficacy, safety, convenience, price, the effectiveness of alternative products, the level of competition, and coverage and adequate reimbursement from government and other third-party payors[83] - Currently, there are no FDA-approved specific treatments for KCNQ2-DEE or SCN8A-DEE, but various anti-seizure medications (ASMs) are in clinical development and may compete with the company's products[84] Government Regulation The company's small molecule product candidates are subject to stringent regulation by the FDA and other domestic and international agencies, covering testing, manufacturing, safety, efficacy, labeling, and marketing, alongside anti-corruption, healthcare fraud, and data privacy laws - Small molecule product candidates are subject to strict regulation by the FDA and other domestic and international regulatory agencies, covering testing, manufacturing, safety, efficacy, labeling, packaging, storage, record-keeping, distribution, import/export, reporting, advertising, and promotion[85] - The US drug development process typically includes non-clinical laboratory testing, IND application, three phases of clinical trials (Phase I for safety, Phase II for preliminary efficacy and safety, Phase III for confirmatory efficacy and safety), and post-marketing studies[86][87] - The FDA offers programs like Fast Track and Orphan Drug Designation to expedite drug development and review for serious or life-threatening diseases; XEN496 has received Orphan Drug Designation[97][98] - Post-market, drugs remain subject to strict GMP, adverse event reporting, and advertising and promotion requirements, with violations potentially leading to market restrictions, product recalls, or civil/criminal penalties[101][103] - The company must also comply with global anti-corruption, data privacy, and healthcare laws and regulations, such as the US Foreign Corrupt Practices Act, Canada's Corruption of Foreign Public Officials Act, HIPAA, and GDPR, with violations potentially resulting in significant fines and reputational damage[109][130][131] Environmental Matters The company's operations involve hazardous materials, subjecting it to federal, provincial, and local environmental and safety regulations, potentially incurring liability for damages and fines due to environmental contamination or exposure to hazardous substances - The company's R&D activities involve the use of hazardous materials (including biological materials) and chemicals, subject to federal, provincial, and local environmental and safety laws and regulations[134] - The company may incur liability for damages and fines due to environmental contamination or personal exposure to hazardous substances and cannot predict the impact of legal changes on future operations or compliance costs[134] Human Capital As of December 31, 2020, the company had 129 employees, with 90 in R&D, attracting and retaining talent through competitive compensation, benefits, and development opportunities, while committing to diversity, equity, and inclusion (DEI) and adapting to COVID-19 with remote work options - As of December 31, 2020, the company had 129 employees, with 122 full-time and part-time permanent employees, 90 primarily engaged in R&D, and 38 holding Ph.D. or M.D. degrees[135] - The company attracts and retains highly qualified personnel by offering competitive compensation, benefits (including stock options and annual bonuses), and training and development opportunities[136][137] - The company is committed to diversity, equity, and inclusion (DEI) and has established a DEI committee; in response to the COVID-19 pandemic, it offered remote work options, suspended non-essential business travel, and implemented additional safety and infection prevention measures[138][139] Manufacturing The company relies on third-party manufacturers and partners for preclinical and clinical supply of product candidates, with plans for future commercial production, believing all necessary materials are available from multiple sources and production processes are scalable - The company currently relies on third-party manufacturers and partners for the production of product candidates required for preclinical and clinical trials, and plans to do so for future commercial production, without developing internal manufacturing facilities or hiring related personnel[140] - The company believes all necessary materials for its product candidates are available from multiple third-party manufacturers, and the drug substance chemical processes are readily scalable without requiring specialized equipment[141] Corporate Information Xenon Pharmaceuticals Inc. was incorporated in British Columbia in 1996, later federally incorporated and renamed in 2000, with its headquarters in Burnaby, British Columbia, Canada, and its common shares traded on the Nasdaq Global Market under 'XENE' - The company was incorporated in British Columbia in 1996, later federally incorporated and renamed Xenon Genetics Inc. in 2000, and then Xenon Pharmaceuticals Inc. in 2004[142] - The company's headquarters are located in Burnaby, British Columbia, Canada, and its common shares are traded on the Nasdaq Global Market under the ticker symbol 'XENE'[142] Where You Can Find Additional Information The company provides free access to its annual, quarterly, and current reports, proxy statements, and all amendments on its investor relations website, with these documents also available on the SEC and SEDAR websites - The company provides free access to its annual reports, quarterly reports, current reports, proxy statements, and all amendments on its investor relations website (http://investor.xenon-pharma.com)[143](index=143&type=chunk) - These reports are also available on the websites of the U.S. Securities and Exchange Commission (www.sec.gov) and SEDAR (www.sedar.com)[143](index=143&type=chunk) Risk Factors This section details significant risks related to the company's financial condition, business operations, product development, commercialization, intellectual property, and common stock ownership, which could materially adversely affect its business, operating results, and financial condition - The company has incurred significant losses since inception, with a net loss of $28.8 million and an accumulated deficit of $278.5 million as of December 31, 2020, and expects to continue incurring losses and requiring additional financing[145] - The clinical drug development process is lengthy, expensive, and uncertain, potentially leading to clinical trial delays, failures, or terminations, which could harm the company's business and stock price[211] - The company relies on third-party manufacturers and partners for the production of product candidates and clinical trials, and any failure by these parties could delay or impair the company's development and commercialization capabilities[277][279] - The company may not obtain or maintain adequate patent protection, and intellectual property infringement claims could lead to costly litigation or restrict the company's R&D and commercialization activities[286][300] - The market price of the company's common shares may fluctuate significantly, future stock issuances could dilute existing shareholders' equity, and the company does not intend to pay cash dividends in the foreseeable future[315][319][333] Risks Related to Our Financial Condition and Capital Requirements The company has incurred continuous losses since inception and expects to continue doing so, requiring substantial additional funding for R&D and commercialization, which may dilute existing shareholders or necessitate relinquishing rights to technology or product candidates, also facing currency fluctuation risks - Financial Loss Summary | Metric | December 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Net Loss | $28.8 million | $41.6 million | | Accumulated Deficit | $278.5 million | $249.7 million | - The company expects to continue incurring substantial expenses and operating losses to advance product candidate development, seek regulatory approvals, maintain intellectual property, and establish commercialization infrastructure[147] - The company will likely need to raise additional capital, which could result in significant dilution to existing shareholders' equity or require the company to relinquish rights to certain technologies or product candidates[150][158] - The company faces risks related to currency fluctuations, particularly Canadian dollar expenditures, and currently does not hedge against foreign exchange risks[159] Risks Related to Our Business and Industry The company faces intense market competition, lacks experience in late-stage clinical development and commercialization, and risks from failing to attract key talent, employee misconduct, managing growth, information security incidents, international operations, and pandemic impacts - The biotechnology and pharmaceutical industry is highly competitive, with the company facing competition from large pharmaceutical, biotechnology companies, academic institutions, and other sources, where competitors may possess greater financial resources, R&D experience, and market expertise[163][165] - The company has no proprietary products on the market and has not completed Phase III clinical trials, making it difficult to assess its ability to independently develop and commercialize product candidates[169] - Failure to attract and retain senior management and key personnel, as well as employee misconduct (including non-compliance with regulatory standards and insider trading), could harm the company's business[173][176] - Information security incidents (such as cyberattacks, system failures) or public health epidemics (such as COVID-19) could disrupt company operations, leading to data loss, increased costs, and reputational damage[182][186] Risks Related to Development, Clinical Testing and Regulatory Approval of Our Product Candidates The regulatory approval process for product candidates is lengthy, costly, and unpredictable, potentially leading to delays or failures, with clinical trial results not always proving safety or efficacy, and difficulties in patient recruitment, especially for rare indications, alongside risks of losing orphan drug designation - The approval process by the FDA, EMA, Health Canada, and other regulatory agencies is lengthy, time-consuming, and unpredictable, potentially leading to delays or complete failure in obtaining approval for the company's product candidates[207] - Clinical drug development is an expensive process with uncertain outcomes, and clinical trials may be suspended or delayed due to safety risks, difficulties in patient recruitment, non-compliance by third-party contractors, changes in regulatory requirements, or insufficient funding[211][212] - Results from preclinical studies and early-stage clinical trials may not predict the results of later-stage clinical trials, and regulatory agencies may disagree with the company's interpretation of data or require additional clinical trials[231][232] - The company may face difficulties recruiting sufficient patients for clinical studies, especially for ultra-rare, orphan, or niche indications, which could delay or prevent clinical studies of product candidates[225] - Failure to obtain or maintain orphan drug designation or other regulatory exclusivity would harm the company's competitive position, as this could lead to shorter market exclusivity periods or competitors obtaining approval for similar products[228][229] Risks Related to Commercialization The company if unable to establish its own sales, marketing, and distribution capabilities or secure agreements, may fail to successfully commercialize future products independently, facing ongoing regulatory obligations, unfavorable pricing, and challenging third-party coverage and reimbursement policies even after approval - The company currently lacks sales or marketing infrastructure, and if it fails to establish or partner with third parties, it may not successfully commercialize future products independently, facing risks related to hiring, market acceptance, costs, and competition[241][242] - Even if products receive regulatory approval, they will face ongoing regulatory obligations and scrutiny, including GMP compliance, adverse event reporting, advertising and promotion restrictions, and potentially expensive post-marketing trials[245][246] - If the market opportunity for product candidates is smaller than anticipated, or if the company fails to successfully identify patients and gain significant market share, its revenue could be adversely affected[250][251] - Unfavorable pricing regulations and challenging third-party coverage and reimbursement policies could harm the company's business, especially for orphan and niche indications requiring higher pricing to offset lower sales volumes[252][254] - Recent and future healthcare legislation, such as the Affordable Care Act (PPACA) and its ongoing legal challenges, may increase the difficulty and cost of commercializing products and affect the pricing available to the company[255][256][257] Risks Related to Our Dependence on Third Parties The successful development and commercialization of product candidates heavily rely on partners' R&D and marketing efforts, with limited company control over resources and decisions, and any failure by third-party manufacturers or CROs could lead to delays, increased costs, or unreliable data - The successful development and commercialization of the company's product candidates depend on the R&D and marketing efforts of partners (such as Neurocrine Biosciences, Flexion, and Genentech), with the company having limited control over their resource allocation and decisions[264] - The collaboration with Neurocrine Biosciences is critical, as it controls the development and commercialization of NBI-921352; if Neurocrine Biosciences underperforms, terminates the agreement, or changes priorities, it would have a material adverse effect on the company's business[267][273] - The company relies on third-party manufacturers for clinical product candidates and commercial supply, and any failure by a manufacturer to provide compliant supply could delay or impair the company's ability to initiate or complete clinical trials, obtain regulatory approval, or commercialize approved products[277] - The company relies on third parties (including CROs) for preclinical studies and clinical trials; if these third parties fail to successfully perform their contractual obligations, comply with regulations, or meet expected timelines, the company's business could be severely harmed[279][280] Risks Related to Intellectual Property The company's commercial success depends on patent and intellectual property protection, but it may fail to obtain or maintain adequate protection, granted patents could be invalidated, and global IP rights vary, potentially leading to costly litigation or inability to use certain technologies - The company's commercial success depends on obtaining and maintaining patent and other intellectual property protection for its product candidates, but patent applications may not be granted, and granted patents may be found invalid or unenforceable[286] - The company may not be able to protect its intellectual property globally, as laws in some countries (especially developing countries) offer less protection for patents, trade secrets, and other intellectual property[290] - The company may become involved in litigation to protect or enforce its patents, which could be time-consuming, expensive, and have uncertain outcomes, potentially leading to patents being found invalid, unenforceable, or narrowly construed[297] - Third parties may claim that the company's product candidates infringe their patents or other intellectual property rights, leading to costly litigation or requiring the company to pay license fees or royalties[300][306] - Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and other proprietary information, thereby harming the company's competitive position[309] Risks Related to Ownership of Our Common Shares The market price of the company's common shares may fluctuate significantly due to various factors, future stock sales could dilute equity, corporate charter and Canadian law provisions may hinder acquisition, and the company does not plan to pay cash dividends in the foreseeable future - The market price of the company's common shares may fluctuate significantly, influenced by factors such as product development progress, regulatory decisions, competition, financial performance, macroeconomic conditions, and securities analyst recommendations[315][316] - Future sales and issuances of common shares, preferred shares, or convertible securities could result in substantial dilution to existing shareholders' equity and may cause the market price of common shares to decline[319][330] - Provisions in the company's articles and Canadian law may make it more difficult for the company to be acquired and could prevent shareholders from replacing management or limit the market price of common shares[320][321] - The company does not intend to pay any cash dividends in the foreseeable future, and investors' future returns will primarily depend on capital appreciation of common shares[333] General Risk Factors This section addresses general risks that could impact the company's business and financial condition, including unstable market and economic conditions, failure to maintain effective internal controls over financial reporting, the influence of environmental, social, and governance (ESG) matters, and the impact of analyst research reports - Unstable market and economic conditions (including the COVID-19 pandemic) could have a material adverse effect on the company's business and financial condition, making financing more difficult and expensive[335] - Failure to maintain effective internal control over financial reporting could lead to inaccurate financial reporting or inability to prevent fraud, thereby harming investor confidence and the company's stock price[336][337] - Environmental, social, and governance (ESG) matters may affect the company's business and reputation, and failure to successfully manage these issues or meet expectations could have a material adverse effect on the company[338][340] Unresolved Staff Comments The company reports no unresolved staff comments - The company has no unresolved staff comments[344] Properties The company's headquarters in Burnaby, British Columbia, Canada, leases approximately 51,404 square feet of office and laboratory space until June 2022, deeming current facilities sufficient for near-term needs with future expansion available on commercially reasonable terms - The company's headquarters are located in Burnaby, British Columbia, Canada, leasing approximately 51,404 square feet of office and laboratory space[345] - The lease term extends to June 2022, with monthly payments of approximately $113,689 for basic rent, property taxes, common area maintenance, and management fees[345] - The company believes its existing facilities are sufficient for near-term business needs, and additional space can be obtained on commercially reasonable terms in the future[346] Legal Proceedings The company is not currently involved in any legal proceedings that management believes would have a material adverse effect on its business, financial condition, operating results, or cash flows, though it acknowledges potential costs and management distraction from litigation - The company is not currently involved in any legal proceedings that management believes would have a material adverse effect on its business, financial condition, operating results, or cash flows[347] - Regardless of the outcome, litigation could adversely affect the company due to defense and settlement costs, and diversion of management resources[347] Mine Safety Disclosures This item is not applicable - Mine safety disclosures are not applicable[348] PART II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common shares trade on the Nasdaq Global Market under 'XENE', with approximately 142 registered holders as of February 26, 2021, and no cash dividends declared or paid, with future earnings to be reinvested in business growth - The company's common shares have been traded on the Nasdaq Global Market since November 5, 2014, under the ticker symbol 'XENE'[350] - As of February 26, 2021, there were approximately 142 registered holders of common shares[351] - The company has never declared or paid any cash dividends and currently expects to retain all available funds and future earnings for business operations and development for the foreseeable future[352] - Canadian non-resident common share holders will be subject to a 25% Canadian withholding tax on dividends received, which may be reduced under a tax treaty[353] Selected Financial Data As a smaller reporting company, the company is not required to provide the selected financial data requested by this item - As a smaller reporting company, the company is not required to provide selected financial data[358] Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's 2020 financial condition and operating results, highlighting its business overview, proprietary and partnered program progress, revenue sources, operating expenses, other income/expenses, key accounting policies, liquidity, capital resources, and cash flow, noting revenue growth but continued losses and significant future R&D investment - The company is a clinical-stage biopharmaceutical company focused on developing innovative therapies for neurological disorders, particularly epilepsy[360] - Key Financial Data for 2020 and 2019 (Thousands of US Dollars) | Metric | December 31, 2020 | December 31, 2019 | Change (2020 vs 2019) | | :--- | :--- | :--- | :--- | | Revenue | $32,166 | $6,829 | Increase $25,337 | | Research and Development Expenses | $50,523 | $38,845 | Increase $11,678 | | General and Administrative Expenses | $12,944 | $10,803 | Increase $2,141 | | Operating Loss | $(31,301) | $(42,819) | Decrease $11,518 | | Net Loss | $(28,837) | $(41,595) | Decrease $12,758 | | Accumulated Deficit | $(278,492) | $(249,655) | Increase $28,837 | | Cash, Cash Equivalents, and Marketable Securities | $177,000 | $141,358 | Increase $35,642 | - The company expects to continue incurring substantial expenses and operating losses over the next 12 to 24 months, primarily to advance product candidate development, seek regulatory approvals, maintain intellectual property, and establish commercialization infrastructure[366][367] Overview The company, a clinical-stage biopharmaceutical firm focused on neurological disorders, particularly epilepsy, outlines progress on proprietary (XEN1101, XEN496, XEN007) and partnered (NBI-921352, FX301) programs, summarizing 2020 financial performance with revenue growth but continued losses and anticipated substantial future R&D investment - The Phase IIb X-TOLE clinical trial for XEN1101 is expected to complete patient randomization in the first half of 2021, with top-line data anticipated in the third quarter of 2021. The Phase III EPIK clinical trial for XEN496 has been initiated, and the Phase II clinical trial for NBI-921352 is expected to start in the third quarter of 2021[362][366] - Financial Overview for 2020 and 2019 (Thousands of US Dollars) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Revenue | $32,200 | $6,800 | | Net Loss | $28,800 | $41,600 | | Accumulated Deficit (as of December 31) | $278,500 | $249,700 | - The company expects to continue incurring substantial expenses and operating losses over the next 12 to 24 months, primarily to advance product candidate development, seek regulatory approvals, maintain intellectual property, and establish commercialization infrastructure[366][367] Financial Operations Overview The company's 2020 revenue significantly increased to $32.2 million, primarily from the Neurocrine Biosciences agreement, while R&D expenses rose to $50.5 million for XEN1101 and XEN496, and general and administrative expenses increased to $12.9 million due to equity compensation and personnel growth, with other income affected by foreign exchange gains and loan repayment losses - Collaboration Revenue for 2020 and 2019 (Thousands of US Dollars) | Collaborator | 2020 | 2019 | | :--- | :--- | :--- | | Neurocrine Biosciences (Transaction Price Recognition) | $26,810 | $2,881 | | Neurocrine Biosciences (R&D Services) | $5,356 | $448 | | Flexion (Transaction Price Recognition) | — | $3,000 | | Flexion (Milestone Payments) | — | $500 | | Total Collaboration Revenue | $32,166 | $6,829 | - Operating Expenses for 2020 and 2019 (Thousands of US Dollars) | Expense Type | 2020 | 2019 | | :--- | :--- | :--- | | Research and Development Expenses | $50,523 | $38,845 | | General and Administrative Expenses | $12,944 | $10,803 | | Total Operating Expenses | $63,467 | $49,648 | - R&D expenses increased by $11.7 million, primarily due to increased clinical development expenditures for XEN1101 and XEN496, partially offset by reduced expenditures for XEN901 (NBI-921352)[396] - General and administrative expenses increased by $2.1 million, primarily due to higher share-based compensation expense, increased salaries and benefits from higher headcount, and increased insurance premiums[397] - Other income increased by $1.0 million, driven by higher foreign exchange gains and reduced interest expense (due to term loan repayment in May 2020), partially offset by a one-time loss on term loan repayment[398] Critical Accounting Policies and Significant Judgments and Estimates The company's financial statements, prepared under U.S. GAAP, involve significant management estimates and assumptions, with key accounting policies covering revenue recognition (five-step model, probability assessment for milestones), R&D costs (expensed as incurred, accrued based on vendor performance), and share-based compensation (Black-Scholes model), all potentially influenced by the COVID-19 pandemic - Key accounting estimates include revenue recognition, research and development costs, and share-based compensation[386] - Revenue recognition employs a five-step model, assessing and allocating multiple performance obligations in collaboration agreements, with milestone payments recognized when it is probable that a significant revenue reversal will not occur[388][389] - Research and development costs are expensed as incurred and accrued or prepaid based on the proportion of services performed by vendors such as contract research organizations and contract development and manufacturing organizations[390][391] - Share-based compensation is estimated using the Black-Scholes option pricing model to determine fair value, requiring estimates for assumptions such as expected life and expected volatility[392][393] - The potential impact of the COVID-19 pandemic on business, operating results, and financial condition, including revenue, expenses, and R&D and clinical development plans and timelines, depends on highly uncertain future developments[440] Results of Operations In 2020, revenue increased by $25.3 million from 2019, primarily due to the Neurocrine Biosciences agreement, while R&D expenses rose by $11.7 million for XEN1101 and XEN496, general and administrative expenses increased by $2.1 million due to equity compensation and personnel, and other income grew by $1.0 million from foreign exchange gains and reduced interest expense, partially offset by a loan repayment loss - Comparison of Operating Results for 2020 and 2019 (Thousands of US Dollars) | Metric | 2020 | 2019 | Change (Increase/(Decrease)) | | :--- | :--- | :--- | :--- | | Revenue | $32,166 | $6,829 | $25,337 | | Research and Development Expenses | $50,523 | $38,845 | $11,678 | | General and Administrative Expenses | $12,944 | $10,803 | $2,141 | | Interest Income | $2,283 | $2,353 | $(70) | | Interest Expense | $(484) | $(1,434) | $950 | | Foreign Exchange Gain | $1,396 | $282 | $1,114 | | Loss on Repayment of Term Loan | $(988) | — | $(988) | | Loss Before Income Taxes | $(29,094) | $(41,618) | $12,524 | - The increase in 2020 revenue is primarily attributable to the recognition of deferred revenue and revenue from R&D services under the license and collaboration agreement with Neurocrine Biosciences[395] - The increase in R&D expenses is primarily due to increased clinical development expenditures for XEN1101 and XEN496, partially offset by reduced expenditures for XEN901 (NBI-921352)[396] - The increase in general and administrative expenses is primarily due to higher share-based compensation expense, increased salaries and benefits from higher headcount, and increased insurance premiums[397] - The increase in other income is driven by higher foreign exchange gains and reduced interest expense, partially offset by a one-time loss on term loan repayment[398] Liquidity and Capital Resources The company primarily funds its cash needs through collaboration and license agreements, equity and debt financing, and government grants, holding $177 million in cash, cash equivalents, and marketable securities as of December 31, 2020, despite accumulated deficits of $278.5 million, expecting existing funds to support operations for at least 12 months, with future capital needs remaining uncertain - The company primarily meets its cash needs through collaboration and license agreements, equity and debt financing, and government grants[399] - Liquidity Overview (Thousands of US Dollars) | Metric | December 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and Cash Equivalents and Marketable Securities | $177,000 | $141,358 | | Net Loss | $(28,837) | $(41,595) | | Accumulated Deficit | $(278,492) | $(249,655) | - The company expects its existing cash, cash equivalents, and marketable securities to be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 12 months[404] - Future capital requirements are difficult to predict and will depend on various factors, including the number and characteristics of product candidates, R&D progress and costs, whether existing collaborations generate milestone payments and royalties, the timing and cost of regulatory approvals, commercialization costs, manufacturing costs, intellectual property maintenance costs, and future product sales[403] Cash Flows In 2020, net cash used in operating activities increased to $48.1 million, primarily due to 2019 upfront payments offsetting some expenditures and increased 2020 clinical development spending for proprietary product candidates. Net cash used in investing activities decreased to $16.8 million due to reduced marketable securities purchases. Net cash provided by financing activities increased to $85.8 million, mainly from common stock issuance proceeds, partially offset by term loan repayment - Cash Flow Summary for 2020 and 2019 (Thousands of US Dollars) | Activity Type | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(48,124) | $(4,714) | | Net Cash Used in Investing Activities | $(16,824) | $(66,209) | | Net Cash Provided by Financing Activities | $85,795 | $27,518 | | Cash and Cash Equivalents, End of Period | $45,009 | $24,755 | - Net cash used in operating activities increased, primarily due to upfront payments received from Neurocrine Biosciences and Flexion in 2019 partially offsetting expenditures in that year, and increased clinical development expenditures for proprietary product candidates in 2020[406] - Net cash used in investing activities decreased, primarily driven by a reduction in net purchases of marketable securities[407] - Net cash provided by financing activities increased, primarily related to increased net proceeds from the issuance of common shares, partially offset by the repayment of a term loan[408] Contractual Obligations As a smaller reporting company, the company is not required to provide contractual obligations information but discloses specific commitments including a $7 million priority access agreement with Medpace, low single-digit percentage net sales royalties for XEN007, potential future milestone payments up to $7.7 million for XEN1101, and tiered low single-digit percentage royalties to Genentech for certain Nav1.6 compounds - The company has a priority access agreement with Medpace Inc., committing to $7 million in clinical development services, with $3.651 million remaining as of December 31, 2020, after receiving $3.349 million in services[410] - The license, manufacturing, and supply agreement for XEN007 requires the company to pay low single-digit percentage royalties on net sales[411] - The asset purchase agreement for XEN1101 involves potential future milestone payments, including up to $1.2 million in clinical development milestones, $6 million in regulatory milestones, and $0.5 million in other milestones, with $0.3 million already paid[412] - The agreement with Genentech stipulates that the company must pay tiered low single-digit percentage royalties to Genentech on net sales of certain Nav1.6 compounds, including NBI-921352[414] Inflation The company believes inflation has not materially impacted its business, financial condition, or results of operations over the past three fiscal years - The company believes inflation has not materially impacted its business, financial condition, or results of operations over the past three fiscal years[415] Off-Balance Sheet Arrangements The company has not engaged in any off-balance sheet financing activities and does not hold any variable interest entities - The company has not engaged in any off-balance sheet financing activities and does not hold any variable interest entities[416] Related Party Transactions Descriptions of related party transactions are provided in the “Certain Relationships and Related Transactions, and Director Independence” section - Descriptions of related party transactions are provided in the 'Certain Relationships and Related Transactions, and Director Independence' section[417] Outstanding Share Data As of February 26, 2021, the company had 35,809,247 common shares, 4,680,377 stock options, and 1,016,000 Series 1 preferred shares outstanding, with Series 1 preferred shares convertible to common shares on a one-to-one basis, subject to beneficial ownership limitations - Outstanding Share Data as of February 26, 2021 | Security Type | Quantity | | :--- | :--- | | Common Shares | 35,809,247 | | Stock Options | 4,680,377 | | Series 1 Preferred Shares | 1,016,000 | - Series 1 preferred shares are convertible to common shares on a one-to-one basis, subject to a limitation that the holder and its affiliates may not beneficially own more than 9.99% of the total common shares outstanding after conversion[417] Recent Accounting Pronouncements The company has evaluated FASB-issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," and determined it will not materially impact its consolidated financial statements - The company has evaluated ASU 2019-12, 'Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,' and determined it will not materially impact its consolidated financial statements[418] Quantitative and Qualitative Disclosure About Market Risk As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk requested by this item - As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk[419] Financial Statements and Supplementary Data This section contains the company's consolidated financial statements as of December 31, 2020, and 2019, including the independent registered public accounting firm's report, consolidated balance sheets, statements of operations and comprehensive loss, statements of shareholders' equity, statements of cash flows, and notes to consolidated financial statements - This section includes the company's consolidated financial statements as of December 31, 2020, and 2019, comprising the independent registered public accounting firm's report, consolidated balance sheets, statements of operations and comprehensive loss, statements of shareholders' equity, statements of cash flows, and notes to consolidated financial statements[421] Reports of Independent Registered Public Accounting Firm KPMG LLP, as the independent registered public accounting firm, issued an unqualified opinion on the company's consolidated financial statements as of December 31, 2020, and 2019, affirming fair presentation in all material respects according to U.S. GAAP, with no critical audit matters identified - KPMG LLP issued an unqualified opinion on the company's consolidated financial statements as of December 31, 2020, and 2019, affirming fair presentation in all material respects according to U.S. GAAP[423] - No critical audit matters were identified during the audit[427] Consolidated Balance Sheets As of December 31, 2020, the company's total assets increased to $189.2 million from $147.7 million in 2019, with cash, cash equivalents, and marketable securities totaling $177 million, while total liabilities significantly decreased to $17.8 million from $55.7 million, primarily due to term loan repayment and deferred revenue recognition, and shareholders' equity rose to $171.4 million - Consolidated Balance Sheets Summary (Thousands of US Dollars) | Metric | December 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and Cash Equivalents | $45,009 | $24,755 | | Marketable Securities | $131,988 | $116,603 | | Total Assets | $189,186 | $147,697 | | Liabilities | | | | Accounts Payable and Accrued Expenses | $10,874 | $8,818 | | Deferred Revenue | $3,642 | $29,743 | | Term Loan | — | $15,539 | | Total Liabilities | $17,831 | $55,720 | | Shareholders' Equity | | | | Total Shareholders' Equity | $171,355 | $91,977 | - Total liabilities significantly decreased from $55.7 million in 2019 to $17.8 million in 2020, primarily due to the repayment of the term loan and the recognition of deferred revenue[429] Consolidated Statements of Operations and Comprehensive Loss In 2020, the company's revenue was $32.17 million, a significant increase from $6.83 million in 2019, with total operating expenses of $63.47 million resulting in an operating loss of $31.30 million, and a net loss of $28.84 million, narrowed from $41.60 million in 2019, leading to a basic and diluted net loss per share of $0.81 - Consolidated Statements of Operations and Comprehensive Loss Summary (Thousands of US Dollars, except per share amounts) | Metric | December 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Revenue | $32,166 | $6,829 | | Research and Development Expenses | $50,523 | $38,845 | | General and Administrative Expenses | $12,944 | $10,803 | | Operating Loss | $(31,301) | $(42,819) | | Interest Income | $2,283 | $2,353 | | Interest Expense | $(484) | $(1,434) | | Foreign Exchange Gain | $1,396 | $282 | | Loss on Repayment of Term Loan | $(988) | — | | Loss Before Income Taxes | $(29,094) | $(41,618) | | Net Loss and Comprehensive Loss | $(28,837) | $(41,595) | | Basic and Diluted Net Loss Per Share | $(0.81) | $(1.54) | - The net loss in 2020 narrowed compared to 2019, primarily due to significant revenue growth and reduced interest expense, despite a one-time loss on term loan repayment[430] Consolidated Statements of Shareholders' Equity As of December 31, 2020, the company's total shareholders' equity significantly increased to $171.4 million from $91.98 million in 2019, driven by a $103.5 million increase in common stock from new issuances and a $4.71 million increase in additional paid-in capital from share-based compensation, while the accumulated deficit grew by $28.84 million to $278.5 million - Consolidated Statements of Shareholders' Equity Summary (Thousands of US Dollars, except share amounts) | Metric | December 31, 2019 | December 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Convertible Preferred Shares | $7,732 | $7,732 | $0 | | Common Shares | $294,244 | $397,748 | $103,504 | | Additional Paid-in Capital | $40,646 | $45,357 | $4,711 | | Accumulated Deficit | $(249,655) | $(278,492) | $(28,837) | | Accumulated Other Comprehensive Loss | $(990) | $(990) | $0 | | Total Shareholders' Equity | $91,977 | $171,355 | $79,378 | - The common stock amount increased by $102.5 million in 2020, primarily from net proceeds from the issuance of common shares[432] - Additional paid-in capital increased by $5.677 million, primarily from share-based compensation expense[432] Consolidated Statements of Cash Flows In 2020, net cash used in operating activities was $48.12 million, net cash used in investing activities was $16.82 million, and net cash provided by financing activities was $85.80 million, resulting in an increase in cash and cash equivalents to $45.01 million at year-end from $24.76 million at the end of 2019 - Consolidated Statements of Cash Flows Summary (Thousands of US Dollars) | Activity Type | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(48,124) | $(4,714) | | Net Cash Used in Investing Activities | $(16,824) | $(66,209) | | Net Cash Provided by Financing Activities | $85,795 | $27,518 | | Cash and Cash Equivalents, End of Period | $45,009 | $24,755 | - Net cash used in operating activities increased, primarily due to upfront payments received in 2019 partially offsetting expenditures, and increased clinical development expenditures for proprietary product candidates in 2020[406] - Net cash used in investing activities decreased, primarily driven by a reduction in net purchases of marketable securities[407] - Net cash provided by financing activities increased, primarily related to increased net proceeds from the issuance of common shares, partially offset by the repayment of a term loan[408] Notes to Consolidated Financial Statements This section provides detailed notes to the consolidated financial statements, covering the company's business nature, basis of presentation, significant accounting policies (including revenue recognition, R&D costs, share-based compensation), accounting policy changes, future accounting pronouncements, net earnings (loss) per share calculation, property, plant and equipment, leases, accounts payable and accrued expenses, term loan, share capital, concentrations of market risk, collaboration agreements, commitments and contingencies, and income taxes - The company has incurred continuous losses since inception, with an accumulated deficit of $278.5 million as of December 31, 2020, and expects to continue incurring losses and requiring additional financing[436] - Revenue recognition employs a five-step model, with milestone payments recognized when it is probable that a significant revenue reversal will not occur. R&D costs are expensed as incurred. Share-based compensation is estimated using the Black-Scholes model to determine fair value[446][449][451] - In May 2020, the company repaid its $15.5 million term loan with Silicon Valley Bank early, recording a $0.988 million loss on repayment[467] - As of December 31, 2020, the company held $45.01 million in cash and cash equivalents and $132 million in marketable securities. The company faces Canadian dollar foreign exchange risk but currently does not hedge[485][487] - As of December 31, 2020, the company had $29.58 million in unclaimed scientific research and experimental development tax credits, $24.31 million in investment tax credits, and $35.80 million in non-capital loss carryforwards[513][514][515] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in accountants or disagreements with accountants on accounting and financial disclosure - The company has no changes in accountants or disagreements with accountants on accounting and financial disclosure[518] Controls and Procedures The company management (including the CEO and CFO) assessed the effectiveness of disclosure controls and procedures and internal control over financial reporting as of December 31, 2020, and concluded that these controls were effective in design and operation, with no material changes during the reporting period - Company management assessed the effectiveness of disclosure controls and procedures and internal control over financial reporting as of December 31, 2020[519][521] - Management concluded that, as of December 31, 2020, the company's disclosure controls and procedures were effective at a reasonable assurance level[520] - No material changes occurred in internal control over financial reporting during the three months ended December 31, 2020[524] Other Information The company has established a written code of conduct applicable to all directors, officers, and employees, available on its website and SEDAR - The company has established a written code of conduct applicable to all directors, officers, and employees[525] - The code of conduct is available on the company's investor relations website (http://www.xenon-pharma.com) and SEDAR (www.sedar.com)[525](index=525&type=chunk) PART III Directors, Executive Officers and Corporate Governance The information