Xenon(US:XENE)2020-08-06 20:53PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for the three and six months ended June 30, 2020, detailing increased cash, marketable securities, and reduced net loss driven by financing and collaboration revenue Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $44,199 | $24,755 | | Marketable securities | $158,555 | $116,603 | | Total Assets | $210,676 | $147,697 | | Deferred revenue (current) | $12,692 | $29,743 | | Term loan (current & long-term) | $0 | $15,539 | | Total Liabilities | $21,378 | $55,720 | | Total Shareholders' Equity | $189,298 | $91,977 | Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $13,384 | $0 | $20,462 | $0 | | Research and development | $10,720 | $8,205 | $22,511 | $17,342 | | General and administrative | $3,310 | $2,307 | $6,630 | $4,928 | | Net Loss | ($175) | ($10,007) | ($7,659) | ($21,348) | | Net Loss per common share | ($0.00) | ($0.37) | ($0.22) | ($0.80) | Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | ($23,856) | ($17,443) | | Net cash used in investing activities | ($41,991) | ($13,631) | | Net cash provided by financing activities | $85,750 | $69 | - In December 2019, the company entered into a License and Collaboration Agreement with Neurocrine Biosciences, receiving a $30.0 million upfront cash payment and a $20.0 million equity investment. For the six months ended June 30, 2020, the company recognized $20.5 million in revenue from this agreement505153 - In May 2020, the company fully repaid its $15.5 million term loan with Silicon Valley Bank ahead of maturity, resulting in a one-time loss on repayment of $988,0004089 - The company raised significant capital through an at-the-market offering and an underwritten public offering in January and February 2020, receiving net proceeds of approximately $102.5 million4142 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, noting $20.5 million in collaboration revenue, increased operating expenses for clinical programs, and strengthened liquidity from recent equity financings, sufficient to fund operations for at least 12 months despite COVID-19 impacts Overview Xenon, a clinical-stage biopharmaceutical company, focuses on neurological disorders, advancing proprietary and partnered programs, with COVID-19 impacting clinical trial timelines for XEN1101 and XEN007 - The Phase 2b X-TOLE study for XEN1101 in adult focal epilepsy is ongoing, with topline data anticipated in the first half of 2021, delayed due to COVID-19's impact on patient enrollment67 - A Phase 3 trial for XEN496 in pediatric patients with KCNQ2-DEE is anticipated to begin in 2020, following FDA feedback on the protocol67 - The physician-led Phase 2 study of XEN007 in childhood absence epilepsy has also been delayed by COVID-19, with results now expected in the first half of 202168 - Partner Neurocrine Biosciences anticipates filing an IND for NBI-921352 (formerly XEN901) and starting a Phase 2 trial in SCN8A-DEE patients in the second half of 2020. Xenon is eligible for a $25.0 million milestone upon IND acceptance70 Results of Operations Revenue for the three and six months ended June 30, 2020, was $13.4 million and $20.5 million respectively, from the Neurocrine collaboration, while R&D and G&A expenses increased due to clinical program advancement and higher compensation costs Change in Operating Results (in thousands) | Item | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change | | :--- | :--- | :--- | :--- | | Revenue | $20,462 | $0 | $20,462 | | R&D Expenses | $22,511 | $17,342 | $5,169 | | G&A Expenses | $6,630 | $4,928 | $1,702 | Research & Development Expense Breakdown (in thousands) | Program | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change | | :--- | :--- | :--- | :--- | | XEN1101 | $10,545 | $7,228 | $3,317 | | XEN496 | $4,556 | $1,572 | $2,984 | | XEN901 (NBI-921352) | $1,263 | $4,085 | ($2,822) | | Pre-clinical & Other | $6,147 | $4,457 | $1,690 | | Total R&D | $22,511 | $17,342 | $5,169 | - The increase in R&D expenses was primarily due to advancing clinical development of XEN496 and XEN1101, partially offset by decreased spending on XEN901 as development costs are now borne by Neurocrine Biosciences94 - The increase in G&A expenses was mainly due to higher stock-based compensation, salaries from increased headcount, and higher insurance premiums95 Liquidity and Capital Resources As of June 30, 2020, the company held $202.8 million in cash and marketable securities, with recent financings significantly strengthening its liquidity, which is expected to fund operations for at least the next 12 months despite ongoing losses - As of June 30, 2020, the company had cash, cash equivalents, and marketable securities of $202.8 million99 - The company expects that its existing cash and marketable securities will be sufficient to fund operating expenses and capital expenditure requirements for at least the next 12 months103131 - Net cash used in operating activities increased to $23.9 million for the first six months of 2020, up from $17.4 million in the same period of 2019, primarily due to increased R&D and G&A expenses104105 - Net cash provided by financing activities was $85.8 million for the first six months of 2020, mainly from the issuance of common shares, compared to just $0.1 million in the prior-year period104107 Quantitative and Qualitative Disclosures About Market Risk The company is not required to provide quantitative and qualitative disclosures about market risk as it qualifies as a smaller reporting company under SEC regulations - As a smaller reporting company, Xenon is not required to provide quantitative and qualitative disclosures about market risk pursuant to Item 305(e) of Regulation S-K115 Controls and Procedures As of June 30, 2020, the CEO and CFO concluded the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period116 - There were no changes in internal control over financial reporting during the quarter ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting117 PART II. OTHER INFORMATION Legal Proceedings The company is not currently a party to any legal proceedings expected to have a material adverse effect on its business, financial condition, or operating results - The company is not presently a party to any legal proceedings that would be expected to have a material adverse effect on its business119 Risk Factors This section details numerous risks, including financial losses, drug development uncertainty, reliance on collaborators, intense competition, intellectual property challenges, COVID-19 impacts, and stock market volatility Risks Related to Financial Condition and Capital Requirements The company has a history of significant losses and anticipates continued losses, requiring substantial future capital that may be difficult to obtain, especially amidst unstable economic conditions like the COVID-19 pandemic - The company has incurred significant losses since inception, with an accumulated deficit of $257.3 million as of June 30, 2020, and anticipates continued losses for the foreseeable future121 - The company will likely need to raise substantial additional capital to complete clinical development and commercialization, and failure to do so could force delays or termination of development efforts128129 - Global economic disruptions, including the COVID-19 pandemic, could adversely affect the company's ability to secure necessary financing on favorable terms135 Risks Related to Business Business risks include potential product development failure, intense competition, lack of late-stage development and commercialization experience, COVID-19 disruptions, and adverse tax consequences from potential PFIC status - The company faces substantial competition from major pharmaceutical and biotechnology companies with greater financial resources and expertise141143 - The COVID-19 pandemic may materially and adversely affect business, including supply chain disruptions and delays in clinical trials, with a significant reduction in new patient enrollment for its Phase 2b XEN1101 trial already experienced167168 - The company has no experience in Phase 3 clinical development or commercialization, making it difficult to assess its ability to execute its strategy for independent product development149 - There is a risk that the company could be characterized as a passive foreign investment company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. shareholders172 Risks Related to Development, Clinical Testing and Regulatory Approval Regulatory approval is lengthy and unpredictable, with clinical trials facing delays, enrollment challenges, and non-predictive early-stage results, alongside risks in obtaining and maintaining orphan drug designation - The regulatory approval process is lengthy, time-consuming, and inherently unpredictable, and there is no guarantee that any product candidates will receive approval182 - Clinical trials can be delayed for many reasons, including inability to enroll sufficient patients, particularly for orphan diseases, with the COVID-19 pandemic already causing a significant reduction in enrollment for the XEN1101 trial186196 - Results of pre-clinical studies and early clinical trials are not necessarily predictive of the results of later-stage trials203 - The company may fail to obtain or maintain orphan drug designation for its product candidates, which would harm its competitive position by removing market exclusivity protections200 Risks Related to Commercialization The company lacks commercialization infrastructure, facing challenges in sales, marketing, and distribution, along with ongoing regulatory obligations, pricing pressures, reimbursement hurdles, and potential negative impacts from healthcare legislation - The company has no sales, marketing, or distribution experience and would need to build this infrastructure or rely on partners to commercialize products, which carries significant risks and costs211212 - The ability to successfully commercialize products depends on obtaining adequate coverage and reimbursement from government and third-party payers, which is uncertain and subject to cost-containment pressures220 - Future legislation and regulatory proposals in the U.S. and other jurisdictions aimed at controlling healthcare costs could increase the difficulty and cost of commercialization and negatively affect product prices224226 Risks Related to Dependence on Third Parties Xenon's success heavily depends on third-party collaborators for partnered asset development and commercialization, and on CMOs and CROs for manufacturing and clinical trials, posing risks to quality, compliance, and timelines - The company is dependent on collaborators like Neurocrine Biosciences to fund and conduct research, clinical development, and commercialization of partnered product candidates, and has no control over the resources they devote232235 - The company relies on third-party manufacturers (CMOs) for clinical product supplies and does not own or operate manufacturing facilities, creating risks related to regulatory compliance (cGMP), quality control, and supply chain continuity242243 - The company depends on third-party CROs to monitor and conduct clinical trials, and any failure by these CROs to perform as required could delay trials or compromise data integrity244245246 Risks Related to Intellectual Property Commercial success depends on obtaining and maintaining patent protection, which is uncertain and subject to challenges, third-party infringement claims, and less extensive foreign protection, with collaborators controlling IP for partnered programs - The company's ability to obtain and maintain patent protection is uncertain and critical to its success; patents may not be issued or could be found invalid or unenforceable if challenged252 - The company may face costly litigation if third parties claim that its products infringe their patent rights, which could result in substantial damages or prevent commercialization268270 - For partnered products, the prosecution and enforcement of related patents are controlled by collaborators (e.g., Neurocrine Biosciences for NBI-921352), and their failure to protect this IP could adversely affect the company263 - Protecting intellectual property rights in foreign jurisdictions can be difficult and less effective than in the U.S., potentially allowing competitors to use the company's technologies in those markets257258 Risks Related to Our Industry The company faces inherent industry risks including product liability lawsuits, complex healthcare regulations with potential penalties for non-compliance, and environmental and safety compliance risks from hazardous materials in R&D - The company faces an inherent risk of product liability lawsuits from the clinical testing and potential commercialization of its product candidates, which could result in substantial liabilities283 - Operations are subject to extensive federal and state healthcare laws, including anti-kickback and false claims statutes, and violations could lead to criminal sanctions, civil penalties, and exclusion from government healthcare programs287289290 Risks Related to the Securities Markets and Ownership of Our Common Shares Shareholders face risks including stock price volatility, dilution from future share sales, difficulties in potential acquisitions due to corporate provisions and Canadian law, challenges for U.S. investors to enforce civil liabilities, and considerations related to the company's reporting status - The market price of the company's common shares has been and is likely to be volatile, influenced by clinical trial results, regulatory decisions, and broad market fluctuations293 - Future sales of common shares, including through its at-the-market equity program, could cause significant dilution to existing shareholders and cause the market price to fall295296310 - As a Canadian corporation, it may be difficult for U.S. investors to enforce U.S. civil liability judgments against the company, its directors, or its officers299 - The company does not anticipate paying any cash dividends in the foreseeable future, so capital appreciation may be the sole source of gain for investors317 Exhibits This section lists exhibits filed with the Form 10-Q, including the Amended and Restated 2014 Equity Incentive Plan, an amendment to an asset purchase agreement, and CEO/CFO certifications - Filed exhibits include the Amended and Restated 2014 Equity Incentive Plan, an amendment to the asset purchase agreement with 1st Order Pharmaceuticals, and required CEO/CFO certifications320 Signatures The quarterly report was signed on August 6, 2020, by CEO Simon Pimstone and President & CFO Ian Mortimer on behalf of Xenon Pharmaceuticals Inc - The report was signed and authorized on August 6, 2020, by CEO Simon Pimstone and President & CFO Ian Mortimer322324