Xenon Pharmaceuticals
Annual Report 2014

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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2014or¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 jurisdictionof incorporation or organization) (I.R.S. EmployerIdentification Number)200 – 3650 Gilmore WayBurnaby, British Columbia V5G 4W8Canada(Address of Principal Executive Offices, including zip code)(Registrant’s Telephone Number, Including Area Code): (604) 484-3300Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which RegisteredCommon Shares, no par value per share The NASDAQ Stock Market LLC(The NASDAQ Global Market)Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No xIndicate 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 preceding12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted 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 andpost such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of theregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.: Large accelerated filer ¨ Accelerated filer ¨Non-accelerated filer x Smaller reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No xThe aggregate market value of the voting and non-voting common shares held by non-affiliates of the registrant on November 5, 2014 (including common shares issued in theregistrant’s initial public offering), based on the closing price of $10.50 per share for the registrant’s common shares as reported by The NASDAQ Global Market, was approximately$111 million. The registrant has elected to use November 5, 2014 as the calculation date, which was the initial trading date of the registrant’s common shares on The NASDAQ GlobalMarket, because on June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter), the registrant was a privately-held company. Common sharesheld by each executive officer and director and by each person who owns 5% or more of the outstanding common shares, based on filings with the Securities and ExchangeCommission, have been excluded from this computation since such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily aconclusive determination for other purposes.The number of outstanding common shares of the registrant, no par value per share, as of March 9, 2015 was 14,221,600. DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2015 Annual Meeting ofShareholders, which will be filed subsequent to the date hereof, are incorporated by reference into Part III of this Form 10 K. Such Proxy Statement will be filed with the Securities andExchange Commission not later than 120 days following the end of the registrant’s fiscal year ended December 31, 2014. XENON PHARMACEUTICALS INC.FORM 10-KFor the Fiscal Year Ended December 31, 2014Table of Contents Page PART I 2 Item 1. Business 3 Item 1A. Risk Factors 42 Item 1B. Unresolved Staff Comments 78 Item 2. Properties 78 Item 3. Legal Proceedings 78 Item 4. Mine Safety Disclosures 78 PART II 79 Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 79 Item 6. Selected Financial Data 82 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 83 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 95 Item 8. Financial Statements and Supplementary Data 96 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 122 Item 9A. Controls and Procedures 122 Item 9B. Other Information 122 PART III 123 Item 10. Directors, Executive Officers and Corporate Governance 123 Item 11. Executive Compensation 123 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 123 Item 13. Certain Relationships and Related Transactions, and Director Independence 123 Item 14. Principal Accountant Fees and Services 123 PART IV 124 Item 15. Exhibits, Financial Statement Schedules 124 SIGNATURES 125 -i- PART IForward-Looking StatementsCertain statements contained in this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended and Canadian Securities laws. The words orphrases “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 shouldread these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or stateother “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and theassumptions that underlie these statements. These forward-looking statements include, but are not limited to:·our ability to identify additional products or product candidates using our Extreme Genetics discovery platform;·the initiation, timing, cost, progress and success of our research and development programs, preclinical studies and clinical trials;·our ability to advance product candidates into, and successfully complete, clinical trials;·our ability to recruit sufficient numbers of patients for our future clinical trials for orphan or more common indications;·our ability to achieve profitability;·our ability to obtain funding for our operations, including research funding;·our ability to receive milestones, royalties and sublicensing fees under our collaborations, and the timing of such payments;·the implementation of our business model and strategic plans;·our ability to develop and commercialize product candidates for orphan and niche indications independently;·our commercialization, marketing and manufacturing capabilities and strategy;·our ability to find families to support our Extreme Genetics discovery platform;·our ability to discover genes and drug targets;·our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;·our expectations regarding federal, state and foreign regulatory requirements;·the therapeutic benefits, effectiveness and safety of our product candidates;·the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products and product candidates;·the rate and degree of market acceptance and clinical utility of Glybera and future products, if any;·the timing of, and our and our collaborators’ ability to obtain and maintain regulatory approvals for our product candidates;·our ability to maintain and establish collaborations;·our use of proceeds from our initial public offering and the concurrent private placement completed in November 2014;·our expectations regarding market risk, including interest rate changes and foreign currency fluctuations;·our belief in the sufficiency of our cash flows to meet our needs for at least the next 12 to 24 months;·our ability to engage and retain the employees required to grow our business;·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. 2 These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from thoseanticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report inPart I, Item 1A — “Risk Factors,” and elsewhere in this report. Forward-looking statements are based on our management’s beliefs and assumptions and oninformation currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake noobligation to update or revise these statements in light of future developments. In this report, “we,” “our,” “us,” “Xenon,” and “the Company” refer toXenon Pharmaceuticals Inc. Unless otherwise noted, all dollar amounts in this report are expressed in United States dollars.Item 1.BusinessOverviewWe are a clinical-stage biopharmaceutical company discovering and developing a pipeline of differentiated therapeutics for orphan indications thatwe intend to commercialize on our own, and for larger market indications that we intend to partner with global pharmaceutical companies. We have built acore enabling discovery platform for the discovery of validated drug targets by studying rare human diseases with extreme traits, including diseases causedby mutations in ion channels, known as channelopathies. We have an integrated platform that includes in-house capabilities for human genetics, smallmolecule drug discovery, as well as preclinical and clinical development.Our business was founded on our proprietary discovery platform, which we refer to as Extreme Genetics. Extreme Genetics involves the study offamilies where individuals exhibit inherited severe traits, or phenotypes. By identifying and characterizing single-gene defects responsible for thesephenotypes, we gain insights into human disease biology to better select targets for therapeutic intervention. Our Extreme Genetics discovery platform hasyielded the first approved gene therapy product in the European Union, or the EU, a broad development pipeline and multiple pharmaceutical partnerships.We believe that our Extreme Genetics discovery platform enhances the likelihood of discovering a drug target that has a major effect in humans. From thesediscoveries, we can gain an improved understanding of how a drug that modulates the target might act when given to a human.Our pharmaceutical partners include Teva Pharmaceutical Industries, Ltd., or Teva (through its subsidiary, Ivax International GmbH), Genentech, Inc.,or Genentech, and Merck & Co., Inc., or Merck (through its affiliate, Essex Chemie AG). Our pharmaceutical collaborations have generated in aggregate over$150.0 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.To date, our Extreme Genetics discovery platform has yielded:·Glybera, developed by our licensee uniQure Biopharma B.V., or uniQure, the first, and currently the only, gene therapy product approved in theEU for the treatment of the orphan disorder lipoprotein lipase deficiency, or LPLD. We believe that uniQure’s commercialization partner,Chiesi Farmaceutici S.p.A., or Chiesi, plans to launch Glybera in the first quarter of 2015;·TV-45070 (formerly XEN402), a product candidate with four Phase 2 proof-of-concept clinical trials completed. Our partner Teva is conductinga 300-patient, randomized Phase 2b clinical trial in osteoarthritis, or OA, of the knee, with data expected in the third quarter of 2015 and isplanning a Phase 2b clinical trial in patients with postherpetic neuralgia, or PHN, with patient enrollment expected to begin in March 2015;·GDC-0276, a product candidate being developed in collaboration with Genentech for the treatment of pain. In September 2014, Genentechinitiated a Phase 1 clinical trial for GDC-0276. The Phase 1 clinical trial has recently been expanded and is expected to complete enrollment inthe second half of 2015. GDC-0276 is a selective, oral Nav1.7 small-molecule inhibitor being developed for the treatment of pain; and·proprietary preclinical programs including a sodium channel inhibitor for the orphan disorder Dravet Syndrome, or DS, and XEN801, a stearoylCo-A desaturase, or SCD1, inhibitor for the treatment of acne. We anticipate filing an investigational new drug, or IND or IND equivalentapplication for XEN801 in the second quarter of 2015 and an IND for our DS program in 2016.The selection of suitable families with rare phenotypes is integral to our successful identification of single-gene defects. Such families are rare anddispersed throughout the world, which makes accessing and studying such families a challenge. We have developed internal clinical genetics expertiseallowing us to identify and access rare families. To date, we have established a global network that has included more than 30 clinical collaborations inmultiple countries. We collect DNA and detailed clinical information from the selected families to which we then apply our in-house genetics, molecularbiology and bioinformatics capabilities to identify the single-gene defect. Using these genetic insights, we apply our in-house, small-molecule expertise aswell as access other therapeutic modalities, with the goal of developing novel medicines. 3 A significant focus of our Extreme Genetics discovery platform has been human channelopathies. This focus has enabled us to develop strongcapabilities in small-molecule ion channel drug discovery. Our ion channel discovery capability is based on our understanding of the genetics ofchannelopathies combined with our proprietary biology and medicinal chemistry assets and know-how. We have been able to discover new binding sites onion channels which, in turn, has led to the discovery of highly-selective voltage-gated ion channel inhibitors, which may have safety and efficacy advantagesover non-selective inhibitors.While the pharmaceutical industry has shown interest in channelopathies, a general inability to target ion channels selectively with a pharmaceuticalagent has been a limitation to the development of effective therapeutics. The efficacy of non-selective ion channel inhibitors has generally been limited bythe adverse events observed at high doses due to the broad non-selective binding of such agents. We believe we have developed a core competence indeveloping highly-selective small-molecule ion channel inhibitors, and we believe we can use this know-how to develop a pipeline of novel ion channelinhibitors for diseases in areas of high unmet medical need.We discovered that deficiency of the voltage-gated sodium channel Nav1.7 is present in the rare human disease called congenital indifference to pain,or CIP. Individuals with CIP are unable to feel pain. This relationship indicated that Nav1.7 may be a key mechanism for the development of novelanalgesics. We are pursuing this mechanism in separate partnerships with Teva and with Genentech.Similarly, with our collaborators from McGill University, we identified the genetic link between rare human epilepsies and mutations in the Nav1.1sodium channel. These genetic epilepsy discoveries helped to define our therapeutic selective ion channel strategy for Dravet Syndrome. We believe that ourExtreme Genetics discovery platform provides the opportunity to validate additional ion channel targets for both prevalent and orphan indications.We were incorporated in the Province of British Columbia on November 5, 1996 under the predecessor to the Business Corporations Act (BritishColumbia) under the name “Xenon Bioresearch Inc.” We continued from British Columbia to the federal jurisdiction pursuant to Section 187 of the CanadaBusiness Corporations Act, or the CBCA, on May 17, 2000 and concurrently changed our name to “Xenon Genetics Inc.” We registered as an extra-provincial company in British Columbia on July 10, 2000 and changed our name to “Xenon Pharmaceuticals Inc.” on August 24, 2004. We have nosubsidiaries. Our principal executive offices are located at 200 – 3650 Gilmore Way, Burnaby, British Columbia, Canada V5G 4W8, and our telephonenumber is (604) 484-3300. We are a reporting issuer in British Columbia, Alberta and Ontario, but our shares are not listed on any recognized Canadian stockexchange. Our common shares trade on The NASDAQ Global Market under the symbol “XENE.”This Annual Report on Form 10-K includes our trademarks and registered trademarks, including the Xenon logo, “Extreme Genetics” and othertrademarks or service marks of Xenon. Each other trademark, trade name or service mark appearing in this Annual Report on Form 10-K belongs to its holder.Where You Can Find Additional InformationWe make available free of charge through our investor relations website, http://www.xenon-pharma.com, our annual reports, quarterly reports, currentreports, proxy statements and all amendments to those reports as soon as reasonably practicable after such material is electronically filed or furnished with theSEC. These reports may also be obtained without charge by contacting Investor Relations, Xenon Pharmaceuticals Inc., 200 – 3650 Gilmore Way, Burnaby,British Columbia, Canada V5G 4W8, e-mail: investors@xenon-pharma.com. Our Internet website and the information contained therein or incorporatedtherein are not intended to be incorporated into this Annual Report on Form 10-K. In addition, the public may read and copy any materials we file or furnishwith the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or may obtain information on the operation of the PublicReference Room by calling the SEC at 1-800-SEC-0330. Moreover, the SEC maintains an Internet site that contains reports, proxy and informationstatements, and other information regarding reports that we file or furnish electronically with them at www.sec.gov. 4 Our PipelineThe following is a summary of our current product pipeline: Approved ProductGlyberaGlybera is the first and currently the only gene therapy product to receive commercial approval in the EU. It is specifically indicated for the treatmentof a subset of adult patients with the orphan lipid disorder lipoprotein lipase deficiency, or LPLD, confirmed by genetic testing and suffering from severe ormultiple pancreatitis attacks, despite dietary fat restrictions. LPLD is a severe metabolic disease of inadequate lipid metabolism resulting in pancreatitis andin some cases, death. Together with collaborators from the University of British Columbia, or UBC, we demonstrated that humans with a single gene variantof the lipoprotein lipase, or LPL, gene called LPLS447X, resulted in increased LPL enzyme activity leading to reduced triglyceride levels. Under oursublicense and research agreement with uniQure, we collaborated with uniQure and UBC on preclinical activities, and thereafter uniQure developed an LPLgene therapy product, Glybera, which contains the LPLS447X variant. We believe that the introduction of the therapeutic LPLS447X gene throughadministration of Glybera provides a clinical benefit for a subset of LPLD patients. 5 Glybera is the first product whose active ingredient was derived from our platform to receive commercial approval. The goal of Glybera therapy is totreat LPLD in order to achieve sustained improvement of clearance of triglyceride-rich lipid particles known as chylomicrons, and to significantly reduce therisk of pancreatitis attacks in patients suffering from multiple recurrent pancreatitis and abdominal pain events. Glybera was developed by our licensee,uniQure. In 2012, Glybera was approved in the EU, and in July 2013, uniQure announced that it had entered into a partnership with Chiesi FarmaceuticiS.p.A., or Chiesi, for the commercialization of Glybera in the EU and more than a dozen other countries including Brazil, China, Mexico and Russia. Webelieve that Chiesi plans to launch Glybera in the first quarter of 2015 in Europe, and that uniQure is pursuing a U.S. product approval strategy, with plans tofile a Biologics License Application, or BLA, with the U.S. Food and Drug Administration, or the FDA, following receipt of the results from a planned Phase 4trial expected to begin in mid-2015. Glybera has received both fast track and orphan drug designations for the treatment of LPLD in both the EU and the U.S.We are eligible to receive mid single-digit royalties on net sales of the licensed products, for sales made by uniQure and its affiliates. The royalty ratesare reduced to a low single-digit for sales made by uniQure and its affiliates in countries where a licensed technology or a licensed product is not covered bya valid patent claim. With respect to uniQure’s sublicense to Chiesi, we are eligible to receive a percentage in the low twenties of all non-royaltycompensation relating to the licensed technology or products that uniQure receives from Chiesi (for example upfront payments and milestone payments), apercentage in the low twenties of any royalties that uniQure receives from Chiesi based on sales of technology or products covered by the licensed patents,plus a mid single-digit percentage of certain further royalties that uniQure receives from Chiesi based on sales of our licensed technology or products after theexpiration of all licensed patents covering the product.Product Candidates in DevelopmentTV-45070 for the Treatment of PainTV-45070 (formerly XEN402) is a small-molecule inhibitor of the sodium channel Nav1.7 and other sodium channels, including those that areexpressed in the pain-sensing peripheral nervous system. TV-45070 has potentially broad application in nociceptive pain, mediated by damage or injury totissues, including the pain sensitivity caused by inflammation, and neuropathic pain mediated by damage, dysfunction or injury of nerves. TV-45070 ispartnered with Teva. Pursuant to the terms of the agreement, Teva is obligated to complete three Phase 2 or later stage clinical trials. Using a topical ointmentformulation of TV-45070, Teva has initiated a 300-patient, randomized Phase 2b clinical trial in OA of the knee with data expected in the third quarter of2015. Teva is also developing topical TV-45070 in neuropathic pain indications, and is planning a Phase 2b clinical trial in patients with PHN with patientenrollment expected to begin in March 2015. We selected Nav1.7 as a drug target after we discovered that the Nav1.7 protein is deficient in the rare humandisease called congenital indifference to pain, or CIP, where humans suffering from CIP are unable to feel pain. We have observed promising evidence ofactivity for TV-45070 in four Phase 2 proof-of-concept clinical trials, including two trials in the orphan disease erythromelalgia, or EM, one trial in PHN andone trial in dental pain, a form of nociceptive pain.In December 2012, we entered into a collaborative development and license agreement with Teva, through its subsidiary, Ivax International GmbH, orIvax, pursuant to which we granted Teva an exclusive worldwide license to develop and commercialize TV-45070. Prior to our entry into the collaborativedevelopment and license agreement with Teva, we submitted INDs to the FDA for oral TV-45070 for the indication of dental pain (July 2009) and topical TV-45070 for the indication of acute and chronic pain, including neuropathic and inflammatory pain (July 2010). Teva submitted an IND to the FDA for topicalTV-45070 for the symptomatic treatment of OA (November 2013). Under the terms of the agreement, Teva made an upfront payment to us of $41.0 million. Inaddition, we are eligible to receive potential milestone payments totaling up to $335.0 million, comprised of a $20.0 million clinical milestone payment, upto $285.0 million in regulatory milestone payments, and a $30.0 million sales-based milestone payment. If TV-45070 is approved, we are also eligible toreceive royalties in the low teens to the low twenties on net sales of the licensed products for the timeframe that such products are covered by the licensedpatents and in certain other instances. We also have an option to co-promote products in the U.S.GDC-0276 and Other Selective Inhibitors of Nav1.7 for the Treatment of Pain In December 2011, we entered into a collaborative research and license agreement with Genentech and its affiliate, F. Hoffmann-La Roche Ltd, orRoche, to discover and develop selective oral inhibitors of Nav1.7 for the treatment of pain. Based on our discovery of Nav1.7 deficiency underlying CIP, webelieve that Nav1.7 is a highly-validated target for the treatment of pain. Our Genentech collaboration is focused on discovering and developing selectiveoral Nav1.7 inhibitors, which is in contrast to our Teva partnership that is focused on developing a topical drug that targets a number of different sodiumchannels, including Nav1.7. The first small molecule, preclinical product candidate that was selected for development under our collaboration is GDC-0276.In September 2014, Genentech initiated a Phase 1 clinical trial for GDC-0276. The Phase 1 clinical trial has recently been expanded and is expected tocomplete enrollment in the second half of 2015. GDC-0276 is a selective, oral Nav1.7 small-molecule inhibitor being developed for the treatment of pain. 6 Under the terms of the agreement, Genentech paid us an upfront fee of $10.0 million, a $5.0 million milestone payment for the selection of GDC-0276for development and an $8.0 million milestone payment upon the approval by Health Canada of the Clinical Trial Application, or CTA, for GDC-0276. Weare also eligible to receive pre-commercial and commercial milestone payments with respect to the licensed products totaling up to an additional $613.0million, comprised of up to $45.5 million in preclinical and clinical milestone payments, up to $387.5 million in regulatory milestone payments, and up to$180.0 million in sales-based milestone payments for multiple products and indications. In addition, we are also eligible to receive royalties based on netsales of the licensed products, which range from a mid single-digit percentage to ten percent for small-molecule inhibitors for the timeframe that suchproducts are covered by the licensed patents and a low single-digit percentage thereafter, plus a low single-digit percentage for large-molecule inhibitors ofNav1.7.Chronic pain conditions, such as severe cancer pain and neuropathic pain, are generally recognized as unmet medical needs providing potentialcommercial opportunities for a new oral pain drug. Currently available pain drugs often have either a lack of meaningful pain relief or dose-limiting sideeffects for many patients. An orally administered selective Nav1.7 inhibitor could present a novel mechanism for the treatment of moderate to severe pain as asingle agent or in combination with existing analgesics that work through different mechanisms.Product Candidates in DiscoverySelective Small-Molecule Sodium Channel Inhibitors for the Treatment of Dravet SyndromeWe are developing selective inhibitors of the voltage-gated sodium channel Nav1.6 as a treatment for the orphan disease Dravet Syndrome, or DS. Wehave developed considerable expertise in voltage-gated sodium channel biology and have accumulated significant experience in the development ofselective sodium channel inhibitors. We are leveraging this expertise and chemistry know-how for the development of selective inhibitors of Nav1.6 for thetreatment of DS.DS is a severe form of childhood epilepsy that typically causes mental retardation and, in approximately 10% of cases, premature death before the ageof 12 years. The frequency of DS in the U.S. has been estimated to be one in 20,000 to 40,000 births, which, when applied to U.S. federal census data,correlates to approximately 7,500 to 15,000 patients with DS in the U.S.With our collaborators from McGill University, we identified the genetic link between rare human epilepsy and mutations in the Nav1.1 gene. It isnow estimated that approximately 80% of DS cases are believed to be due to mutations in one copy of the Nav1.1 voltage-gated sodium channel that cause apartial loss of Nav1.1 function. Nav1.1 plays a critical role in the normal functioning of inhibitory pathways in the brain. The lack of fully functioningNav1.1 and inhibitory pathways allows the brain excitatory pathways to be unopposed resulting in the severe seizures of DS. The brain excitatory pathwaysare preferentially mediated by the voltage-gated sodium channel Nav1.6, and therefore if we are able to selectively inhibit Nav1.6 with a small-moleculecompound, we expect to taper this neuronal excitation and thereby treat DS. To further support inhibiting Nav1.6 as a potential therapeutic approach to treatDS, published data have shown that seizures and premature death observed in a DS mouse model can be corrected when these animals are bred with a Nav1.6knockout mouse.DS is one of the most resistant epilepsies to treatment. Some benefit has been reported for drugs that increase the activity of the inhibitory brainpathways such as benzodiazepines and Stiripentol, while non-selective sodium channel blockers such as lamotrigine are contraindicated as they may worsenseizures due to further inhibition of Nav1.1. Other intractable childhood seizures that have been associated with genetically-linked partial loss of function ofNav1.1 or gain of function of Nav1.6 may benefit from a selective inhibitor of Nav1.6 include intractable childhood epilepsy with generalized tonic-clonicseizures and sporadic infantile epileptic encephalopathy.Based on our experience and know-how in developing selective ion channel inhibitors, we have identified potent, selective Nav1.6 inhibitors. Wehave demonstrated efficacy for seizures in an animal model with such an inhibitor. We anticipate filing an IND for a drug candidate to treat DS in 2016.Given the orphan nature of this disorder, we believe that DS may represent an attractive opportunity for us to advance independently. 7 XEN801 for the Treatment of AcneXEN801 is a selective, small molecule inhibitor of stearoyl Co-A desaturase, or SCD1 being developed for the treatment of moderate to severe acne.SCD1 is an enzyme involved in lipid synthesis that is expressed in sebaceous glands in the skin. Mice deficient in SCD1 have a marked phenotype ofsebaceous gland atrophy suggesting that inhibition of SCD1 activity in the skin may provide a novel treatment option for disorders of enlarged or overactivesebaceous glands, including acne. We have discovered and developed novel small-molecule SCD1 inhibitors to which we have sole rights. In multipleanimal models, we have shown that our SCD1 inhibitors can reduce the size and number of sebaceous glands. XEN801 has demonstrated good properties fortopical administration including formulation in a light gel and adequate skin penetration in multiple animal species.XEN801 is currently in IND-enabling studies, and we anticipate filing an IND or IND equivalent application to initiate a Phase 1 trial in the secondquarter of 2015 and initiating a proof-of-concept Phase 2 trial in the second half of 2015. We believe a selective, small-molecule inhibitor of SCD1 hastherapeutic potential for skin disorders such as moderate to severe acne, seborrhoea and sebaceous hyperplasia.Selective Small-Molecule Inhibitors of Targets for the Treatment of Cardiovascular DiseaseWe entered into a collaborative research and option agreement with Merck in June 2009 to discover novel targets and compounds for the treatment ofcardiovascular disease using our Extreme Genetics discovery platform. In 2012, Merck exercised its option to obtain an exclusive license to a target forcardiovascular disease and compound inhibitors that were discovered during the research collaboration. The target, when inhibited, is predicted to provide abeneficial lipid profile with the goal of protecting from cardiovascular disease.New Pipeline OpportunitiesGiven the commercial opportunity and the pharmaceutical industry’s interest in the pain market, we are using our Extreme Genetics discoveryplatform and specialized insights into the biology of pain to identify new drug targets for this common medical problem. We formed a second collaborationwith Genentech in March 2014 for pain genetics, pursuant to which we intend to focus on rare phenotypes where individuals have an inability to perceivepain or where individuals have non-precipitated spontaneous severe pain. We believe these phenotypes may unlock new key molecular regulators of painsignaling in humans, which we will seek to validate as targets for new pain drugs. For example, we are analyzing CIP families that are not explained byNav1.7 deficiency as well as families with severe pain phenotypes, such as paroxysmal extreme pain disorder, or PEPD, inherited EM and cluster headache.In addition to our study of rare human disorders of extreme pain or the absence of pain, we are studying other rare disorders with extreme phenotypesthat we believe could yield new drug targets in disorders where high medical need exists, such as neurological disorders like essential tremor.In addition, given our expertise in ion channel drug discovery, we are also focusing our discovery efforts on the identification of ion channel targetswhere we believe novel selective inhibitors might represent significant therapeutic advances with a focus on orphan indications.Our StrategyOur goal is to build a self-sustaining, fully-integrated and profitable company that discovers, develops and commercializes innovative therapeutics,including novel selective ion channel inhibitors, by applying our expertise in the genetics of rare human diseases.Since our inception, we believe we have operated in a capital-efficient manner to build our capabilities and assets through phased growth, expansionand value creation. Prior to our November 2014 initial public offering and concurrent private placement, our last equity financing was in 2006. From 2006 toNovember 2014, we funded our operations and expanded our platform, product pipeline and infrastructure through a strategy which combined thedeployment of our own resources and the establishment of broadly enabling and well-structured pharmaceutical partnerships with industry leaders. 8 Our strategy includes:·Expanding our pipeline and advancing multiple discovery and development programs, focusing on orphan and niche disease marketopportunities that we can independently develop and commercialize ourselves.·Selectively establishing additional partnerships enabling us to access large commercial indications while leveraging the benefits of thosecollaborations to expand our internal capabilities.·Further leveraging our discovery platform and insights into disease biology to identify novel targets and develop next-generation products. Our Extreme Genetics Discovery PlatformDespite advances in medical sciences and the pharmaceutical industry’s understanding of diseases, research and development productivity in theindustry has declined over the years. We believe that a contributor to this problem is the industry’s reliance on drug discovery approaches that are sometimesbased on targets that do not necessarily have a major biological effect in humans. Consequently, it is fairly common for a pharmaceutical company to investsubstantial time, resources and funds into drug development only to realize in late-stage clinical trials that a product candidate may be directed to a targetthat is either not biologically relevant to the disease or that may have diverse functions or effects in humans, thereby leading to poor efficacy or safety.Our Extreme Genetics discovery platform enables us to identify drug targets that may be more biologically relevant in humans. Our platform is builton the foundation of identifying and studying rare individuals and families with severe phenotypes to discover single-gene defects that have majorbiological effects in humans. By studying these individuals and families with severe phenotypes, we can obtain critical insights into the genes underlyingthese diseases and their related biology to develop promising product candidates. We therefore are able to initiate our drug discovery with the advantage ofhaving a greater understanding of the role of the drug target in human disease.Our reliance on our Extreme Genetics discovery platform for target selection differs from other target selection methods commonly employed in theindustry, such as in vitro cell biology and screening, tissue and differential expression studies, in vitro and animal based pharmacology and the use of animalmodels, such as gene knock-outs or animal transgenics. Some companies, however, do use human genetics to varying degrees to assist with targetidentification, such as approaches where larger populations of patients and controls are studied to define associations where a disease and single nucleotidepolymorphisms, or SNPs, in certain genes are linked. While SNP associations allow the identifications of genes that show an association with a disease or mayincrease risk of disease, such associations differ from our Extreme Genetics discovery platform since they do not discover genes that are determinant or causalof a disease. By studying families with rare diseases where individuals present with severe phenotypes, we seek to isolate the genetic cause of such diseases.We then use this causal information as our primary methodology underlying our target discovery and selection.The key components of our Extreme Genetics discovery platform include:·an established global network that has included more than 30 clinical collaborators in multiple countries, and which has provided us withaccess to rare individuals and families with severe phenotypes dispersed throughout the world;·clinical geneticists and genetic counselors with a deep understanding of clinical phenotypes. These experts identify the rare genetic disorderswith severe phenotypes that we study;·years of experience and extensive know-how in successfully navigating through regulations in multiple countries in order to obtain theapprovals necessary to collect and use detailed clinical information and DNA samples from individuals and families with severe phenotypes;·internal capabilities in genome sequencing, molecular biology and bioinformatics to enable identification of single-gene defects andvalidation of these as potential drug targets; and·expertise in small-molecule drug discovery to design promising product candidates that effectively modulate the identified drug targets. Ourdrug discovery capabilities include medicinal and synthetic chemistry, assay development and in vitro and in vivo pharmacology. 9 Our Extreme Genetics discovery platform has proven to be a valuable asset for our company over the years. It has led to a robust pipeline, including anapproved product, two development programs, and three preclinical programs. Our platform has also allowed us to attract numerous collaborations withleading pharmaceutical companies, including Teva, Genentech, and Merck, that have in aggregate generated more than $150.0 million in non-equityfunding through December 31, 2014 and provide us with research funding and the potential for more than $1.0 billion of research, development, regulatoryand sales-based milestone payments, as well as royalties on net product sales.A significant focus of our Extreme Genetics discovery platform has been human channelopathies, enabling us to develop strong capabilities in smallmolecule ion channel drug discovery. Our ion channel discovery capability is founded upon our understanding of the genetics of channelopathies combinedwith our proprietary biology and medicinal chemistry assets and know-how. We have been able to identify new binding sites on ion channels which, in turn,has led to the discovery of highly-selective voltage-gated ion channel inhibitors which may have safety and efficacy advantages over non-selectiveinhibitors.While the pharmaceutical industry has shown significant interest in channelopathies, a general inability to target ion channels selectively with apharmaceutical agent has been a limitation to the development of effective therapeutics. We believe we have developed a core competence in developinghighly-selective small-molecule ion channel inhibitors, and we believe we can use this know-how to develop a pipeline of novel ion channel inhibitors fordiseases in areas of high unmet medical need.ProgramsGlybera (alipogene tiparvovec): A Gene Therapy for the Orphan Disease LPLDGlybera is a gene therapy product approved in the EU in October 2012 for the treatment of a subset of patients with the orphan lipid disorderlipoprotein lipase deficiency, or LPLD. Specifically, it is intended to treat LPLD in patients with severe or multiple pancreatitis attacks, despite dietary fatrestrictions. LPLD is a severe metabolic disease of inadequate lipid metabolism, resulting in pancreatitis and in some cases, death. In collaboration with UBC,we demonstrated that humans with a variant of the LPL gene called LPLS447X resulted in increased LPL enzyme activity leading to reduced triglyceridelevels. Under our sublicense and research agreement with uniQure, we collaborated with uniQure and UBC on preclinical activities, and thereafter uniQuredeveloped a LPL gene therapy product, Glybera, which contains the LPLS447X variant. We believe that the introduction of the therapeutic LPLS447X genethrough administration of Glybera provides a clinical benefit for LPLD patients.Glybera is the first product whose active ingredient was derived from our platform to receive commercial approval and is the first gene therapy productto be approved in the EU or North America. The goal of Glybera therapy is to treat LPLD in order to achieve sustained improvement of clearance oftriglyceride-rich lipid particles known as chylomicrons, and to significantly reduce the risk of pancreatitis attacks in patients suffering from multiplerecurrent pancreatitis and abdominal pain events. Glybera was developed by our licensee, uniQure. In 2012, Glybera was approved in the EU for the orphandisorder LPLD to treat patients with severe or multiple pancreatitis attacks. In July 2013, uniQure announced that it had entered into a partnership withChiesi for the commercialization of Glybera in the EU and more than a dozen other countries including Brazil, China, Mexico and Russia. We believe thatChiesi plans to launch Glybera in the first quarter of 2015 in Europe, and that uniQure is pursuing a U.S. product approval strategy with plans to file a BLAwith the FDA following receipt of the results from a planned Phase 4 trial expected to begin in mid-2015. Glybera has received orphan drug designation forthe treatment of LPLD in both the EU and the U.S. We are eligible to receive mid single-digit royalties on net sales of the licensed products, for sales made byuniQure and its affiliates. The royalty rates are reduced to a low single-digit for sales made by uniQure and its affiliates in countries where a licensedtechnology or a licensed product is not covered by a valid patent claim. With respect to uniQure’s sublicense to Chiesi, we are eligible to receive apercentage in the low twenties of all non-royalty compensation relating to the licensed technology or products that uniQure receives from Chiesi (forexample upfront payments and milestone payments), a percentage in the low twenties of any royalties that uniQure receives from Chiesi based on sales oftechnology or products covered by the licensed patents, plus a mid single-digit percentage of certain further royalties that uniQure receives from Chiesi basedon sales of our licensed technology or products after the expiration of all licensed patents covering the product.About LPLDFamilial LPLD is a rare autosomal-recessive disorder of lipoprotein metabolism. LPLD is characterized by severe hypertriglyceridemia caused by theabsence of LPL activity, and, as a consequence, certain triglyceride-rich lipoproteins accumulate in the plasma. The population frequency of LPLD in theU.S. has been reported to be approximately one in a million individuals by the National Library of Medicine. 10 LPLD typically manifests early in childhood, with repeated episodes of abdominal pain and acute pancreatitis that can be life-threatening. There iscurrently no approved gene therapy for LPLD in the U.S. The current management of LPLD consists of strict adherence to an extremely low-fat diet, butcompliance with such a diet is challenging. Lipid-lowering drugs are generally not effective for treating LPLD. We believe effective therapeutic strategies aretherefore needed for this condition.About LPLS447XTogether with our collaborators at UBC and using our Extreme Genetics discovery platform, we demonstrated that the LPLS447X variant resulted inreduced triglyceride levels in humans, as this single-gene defect results in elevated LPL enzyme activity and we further demonstrated that LPLS447X in anadenovirus gene therapy could treat hypertriglyceridemia in animal models of LPLD.Clinical Development of GlyberaIn a scientific publication, a single dose of Glybera was well-tolerated with no material safety concerns and was demonstrated to reduce the incidenceof acute pancreatitis and abdominal pain events over the two-year study period.Commercialization of GlyberaIn 2012, Glybera was approved in the EU for the orphan disorder LPLD to treat patients with severe or multiple pancreatitis attacks. In July 2013,uniQure announced that it had entered into a partnership with Chiesi for the commercialization of Glybera in the EU and more than a dozen other countriesincluding Brazil, China, Mexico and Russia. We believe that Chiesi plans to launch Glybera in the first quarter of 2015 in Europe, and that uniQure ispursuing a U.S. product approval strategy with plans to file a BLA with the FDA following receipt of the results from a planned Phase 4 trial expected tobegin in mid-2015. Glybera has received orphan drug designation for the treatment of LPLD in both the EU and the U.S.TV-45070: A Small Molecule for the Treatment of PainTV-45070 (formerly XEN402) is a small-molecule inhibitor of the sodium channel Nav1.7 and other sodium channels, including those that areexpressed in the pain-sensing peripheral nervous system. TV-45070 has potentially broad application in nociceptive pain, mediated by damage or injury totissues, including the pain sensitivity caused by inflammation, and neuropathic pain mediated by damage, dysfunction, or injury of nerves. TV-45070 ispartnered with Teva. Pursuant to the terms of the agreement, Teva is obligated to complete three Phase 2 or later stage clinical trials. Using a topical ointmentformulation of TV-45070, Teva has initiated a 300-patient, randomized Phase 2b clinical trial in OA of the knee, and data are expected in the third quarter of2015. Teva is also developing topical TV-45070 in neuropathic pain indications, and is planning a Phase 2b clinical trial in patients with PHN with patientenrollment expected to begin in March 2015.We selected Nav1.7 as a drug target for pain after we discovered that the Nav1.7 protein is deficient in the rare human disease, CIP, where humanssuffering from CIP are unable to feel pain. We have observed promising evidence of activity for TV-45070 in four Phase 2 proof-of-concept clinical trials,including two trials in the orphan disease erythromelalgia, or EM, one trial in PHN and one trial in dental pain, a form of nociceptive pain.In December 2012,we entered into a collaborative development and license agreement with Teva through its subsidiary Ivax, pursuant to which we granted Teva an exclusiveworldwide license to develop and commercialize TV-45070. Under the terms of the agreement, Teva made an upfront payment to us of $41.0 million. Inaddition, we are eligible to receive potential milestone payments totaling up to $335.0 million, comprised of a $20.0 million clinical milestone payment, upto $285.0 million in regulatory milestone payments, and a sales-based milestone payment of $30.0 million. If TV-45070 is approved, we are also eligible toreceive royalties in the low teens to the low twenties on net sales of the licensed products for the timeframe that such products are covered by the licensedpatents and in certain other instances. We also have an option to co-promote products in the U.S. Prior to our entry into the collaborative development andlicense agreement with Teva, we submitted INDs to the FDA for oral TV-45070 for the indication of dental pain (July 2009) and topical TV-45070 for theindication of acute and chronic pain, including neuropathic and inflammatory pain (July 2010). Teva submitted an IND to the FDA for topical TV-45070 forthe symptomatic treatment of OA (November 2013).Discovery of TV-45070 and Mechanism of ActionUsing our Extreme Genetics discovery platform, we discovered Nav1.7 by studying families with the rare disorder CIP. CIP patients are unable to feelpain for painful events including fractures, childbirth, osteomyelitis and OA, severe burns, ulcers, wounds and tooth abscesses. Based on this severephenotype of absence of pain in humans with CIP, we predicted that the single-gene defect causing CIP could define an important novel human drug targetfor treating pain. We showed that defects in the CIP gene result in deficiency of the sodium channel Nav1.7. 11 Nav1.7 is highly expressed in peripheral nerves and transmits pain signals. We believe that inhibition of Nav1.7 may reduce these pain signals. TV-45070 was designed to be a non-selective small-molecule inhibitor of Nav1.7 such that it also can inhibit additional sodium channels, including those thatwe believe play a role in pain signaling. We believe this mixed sodium channel inhibition may enhance the potential efficacy of TV-45070 in chronic pain.TV-45070 is currently being developed as a topical product as its chemical properties are favorable for topical administration, including high local skin andunderlying tissue concentrations with low plasma levels. With these properties, we believe we can target the site of generation of peripherally-based painwithout unnecessarily exposing other tissues to significant levels of this compound. This is especially true for the central nervous system where we mightexpect to observe side-effects when multiple sodium channels are inhibited, such as sleepiness, nausea, and dizziness. We have demonstrated efficacy withthis compound in multiple animal models for pain including both nociceptive and neuropathic pain models. Topical TV-45070 in animal models has beenshown to exhibit anti-inflammatory properties and may be suited to peripherally-based inflammatory pain such as joint arthritic pain. The broad sodiumchannel inhibition of TV-45070 is in contrast to our selective inhibitors licensed to Genentech, which are selective for Nav1.7 and are being developed asoral formulations.TV-45070 Clinical DevelopmentTopical and oral formulations of TV-45070 have been studied in Phase 1 clinical trials in healthy volunteers and in four Phase 2 proof-of-conceptclinical trials. A 300-patient, randomized Phase 2b clinical trial in OA is ongoing and future clinical development in post-herpetic neuralgia is planned.TV-45070 Phase 1 Clinical TrialsIn a topical Phase 1 study, 20 healthy volunteers were dosed once daily for 21 days with 4% and 8% ointment, placebo, a positive control and a 0.9%saline negative control. Topical TV-45070 was generally well tolerated with no clinically meaningful difference observed between cumulative skin irritationscores for 4% and 8% ointment, placebo and the negative saline control. The positive control as expected did show greater skin irritation; there were noserious adverse events, or SAEs, or deaths in this study. All adverse events were moderate or mild in severity with the majority of adverse events related tolocal skin reactions from the occlusive tape dressings. The most frequently reported adverse events which were not local skin reactions were headache,dizziness, fatigue and oropharyngeal pain. Importantly the average plasma concentrations of TV-45070 were low and, as would be expected, central nervoussystem side effects were not observed.To better understand the systemic side effect profile of TV-45070, the drug was also dosed in Phase 1 single and multiple ascending dose studies usinga simple liquid-filled capsule for oral administration. The single-ascending dose, or SAD, study was carried out in 38 healthy volunteers dosed up to 800 mg.The multi-ascending dose, or MAD, study was performed in 32 healthy volunteers who were dosed up to 400 mg twice daily for 5.5 days. The maximaltolerated dose, or MTD, for SAD study was 500 mg and dose-limiting toxicity included dizziness and drowsiness observed for the 800 mg single dose, whichwe believe indicates inhibition of central nervous system expressed sodium channels. The MTD in the MAD study was not achieved and occasional short-lived adverse events of mild to moderate dizziness and drowsiness were reported by some subjects for the 400 mg twice daily dose.TV-45070 Phase 2 Proof-of-Concept Clinical TrialsWe believe that TV-45070, if successfully developed and approved, may have broad market potential as a pain drug. The types of pain that CIPpatients cannot perceive suggest that Nav1.7 may be involved in pain signaling for different types of painful stimuli including both nociceptive, such asinflammatory-based pain, and neuropathic pain. The current standards of care for such prevalent forms of pain often provide poor efficacy and dose increasesto provide improved efficacy are often limited by poor tolerability including common side effects, such as nausea, dizziness and sleepiness. Certain anti-inflammatory pain medications, including those used to treat OA, have FDA black box warnings for gastrointestinal bleeding and cardiovascular events, bothof which can be fatal. Despite currently available treatments for prevalent pain disorders, we believe that there may be subpopulations of pain patients withunmet medical needs, which topical TV-45070 may be able to address given its novel mechanism and local site of action. Given its novel mechanism, wealso expect that topical TV-45070 could be used as either a single agent or in combination with other analgesics that work through different mechanisms.Based on the potential broad utility of TV-45070, prior to our collaboration with Teva, we had conducted four Phase 2 proof-of-concept trials toexplore the potential of TV-45070 as a treatment for both nociceptive and neuropathic pain, as well as providing evidence that TV-45070 can block the painsignaling mediated by Nav1.7. 12 These trials included an oral Phase 2 clinical trial in third molar tooth extraction; a topical Phase 2 clinical trial in postherpetic neuralgia; and two(one oral and one topical) Phase 2 clinical trials in the orphan indication EM. In contrast to the absence of pain in CIP, where Nav1.7 is deficient, overactivity of Nav1.7, including genetic gain of function mutations that increase the Nav1.7 mediated pain signaling, can cause the spontaneous pain of primaryEM. Primary EM is a condition of EM that is not caused by another disease or disorder. Furthermore, EM represents a high treatment hurdle as the majority ofEM patients do not experience adequate pain relief from current drugs approved for the treatment of pain.Oral TV-45070 Trial in Nociceptive Inflammatory PainWe conducted a trial for third molar tooth extraction, which is an established acute inflammatory pain model. The data from this proof-of-concept trialsupport future development of TV-45070 for nociceptive pain indications, including OA.We performed a randomized, double-blind, placebo-controlled, Phase 2 proof-of-concept trial in 61 healthy male subjects, of which, 41 subjectsreceived a single oral 500 mg dose of TV-45070 and 20 subjects received placebo. DESIGN KEY SAFETY DATA KEY EFFICACY DATA● Double-blind, randomized, placebo-controlled● 61 subjects randomized● Single oral dose of 500 mg or placebo ● Safe and well tolerated● The most frequently reported adverseevents, or AEs, were nausea, dizziness,headache and drowsiness, which were mildor moderate in intensity● No SAEs ● The primary and secondary endpointsshowed consistent trends in favor ofreduced pain for TV-45070 versus placebo● The primary endpoint of TOTPAR-6showed a separation between active andplacebo but did not reach the pre-definedstatistical significance for the trial● Certain secondary endpoints achievedstatistical significance● In a post-hoc analysis, a significantlyincreased proportion of TV-45070-treatedpatients reported 30% or greater and 50%or greater reduction in their pain comparedto placebo The primary and all secondary endpoints showed consistent trends in favor of reduced pain for TV-45070 versus placebo. 13 The primary efficacy endpoint was the change in total pain relief at six hours post-dose, or TOTPAR-6. For this endpoint, TV-45070-treated subjectsexperienced greater pain relief compared to subjects who received placebo (p=0.171), although the difference did not achieve the pre-defined statisticalsignificance for the trial of p=0.1. The figure below illustrates the greater pain relief of TV-45070 versus placebo and a greater separation between TV-45070and placebo at subsequent observations, including 8, 10, and 12 hours, suggesting improved effect over time.Multiple secondary endpoints were studied including Categorical Pain Relief Rating Scale, or REL, a numerical five-point scale ranging from no painto complete pain and Pain Intensity Difference, or PID, compared to baseline. Certain secondary endpoints for the REL achieved predefined statisticalsignificance for this trial.An exploratory analysis not described within the study protocol submitted to the FDA demonstrated a statistically significant proportion of subjectson TV-45070 exhibited a 30% or greater (p<0.05) (see figure below) and 50% or greater (p<0.05) reduction in pain compared to placebo. Theseimprovements were observed from approximately 1.5 to 19 hours post-dosing, suggestive of an extended clinical effect after a single oral dose.The data from this proof-of-concept trial support future development of TV-45070 for nociceptive pain indications, including OA. 14 TV-45070 in Neuropathic EM PainTV-45070 has been studied in both a topical formulation and an oral formulation in small, exploratory Phase 2 proof-of-concept clinical trials inprimary EM. EM is a disorder of severe neuropathic pain where, in certain families, mutations causing increased activity of the Nav1.7 sodium channel havebeen identified. The disorder is characterized by recurrent flares of intense burning pain with redness of the skin in the feet, hands or both. The table belowsummarizes the results of these TV-45070 trials:Oral Phase 2 EM Trial DESIGN KEY SAFETY DATA KEY EFFICACY DATA● Double-blind, randomized, placebo-controlled crossover● Four primary EM patients randomized● 400 mg or placebo was dosed twice dailyfor two days ● Most common AEs were dizziness anddrowsiness that ranged from mild (nointerference in daily activities) to severe(significant interference in daily activities)● No SAEs or deaths, with the mostfrequently reported AEs being dizziness,headache, sedation and drowsiness ● A significant (42%) reduction in EM painwas observed in the three patients wherepain was induced (p=0.014) Topical Phase 2 EM Trial DESIGN KEY SAFETY DATA KEY EFFICACY DATA● Double-blind,randomized,placebo-controlled● Eightprimary EMpatientsrandomized● 8% ointmentor placebowas dosedtwice dailyfor two orthree weeks ● Safe and welltolerated● Low plasmaexposures● Nomeaningfulcentralnervoussystem sideeffects● No drug-related SAEs,or deaths,with localapplicationsite reactionsbeing themostcommondrug-relatedAE reported ● Three of seven patients (43%) on TV-45070 showed consistent clinically meaningful reductions in induced and daily pain compared to baseline● Four of six (67%) patients on TV-45070 who used rescue cooling showed a reduction in cooling usage compared to baseline● Six of seven (86%) patients on TV-45070 had an improvement in sleep interference scores compared to baseline Oral TV-45070 Phase 2 Trial in EMWe conducted a small Phase 2 proof-of-concept trial with oral TV-45070 in patients with primary EM. This exploratory trial, which was published inthe journal Pain, Goldberg, Y.P. et al Pain 153 (2012) 80-85, was a randomized, double-blind, placebo-controlled, two-period crossover design with foursubjects comparing oral TV-45070 to placebo each administered twice per day for a duration of two days. In one treatment period, subjects received TV-45070 (400 mg bid), and in the other treatment period, subjects received placebo. The order in which the subjects received each treatment was randomized.We developed a novel pain induction method for assessing the response of TV-45070 using an electric heater placed at a standardized distance fromthe subject’s feet. Three patients with episodic EM pain were subjected to heat or exercise on up to six occasions during each treatment period to induce acontrolled painful flare. One patient who was in constant, severe pain was not induced. Mean total pain intensity scores were measured for the two hoursfollowing each pain induction over the two day treatment period with either TV-45070 or placebo. The amount of pain following induction was calculatedby quantifying the area under the pain intensity curve for two hours following induction, or AUC0-2hrs. 15 Improvements in pain efficacy measures in all four subjects were observed, with statistically significant reductions in pain scores in the three subjectsin whom pain was induced. The amount of pain in the two hours following induction was reduced by 21% (p = 0.011), 33% (p = 0.004) and 88% (p = 0.031)in these three patients, respectively. Overall, in these three subjects, pain was reduced by 42% on TV-45070, compared to placebo (p = 0.014). The subjectwho was in constant pain and was not induced, showed a mild reduction in pain at various time points during the TV-45070 dosing period.In the following figure, these data are presented as a mean AUC0-2hrs for the three subjects as a percentage of placebo who underwent pain inductioneither by step exercise or by heat. A 42% reduction in the amount of induced pain was observed on average with TV-45070 compared to placebo (p=0.014).These data support our belief in the ability of TV-45070 to inhibit human Nav1.7 mediated pain signaling which supports the predicted mechanism of action.Topical TV-45070 Phase 2 Trial in EMWe conducted a small Phase 2 proof-of-concept trial with TV-45070 ointment in patients with primary EM. This exploratory trial was a randomized,double-blind, placebo-controlled design with eight subjects (seven TV-45070 and one placebo) comparing 8% TV-45070 to placebo applied two times perday to the feet for a duration of 14 or 21 days. We evaluated multiple endpoints for each subject to increase our understanding of the effect of TV-45070,including the amount of pain in response to a heat stimulus, the frequency and duration of cooling to provide relief from their painful flares, changes in dailypain scores and the degree of sleep interference. Throughout the trial, TV-45070 plasma concentrations were low and TV-45070 was well-tolerated.Consistent with these low plasma levels, there was no treatment-related dizziness and drowsiness and there were no treatment-related SAEs. Dizziness anddrowsiness are common side effects for many currently prescribed centrally-acting analgesics. Local application site reactions were the most common drug-related AEs observed.In this trial, three of the seven (43%) TV-45070-treated subjects responded positively based on the magnitude and consistency of improvement acrossthe measured efficacy parameters. While the four remaining TV-45070-treated subjects were considered to be non-responders based on their magnitude ofresponse or inconsistent response or both, some improvements were seen in certain efficacy parameters, in particular, sleep and rescue cooling. Similarly, theplacebo-treated subject did not show a consistent pattern of response.Four of the seven (57%) subjects receiving TV-45070 treatment responded to the standard heat inductions compared to pre-treatment. Three of theseseven (43%) subjects showed more than 50% improvements in their ability to tolerate and/or recover from the heat inductions. In addition, these threesubjects demonstrated clinically meaningful improvements (a one-point, or 30% or greater reduction) in the level of daily pain experienced during theoutpatient treatment period compared to pre-treatment. The remaining TV-45070-treated subjects and the placebo-treated subject responded inconsistently ordemonstrated deteriorations in their responses compared to baseline.EM patients may seek relief by immersing their limbs in cold or ice water to help manage their painful flares. If a patient uses less cooling when onTV-45070, this may indicate the product is reducing the number and/or intensity of their EM flares. Four of the six (67%) TV-45070-treated subjects whoused cooling at baseline showed a reduction in cooling usage while on treatment. In contrast, the placebo-treated subject cooled for substantially longerduring the outpatient period compared to pre-treatment. 16 Unlike the placebo-treated subject, subjects on TV-45070 used less rescue cooling compared to their baseline measurements. The amount of dailycooling usage, including cooling frequency and cooling duration, for subjects on TV-45070 or placebo as a percentage change from baseline is shown below.This small exploratory trial was not designed to reach statistical significance of p £ 0.05, and no such statistical significance was found.EM flares often wake patients several times each night and an improvement in the sleep interference scores could indicate that TV-45070 may reducethe number and/or intensity of the flares during sleep. Six of the seven (86%) subjects receiving TV-45070 treatment showed improvements in their dailysleep interference scores during treatment compared to baseline, with three subjects demonstrating at least 50% improvements. In five of the six(83%) subjects this was associated with less or no cooling usage. The placebo-treated subject also demonstrated a reduction in sleep interference; however, aswith the daily pain scores, the interpretation of this response is confounded by the greater cooling usage by this subject.Although we and Teva have evaluated the opportunity to develop TV-45070 as a treatment for EM, Teva is currently focused on the development ofTV-45070 for larger market opportunities, including OA and PHN, and has no current development plans for TV-45070 in EM. 17 Topical TV-45070 Trial in Postherpetic Neuralgia, or PHNWe conducted a Phase 2 proof-of-concept trial of topical TV-45070 in 70 PHN patients. Patients enrolled into the study had refractory PHN and theiraverage disease duration was 76.6 months. This study was a double-blind, placebo-controlled, crossover trial where topical TV-45070 was administered twicedaily with each patient receiving either TV-45070 or placebo for three weeks, then after a washout period, the subjects received the alternative treatment. DESIGN KEY SAFETY DATA KEY EFFICACY DATA● Double-blind, randomized, placebo-controlled, cross-over● 70 subjects randomized● 8% ointment or placebo administeredtwice daily for three weeks ● Safe and well tolerated● The most frequent AEs (greater than 5%frequency) included local application sitereactions, nasopharyngitis and urinary tractinfections, or UTIs● Fewer related treatment emergent AEs forTV-45070 (18%) versus placebo (30%)● Low plasma exposure● No meaningful central nervous system sideeffects● Less application site pain for TV-45070(16% placebo versus 3% TV-45070) andpruritus, or itch, (13% placebo versus 3%TV-45070)● No drug-related SAEs ● There was a reduction in the primaryefficacy endpoint (change from baseline inmean daily pain score) for TV-45070 andplacebo, but the difference betweentreatments was not statistically significant● Significantly increased proportion of TV-45070-treated patients reported 30% orgreater (p=0.049) and 50% or greater(p=0.0078) reduction in their paincompared to placebo● A retrospective exploratory analysis notdescribed in the study protocol showedthat a significant increased proportion ofTV-45070-treated patients reported 30% orgreater improvement in sleep (p=0.034)compared to placebo Topical TV-45070 was well-tolerated with no drug-related SAEs. No drug-related centrally mediated side effects of dizziness and drowsiness wereobserved in this study. In addition, while on topical TV-45070, PHN patients reported reduced site application pain (3% TV-45070 versus 16% placebo) andless pruritus, or itch, (3% TV-45070 versus 13% placebo) compared to while on placebo treatment. Chronic itch is an important co-morbidity for many PHNpatients. The most frequently reported AEs included local application site reactions, nasopharyngitis and UTIs.There was a reduction in the primary efficacy endpoint (change from baseline in mean daily pain score) for TV-45070 and placebo, but the differencebetween treatments was not statistically significant. Multiple secondary endpoints were studied, including the proportion of subjects achieving at least 30%and 50% improvements in pain, the use of rescue analgesic medications, and the change in Daily Sleep Interference Scale score. A greater proportion ofsubjects on TV-45070 experienced a clinically meaningful reduction in their pain during the trial, which is a 30% or greater reduction in pain. A statisticallysignificant larger proportion of subjects on topical TV-45070 exhibited a 30% or greater (p=0.049) and a 50% or greater (p=0.0078) reduction in paincompared to placebo. A greater proportion of subjects on topical TV-45070 exhibited a statistically significant 30% or greater (p=0.034) improvement insleep compared to placebo. Importantly, a slight trend to reduced use of rescue pain medication in the responders on TV-45070 was observed, suggestingrescue use did not explain the improved efficacy response in these subjects. These data support the development of topical TV-45070 as a treatment for PHN. 18 TV-45070 demonstrated a statistically significant increase in the proportion of clinically meaningful responders (30% or greater and 50% or greaterreduction in pain) compared to placebo.There is a relatively common genetic variant of Nav1.7 called the R1150W gene variant. We estimate that this variant has a frequency of 6% to 30%in different ethnic populations. Publications have reported that subjects with this variant who suffer from various painful disorders, including OA, report agreater amount of pain compared to those subjects who do not have this variant. Peripheral nervous system cell-based assays suggest this variant increases theactivity of the Nav1.7 channel and the number of resultant nerve signaling action potentials. This increased activity may explain why patients with thisvariant feel more pain.We genotyped the PHN trial subjects for R1150W status to explore if the variant could predict a greater likelihood of response to TV-45070 due to itsinhibition of NAV1.7. In our PHN trial there were eight carriers of this R1150W variant who were among the evaluable subjects. Of these carriers, five out ofeight (63%) had a 30% or greater reduction in their pain when on topical TV-45070. Although it was not a pre-selected endpoint of the trial, a trend towardsgreater response to TV-45070 was observed in R1150W-carriers versus non-carriers. Due to these observations, stratification of subjects for R1150W isplanned for Teva’s upcoming Phase 2bclinical trial of TV-45070 in PHN. 19 A larger proportion of Nav1.7 R1150W-carriers had a clinically meaningful 30% or greater response to TV-45070 than non-carriers.Future Development Plans for TV-45070We are collaborating with Teva on the development of topical TV-45070. Our agreement with Teva requires them to complete three Phase 2 or laterstage clinical trials. Using a topical (ointment) formulation of TV-45070, Teva has initiated a 300-patient, randomized Phase 2b clinical trial in OA of theknee, and data are expected in the third quarter of 2015. Teva is also developing topical TV-45070 in neuropathic pain indications, and is currently planninga Phase 2b clinical trial in patients with PHN with patient enrollment expected to begin in March 2015..Development of Topical TV-45070 for the Treatment of OABased on clinical proof-of-concept data of TV-45070 in the completed clinical trial of third molar tooth extraction, an established pain model ofnociceptive pain, Teva has selected to develop topical TV-45070 for the treatment of nociceptive pain in knee OA and a randomized Phase 2b study isongoing. The rationale supporting the development of TV-45070 in OA includes:·Clinical proof-of-concept was observed with TV-45070 in the third molar extraction model of nociceptive pain.·In preclinical models, topical TV-45070 has exhibited an ability to penetrate the knee joint and reside locally at relatively high concentrationswhile maintaining low plasma concentrations.·We have identified a CIP patient with Nav1.7 deficiency and painless late stage OA of the knee.·Published data for the R1150W variant suggest a role of Nav1.7 in OA pain.·Application of TV-45070 to the human torso in Phase 1 and Phase 2 clinical trials to date showed low systemic exposure of TV-45070, whichmay in turn reduce systemic adverse events.·Central nervous system, or CNS, side effects were not observed in the topical PHN trial due to low plasma levels, which we believe is a benefitgiven evidence that OA patients have shown poor compliance with products that trigger common CNS side effects.·Injections of lidocaine, a weak blocker of sodium channels, into human knee joints provides short term relief from OA pain providingpharmacological validation that a sodium channel inhibitor can provide relief from OA pain.Teva filed an IND application with the FDA in November 2013 and, in the first quarter of 2014, commenced a Phase 2b single knee OA clinical trial.The trial is being conducted at approximately 35 U.S. sites and is a randomized, double-blind, placebo controlled study. Teva plans to enroll 300 patientswho will be randomized to receive either placebo, 4% or 8% topical TV-45070. Patients will apply the treatment twice a day to the affected knee for fourweeks. 20 The primary efficacy endpoint is the change from baseline to the last five days of treatment in average evening pain intensity in the treated knee whenwalking on a flat surface, as measured using the Western Ontario and McMasters Universities Arthritis Index, or WOMAC, scale. Secondary endpointsinclude the full WOMAC pain subscale, responder rates for 30% and 50% improvement in average evening pain intensity, the percentage of patients who areresponders per Outcome Measures in Rheumatoid Arthritis Clinical Trials-Osteoarthritis Research Society International, or OMERACT-OARSI, criteria atweek four, other quality of life assessments and various safety and pharmacokinetic analyses.Exploratory efficacy analyses will also include stratification of the patients based on their R1150W status to evaluate the response to TV-45070 in thepresence of this Nav1.7 variant.We anticipate top line data from this study to be available in the third quarter of 2015 and, if positive, Teva plans to initiate a Phase 3 clinical trial.About Osteoarthritis PainOA is a degenerative disorder that affects joints, most often the knees, hands, hips, spine and feet. It is characterized by the gradual deterioration of thecartilage in the joint often with joint space narrowing. The major symptom of OA is progressive pain, which may lead to stiffness and loss of mobility, as wellas swelling around the joints. It has been estimated that approximately 9% of the U.S. population have pain associated with OA, which translates intoapproximately 28 million patients.Arthritic pain, including OA, is generally thought to have an inflammatory component and is often treated with anti-inflammatory pain medicines,which work by inhibiting the effects of inflammatory molecules, such as prostaglandins. Acetaminophen and non-selective non-steroidal anti-inflammatorydrugs, or NSAIDs, are generally considered the first-line therapy for OA. Non-selective NSAIDs are often replaced by selective NSAIDs that inhibitcyclooxygenase-2, or COX-2, for those individuals at risk of upper gastrointestinal, or GI, adverse reactions including bleeding, ulcers and perforation. Ifallowed to progress, these GI adverse events can be fatal and NSAID drugs have a FDA black-box warning for these reactions. Although the COX-2 selectiveinhibitors have a reduced risk of GI adverse reactions, they also have an increased risk of cardiovascular events that can be fatal. This cardiovascular risk ledto some COX-2 products being withdrawn from the market and the addition of a black-box warning for such cardiovascular events. Despite limitations, theseanti-inflammatory drugs are widely used in OA patients and provide relief from mild to moderate pain. Patients with severe symptomatic OA who fail torespond to these drugs often have joint replacement surgery and may require narcotics or injections of anesthetic agents into the arthritic joint while waitingfor such surgery. We believe that the adverse effects associated with narcotics, especially in the elderly, and the difficulty of injections into the joint,combined with the large number of patients with moderate to severe OA, provide a significant market opportunity for a product with a novel mechanism, suchas topical TV-45070. We believe that TV-45070 may avoid many of the efficacy limitations and adverse effects observed with acetaminophen, non-selectiveNSAIDS, COX-2 inhibitors and narcotics.Development of Topical TV-45070 for the Treatment of Neuropathic Pain IndicationsTeva is also developing topical TV-45070 for neuropathic pain disorders, including PHN. Teva expects to initiate patient enrollment in a Phase 2bclinical trial in PHN in March 2015. The rationale supporting the development of TV-45070 in PHN, includes:·We observed efficacy findings in our PHN Phase 2 proof of concept trial.·We observed improved responder rates for carriers of the R1150W variant in our PHN Phase 2 proof of concept trial.·Topical TV-45070 has exhibited an ability to penetrate the skin of PHN patients and reside locally, in both the skin and underlying tissue, atrelatively high concentrations.·Application of TV-45070 to the human torso in Phase 1 and Phase 2 clinical trials to date resulted in low systemic exposure of TV-45070,which may reduce systemic adverse events.·CNS side effects were not observed in the topical PHN trial due to low plasma levels, which we believe is a benefit given evidence that PHNpatients have shown poor compliance with products that trigger common CNS side effects.·Topical TV-45070 in the PHN Phase 2 proof-of-concept trial reduced the incidence of itch compared to placebo.·Lidocaine, a weak sodium channel blocker, provides relief of PHN pain and is approved and widely used for this indication. 21 Teva has an IND with the FDA for the development of TV-45070 as a treatment of neuropathic pain, and is currently planning a Phase 2b clinical trialin patients with PHN with patient enrollment expected to begin in March 2015. The anticipated completion date for the PHN Phase 2b trial is in mid-2016. The Phase 2b clinical trial in PHN will be a randomized, double-blind, placebo controlled, multi-site study to evaluate the efficacy and safety of TV-45070 in patients with PHN. The study will include three treatment groups to receive doses of 4% or 8% of TV-45070 or placebo, dosed twice daily.Approximately 330 patients will be enrolled in the study. Patients will be stratified into treatment groups based on their R1150W status, a genetic painbiomarker believed to be related to pain susceptibility. The primary endpoint of this study is the change from baseline to week 4 in the numeric rating scale,or NRS, scores. Secondary endpoints include additional pain measurement scores at specified daily time points, the percentage of patients with greater than30% and greater than 50% improvement in pain scores, quality of life measurements and adverse events measurements.About Postherpetic NeuralgiaPHN is a painful complication of Herpes zoster infection, occurring particularly in patients above the age of 50. Herpes zoster, otherwise known asshingles, generally manifests as a painful skin rash with blisters in a limited area on one side of the body. Pain can occur both before and during the rash, andcan also persist after the infection has resolved. PHN is defined as pain that persists for 120 days or longer after the onset of rash. It is estimated that theannual incidence of Herpes zoster is between 230 and 630 cases per 100,000 people, with PHN occurring in approximately 20% of cases, resulting inapproximately 200,000 PHN patients in the U.S.Like other forms of neuropathic pain, there is a need for improved treatments for PHN. The current leading drugs used to treat PHN suffer from lowefficacy for many patients and common dose limiting side effects. It has been reported that 30% to 50% of PHN patients achieve a 30% to 50% improvementin their pain with these agents. Currently prescribed treatments include Pfizer’s Lyrica, and generic forms of gabapentin, both of which target the samemechanism. Common side effects for these drugs include sleepiness, dizziness, blurred vision, edema and weight gain.GDC-0276 and Other Selective Inhibitors of Nav1.7 for the Treatment of PainIn December 2011, we entered into a collaborative research and license agreement with Genentech and its affiliate, Roche, to discover and developselective oral inhibitors of Nav1.7 for the treatment of pain. Based on our discovery of Nav1.7 deficiency underlying CIP, we believe that Nav1.7 is a highly-validated target for the treatment of pain. Our Genentech collaboration is focused on discovering and developing selective oral Nav1.7 inhibitors, which is incontrast to our Teva partnership that is focused on developing a topical drug that targets a number of different sodium channels, including Nav1.7. The first small-molecule, preclinical product candidate that was selected for development under our collaboration is GDC-0276. In September 2014,Genentech initiated a Phase 1 clinical trial for GDC-0276. The Phase 1 clinical trial has recently been expanded and is expected to complete enrollment inthe second half of 2015. GDC-0276 is a selective, oral Nav1.7 small-molecule inhibitor being developed for the treatment of pain. 22 To study the effects of targeting Nav1.7 for the treatment of pain, we developed an animal model of inherited EM, or IEM, by expressing humanNav1.7 carrying a known IEM mutation in mice. These mice demonstrate a greater sensitivity to pain. As shown in the figure below, with a single dose ofGDC-0276, these mice have fewer pain events demonstrating the ability of GDC-0276 to inhibit Nav1.7 in vivo.Under the terms of the agreement, Genentech paid us an upfront fee of $10.0 million, a $5.0 million milestone payment for the selection of GDC-0276for development and an $8.0 million milestone payment upon the approval by Health Canada of the CTA for GDC-0276. We are also eligible to receive pre-commercial and commercial milestone payments with respect to the licensed products totaling up to an additional $613.0 million, comprised of up to$45.5 million in preclinical and clinical milestone payments, up to $387.5 million in regulatory milestone payments, and up to $180.0 million in sales-basedmilestone payments for multiple products and indications. In addition, we are eligible to receive royalties based on net sales of the licensed products, whichrange from a mid single-digit percentage to ten percent for small-molecule inhibitors for the timeframe that such products are covered by the licensed patentsand a low single-digit percentage thereafter, plus a low single-digit percentage for large-molecule inhibitors of Nav1.7.Chronic pain conditions, such as severe cancer pain and neuropathic pain, are generally recognized as unmet medical needs providing potentialcommercial opportunities for a new oral pain drug. Currently available pain drugs often have either a lack of meaningful pain relief or dose limiting sideeffects for many patients. An orally administered selective Nav1.7 inhibitor could present a novel mechanism for the treatment of moderate to severe pain as asingle agent or in combination with existing analgesics that work through different mechanisms. This mechanism contrasts with our non-selective sodiumchannel inhibition approach taken with TV-45070. We believe that the selective inhibition of Nav1.7 may lower the potential for dose-limiting centralnervous system side-effects and allow for an improved side-effect profile for oral administration of such an inhibitor, which could potentially allow for thetreatment of pain that has a central or deep tissue component, including cancer pain and neuropathic pain.Product Candidates in DiscoverySelective Small-Molecule Sodium Channel Inhibitors for the Treatment of Dravet SyndromeWe are developing selective inhibitors of the voltage-gated sodium channel Nav1.6 as a treatment for the orphan disease DS. We have developedconsiderable expertise in voltage-gated sodium channel biology and have accumulated significant experience in the development of selective sodiumchannel inhibitors. We are leveraging this expertise and chemistry know-how for the development of selective inhibitors of Nav1.6 for the treatment of DS.DS is a severe form of childhood epilepsy that typically causes mental retardation and, in approximately 10% of cases, premature death before the ageof 12 years. The frequency of DS in the U.S. has been estimated to be one in 20,000 to 40,000 births, which, when applied to U.S. federal census data,correlates to approximately 7,500 to 15,000 patients with DS in the U.S. 23 With our collaborators from McGill University, we identified the genetic link between rare human epilepsy and mutations in the Nav1.1 gene. It isnow estimated that approximately 80% of DS cases are believed to be due to mutations in one copy of the Nav1.1 voltage-gated sodium channel that cause apartial loss of Nav1.1 function. Nav1.1 plays a critical role in the normal functioning of inhibitory pathways in the brain. The lack of fully functioningNav1.1 and inhibitory pathways allows the brain excitatory pathways to be unopposed resulting in the severe seizures of DS. The brain excitatory pathwaysare preferentially mediated by the voltage-gated sodium channel Nav1.6 and therefore if we are able to selectively inhibit Nav1.6 with a small-moleculecompound, we expect to taper this neuronal excitation and thereby treat DS. To further support inhibiting Nav1.6 as a potential therapeutic approach to treatDS, published data has shown that seizures and premature death observed in a DS mouse model can be corrected when these animals are bred with a Nav1.6knockout mouse.DS is one of the most resistant epilepsies to treatment. Some benefit has been reported for drugs that increase the activity of the inhibitory brainpathways such as benzodiazepines and Stiripentol, while non-selective sodium channel blockers such as lamotrigine are contraindicated as they may worsenseizures due to further inhibition of Nav1.1. Other intractable childhood seizures that have been associated with genetically-linked partial loss of function ofNav1.1 or gain of function of Nav1.6 may benefit from a selective inhibitor of Nav1.6 include intractable childhood epilepsy with generalized tonic-clonicseizures and sporadic infantile epileptic encephalopathy.Based on our experience and know-how in developing selective ion channel inhibitors, we have identified potent, selective Nav1.6 inhibitors andhave demonstrated efficacy for seizures in an animal model with such an inhibitor. We anticipate filing an IND for a drug candidate to treat DS in 2016.Given the orphan nature of this disorder, we believe that DS may represent an attractive opportunity for us to advance independently.XEN801 for the Treatment of AcneXEN801 is a selective, small molecule inhibitor of SCD1 being developed for the treatment of moderate to severe acne. SCD1 is an enzyme involvedin lipid synthesis that is expressed in sebaceous glands in the skin. Mice deficient in SCD1 have a marked phenotype of sebaceous gland atrophy suggestingthat inhibition of SCD1 activity in the skin may provide a novel treatment option for disorders of enlarged or overactive sebaceous glands, including acne.Published literature studying animals deficient in skin SCD1 have shown that these animals have lower levels of certain lipids produced by sebaceousglands, increased levels of retinoic acid, and increased levels of retinoic acid induced proteins including greatly elevated expression of Lipocalin-2, orLCN2, a gene which transcribes neutrophil gelatinase-associated lipocalin, or NGAL. NGAL has been shown to mediate sebaceous gland cell death and mayalso have antibacterial properties. LCN2 is also highly upregulated and NGAL levels increased in a human sebaceous gland cell line treated with a SCD1inhibitor. Published reports on isotretinoin, an approved acne treatment, also support the theory that isotretinoin’s therapeutic effects are achieved in partthrough increasing levels of NGAL.We have discovered and developed novel small-molecule SCD1 inhibitors to which we have sole rights. In multiple animal models, we have shownthat our SCD1 inhibitors can reduce the size and number of sebaceous glands. XEN801 has demonstrated good properties for topical administrationincluding formulation in a light gel and adequate skin penetration in multiple animal species.In preclinical mouse models, XEN801 applied topically showed reduction in the size of sebaceous glands in the underlying skin in a time and dosedependent manner. 24 In these preclinical mouse efficacy studies, at the vehicle treated sites, numerous normally sized lipid loaded sebaceous glands are visible whereasonly very small sebaceous glands with hardly any visible lipids are present at the XEN801 treated sites. These reductions are visible after two days of twice-daily treatment and reached statistical significance after seven days (data presented in the above figure), reverting to normal levels once the treatment isstopped. Skin areas distant from the XEN801 treated sites exhibit no changes in sebaceous glands which is consistent with the observed low plasmaconcentrations of XEN801 and the high local concentrations found in the skin at the treated sites.We believe these properties support the local treatment of acne and other dermatological disorders with topical XEN801 by decreasing the size of thesebaceous glands, while leaving the skin in other areas unaffected and not exposed unnecessarily to high drug concentrations.XEN801 is currently in IND-enabling studies, and we anticipate filing an IND or IND equivalent application to initiate a Phase 1 trial in the secondquarter of 2015 and we anticipate initiating a proof-of-concept Phase 2 trial in the second half of 2015. We believe a selective, small-molecule inhibitor ofSCD1 has therapeutic potential for skin disorders such as moderate to severe acne seborrhoea and sebaceous hyperplasia.About AcneAcne is a multifactorial disease of the pilosebaceous unit, which are skin structures consisting of a hair follicle and its associated sebaceous gland.Increased levels of androgens, such as testosterone, which occurs during puberty cause an enlargement of the sebaceous gland that increases the amount ofsebum, a naturally occurring oil, production. Acne develops as a result of blockages in the hair follicles due to the sebaceous glands becoming clogged withexcess sebum and dead skin cells. Under these conditions, the bacteria proprionibacterium acnes can multiply and cause the noticeable inflammatorylesions. We believe that topically applied SCD1 inhibitors will treat acne at its root cause by reducing the underlying sebaceous gland enlargement andreducing sebum production.With its association with the onset of puberty, acne prevalence peaks in late adolescence and is estimated to affect 40 to 50 million people in the U.S,of which there are approximately 11 million and 1.2 million individuals with moderate and severe acne, respectively.Milder forms of acne are normally treated with over the counter products such as those containing benzoyl peroxide whereas moderate and severeforms of acne are often treated with the prescription drug isotretinoin. Isotretinoin is effective with the majority of patients reporting an improvement andapproximately 50% of patients reporting remission of their acne. Scientific studies have shown that isotretinoin can cause apoptosis, a form of cell death, insebaceous glands thereby reducing sebum production.Isotretinoin treatment has been associated with relatively common side effects including thin and dry skin, hair loss, severe acne flares, blood lipidand liver enzyme elevations. However, the most significant adverse event of isotretinoin is birth defects if taken by women during pregnancy or even a shorttime before conception due to its teratogenic potential. In 2005, the FDA approved a risk management plan for isotretinoin called iPLEDGE. Under thisprogram, general practitioners are prohibited to prescribe isotretinoin and patients are referred to dermatologists registered and activated in the iPLEDGEprogram. In addition, patients are also required to register and qualify for the iPLEDGE program. Isotretinoin can only be dispensed for a 30-day supply (norefills) by a registered pharmacy.We believe that a safer alternative drug (without an onerous risk mitigation plan) that potently reduces sebum production may be a significanttreatment option for moderate to severe acne.Selective Small-Molecule Inhibitors of Targets for the Treatment of Cardiovascular DiseaseWe entered into a collaborative research and option agreement with Merck in June 2009 to discover novel targets and compounds for the treatment ofcardiovascular disease using our Extreme Genetics discovery platform. In 2012, Merck exercised its option to obtain an exclusive license to a target forcardiovascular disease and compound inhibitors that were discovered during the research collaboration. The target, when inhibited, is predicted to provide abeneficial lipid profile with the goal of protecting from cardiovascular disease. 25 New Pipeline OpportunitiesGiven the commercial opportunity and the pharmaceutical industry’s interest in the pain market, we are using our Extreme Genetics discoveryplatform and specialized insights into the biology of pain to identify new drug targets for this common medical problem. We formed a second collaborationwith Genentech in March 2014 for pain genetics, where we intend to focus on rare phenotypes where individuals have an inability to perceive pain or whereindividuals have non-precipitated spontaneous severe pain. We believe these phenotypes may unlock new key molecular regulators of pain signaling inhumans, which we will seek to validate as targets for new pain drugs. For example, we are analyzing CIP families that are not explained by Nav1.7 deficiencyas well as families with severe pain phenotypes such as PEPD, inherited EM and cluster headache.In addition to our study of rare human disorders of extreme pain or the absence of pain, we are also studying other rare disorders with extremephenotypes that we believe could yield new drug targets in disorders where high medical need exists, such as neurological disorders like essential tremor.Given our expertise in ion channel drug discovery, we are also focusing our discovery efforts on the identification of ion channel targets where we believenovel selective inhibitors might represent significant therapeutic advances with a focus on orphan indications.Strategic AlliancesAgreement with uniQure for GlyberaEffective August 2000, we entered into a sublicense and research agreement with uniQure (formerly Amsterdam Molecular Therapeutics); pursuant towhich we granted to uniQure an exclusive, worldwide sublicense under certain intellectual property controlled by us to develop and commercializetechnology and compounds related to the variant of LPL, called LPLS447X. Together with collaborators from UBC, we demonstrated that the LPLS447X variantresulted in increased LPL enzyme activity leading to reduced triglyceride levels in humans. Under our sublicense and research agreement with uniQure, wecollaborated with uniQure and UBC on preclinical activities, and thereafter uniQure developed an LPL gene therapy product, Glybera, which contains theLPLS447X variant. Glybera was approved in the EU in October 2012 to treat LPLD in patients with severe or multiple pancreatic attacks despite dietary fatrestrictions. uniQure conducted the clinical trials and is responsible for the commercialization of Glybera. Under the terms of the agreement, we are eligible to receive mid single-digit royalties on net sales of the licensed products, for sales made by uniQure and itsaffiliates. The royalty rates for sales made by uniQure and its affiliates are reduced to a low single-digit in countries where the licensed technology andproducts are not covered by a valid patent claim. Such royalties are payable until the expiration of the last licensed patent from UBC. In July 2013, uniQureannounced that it had entered into a partnership with Chiesi for the commercialization of Glybera in the EU and more than a dozen other countries includingBrazil, China, Mexico and Russia. We believe that Chiesi plans to launch Glybera in the first quarter of 2015 in the EU and that uniQure is pursuing a U.S.product approval strategy with plans to file a BLA with the FDA following receipt of the results from a planned Phase 4 trial expected to begin in mid-2015.With respect to uniQure’s sublicense to Chiesi for the commercialization of Glybera in the EU and more than a dozen other countries including Brazil, China,Mexico and Russia, we are eligible to receive a percentage in the low twenties of all non-royalty compensation relating to the licensed technology orproducts that uniQure receives from Chiesi (including, for example, upfront payments and milestone payments), a percentage in the low twenties of anyroyalties that uniQure receives from Chiesi based on sales of technology or products covered by the licensed patents, plus a mid single-digit percentage ofcertain further royalties that uniQure receives from Chiesi based on sales of our licensed technology or products after the expiration of all licensed patentscovering the licensed technology or products during the period expiring ten years after the date of the first sale by or on behalf of Chiesi. If uniQure grants asublicense to a third party other than to Chiesi, then we are eligible to receive a percentage in the low twenties of all non-royalty compensation relating to thelicensed technology or products that uniQure receives from such sublicensee (for example upfront payments and milestone payments), plus a percentage inthe low twenties of any royalties that uniQure receives from such sublicensee based on sales of technology or products covered by the licensed patents.We are eligible to receive certain additional milestone payments of less than CAD$1.0 million for Glybera and for each subsequent product, if any,developed pursuant to the agreement with uniQure. We, in turn, have certain payment obligations to our licensor, UBC, based on amounts received fromuniQure or otherwise based on the exploitation of the licensed intellectual property.Our sublicense agreement with uniQure expires on the date of the expiration of the UBC license agreement. Either party may terminate the agreementin the event of the other party’s default under the agreement that remains uncured for 20 days after receipt of notice from the non-breaching party. 26 Agreement with UBCEffective August 2000, we entered into a license agreement with UBC pursuant to which UBC granted to us an exclusive, worldwide license underUBC’s interest in certain intellectual property controlled by UBC to develop and commercialize technology and compounds in the field of gene therapy,including products that related to the variant of LPL, called LPLS447X.Under the terms of the agreement, UBC is eligible to receive certain pre-commercial milestone payments. UBC is also eligible to receive a mid single-digit percentage of certain compensation that we receive based on sublicenses granted by us to a third party relating to the licensed technology or products,including in connection with our sublicensing agreement with uniQure for LPLS447X.Through December 31, 2014, we have paid to UBC upfront fees and milestone payments totaling CAD$230,000 and are obligated to pay a certainadditional milestone payment of approximately CAD$200,000 for Glybera and further milestone payments of CAD$322,500 for each subsequent product, ifany, developed pursuant to our sublicensing agreement with uniQure.Our license agreement with UBC expires on the date of the expiration of the last patent granted under such license. In the event that our sublicensewith uniQure is terminated, we may terminate the agreement with 30 days advance notice to UBC. Either party may terminate the agreement in the event ofthe other party’s default under the agreement that remains uncured for 30 days after receipt of notice from the non-breaching party, and UBC may terminatewithout such cure period in the event of certain types of breach by us.Agreement with Teva for TV-45070In December 2012, we entered into a collaborative development and license agreement with Teva, through its subsidiary, Ivax, pursuant to which wegranted Teva an exclusive worldwide license to develop and commercialize certain products, including TV-45070.Under the terms of the agreement, Teva paid us an upfront fee of $41.0 million. We are collaborating with Teva to further develop TV-45070, andTeva is funding all development costs with respect to the licensed products. Teva is providing funding to us for certain of our full-time equivalents, or FTEs,performing the research collaboration plan. In addition, we are eligible to receive potential milestone payments totaling up to $335.0 million, comprised of a$20.0 million clinical milestone payment, up to $285.0 million in regulatory milestone payments, and a $30.0 million sales-based milestone payment. If TV-45070 is approved, we are also eligible to receive royalties in the low teens to the low twenties on net sales of the licensed products for the timeframe endingupon the latest of (a) expiration of the last valid claim of a licensed patent covering the product, (b) the date on which such product loses market exclusivityand (c) the 10th anniversary of first commercial sale, in each case on a country-by-country basis.We have an option to a 20% to 30% co-promotion interest for products incorporating TV-45070 in the U.S. Our exercise of this option is subject tomeeting objective financial conditions, staffing requirements and compliance standards to be determined in Teva’s reasonable discretion in accordance withstandard industry practice. Our co-promotion option is exercisable upon the filing of the first new drug application, or NDA, for a TV-45070 product with theFDA and we will be obligated to pay an opt-in fee to Teva, which is calculated by multiplying our co-promotion interest (as a percentage) by the amount ofcertain milestones paid or payable by Teva, to which is added certain past and future development costs incurred by Teva with respect to the product for theU.S. Our co-promotion interest is in the 20% to 30% range, and equals our percentage share of detailing activities and co-promotion expenses. Such opt-infee is payable as a reduction to the milestone payments or our share of operating profits that Teva would otherwise owe to us or a combination of the two. Ifwe exercise this option, upon paying an opt-in fee to Teva, we will be eligible to receive, in lieu of royalties with respect to such product sales in the U.S., apercentage share (equal to our co-promotion interest) of operating profits from such product sales in the U.S.Our agreement with Teva expires on the date of the expiration of all payment obligations to us under the agreement. Teva may terminate theagreement with 60 days advanced written notice to us after at least three Phase 2 (or later stage) clinical trials have been completed or in the event that safetyor efficacy issues arise in the development of the licensed products. Either party may terminate the agreement in the event of the other party’s material breachwhich remains uncured for 90 business days. In certain termination circumstances, we would receive licenses to Teva intellectual property relating to TV-45070 clinical development and regulatory filings. If patents within such Teva intellectual property cover the TV-45070 product, then Teva is eligible toreceive royalties from us based on a percentage of net product sales, within the mid single-digit range.Pursuant to the terms of our agreement with Teva, an affiliate of Teva purchased 1,111,111 common shares in our initial public offering, based uponthe initial public offering price of $9.00 per share. 27 Agreements with Genentech for GDC-0276 and Selective Inhibitors of Nav1.7 and Pain GeneticsIn December 2011, we entered into a collaborative research and license agreement with Genentech and its affiliate, Roche, to discover and developsmall and large molecules that selectively inhibit the Nav1.7 sodium channel and companion diagnostics for the potential treatment of pain. Pursuant to thisagreement, we granted Genentech a worldwide exclusive license to develop and commercialize compounds directed to Nav1.7 and products incorporatingsuch compounds for all uses. We also granted Genentech a worldwide non-exclusive license to diagnostic products for the purpose of developing orcommercializing such compounds.Under the terms of the agreement, Genentech paid us an upfront fee of $10.0 million, a $5.0 million milestone payment for the selection of GDC-0276for development and an $8.0 million milestone payment upon the approval by Health Canada of the CTA for GDC-0276. Genentech is providing funding tous for certain of our full-time equivalents, or FTEs, performing the research collaboration plan. In addition, we are eligible to receive pre-commercial andcommercial milestone payments with respect to the licensed products totaling up to an additional $613.0 million, comprised of up to $45.5 million inpreclinical and clinical milestone payments, up to $387.5 million in regulatory milestone payments, and up to $180.0 million in sales-based milestonepayments for multiple products and indications. In addition, we are eligible to receive royalties based on net sales of the licensed products, which range froma mid single-digit percentage to ten percent for small-molecule inhibitors for the timeframe that such products are covered by the licensed patents and a lowsingle-digit percentage thereafter until the date that is ten years after first commercial sale on a country-by-country basis, plus a low single-digit percentagefor large molecule inhibitors of Nav1.7 for a period of ten years from first commercial sale on a country-by-country basis.Our agreement with Genentech expires on the date of the expiration of all payment obligations to us under the agreement. Genentech may terminatethe agreement with three months advance notice anytime on or after the third anniversary of the effective date of the agreement, and each party may terminatethe agreement in the event of a material breach by the other party that remains uncured after 90 days. In the event that Genentech terminates the agreementdue to our breach, Genentech retains its licenses and its payment obligations to us are reduced. In the event that we terminate the agreement due toGenentech’s breach, the rights and licenses granted to Genentech revert back to us, subject to certain rights to make and use certain large-molecule productcandidates that are retained by Genentech, and Genentech is obligated to assign certain regulatory approvals and grant certain licenses to us to enable us todevelop and commercialize certain terminated products outside of the collaboration.In March 2014, we entered into an additional agreement with Genentech for pain genetics, where we intend to use our Extreme Genetics discoveryplatform to focus on identifying genetic targets associated with rare phenotypes where individuals have an inability to perceive pain or where individualshave non-precipitated spontaneous severe pain. Pursuant to the terms of this agreement, any intellectual property arising out of the collaboration will bejointly owned by us and Genentech. We have also granted Genentech a time-limited, exclusive right of first negotiation on a target-by-target basis to formjoint drug discovery collaborations. Under the terms of this agreement, Genentech paid us an upfront payment of $1.5 million and we are eligible for anadditional $2.0 million in milestone payments. The agreement terminates upon the expiration of Genentech’s time-limited, exclusive right of firstnegotiation which shall be exercisable for two years. Genentech may terminate the agreement with three months advance notice anytime on or after the 12month anniversary of the effective date of the agreement, and each party may terminate the agreement in the event of a material breach by the other party thatremains uncured for 90 days. Furthermore, pursuant to the terms of a common share put agreement, an affiliate of Genentech, Roche Finance Ltd., investedapproximately $4.5 million in a private placement concurrent with our initial public offering at the same price per share as the initial public offering.Agreement with Merck for Cardiovascular DiseaseIn June 2009, we entered into an exclusive collaborative research and option agreement with Merck, pursuant to which the parties conducted aresearch program to discover and develop novel small-molecule candidates for the potential treatment of cardiovascular disease. Merck provided payments tous for our FTEs who performed our activities pursuant to the research program conducted under the Merck agreement. The Merck collaborative researchprogram ended in December 2012.Under the terms of the agreement, Merck had the option to obtain an exclusive license under certain intellectual property controlled by us to developand commercialize compounds and products directed to targets in the research program, which has now expired. In June 2012, Merck exercised its option andpaid us $2.0 million to obtain such a worldwide exclusive license to develop and commercialize compound inhibitors of a target that was identified usingour Extreme Genetics discovery platform. Through December 31, 2014, we have received milestone payments and an option fee totaling $9.0 million, and weare eligible for further research, development and regulatory milestone payments of up to $64.0 million, comprised of $21.0 million in preclinical andclinical milestone payments and up to $43.0 million in regulatory milestone payments for products directed to the licensed target, as well as royalties fromthe mid to high single-digit range in countries where such products are covered by a valid composition or method of use claim of a Xenon or Merck patent or,if not covered by such claims, royalties in the mid single-digit range for ten years after first commercial sale of such products. 28 We have an option to co-fund the Phase 1 and first Phase 2 clinical trials of product candidates licensed by Merck by paying Merck 50% of suchdevelopment costs. Such co-funding option is available at the IND-filing stage for the applicable product candidate. If we exercise our co-funding optionthen the maximum eligible milestone amounts due to us increase to $86.5 million and the royalties increase to the high single-digit to the sub-teen double-digit range.Our agreement with Merck expires on the date of the expiration of all royalty payment obligations to us under the agreement. Merck has the right toterminate the agreement upon providing certain notices to us. Each party may terminate the agreement in the event of a material breach by the other partythat remains uncured for 90 days after notice of such breach. In the event that Merck terminates the agreement due to our breach, the licenses granted toMerck survive and becomes fully paid up. In the event that we terminate the agreement due to Merck’s breach, the licenses granted to Merck terminate.Intellectual PropertyAs part of our business strategy, we generally file patent applications disclosing and claiming the drug targets and their novel uses that we identifiedwith the use of our Extreme Genetics discovery platform, novel compositions that modulate such targets, methods of making and using such compositionsand various therapeutic formulations of such compositions that cover our product candidates. In some cases, we also file claims on screening assays as well ascompositions and methods for use in diagnosing certain diseases. We generally file applications in the U.S., Canada, the EU and other commerciallysignificant foreign jurisdictions. We also rely on trade secrets, internal know-how, technological innovations and agreements with third parties to develop,maintain and protect our competitive position. Our ability to be competitive will depend on the success of this strategy.As of December 31, 2014, we owned, co-owned or licensed 51 issued or allowed U.S. patents and approximately 25 pending U.S. patent applications,including provisional and non-provisional filings. We also owned, co-owned or licensed an additional 567 pending and granted counterpart applicationsworldwide, including 129 country-specific validations of 11 European patents.We have in-licensed from UBC patent applications and patents related to Glybera, and methods of making and using Glybera. These include EuropeanPatent No. 1,200,117, Japanese Patent No. 5,095,894, Canadian Patent No. 2,370,081 and pending U.S. Patent Application No. 14/324,151. European PatentNo. 1,200,117, Japanese Patent No. 5,095,894 and Canadian Patent No. 2,370,081, are expected to expire in June 2020 (absent any extensions of term); U.S.Patent Application No. 14/324,151, if issued, is expected to expire in 2020 (absent any extensions of term). In addition, U.S. Patent No. 6,814,962, relatedEuropean Patent No. 763,116, and pending counterpart U.S. Patent Application No. 13/584,203 have composition claims directed to various recombinantviruses containing LPL coding sequences and methods of using such viruses to treat various pathologies, and various other related patents and applicationsclaiming priority to PCT/FR1995/00669 are directed to the preparation of recombinant viruses and uses in gene therapy, all of which are expected to expirein 2015 (absent any extensions of term).As of December 31, 2014, we owned seven issued U.S. patents and six pending U.S. patent applications related to TV-45070, and methods of makingand using this and certain related compounds. The issued patents are expected to expire between 2026 and 2030 (absent any extensions of term). In addition,we have 50 foreign issued patents (exclusive of European patent national validation) and filed 123 corresponding applications in various foreignjurisdictions relating to TV-45070.As of December 31, 2014, we, together with Genentech, co-owned two allowed U.S. patent applications, two pending U.S. patent applications and 26pending counterpart patent applications worldwide relating to GDC-0276 and methods of making and using this and certain related compounds. Any patentsissuing from these applications are expected to expire in 2033 (absent any extensions of term).We may obtain patents on our novel compositions before we obtain marketing approval for product candidates containing such compositions.Because patents are only valid for a limited period, and the life of a particular patent may begin prior to the commercial sale of the related product, thecommercial value of any patent is limited. However, in certain circumstances, we may be able to seek patent term extensions for patents in the U.S. and in anumber of European countries, compensating in part for delays in obtaining marketing approval, but we cannot be certain we will obtain such extensions.Further, the existence of issued patents does not guarantee our right to practice the patented technology or commercialize any product candidatecovered by such a patent. Third parties may have or obtain rights to other patents that could be used to prevent or attempt to prevent us from commercializingour product candidates. If these other parties are successful in obtaining valid and enforceable patents, and establishing our infringement of those patents, wecould be prevented from commercializing our product candidates unless we were able to obtain a license under such patents, which may not be available oncommercially reasonable terms or at all. 29 In the conduct of our business, we may infringe patents or other proprietary rights of third parties. If we do infringe such patents or other proprietaryrights, we could be prevented from developing or selling products or from using the processes covered by those patents, could be required to pay substantialdamages or could be required to obtain a license from the third party to allow us to use their technology, which may not be available on commerciallyreasonable terms or at all. If we are not able to obtain a required license or develop alternative technologies, we may be unable to develop or commercializesome or all of our products, and our business could be adversely affected.Much of our scientific capabilities depend upon the knowledge, experience and skills of key scientific and technical personnel. To protect our rightsto our proprietary know-how and technology, we require all our employees, consultants and advisors to enter into confidentiality agreements that requiredisclosure and assignment to us of ideas, developments, discoveries and inventions made by these employees, consultants and advisors in the course of theirservice to us.We may be unable to obtain, maintain and protect the intellectual property rights necessary to conduct our business, and we may be subject to claimsthat we infringe or otherwise violate the intellectual property rights of others, which could materially harm our business. Although we believe our patents andpatent applications provide us with a competitive advantage, the patent positions of biotechnology and pharmaceutical companies can be uncertain andinvolve complex legal and factual questions. We and our collaborators may not be able to develop patentable product candidates or processes or obtainpatents from pending patent applications. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient toprotect the technology owned by or licensed to us or to our collaborators. In certain cases where we have licensed rights to our intellectual property to ourcollaborators, such collaborators have assumed control of the prosecution and maintenance of the intellectual property portfolio related to such licensedrights. If our collaborators fail to adequately prosecute or maintain any portion of our licensed intellectual property, the competitive advantage and value ofour intellectual property portfolio may be reduced. For more information, see “Risk Factors—Risks Related to Our Intellectual Property Rights.”We own a number of trademarks and intend to develop names for our product candidates and as appropriate seek to secure trademark protection forthem, including domain name registration, in relevant jurisdictions.Research and DevelopmentWe have committed, and expect to continue to commit, significant resources to developing new product candidates. We have assembled experiencedresearch and development teams at our Burnaby, British Columbia location with scientific, clinical and regulatory personnel. As of December 31, 2014, wehad 53 employees primarily engaged in research and development. Of these employees, 23 hold a Ph.D. degree or M.D. (or equivalent) degree. From time totime we engage individuals on a contractual basis for limited time periods. Our research and development expenses for the years ended December 31, 2014,2013 and 2012 were $11.8 million, $12.3 million and $10.5 million, respectively.ManufacturingWe currently rely, and expect to continue to rely, on third parties and our collaborators for the manufacture of our product candidates for preclinicaland clinical testing, as well as for commercial manufacture if our product candidates receive marketing approval. Accordingly, we have not internallydeveloped any manufacturing facilities or hired related personnel.To date, we have obtained materials for our product candidates from multiple third-party manufacturers. We believe that all of the materials requiredfor the manufacture of our product candidates can be obtained from more than one source. However, the manufacturing processes for each of our productcandidates, which include large and small-molecules, vary and sourcing adequate supplies may be made more difficult depending on the type of productcandidate involved. Our small-molecule product candidates generally can be manufactured in reliable and reproducible synthetic processes from readilyavailable starting materials. This chemistry generally is amenable to scale-up and does not require unusual equipment in the manufacturing process.CompetitionThe biotechnology and pharmaceutical industries are highly competitive and are characterized by rapidly advancing technologies and a strongemphasis on proprietary products. While we believe that our technology, development experience, scientific knowledge and drug discovery approachprovide us with certain advantages, we face potential competition in target discovery and product development from many different approaches and sources,including pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research institutions. Anyproduct candidates or products that we or our collaborators successfully develop and commercialize will compete with existing products and new productsthat may become available in the future. 30 With respect to target discovery activities, competitors and other third parties, including academic and clinical researchers, may be able to access rarefamilies and identify targets before we do.Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resourcesand expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketingapproved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources beingconcentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly throughcollaboration arrangements with large and established companies.The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their efficacy, safety, convenience,price, the effectiveness of alternative products, the level of competition and the availability of coverage and adequate reimbursement from government andother third party payers.Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products or therapies that are safer, moreeffective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also mayobtain FDA, European Medicines Agency, or EMA, or other regulatory approval for their products more rapidly than we may obtain approval for ours, whichcould result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may beaffected in many cases by insurers or other third party payers seeking to encourage the use of generic products.Aside from the product marketplace, our competitors also compete with us in recruiting and retaining qualified scientific and management personnel,establishing clinical trial sites, recruiting patients for clinical trials, and by acquiring technologies complementary to, or necessary for, our programs.Our products and product candidates may compete with various therapies and drugs, both in the marketplace and currently under development.Glybera (alipogene tiparvovec) CompetitionThere are no approved gene therapies currently on the market for LPLD. The current management of LPLD consists of strict adherence to an extremelylow-fat diet, but compliance with such a diet is challenging. Lipid-lowering drugs are generally not effective for treating LPLD. We are not aware of any otherdrugs or therapies currently in development that treat LPLD by using the LPL sequence containing the LPLS447X genetic variant or otherwise.TV-45070 and GDC-0276 CompetitionDrug discovery and development for various pain applications is intensely competitive. There are a large number of approved products forneuropathic pain, inflammatory pain and other pain indications. These approved products include capsaicin, celecoxib, lidocaine, narcotic analgesics andpregabalin. We are also aware of clinical-stage development programs at several pharmaceutical and biotechnology companies that are developing Nav1.7inhibitors for the treatment of pain, including Bioline Rx Ltd., Biogen Idec through its recently announced intention to acquire ConvergencePharmaceuticals Limited, Dainippon Sumitomo Co., Ltd. and Pfizer, Inc. Moreover, we are aware of various other product candidates in development thattarget other mechanisms of action to treat various pain indications, including calcium channel inhibitors, nerve growth factor inhibitors and P2Xpurinoceptor 3 inhibitors. 31 Government RegulationWe are developing both small-molecule and large-molecule product candidates. Our small-molecule product candidates are regulated as drugs by theFDA. The gene therapy product, Glybera, will be regulated by the FDA as a biologic. Within the FDA, the Center for Drug Evaluation and Research, orCDER, regulates drugs and the Center for Biologics Evaluation and Research, or CBER, regulates biological products. Drugs and biological products aresubject to regulation under the Federal Food, Drug, and Cosmetic Act, or FD&C Act, and other federal, provincial, state, local and foreign statutes andregulations. Biological products are also subject to regulation under the Public Health Service Act, or PHS Act. Both the FD&C Act and the PHS Act, asapplicable, and their corresponding regulations govern, among other things, the testing, manufacturing, safety, efficacy, labeling, packaging, storage, recordkeeping, distribution, import, export, reporting, advertising and other promotional practices involving drugs and biological products. FDA approval must beobtained before clinical testing of drugs or biological products is initiated, and each clinical study protocol for such product candidates is reviewed by theFDA prior to initiation in the U.S. FDA approval also must be obtained before marketing of drugs and biological products in the U.S. The process ofobtaining regulatory approvals and the subsequent compliance with appropriate federal, provincial, state, local and foreign statutes and regulations requirethe expenditure of substantial time and financial resources and we may not be able to obtain the required regulatory approvals.Federal and state agencies, congressional committees and foreign governments have expressed interest in further regulating biotechnology. Inparticular, ethical, social and legal concerns about genetic testing, genetic research and gene therapy could result in additional regulations restricting orprohibiting the processes we may use in discovering and developing our products candidates and in manufacturing and marketing Glybera and any othergene therapy products we or our collaborators may develop. More restrictive regulations or claims that our products are unsafe or pose a hazard could preventus from commercializing any products. New government requirements may be established that could delay or prevent regulatory approval of our productcandidates under development. It is impossible to predict whether legislative changes will be enacted, regulations, policies or guidance changed, orinterpretations by agencies or courts changed, or what the impact of such changes, if any, may be.U.S. Drug Development ProcessThe process required by the FDA before a drug or biological product may be marketed in the U.S. generally involves the following:·completion of nonclinical laboratory tests and animal studies according to good laboratory practices, or GLPs, and applicable requirements forthe humane use of laboratory animals or other applicable regulations;·submission to the FDA of an application for an IND, which must become effective before human clinical studies may begin;·performance of adequate and well-controlled human clinical studies according to the FDA’s regulations commonly referred to as good clinicalpractices, or GCPs, and any additional requirements for the protection of human research subjects and their health information, to establish thesafety and efficacy of the proposed product for its intended use;·submission to the FDA of an NDA for drug products or a BLA for biological products for marketing approval that includes substantiveevidence of safety, purity, and potency from results of nonclinical testing and clinical studies;·satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the product is produced to assess compliancewith good manufacturing practices, or GMP, to assure that the facilities, methods and controls are adequate to preserve the product’s identity,strength, quality and purity;·potential FDA audit of the nonclinical and clinical study sites that generated the data in support of the NDA or BLA; and·FDA review and approval of the NDA, or licensure of the BLA.Before testing any drug or biological product candidate in humans, the product candidate enters the preclinical testing stage. Preclinical tests, alsoreferred to as nonclinical studies, include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies to assess thepotential safety and activity of the product candidate. The conduct of the preclinical tests must comply with federal regulations and requirements includingGLPs. 32 The clinical study sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any availableclinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. Some preclinical testing may continue even after the IND issubmitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical study on a clinical hold within that30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical study can begin. The FDA mayalso impose clinical holds on a product candidate at any time before or during clinical studies due to safety concerns or non-compliance. If the FDA imposesa clinical hold, studies may not recommence without FDA authorization and then only under terms authorized by the FDA. Accordingly, we cannot be surethat submission of an IND will result in the FDA allowing clinical studies to begin, or that, once begun, issues will not arise that suspend or terminate suchstudies.Clinical studies involve the administration of the drug or biological product candidate to healthy volunteers or patients under the supervision ofqualified investigators, generally physicians not employed by or under the study sponsor’s control. Clinical studies are conducted under protocols detailing,among other things, the objectives of the clinical study, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitorsubject safety, including stopping rules that assure a clinical study will be stopped if certain AEs should occur. Each protocol and any amendments to theprotocol must be submitted to the FDA as part of the IND. Clinical studies must be conducted and monitored in accordance with the FDA’s regulationscomprising the GCP requirements, including the requirement that all research subjects provide informed consent. Further, each clinical study must bereviewed and approved by an independent institutional review board, or IRB, at or servicing each institution at which the clinical study will be conducted.An IRB is charged with protecting the welfare and rights of study participants and considers such items as whether the risks to individuals participating in theclinical studies are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the form and content of the informed consent thatmust be signed by each clinical study subject or his or her legal representative and must monitor the clinical study until completed.Human clinical studies are typically conducted in three sequential phases that may overlap or be combined:·Phase 1. The drug or biological product is initially introduced into healthy human subjects and tested for safety. In the case of some productsfor severe or life-threatening diseases, especially when the product may be too inherently toxic to ethically administer to healthy volunteers,the initial human testing is often conducted in patients.·Phase 2. The drug or biological product is evaluated in a limited patient population to identify possible adverse effects and safety risks, topreliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosingschedule.·Phase 3. Clinical studies are undertaken to further evaluate dosage, clinical efficacy, potency, and safety in an expanded patient population atgeographically dispersed clinical study sites. These clinical studies are intended to establish the overall risk/benefit ratio of the product andprovide an adequate basis for product labeling.Post-approval clinical studies, sometimes referred to as Phase 4 clinical studies, may be conducted after initial marketing approval. These clinicalstudies are used to gain additional experience from the treatment of patients in the intended therapeutic indication, particularly for long-term safety follow-up. The FDA recommends that sponsors observe subjects in studies of gene therapy products for potential gene therapy-related delayed AEs for a 15-yearperiod, including a minimum of five years of annual examinations followed by ten years of annual queries, either in person or by questionnaire, of studysubjects. During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data, andclinical study investigators.Concurrent with clinical studies, companies usually complete additional animal studies and must also develop additional information about thephysical characteristics of the drug or biological product as well as finalize a process for manufacturing the product in commercial quantities in accordancewith GMP requirements. To help reduce the risk of the introduction of adventitious agents with use of biological products, the PHS Act emphasizes theimportance of manufacturing control for products whose attributes cannot be precisely defined. The manufacturing process must be capable of consistentlyproducing quality batches of the product candidate and, among other things, the sponsor must develop methods for testing the identity, strength, quality,potency and purity of the final drug or biological product. Additionally, appropriate packaging must be selected and tested and stability studies must beconducted to demonstrate that the drug or biological product candidate does not undergo unacceptable deterioration over its shelf life.Human gene therapy products are a new category of therapeutics, and studies of gene therapy products are subject to certain regulatory requirementsin addition to those set forth above including certain requirements of the National Institutes of Health. 33 U.S. Review and Approval ProcessesAfter the completion of clinical studies of a drug or biological product, FDA approval of an NDA or a BLA must be obtained before commercialmarketing of the drug or biological product, respectively. The NDA or BLA must include results of product development, laboratory and animal studies,human studies, information on the manufacture and composition of the product, proposed labeling and other relevant information. In addition, under thePediatric Research Equity Act, or PREA, an NDA or a BLA or supplement to an NDA or a BLA must contain data to assess the safety and effectiveness of theproduct for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation forwhich the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation,PREA does not apply to any drug or biological product for an indication for which orphan designation has been granted. The testing and approval processesrequire substantial time and effort and there can be no assurance that the FDA will accept the NDA or BLA for filing and, even if filed, that any approval willbe granted on a timely basis, if at all.Under the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA or BLA must be accompanied by a substantial user fee. PDUFA alsoimposes an annual product fee for drugs and biologics and an annual establishment fee on facilities used to manufacture prescription drugs or biologics. Feewaivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business.Additionally, no user fees are assessed on NDAs or BLAs for products designated as orphan drugs, unless the product also includes a non-orphan indication.Within 60 days following submission of the application, the FDA reviews an NDA or BLA submitted to determine if it is substantially complete beforethe agency accepts it for filing. The FDA may refuse to file any marketing application that it deems incomplete or not properly reviewable at the time ofsubmission and may request additional information. In this event, the NDA or BLA must be resubmitted with the additional information. The resubmittedapplication also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantivereview of the NDA or BLA. The FDA reviews the application to determine, among other things, whether the proposed product is safe and potent, or effective,for its intended use, and has an acceptable purity profile, and whether the product is being manufactured in accordance with GMP to assure and preserve theproduct’s identity, safety, strength, quality, potency and purity. The FDA may refer applications for novel products or products that present difficultquestions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and arecommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisorycommittee, but it considers such recommendations carefully when making decisions. During the product approval process, the FDA also will determinewhether a Risk Evaluation and Mitigation Strategy, or REMS, is necessary to assure the safe use of the product. If the FDA concludes a REMS is needed, thesponsor of the NDA or BLA must submit a proposed REMS; the FDA will not approve the application without a REMS, if required.Before approving an NDA or a BLA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the productunless it determines that the manufacturing processes and facilities are in compliance with GMP requirements and adequate to assure consistent production ofthe product within required specifications. Additionally, before approving an NDA or a BLA, the FDA will typically inspect one or more clinical sites toassure that the clinical studies were conducted in compliance with IND study requirements and GCP requirements. To assure GMP and GCP compliance, anapplicant must incur significant expenditure of time, money and effort in the areas of training, record keeping, production, and quality control.Notwithstanding the submission of relevant data and information, the FDA may ultimately decide that the NDA or BLA does not satisfy its regulatorycriteria for approval and deny approval. Data obtained from clinical studies are not always conclusive and the FDA may interpret data differently than weinterpret the same data. If the agency decides not to approve the marketing application, the FDA will issue a complete response letter that usually describesall of the specific deficiencies in the application identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling changes, ormajor, for example, requiring additional clinical studies. Additionally, the complete response letter may include recommended actions that the applicantmight take to place the application in a condition for approval. If a complete response letter is issued, the applicant may either resubmit the NDA or BLA,addressing all of the deficiencies identified in the letter, or withdraw the application.If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use mayotherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings orprecautions be included in the product labeling. The FDA may impose restrictions and conditions on product distribution, prescribing, or dispensing in theform of a risk management plan, or otherwise limit the scope of any approval. In addition, the FDA may require post-approval clinical studies, sometimesreferred to as Phase 4 clinical studies, designed to further assess a product’s safety and effectiveness, and testing and surveillance programs to monitor thesafety of approved products that have been commercialized. 34 One of the performance goals agreed to by the FDA under the PDUFA is to complete its review of 90% of standard NDAs and BLAs within ten monthsfrom filing and 90% of priority NDAs and BLAs within six months from filing, whereupon a review decision is to be made. The FDA does not always meet itsPDUFA goal dates and its review goals are subject to change from time to time. The review process and the PDUFA goal date may be extended by threemonths if the FDA requests or the application sponsor otherwise provides additional information or clarification regarding information already provided inthe submission within the last three months before the PDUFA goal date.Fast Track DesignationThe FDA has various programs, including Fast Track, which are intended to expedite the process for reviewing drugs. Even if a drug qualifies for oneor more of these programs, the FDA may later decide that the drug no longer meets the conditions for qualification. Generally, drugs that are eligible for theseprograms are those for serious or life-threatening conditions, those with the potential to address unmet medical needs, and those that offer meaningfulbenefits over existing treatments. For example, Fast Track is a process designed to expedite the FDA’s review of drugs that treat serious or life-threateningdiseases or conditions and fill unmet medical needs. Under the Fast Track process, drugs that offer major advances in treatment or provide a treatment whereno adequate therapy exists, may also receive priority review by the FDA, or review within six months of the filing of an NDA compared to a traditional reviewtime of ten months. Although Fast Track and priority review do not affect the standards for approval of a drug, for Fast Track designated drugs, the FDA willalso attempt to facilitate early and frequent meetings with a sponsor of a Fast Track designated drug, to expedite such drug’s review and development.Although FDA has granted fast track designations to TV-45070 for EM and to Glybera for LPLD, such designations may not result in a faster development orreview time, do not increase the odds of approval, and may be rescinded at any time if these drug candidates do not continue to meet the qualifications forthese programs.Orphan Drug DesignationUnder the Orphan Drug Act, the FDA may grant orphan designation to a drug or biological product intended to treat a rare disease or condition, whichis generally a disease or condition that affects fewer than 200,000 individuals in the U.S., or more than 200,000 individuals in the U.S. and for which there isno reasonable expectation that the cost of developing and making a drug or biological product available in the U.S. for this type of disease or condition willbe recovered from sales of the product. Both Glybera and TV-45070 have received orphan drug designation from the FDA. Orphan product designation mustbe requested before submitting an NDA or BLA. After the FDA grants orphan product designation, the identity of the therapeutic agent and its potentialorphan use are disclosed publicly by the FDA. Orphan product designation does not convey any advantage in or shorten the duration of the regulatory reviewand approval process.If a product that has orphan designation subsequently receives the first FDA approval for such drug for the disease or condition for which it has suchdesignation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the samedrug or biological product for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the productwith orphan exclusivity. Competitors, however, may receive approval of different products for the indication for which the orphan product has exclusivity orobtain approval for the same product but for a different indication for which the orphan product has exclusivity. Orphan product exclusivity also could blockthe approval of one of our products for seven years if a competitor obtains approval of the same product as defined by the FDA or if our product candidate isdetermined to be contained within the competitor’s product for the same indication or disease. If a drug or biological product designated as an orphanproduct receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan product exclusivity. Orphan drugstatus in the EU has similar, but not identical, benefits, including up to ten years of exclusivity. 35 Post-Approval RequirementsMaintaining substantial compliance with applicable federal, provincial, state, and local statutes and regulations requires the expenditure ofsubstantial time and financial resources. Rigorous and extensive FDA regulation of drug and biological products continues after approval, particularly withrespect to GMP. We will rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of any products that wemay commercialize. Manufacturers of our products are required to comply with applicable requirements in the GMP regulations, including quality controland quality assurance and maintenance of records and documentation. Other post-approval requirements applicable to drug and biological products, includereporting of GMP deviations that may affect the identity, potency, purity and overall safety of a distributed product, record-keeping requirements, reportingof adverse effects, reporting updated safety and efficacy information, and complying with electronic record and signature requirements. After an NDA or BLAis approved, the product also may be subject to official lot release. As part of the manufacturing process, the manufacturer is required to perform certain testson each lot of the product before it is released for distribution. If the product is subject to official release by the FDA, the manufacturer submits samples ofeach lot of product to the FDA together with a release protocol showing a summary of the history of manufacture of the lot and the results of all of themanufacturer’s tests performed on the lot. The FDA also may perform certain confirmatory tests on lots of some products before releasing the lots fordistribution by the manufacturer. In addition, the FDA conducts laboratory research related to the regulatory standards on the safety, purity, potency, andeffectiveness of drug and biological products.We also must comply with the FDA’s advertising and promotion requirements, such as those related to direct-to-consumer advertising, the prohibitionon promoting products for uses or in patient populations that are not described in the product’s approved labeling (known as “off-label use”), industry-sponsored scientific and educational activities, and promotional activities involving the internet. Discovery of previously unknown problems or the failureto comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the marketas well as possible civil or criminal sanctions. Failure to comply with the applicable U.S. requirements at any time during the product development process,approval process or after approval, may subject an applicant or manufacturer to administrative or judicial civil or criminal sanctions and adverse publicity.FDA sanctions could include refusal to approve pending applications, withdrawal of an approval, clinical hold, warning or untitled letters, product recalls,product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, mandated correctiveadvertising or communications with doctors, debarment, restitution, disgorgement of profits, or civil or criminal penalties. Any agency or judicialenforcement action could have a material adverse effect on us.Drug and biological product manufacturers and other entities involved in the manufacture and distribution of approved drug or biological productsare required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA andcertain state agencies for compliance with GMPs and other laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area ofproduction and quality control to maintain GMP compliance. Discovery of problems with a product after approval may result in restrictions on a product,manufacturer, or holder of an approved NDA or BLA, including withdrawal of the product from the market. In addition, changes to the manufacturing processor facility generally require prior FDA approval before being implemented and other types of changes to the approved product, such as adding newindications and additional labeling claims, are also subject to further FDA review and approval.U.S. Patent Term Restoration and Marketing ExclusivityDepending upon the timing, duration and specifics of the FDA approval of the use of our product candidates, some of our U.S. patents may be eligiblefor limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-WaxmanAmendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during productdevelopment and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND and thesubmission date of an NDA or BLA plus the time between the submission date of an NDA or BLA and the approval of that application. Only one patentapplicable to an approved product is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent.The U.S. Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration.Under the Hatch-Waxman Amendments, a drug product containing a new chemical entity as its active ingredient is entitled to five years of marketexclusivity, and a product for which the sponsor is required to generate new clinical data is entitled to three years of market exclusivity. A drug or biologicalproduct can also obtain pediatric market exclusivity in the U.S. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patentterms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on the voluntary completionof a pediatric study in accordance with an FDA-issued “Written Request” for such a study. 36 The Biologics Price Competition and Innovation Act of 2009 created an abbreviated approval pathway for biological products shown to be similar to,or interchangeable with, an FDA-licensed reference biological product. Biosimilarity, which requires that there be no clinically meaningful differencesbetween the biological product and the reference product in terms of safety, purity, and potency, can be shown through analytical studies, animal studies, anda clinical study or studies. Interchangeability requires that a product is biosimilar to the reference product and the product must demonstrate that it can beexpected to produce the same clinical results as the reference product and, for products administered multiple times, the biologic and the reference biologicmay be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of thereference biologic. However, complexities associated with the larger, and often more complex, structure of biological products, as well as the process bywhich such products are manufactured, pose significant hurdles to implementation that are still being worked out by the FDA.A reference biologic is granted 12 years of exclusivity from the time of first licensure of the reference product. On April 10, 2013, President Obamareleased his proposed budget for fiscal year 2014 and proposed to cut this 12-year period of exclusivity down to seven years. He also proposed to prohibitadditional periods of exclusivity for reference biologics due to minor changes in product formulations, a practice often referred to as “evergreening.” The firstbiologic product submitted under the abbreviated approval pathway that is determined to be interchangeable with the reference product has exclusivityagainst other biologics submitted under the abbreviated approval pathway for the lesser of (i) one year after the first commercial marketing, (ii) 18 monthsafter approval if there is no legal challenge, (iii) 18 months after the resolution in the applicant’s favor of a lawsuit challenging the biologics’ patents if anapplication has been submitted, or (iv) 42 months after the application has been approved if a lawsuit is ongoing within the 42-month period.Additional RegulationIn addition to the foregoing, provincial, state and federal U.S. and Canadian laws regarding environmental protection and hazardous substances affectour business. These and other laws govern our use, handling and disposal of various biological, chemical and radioactive substances used in, and wastesgenerated by, our operations. If our operations result in contamination of the environment or expose individuals to hazardous substances, we could be liablefor damages and governmental fines. We believe that we are in material compliance with applicable environmental laws and that continued compliancetherewith will not have a material adverse effect on our business. We cannot predict, however, how changes in these laws may affect our future operations.U.S. Foreign Corrupt Practices Act and Canadian Corruption of Foreign Public Officials ActThe U.S. Foreign Corrupt Practices Act and the Canadian Corruption of Foreign Public Officials Act, to which we are subject, prohibit corporationsand individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay,offer to pay or authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidatein an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. We can also be held liable for the acts of our thirdparty agents under the Canadian Corruption of Foreign Public Officials Act.Government Regulation Outside of the U.S.In addition to regulations in the U.S., we will be subject to a variety of regulations in other jurisdictions governing, among other things, clinicalstudies and any commercial sales and distribution of our products.Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior tothe commencement of clinical studies or marketing of the product in those countries. Certain countries outside of the U.S. have a similar process that requiresthe submission of a clinical study application much like the IND prior to the commencement of human clinical studies. In the EU, for example, a clinical trialapplication, or CTA, must be submitted to each country’s national health authority and an independent ethics committee, much like the FDA and the IRB,respectively. Once the CTA is approved in accordance with a country’s requirements, clinical study development may proceed.The requirements and process governing the conduct of clinical studies, product licensing, coverage, pricing and reimbursement vary from country tocountry. In all cases, the clinical studies are conducted in accordance with GCP and the applicable regulatory requirements and the ethical principles thathave their origin in the Declaration of Helsinki. 37 To obtain regulatory approval of an investigational drug or biological product under EU regulatory systems, we must submit a marketingauthorization application, or MAA. The application used to file the NDA or BLA in the U.S. is similar to that required in the EU, with the exception of,among other things, country-specific document requirements. The EU also provides opportunities for market exclusivity. For example, in the EU, uponreceiving marketing authorization, new chemical entities generally receive eight years of data exclusivity and an additional two years of market exclusivity.If granted, data exclusivity prevents regulatory authorities in the EU from referencing the innovator’s data to assess a generic application. During theadditional two-year period of market exclusivity, a generic marketing authorization can be submitted, and the innovator’s data may be referenced, but nogeneric product can be marketed until the expiration of the market exclusivity. However, there is no guarantee that a product will be considered by the EU’sregulatory authorities to be a new chemical entity, and products may not qualify for data exclusivity. Products receiving orphan designation in the EU canreceive ten years of market exclusivity, during which time no similar medicinal product for the same indication may be placed on the market. An orphanproduct can also obtain an additional two years of market exclusivity in the EU for pediatric studies. No extension to any supplementary protectioncertificate can be granted on the basis of pediatric studies for orphan indications.The criteria for designating an “orphan medicinal product” in the EU are similar in principle to those in the U.S. Under Article 3 of Regulation (EC)141/2000, a medicinal product may be designated as orphan if (1) it is intended for the diagnosis, prevention or treatment of a life-threatening or chronicallydebilitating condition; (2) either (a) such condition affects no more than five in 10,000 persons in the EU when the application is made, or (b) the product,without the benefits derived from orphan status, would not generate sufficient return in the EU to justify investment; and (3) there exists no satisfactorymethod of diagnosis, prevention or treatment of such condition authorized for marketing in the EU, or if such a method exists, the product will be ofsignificant benefit to those affected by the condition, as defined in Regulation (EC) 847/2000. Orphan medicinal products are eligible for financialincentives such as reduction of fees or fee waivers and are, upon grant of a marketing authorization, entitled to ten years of market exclusivity for theapproved therapeutic indication. The application for orphan drug designation must be submitted before the application for marketing authorization. Theapplicant will receive a fee reduction for the marketing authorization application if the orphan drug designation has been granted, but not if the designationis still pending at the time the marketing authorization is submitted. Orphan drug designation does not convey any advantage in, or shorten the duration of,the regulatory review and approval process. Glybera has received orphan drug designation for the treatment of LPLD in the EU.The 10-year market exclusivity may be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteriafor orphan designation, for example, if the product is sufficiently profitable not to justify maintenance of market exclusivity. Additionally, marketingauthorization may be granted to a similar product for the same indication at any time if:·The second applicant can establish that its product, although similar, is safer, more effective or otherwise clinically superior;·The applicant consents to a second orphan medicinal product application; or·The applicant cannot supply enough orphan medicinal product.For other countries outside of the EU, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinicalstudies, product licensing, coverage, pricing and reimbursement vary from country to country. In all cases, again, the clinical studies are conducted inaccordance with GCP and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal ofregulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.Pharmaceutical Coverage, Pricing and ReimbursementSignificant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain regulatory approval. In theU.S. and markets in other countries, sales of any products for which we receive regulatory approval for commercial sale will depend, in part, on theavailability of coverage and adequate reimbursement from third-party payers. Third-party payers include government programs such as Medicare orMedicaid, managed care plans, private health insurers, and other organizations. These third-party payers may deny coverage or reimbursement for a productor therapy in whole or in part if they determine that the product or therapy was not medically appropriate or necessary. Third-party payers may attempt tocontrol costs by limiting coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drugproducts for a particular indication, and by limiting the amount of reimbursement for particular procedures or drug treatments. 38 The cost of pharmaceuticals and devices continues to generate substantial governmental and third party payer interest. We expect that thepharmaceutical industry will experience pricing pressures due to the trend toward managed healthcare, the increasing influence of managed careorganizations and additional legislative proposals. Third-party payers are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies inorder to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costs required to obtain the FDA approvals. Our productcandidates may not be considered medically necessary or cost-effective. A payer’s decision to provide coverage for a drug product does not imply that anadequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient torealize an appropriate return on our investment in product development.Some third-party payers also require pre-approval of coverage for new or innovative devices or drug therapies before they will reimburse healthcareproviders who use such therapies. While we cannot predict whether any proposed cost-containment measures will be adopted or otherwise implemented inthe future, these requirements or any announcement or adoption of such proposals could have a material adverse effect on our ability to obtain adequateprices for our product candidates and to operate profitably.In international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted priceceilings on specific products and therapies. There can be no assurance that our products will be considered medically reasonable and necessary for a specificindication, that our products will be considered cost-effective by third-party payers, that coverage or an adequate level of reimbursement will be available orthat the third-party payers’ reimbursement policies will not adversely affect our ability to sell our products profitably.Healthcare ReformIn the U.S. and foreign jurisdictions, there have been a number of legislative and regulatory changes to the healthcare system that could affect ourfuture results of operations. In particular, there have been and continue to be a number of initiatives at the U.S. federal and state levels that seek to reducehealthcare costs.In the U.S., the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the Medicare Modernization Act, changed the wayMedicare covers and pays for pharmaceutical products. The Medicare Modernization Act expanded Medicare coverage for drug purchases by the elderly byestablishing Medicare Part D and introduced a new reimbursement methodology based on average sales prices for physician administered drugs underMedicare Part B. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class under the newMedicare Part D program. Cost reduction initiatives and other provisions of this legislation could decrease the coverage and reimbursement rate that wereceive for any of our approved products. While the Medicare Modernization Act applies only to drug benefits for Medicare beneficiaries, private payersoften follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement thatresults from the Medicare Modernization Act may result in a similar reduction in payments from private payers.In March 2010, the President signed into law the Patient Protection and Affordable Care Act, as amended, or PPACA, a sweeping law intended tobroaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add newtransparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturersand impose additional health policy reforms. Among other things, PPACA revises the definition of “average manufacturer price” for reporting purposes,which could increase the amount of Medicaid drug rebates to states. Further, the new law imposes a significant annual fee on companies that manufacture orimport branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may affect our business practiceswith healthcare practitioners and a significant number of provisions are not yet, or have only recently become, effective. Although it is too early to determinethe full effect of PPACA, the new law appears likely to continue the downward pressure on pharmaceutical pricing, especially under the Medicare program,and may also increase our regulatory burdens and operating costs.In addition, other legislative changes have been proposed and adopted since PPACA was enacted. For example, on August 2, 2011, the Presidentsigned into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend toCongress proposals in spending reductions. The Joint Select Committee on Deficit Reduction did not achieve a targeted deficit reduction of at least $1.2trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductionsto Medicare payments to providers of up to 2% per fiscal year, starting in 2013. On January 2, 2013, President Obama signed into law the American TaxpayerRelief Act of 2012, which, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for thegovernment to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and otherhealthcare funding, which could have a material adverse effect on our customers and accordingly, our financial operations. 39 We expect that PPACA, as well as other healthcare reform measures that have been and may be adopted in the future, may result in more rigorouscoverage criteria and in additional downward pressure on the price that we receive for any approved product, and could seriously harm our future revenue.Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. Theimplementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, orcommercialize our products.In addition, different pricing and reimbursement schemes exist in other countries. In the European Community, governments influence the price ofpharmaceutical products through their pricing and reimbursement rules and control of national healthcare systems that fund a large part of the cost of thoseproducts to consumers. Some jurisdictions operate positive and negative list systems under which products may be marketed only once a reimbursement pricehas been agreed upon. Some of these countries may require, as condition of obtaining reimbursement or pricing approval, the completion of clinical trialsthat compare the cost-effectiveness of a particular product candidate to currently available therapies. Other member states allow companies to fix their ownprices for medicines, but monitor and control company profits. The downward pressure on healthcare costs in general, particularly prescription drugs, hasbecome very intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border importsfrom low-priced markets exert a commercial pressure on pricing within a country.Other Healthcare Laws and Compliance RequirementsIn the U.S., the research, manufacturing, distribution, sale and promotion of drug products and medical devices are potentially subject to regulation byvarious federal, provincial, state and local authorities in addition to the FDA, including the Centers for Medicare & Medicaid Services, other divisions of theU.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice, state Attorneys General, and other stateand local government agencies. For example, sales, marketing and scientific/educational grant programs must comply with fraud and abuse laws such as thefederal Anti-Kickback Statute, as amended, the federal False Claims Act, as amended, and similar state laws. Pricing and rebate programs must comply withthe Medicaid Drug Rebate Program requirements of the Omnibus Budget Reconciliation Act of 1990, as amended, and the Veterans Health Care Act of 1992,as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws andrequirements apply. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws.The federal Anti-Kickback Statute prohibits any person, including a prescription drug manufacturer (or a party acting on its behalf), from knowinglyand willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce or reward either the referral of an individual, or thefurnishing, recommending, or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare andMedicaid programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers,purchasers, and formulary managers on the other. The term “remuneration” is not defined in the federal Anti-Kickback Statute and has been broadlyinterpreted to include anything of value, including for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments ofcash, waivers of payments, ownership interests and providing anything at less than its fair market value. Although there are a number of statutory exemptionsand regulatory safe harbors protecting certain business arrangements from prosecution, the exemptions and safe harbors are drawn narrowly, and practices thatinvolve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safeharbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from federal Anti-Kickback Statute liability. The reach of the Anti-Kickback Statute was broadened by the recently enacted PPACA, which, among other things, amends the intent requirement of the federal Anti-KickbackStatute such that a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to have committed aviolation. In addition, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federalAnti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act (discussed below) or the civil monetary penaltiesstatute, which imposes fines against any person who is determined to have presented or caused to be presented claims to a federal healthcare program that theperson knows or should know is for an item or service that was not provided as claimed or is false or fraudulent. Additionally, many states have adopted lawssimilar to the federal Anti-Kickback Statute, and some of these state prohibitions apply to referral of patients for healthcare items or services reimbursed byany third-party payer, not only the Medicare and Medicaid programs in at least some cases, and do not contain safe harbors. 40 The federal False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a falseor fraudulent claim for payment by a federal healthcare program. The qui tam provisions of the False Claims Act allow a private individual to bring civilactions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetaryrecovery. In recent years, the number of suits brought by private individuals has increased dramatically. In addition, various states have enacted false claimslaws analogous to the False Claims Act. Many of these state laws apply where a claim is submitted to any third-party payer and not merely a federalhealthcare program. There are many potential bases for liability under the False Claims Act. Liability arises, primarily, when an entity knowingly submits, orcauses another to submit, a false claim for reimbursement to the federal government. The False Claims Act has been used to assert liability on the basis ofinadequate care, kickbacks and other improper referrals, improperly reported government pricing metrics such as Best Price or Average Manufacturer Price,improper use of Medicare numbers when detailing the provider of services, improper promotion of off-label uses (i.e., uses not expressly approved by FDA ina drug’s label), and allegations as to misrepresentations with respect to the services rendered. Our future activities relating to the reporting of discount andrebate information and other information affecting federal, provincial, state and third party reimbursement of our products, and the sale and marketing of ourproducts and our service arrangements or data purchases, among other activities, may be subject to scrutiny under these laws. We are unable to predictwhether we would be subject to actions under the False Claims Act or a similar state law, or the impact of such actions. However, the cost of defending suchclaims, as well as any sanctions imposed, could adversely affect our financial performance. Also, the Health Insurance Portability and Accountability Act of1996, or HIPAA, created several new federal crimes, including healthcare fraud, and false statements relating to healthcare matters. The healthcare fraudstatute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private third-party payers. The falsestatements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious orfraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.In addition, we may be subject to, or our marketing activities may be limited by, data privacy and security regulation by both the federal governmentand the states in which we conduct our business. For example, HIPAA and its implementing regulations established uniform federal standards for certain“covered entities” (healthcare providers, health plans and healthcare clearinghouses) governing the conduct of certain electronic healthcare transactions andprotecting the security and privacy of protected health information. The American Recovery and Reinvestment Act of 2009, commonly referred to as theeconomic stimulus package, included expansion of HIPAA’s privacy and security standards called the Health Information Technology for Economic andClinical Health Act, or HITECH, which became effective on February 17, 2010. Among other things, HITECH makes HIPAA’s privacy and security standardsdirectly applicable to “business associates”—independent contractors or agents of covered entities that create, receive, maintain, or transmit protected healthinformation in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may beimposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions fordamages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions.There are also an increasing number of state “sunshine” laws that require manufacturers to make reports to states on pricing and marketinginformation. Several states have enacted legislation requiring pharmaceutical companies to, among other things, establish marketing compliance programs,file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities, and/or register their salesrepresentatives, as well as to prohibit pharmacies and other healthcare entities from providing certain physician prescribing data to pharmaceuticalcompanies for use in sales and marketing, and to prohibit certain other sales and marketing practices. In addition, beginning in 2013, a similar federalrequirement began requiring manufacturers to track and report to the federal government certain payments and other transfers of value made to physiciansand other healthcare professionals and teaching hospitals and ownership or investment interests held by physicians and their immediate family members. Thefederal government will disclose the reported information on a publicly available website beginning in 2014. These laws may affect our sales, marketing, andother promotional activities by imposing administrative and compliance burdens on us. If we fail to track and report as required by these laws or otherwisecomply with these laws, we could be subject to the penalty provisions of the pertinent state and federal authorities.Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible that some of our businessactivities could be subject to challenge under one or more of such laws. If our operations are found to be in violation of any of the federal and state lawsdescribed above or any other governmental regulations that apply to us, we may be subject to penalties, including criminal and significant civil monetarypenalties, damages, fines, imprisonment, exclusion from participation in government healthcare programs, injunctions, recall or seizure of products, total orpartial suspension of production, denial or withdrawal of pre-marketing product approvals, private qui tam actions brought by individual whistleblowers inthe name of the government or refusal to allow us to enter into supply contracts, including government contracts, and the curtailment or restructuring of ouroperations, any of which could adversely affect our ability to operate our business and our results of operations. To the extent that any of our products aresold in a foreign country, we may be subject to similar foreign laws and regulations, which may include, for instance, applicable post-approval requirements,including safety surveillance, anti-fraud and abuse laws, and implementation of corporate compliance programs and reporting of payments or transfers ofvalue to healthcare professionals. 41 Environmental MattersOur operations require the use of hazardous materials (including biological materials) which subject us to a variety of federal, provincial and localenvironmental and safety laws and regulations. Some of the regulations under the current regulatory structure provide for strict liability, holding a partypotentially liable without regard to fault or negligence. We could be held liable for damages and fines as a result of our, or others’, business operations shouldcontamination of the environment or individual exposure to hazardous substances occur. We cannot predict how changes in laws or development of newregulations will affect our business operations or the cost of compliance.EmployeesAs of December 31, 2014, we had 74 employees, including 66 full-time employees. Of our employees, 53 were primarily engaged in research anddevelopment, and 23 of whom hold a Ph.D. or M.D. (or equivalent) degree. None of our employees is represented by a labor union. We have not experiencedany work stoppages, and we consider our relations with our employees to be good. Item 1A.Risk FactorsYou should carefully consider the following risk factors, in addition to the other information contained in this report, including the section of thisreport captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and relatednotes. If any of the events described in the following risk factors and the risks described elsewhere in this report occurs, our business, operating results andfinancial condition could be seriously harmed. This report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Ouractual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewherein this report.Risks Related to Our Financial Condition and Capital RequirementsWe have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.We are a clinical-stage biotechnology company and, other than the years ended December 31, 2014 and 2013, we have recorded net losses in eachreporting period since inception in 1996, and we do not expect to have sustained profitability for the foreseeable future. We had net losses of $4.3 million forthe year ended December 31, 2012, and had an accumulated deficit of $103.7 million as of December 31, 2014.We have devoted most of our financial resources to research and development, including our clinical and preclinical development activities. To date,we have financed our operations through the sale of equity securities, funding received from our licensees and collaborators and, to a lesser extent,government funding. We have not generated any royalty revenue from product sales and our product candidates will require substantial additionalinvestment before they will provide us with any product royalty revenue.We expect to incur significant expenses and increasing operating losses for the foreseeable future as we:·continue our research and preclinical and clinical development of our product candidates;·expand the scope of our clinical studies for our current and prospective product candidates;·initiate additional preclinical, clinical or other studies for our product candidates, including under our collaboration agreements;·change or add additional manufacturers or suppliers;·seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical studies;·seek to identify and validate additional product candidates;·acquire or in-license other product candidates and technologies;·make milestone or other payments under our in-license agreements including, without limitation, our agreements with the University of BritishColumbia, or UBC, and the Memorial University of Newfoundland;·maintain, protect and expand our intellectual property portfolio; 42 ·establish a sales, marketing and distribution infrastructure to commercialize any products for which we or one of our collaborators may obtainmarketing approval, and for which we have maintained commercial rights;·create additional infrastructure to support our operations as a public company and our product development and planned futurecommercialization efforts; and·experience any delays or encounter issues with any of the above.Our expenses could increase beyond expectations for a variety of reasons, including if we are required by the U.S. Food and Drug Administration, orFDA, the European Medicines Agency, or EMA, or other regulatory agencies, domestic or foreign, to perform clinical and other studies in addition to thosethat we currently anticipate. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our shareholders’equity.We have not generated any royalty revenue from product sales and may never become profitable on a U.S. GAAP basis.Our ability to generate meaningful revenue and achieve profitability on a U.S. GAAP basis depends on our ability, alone or with strategiccollaborators, to successfully complete the development of, and obtain the regulatory approvals necessary to commercialize, our product candidates.Substantially all of our revenue since inception has consisted of upfront and milestone payments associated with our collaboration and license agreements.Revenue from these agreements is dependent on successful development of our product candidates by us or our collaborators. To date, we have not generatedany royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales other than from sales of Glybera under ourlicense to uniQure Biopharma B.V., or uniQure, for the foreseeable future, if ever. If any of our product candidates fail in clinical trials or do not gainregulatory approval, or if Glybera or any of our future products, if any, once approved, fails to achieve market acceptance or adequate market share, we maynever become profitable. Although we were profitable for the years ended December 31, 2014 and 2013, we may not be able to sustain profitability insubsequent periods. Our ability to generate future revenue from product sales depends heavily on our success, and the success of our collaborators, in:·completing research, preclinical and clinical development of our product candidates;·seeking and obtaining regulatory and marketing approvals for product candidates for which we complete clinical studies;·commercializing products for which we obtain regulatory and marketing approval, either with a collaborator or, if launched independently, byestablishing sales, marketing and distribution infrastructure;·negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter;·obtaining market acceptance of products for which we obtain regulatory and marketing approval as therapies;·addressing any competing technological and market developments;·establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate (in amount and quality)products and services to support clinical development and the market demand for any approved products in the future;·developing a sustainable, scalable, reproducible, and transferable manufacturing processes for any of our products approved in the future;·maintaining, protecting, expanding and enforcing our portfolio of intellectual property rights, including patents, trade secrets and know-how;·implementing additional internal systems and infrastructure, as needed; and·attracting, hiring and retaining qualified personnel.The scope of our future revenue will also depend upon the size of any markets in which our product candidates receive approval and the availabilityof insurance coverage and the availability and amount of reimbursement from third-party payers for Glybera and future products, if any. If we are unable toachieve sufficient revenue to become profitable and remain so, our financial condition and operating results will be negatively impacted, and our tradingprice might be harmed. 43 We will likely need to raise additional funding, which may not be available on acceptable terms, if at all. Failure to obtain this necessary capital whenneeded may force us to delay, limit or terminate our product development efforts or other operations.Since our inception, we have dedicated most of our resources to the discovery and development of our proprietary preclinical and clinical productcandidates, and we expect to continue to expend substantial resources doing so for the foreseeable future. These expenditures will include costs associatedwith research and development, manufacturing of product candidates and products approved for sale, conducting preclinical experiments and clinical trialsand obtaining and maintaining regulatory approvals, as well as commercializing any products later approved for sale. During the year ended December 31,2014, we incurred approximately $11.8 million of costs associated with research and development, exclusive of costs incurred by our collaborators indeveloping our current product and product candidates.Our current cash and cash equivalents and marketable securities, including the net proceeds from our November 2014 initial public offering andconcurrent private placement are not expected to be sufficient to complete clinical development of any of our product candidates and prepare forcommercializing any product candidate which receives regulatory approval. Accordingly, we will likely require substantial additional capital to continue ourclinical development and potential commercialization activities. Our future capital requirements depend on many factors, including but not limited to:·the number and characteristics of the future product candidates we pursue;·the scope, progress, results and costs of independently researching and developing any of our future product candidates, and conductingpreclinical research and clinical trials;·whether our existing collaborations continue to generate substantial milestone payments and, ultimately, royalties on future products for us;·the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates we develop independently;·the cost of future commercialization activities, including activities required pursuant to our option to co-promote TV-45070, if exercised by us,and the cost of commercializing any future products we develop independently that are approved for sale;·the cost of manufacturing our future products, if any;·our ability to maintain existing collaborations and to establish new collaborations, licensing or other arrangements and the financial terms ofsuch agreements;·the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcomeof such litigation; and·the timing, receipt and amount of sales of, or royalties on, Glybera, and our future products, if any.We are unable to estimate the funds we will actually require to complete research and development of our product candidates or the funds required tocommercialize any resulting product in the future.Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cashand cash equivalents and marketable securities as of the date of this report and research funding that we expect to receive under our existing collaborations,will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 to 24 months.Our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned,through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and othercollaborations, strategic alliances and licensing arrangements or a combination of these approaches. Raising funds in the future may present additionalchallenges and future financing may not be available in sufficient amounts or on terms acceptable to us, if at all. 44 Raising additional capital may cause dilution to our existing shareholders, restrict our operations or require us to relinquish rights to our technologiesor product candidates.The terms of any financing arrangements we enter into may adversely affect the holdings or the rights of our shareholders and the issuance ofadditional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale ofadditional equity or convertible securities would dilute all of our shareholders. The incurrence of indebtedness would result in increased fixed paymentobligations and, potentially, the imposition of restrictive covenants. Those covenants may include limitations on our ability to incur additional debt,limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability toconduct our business. We could also be required to seek funds through arrangements with collaborators or otherwise at an earlier stage than otherwise wouldbe desirable resulting in the loss of rights to some of our product candidates or other unfavorable terms, any of which may have a material adverse effect onour business, operating results and prospects. In addition, any additional fundraising efforts may divert our management from their day-to-day activities,which may adversely affect our ability to develop and commercialize our product candidates.Unstable market and economic conditions may have serious adverse consequences on our business and financial condition.Global credit and financial markets experienced extreme disruptions at various points over the last decade, characterized by diminished liquidity andcredit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economicstability. If another such disruption in credit and financial markets and deterioration of confidence in economic conditions occurs, our business may beadversely affected. If the equity and credit markets were to deteriorate significantly in the future, it may make any necessary debt or equity financing moredifficult to complete, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have amaterial adverse effect on our growth strategy, financial performance and share price and could require us to delay or abandon development orcommercialization plans. In addition, there is a risk that one or more of our current collaborators, service providers, manufacturers and other partners wouldnot survive or be able to meet their commitments to us under such circumstances, which could directly affect our ability to attain our operating goals onschedule and on budget.We are subject to risks associated with currency fluctuations, and changes in foreign currency exchange rates could impact our results of operations.As of February 28, 2015, approximately 73% of our cash and cash equivalents and marketable securities was denominated in Canadian dollars.Historically, the majority of our operating expenses have been denominated in Canadian dollars and the majority of our revenue has been denominated inU.S. dollars and we expect this trend to continue.Prior to December 31, 2014, our functional currency was the Canadian dollar. On January 1, 2015, our functional currency changed from the Canadiandollar to the U.S. dollar based on our analysis of the changes in the primary economic environment in which we operate. As a result, changes in the exchangerate between the Canadian dollar and the U.S. dollar could materially impact our reported results of operations and distort period to period comparisons. Inparticular, to the extent that foreign currency-denominated (i.e., non-U.S. dollar) monetary assets do not equal the amount of our foreign currencydenominated monetary liabilities, foreign currency gains or losses could arise and materially impact our financial statements. As a result of such foreigncurrency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent thatfluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price ofour common shares could be adversely affected.From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. For example,we maintain a natural currency hedge against fluctuations in the U.S./Canadian foreign exchange rate by matching the amount of U.S. dollar and Canadiandollar investments to the expected amount of future U.S. dollar and Canadian dollar obligations, respectively. Any hedging technique we implement may failto be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on the trading price of ourcommon shares. 45 Risks Related to Our BusinessWe, or our collaborators, may fail to successfully develop our product candidates.Our product candidates, including TV-45070 and GDC-0276 and compounds in our preclinical and discovery pipeline, are in varying stages ofdevelopment and will require substantial clinical development, testing and regulatory approval prior to commercialization. It may be several more yearsbefore these product candidates or any of our other product candidates receive marketing approval, if ever. If any of our product candidates fail to becomeapproved products, our business, growth prospects, operating results and financial condition may be adversely affected and a decline of our common shareprice could result. For example, in June 2013, we paid Isis Pharmaceuticals, Inc., or Isis, an option exercise fee of $2.0 million to obtain an exclusive licenseto develop, manufacture and commercialize antisense products under our collaboration and license agreement with Isis; however, in the fourth quarter of2013, we discontinued development of product candidates under this program as the preclinical data did not support the continued advancement of anyproduct candidates.Our near-term operating revenue is partially dependent upon the regulatory and marketing efforts of uniQure, or its sublicensee, for the developmentand commercialization of Glybera.Under the terms of our license agreement with uniQure, we rely on uniQure, or its sublicensees, to market Glybera and to obtain regulatory approval ofGlybera. In July 2013, uniQure announced that it had granted to Chiesi Farmaceutici, S.p.A., or Chiesi, an Italian pharmaceutical firm, an exclusive license tocommercialize Glybera in the European Union, or the EU, and certain other countries outside of North America and Japan. Despite the efforts of uniQure andChiesi, Glybera may not gain market acceptance among physicians, patients, healthcare payers and the medical community. The commercial success ofGlybera will depend on a number of factors, including:·establishment and demonstration of clinical efficacy and safety and acceptance of the same by the medical community;·commercialization of competing products;·sufficient commercial supply of Glybera;·cost-effectiveness of Glybera;·the availability of coverage and adequate reimbursement from third parties, including governmental payers, managed care organizations, andprivate health insurers;·the relative cost, safety and efficacy of therapies that exist now or may be developed in the future;·whether the product can be manufactured in commercial quantities at acceptable cost;·marketing and distribution support for Glybera;·the effect of current and future healthcare laws;·the acceptance of gene therapies as a class of treatment; and·any market or regulatory exclusivities applicable to the product.To date, the FDA has never approved any gene therapy product as a treatment for any indication in the U.S. and the FDA may never approve Glybera.Any failure of uniQure or its sublicensee to successfully commercialize Glybera could have a material adverse effect on our business, growth prospects,operating results and financial condition and could result in a substantial decline in the price of our common shares.We and our collaborators face substantial competition in the markets for our product candidates, which may result in others discovering, developing orcommercializing products before us or doing so more successfully than we or our collaborators do.The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis onproprietary products. We face potential competition in target discovery and product development from many different approaches and sources, includingmajor pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and privateresearch institutions. Any product candidates that we or our collaborators successfully develop and commercialize will compete with existing products andany new products that may become available in the future. 46 The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their efficacy, safety, convenience andprice; the effectiveness of alternative products; the level of generic competition; and the availability of coverage and adequate reimbursement fromgovernment and other third-party payers.With respect to target discovery activities, competitors and other third parties, including academic and clinical researchers, may access rare familiesand identify novel targets for drug development before we do.Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resourcesand expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketingapproved products than we, or our collaborators, do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even moreresources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors,particularly through collaboration arrangements with large and established companies.Our commercial opportunities could be reduced or eliminated if our competitors develop and commercialize products or therapies that are safer, moreeffective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also mayobtain FDA, EMA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitorsestablishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected by decisions made by insurersor other third party payers.To the extent that we are unable to compete effectively against one or more of our competitors in these areas, our business will not grow and ourfinancial condition, results of operations and common share price may suffer.There are no approved gene therapies currently on the market for lipoprotein lipase deficiency, or LPLD, in the U.S. The current management of LPLDconsists of strict adherence to an extremely low-fat diet, but compliance with such a diet is challenging. Lipid-lowering drugs are generally not effective fortreating LPLD. We are not aware of any other drugs or therapies currently in development that treat LPLD by using the lipoprotein lipase, or LPL, sequencecontaining the LPLS447X genetic variant or otherwise.Drug discovery and development for various pain applications is intensely competitive. There are a large number of approved products forneuropathic pain, inflammatory pain and other pain indications. These approved products include capsaicin, celecoxib, lidocaine, narcotic analgesics andpregabalin. We are also aware of clinical-stage development programs at several pharmaceutical and biotechnology companies that are targeting Nav1.7inhibitors to develop products to treat various pain indications, including Bioline Rx Ltd., Biogen Idec Inc. through its recently announced intention toacquire Convergence Pharmaceuticals Limited, Dainippon Sumitomo Co., Ltd. and Pfizer, Inc. Moreover, we are aware of various other product candidates indevelopment that target other mechanisms of action to treat various pain indications. We are not aware of any drugs or therapies currently approvedspecifically for treating primary erythromelalgia, or EM.The novelty of gene therapy products and their lack of a commercial track record may hinder market acceptance of Glybera among physicians,patients, healthcare payers and the medical community.Glybera is the first gene therapy product approved in the EU and no gene therapy product has been approved in the U.S. Because Glybera is likely tobe the first gene therapy to be marketed in the EU, gaining market acceptance and overcoming any safety or efficacy concerns may be more challenging thanfor a more traditional therapy. Glybera’s commercial success will depend, in part, on the success of efforts to educate the market regarding gene therapyproducts. In particular, the success of Glybera will depend upon physicians who treat patients with LPLD, prescribing Glybera. With respect to Glybera andany other gene therapy products we or a collaborator may develop, public perception may be influenced by claims that gene therapy is unsafe, and, if so,gene therapy may not gain the acceptance of the public or the medical community. More restrictive government regulations or negative public opinion couldhave a negative effect on our business or financial condition and may delay or impair the commercialization of Glybera. If Glybera is not successfullycommercialized, our ability to generate near term revenue could be impaired. 47 We have no marketed products and have not yet advanced a product candidate beyond Phase 2 clinical trials, which makes it difficult to assess ourability to develop our future product candidates and commercialize any resulting products independently.We have no experience in Phase 3 and later stage clinical development, and related regulatory requirements or the commercialization of products.uniQure controls and has been responsible for the development and commercialization of Glybera, Teva Pharmaceutical Industries Ltd., or Teva, isresponsible for the on-going clinical development of TV-45070, and Genentech Inc., or Genentech, is responsible for the ongoing clinical development ofGDC-0276. Accordingly, we have not yet demonstrated our ability to independently and repeatedly conduct clinical development after Phase 2, obtainregulatory approval and commercialize therapeutic products. We will need to develop such abilities if we are to execute on our business strategy toselectively develop and independently commercialize product candidates for orphan and niche indications. To execute on our business plan for thedevelopment of independent programs, we will need to successfully:·execute our clinical development plans for later-stage product candidates;·obtain required regulatory approvals in each jurisdiction in which we will seek to commercialize products;·build and maintain appropriate sales, distribution and marketing capabilities;·gain market acceptance for our future products, if any; and·manage our spending as costs and expenses increase due to clinical trials, regulatory approvals and commercialization activities.If we are unsuccessful in accomplishing these objectives, we would not be able to develop and commercialize any future orphan and niche diseaseproduct candidates independently, and could fail to realize the potential advantages of doing so.If we are not successful in leveraging our Extreme Genetics discovery platform to discover product candidates in addition to TV-45070 and GDC-0276,our ability to expand our business and achieve our strategic objectives may be impaired.We rely on our Extreme Genetics discovery platform to identify validated drug targets and develop new product candidates. To date, our ExtremeGenetics discovery platform has yielded one approved product, Glybera, and two clinical development candidates TV-45070 and GDC-0276. Use of ourdiscovery platform requires substantial technical, financial and human resources, regardless of whether we identify any novel drug targets. Our ExtremeGenetics discovery platform may initially show promise in identifying additional potential product candidates, yet fail to yield viable product candidates forclinical development or commercialization. Such failure may occur for many reasons, including the following: any product candidate may, on further study,be shown to have serious or unexpected side effects or other characteristics that indicate it is unlikely to be safe or otherwise does not meet applicableregulatory criteria; and any product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all.If we are unable to identify additional product candidates suitable for clinical development and commercialization, we may not be able to obtainproduct revenue in future periods, which likely would result in significant harm to our financial position and adversely impact our trading price.Our approach to drug discovery is unproven, and we do not know whether we will be able to develop any products of commercial value.Our Extreme Genetics discovery platform may not reproducibly or cost-effectively result in the discovery of product candidates and development ofcommercially viable products that safely and effectively treat human disease.There are various challenges in utilizing our Extreme Genetics discovery platform to successfully identify novel drug targets, including locatingfamilies suffering from rare disorders and severe phenotypes, entering into agreements with foreign collaborators, complying with various domestic andforeign privacy laws, accessing required technologies in a timely manner and transporting DNA across national borders.To date, only Glybera has been both developed using our Extreme Genetics discovery platform and approved for commercial sale. If the use of ourExtreme Genetics discovery platform fails to identify novel targets for drug discovery, or such targets prove to be unsuitable for treating human disease, or weare unable to develop product candidates with specificity and selectivity for such targets, we will fail to develop viable products. If we fail to develop andcommercialize viable products, we will not achieve commercial success. 48 We may encounter difficulties in managing our growth, including headcount, and expanding our operations successfully.Our business strategy involves continued development and, where development is successful, commercialization of select successfully developedproduct candidates for orphan and niche indications independently. In order to execute on this strategy, we will need to build out a regulatory, sales,manufacturing, distribution and marketing infrastructure and expand our development capabilities or contract with third parties to provide these capabilitiesand infrastructure for us. To achieve this, we will need to identify, hire and integrate personnel who have not worked together as a group previously. Weanticipate that we may need to hire additional accounting, legal and financial staff with appropriate public company experience and technical accountingand other knowledge to address the added burdens of operating as a public company. There are likely to be infrastructure costs associated with publiccompany compliance as well.As our operations expand, we expect that we will need to manage additional relationships with various strategic collaborators, suppliers and otherthird parties.Dr. Gary Bridger, our Executive Vice President of Research and Development, works for us on a part-time, one-day-a-week basis, pursuant to aconsulting agreement. Drs. Simon Pimstone and Y. Paul Goldberg each devote a small amount of their time to clinical work outside of their duties at ourcompany, conducting, generally, two to three outpatient clinics per month. Future growth will impose significant added responsibilities on members ofmanagement, and our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantialamount of time to managing these growth activities.If we are to effectively manage our growth, our expenses may increase more than expected, our ability to generate and grow revenue could be reduced,and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize product candidates andcompete effectively will depend, in part, on our ability to effectively manage any future growth.If we fail to attract and retain senior management and key personnel, we may be unable to successfully develop our product candidates, perform ourobligations under our collaboration agreements, conduct our clinical trials and commercialize our product candidates.Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel.We could experience difficulties attracting and retaining qualified employees as competition for qualified personnel in the biotechnology andpharmaceutical field is intense. We are highly dependent upon our senior management, particularly Dr. Pimstone, our Chief Executive Officer and President;Mr. Ian Mortimer, our Chief Financial Officer; and Dr. Goldberg, our Vice President, Clinical Development, as well as other employees. In the near future, theloss of services of any of these individuals or one or more of our other members of senior management could materially delay or even prevent the successfuldevelopment of our product candidates.In addition, we will need to hire additional personnel as we expand our clinical development activities and develop commercial capabilities,including a sales infrastructure to support our independent commercialization efforts. We may not be able to attract and retain personnel on acceptable termsgiven the competition among numerous pharmaceutical and biotechnology companies for individuals with similar skill sets. The inability to recruit or loss ofthe services of any executive or key employee may impede the progress of our research, development and commercialization objectives.Our employees, collaborators and other personnel may engage in misconduct or other improper activities, including non-compliance with regulatorystandards and requirements and insider trading.We are exposed to the risk of fraud or other misconduct by our employees, collaborators, vendors, principal investigators, consultants and commercialpartners. Misconduct by these parties could include intentional failures to comply with the regulations of the FDA, EMA and other non-U.S. regulators,provide accurate information to the FDA, EMA and other non-U.S. regulators, comply with data privacy and security and healthcare fraud and abuse laws andregulations in the U.S. and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing andbusiness arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealingand other abusive practices. Additionally, laws regarding data privacy and security, including the federal Health Insurance Portability and AccountabilityAct of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, as well as comparablelaws in non-U.S. jurisdictions, may impose obligations with respect to safeguarding the privacy, use, security and transmission of individually identifiablehealth information such as genetic material. 49 Various laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customerincentive programs and other business arrangements. Any misconduct could also involve the improper use of information obtained in the course of clinicalstudies, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of conduct applicable to all of ouremployees, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may notbe effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemmingfrom a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves orasserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.A variety of risks associated with international operations could materially adversely affect our business.Glybera has been approved for commercial sale in the EU by the EMA. Our collaborator for TV-45070, Teva, is based in Israel and a significantportion of the research and development activities. under our collaboration with Teva are performed outside of North America. If we continue to engage insignificant cross-border activities, we will be subject to risks related to international operations, including:·different regulatory requirements for maintaining approval of drugs and biologics in foreign countries;·reduced protection for intellectual property rights in certain countries;·unexpected changes in tariffs, trade barriers and regulatory requirements;·economic weakness, including inflation, political instability or open conflict in particular foreign economies and markets;·compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;·foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doingbusiness in another country;·workforce uncertainty in countries where labor unrest is more common than in North America;·tighter restrictions on privacy and the collection and use of data, including genetic material, may apply in jurisdictions outside of NorthAmerica, where we find some of the families with individuals that exhibit the severe phenotypes that we study; and·business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons,floods and fires.If any of these issues were to occur, our business could be materially harmed.U.S. Holders of our shares may suffer adverse tax consequences if we are characterized as a passive foreign investment company.Generally, for any taxable year in which 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of ourassets (which may be determined in part by the market value of our common shares, which is subject to change) are held for the production of, or produce,passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Based on the compositionof our gross income and gross assets and the nature of our business, we do not believe that we were a PFIC for the taxable years ended December 31, 2014 and2013, although we could be a PFIC in one or more subsequent years. Our status as a PFIC is a fact-intensive determination made on an annual basis and wecannot provide any assurance regarding our PFIC status for the future taxable years.If we are a PFIC for any subsequent year, U.S. Holders of our common shares may suffer adverse tax consequences. Gains realized by non-corporateU.S. Holders on the sale of our common shares would be taxed as ordinary income, rather than as capital gain, and the preferential tax rate applicable todividends received on our common shares would be lost. Interest charges would also be added to taxes on gains and dividends realized by all U.S. Holders. 50 A U.S. Holder may avoid these adverse tax consequences by timely making a qualified electing fund election. For each year that we would meet thePFIC gross income or asset test, an electing U.S. Holder would be required to include in gross income its pro rata share of our net ordinary income and netcapital gains, if any. A U.S. Holder may make a qualified electing fund election only if we commit to provide U.S. Holders with their pro rata share of our netordinary income and net capital gains. If we are a PFIC in the current or a future tax year, we will provide our U.S. Holders with the information that isnecessary in order for them to make a qualified electing fund election and to report their common shares of ordinary earnings and net capital gains for eachyear for which we are a PFIC.A U.S. Holder may also mitigate the adverse tax consequences if we are a PFIC by timely making a mark-to-market election. Generally, for each yearthat we would meet the PFIC gross income or asset test, an electing U.S. Holder would include in gross income the increase in the value of its shares duringeach of its taxable years and deduct from gross income the decrease in the value of such shares during each of its taxable years. A mark-to-market electionmay be made and maintained only if our common shares are regularly traded on a qualified exchange, including The NASDAQ Global Market, or NASDAQ.Whether our common shares are regularly traded on a qualified exchange is an annual determination based on facts that, in part, are beyond our control.Accordingly, a U.S. Holder might not be eligible to make a mark-to-market election to mitigate the adverse tax consequences if we are characterized as aPFIC.Acquisitions or joint ventures could disrupt our business, cause dilution to our shareholders and otherwise harm our business.We actively evaluate various strategic transactions on an ongoing basis and may acquire other businesses, products or technologies as well as pursuestrategic alliances, joint ventures or investments in complementary businesses. Any of these transactions could be material to our financial condition andoperating results and expose us to many risks, including:·disruption in our relationships with collaborators or suppliers as a result of such a transaction;·unanticipated liabilities related to acquired companies;·difficulties integrating acquired personnel, technologies and operations into our existing business;·retention of key employees;·diversion of management time and focus from operating our business to management of strategic alliances or joint ventures or acquisitionintegration challenges;·increases in our expenses and reductions in our cash available for operations and other uses; and·possible write-offs or impairment charges relating to acquired businesses.Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across differentcultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.Also, the anticipated benefit of any strategic alliance, joint venture or acquisition may not materialize. Future acquisitions or dispositions could resultin potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, anyof which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any suchtransactions might have on our operating results.Risks Related to Development, Clinical Testing and Regulatory Approval of Our Product CandidatesThe regulatory approval processes of the FDA, EMA and regulators in other jurisdictions are lengthy, time-consuming and inherently unpredictable. Ifwe, or our collaborators, are unable to obtain timely regulatory approval for our product candidates, our business will be substantially harmed.The regulatory approval process is expensive and the time required to obtain approval from the FDA, EMA or other regulatory authorities in otherjurisdictions to sell any product is uncertain and may take years. Whether regulatory approval will be granted is unpredictable and depends upon numerousfactors, including the substantial discretion of the regulatory authorities. Approval policies, regulations, or the type and amount of preclinical and clinicaldata necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. Other thanfor Glybera in the EU, neither we nor our collaborators have obtained regulatory approval for any of our product candidates. It is possible that none of ourexisting product candidates or any of our future product candidates will ever obtain regulatory approval, even if we expend substantial time and resourcesseeking such approval. 51 Our product candidates could fail to receive regulatory approval for many reasons, including the following:·the FDA, EMA or other regulatory authorities may disagree with the design or implementation of our or our collaborators’ clinical trials;·we or our collaborators may be unable to demonstrate to the satisfaction of the FDA, EMA or other regulatory authorities that a productcandidate is safe and effective for its proposed indication;·the results of clinical trials may not meet the level of statistical significance required by the FDA, EMA or other regulatory authorities forapproval;·we, or our collaborators, may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;·the FDA, EMA or other regulatory authorities may disagree with our or our collaborators’ interpretation of data from preclinical studies orclinical trials;·the data collected from clinical trials of our product candidates may not be sufficient to support the submission of a New Drug Application, orNDA, or other submission or to obtain regulatory approval in the U.S. or elsewhere;·the FDA, EMA or other regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers withwhich we or our collaborators contract for clinical and commercial supplies; and·the approval policies or regulations of the FDA, EMA or other regulatory authorities outside of the U.S. may significantly change in a mannerrendering our or our collaborators’ clinical data insufficient for approval.Even if we, or our collaborators, obtain approval for a particular product, regulatory authorities may grant approval contingent on the performance ofcostly post-approval clinical trials, or may approve a product with a label that does not include the labeling claims necessary or desirable for the successfulcommercialization of that product.Clinical drug development involves a lengthy and expensive process with uncertain timelines and uncertain outcomes. If clinical trials are prolongedor delayed, we, or our collaborators, may be unable to commercialize our product candidates on a timely basis.Clinical testing of product candidates is expensive and, depending on the stage of development, can take a substantial period of time to complete.Clinical trial outcomes are inherently uncertain, and failure can occur at any time during the clinical development process.Clinical trials can be halted or delayed for a variety of reasons, including those related to:·side effects or adverse events in study participants presenting an unacceptable safety risk;·inability to reach agreement with prospective contract research organizations, or CROs, and clinical trial sites, or the breach of suchagreements;·failure of third-party contractors, such as CROs, or investigators to comply with regulatory requirements;·delay or failure in obtaining the necessary approvals from regulators or institutional review boards, or IRBs, in order to commence a clinicaltrial at a prospective trial site, or their suspension or termination of a clinical trial once commenced;·a requirement to undertake and complete additional preclinical studies to generate data required to support the submission of an NDA;·inability to enroll sufficient patients to complete a protocol, particularly in orphan diseases;·difficulty in having patients complete a trial or return for post-treatment follow-up;·clinical sites deviating from trial protocol or dropping out of a trial;·problems with drug product or drug substance storage and distribution;·adding new clinical trial sites;·our inability to manufacture, or obtain from third parties, adequate supply of drug substance or drug product sufficient to complete ourpreclinical studies and clinical trials; and·governmental or regulatory delays and changes in regulatory requirements, policy and guidelines. 52 The results of any Phase 3 or other pivotal clinical trial may not be adequate to support marketing approval. These clinical trials are lengthy and, withrespect to non-orphan indications, usually involve many hundreds to thousands of patients. In addition, if the FDA, EMA or another applicable regulatordisagrees with our or our collaborator’s choice of the key testing criterion, or primary endpoint, or the results for the primary endpoint are not robust orsignificant relative to the control group of patients not receiving the experimental therapy, such regulator may refuse to approve our product candidate in theregion in which it has jurisdiction. The FDA, EMA or other applicable non-U.S. regulators also may require additional clinical trials as a condition forapproving any of these product candidates.We could also encounter delays if a clinical trial is suspended or terminated by us, by our collaborators, by the IRBs of the institutions in which suchtrial is being conducted, by any Data Safety Monitoring Board for such trial, or by the FDA, EMA or other regulatory authorities. Such authorities mayimpose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirementsor our clinical protocols, inspection of the clinical trial operations or trial site by the FDA, EMA or other regulatory authorities resulting in the imposition ofa clinical hold, product candidate manufacturing problems, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug,changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. In addition, delays can occur due tosafety concerns arising from trials or other clinical data regarding another company’s product candidate in the same compound class as one of ours.If we or our collaborators experience delays in the completion of, or termination of, any clinical trial of one of our product candidates, the commercialprospects of the product candidate will be harmed, could shorten the patent protection period during which we may have the exclusive right tocommercialize our products and our or our collaborators’ ability to commence product sales and generate product revenue from the product will be delayed.In addition, any delays in completing our clinical trials will increase our costs and slow down our product candidate development and approval process. Anyof these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay inthe commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.Our TV-45070 and GDC-0276 product candidates for treatment of pain target novel molecular mechanisms. Regulatory authorities may require moreextensive studies of the long-term effects of such product candidates for regulatory approval, which could delay development of our product candidates orour future product candidates based on novel mechanisms.Our clinical trials may fail to demonstrate adequately the safety and efficacy of our product candidates, which could prevent or delay regulatoryapproval and commercialization.Before obtaining regulatory approvals for the commercial sale of our products, we must demonstrate through lengthy, complex and expensivepreclinical testing and clinical trials that the product candidate is both safe and effective for use in each target indication. Clinical trials often fail todemonstrate safety and efficacy of the product candidate studied for the target indication. Most product candidates that commence clinical trials are neverapproved as products.In the case of our product candidates, we are seeking to develop treatments for diseases for which there is relatively limited clinical experience, and, insome cases our clinical trials use novel end points and measurement methodologies, which adds a layer of complexity to our clinical trials and may delayregulatory approval. In addition, our focus on orphan and niche markets may cause us to select target indications that are in more challenging therapeuticareas. For example, clinical trials for pain, the indication for which TV-45070 is being developed, are inherently difficult to conduct. The primary measure ofpain is subjective patient feedback, which can be influenced by factors outside of our control, and can vary widely from day to day for a particular patient,and from patient to patient and site to site within a clinical study. The placebo effect also tends to have a more significant impact on pain trials.If our product candidates are not shown to be both safe and effective in clinical trials, we will not be able to obtain regulatory approval orcommercialize these product candidates and products. In such case, we would need to develop other compounds and conduct associated preclinical testingand clinical trials, as well as potentially seek additional financing, all of which would have a material adverse effect on our business, growth prospects,operating results, financial condition and results of operations. 53 We may find it difficult to enroll patients in our clinical studies, including for orphan or niche indications, which could delay or prevent clinical studiesof our product candidates.We may not be able to identify, recruit and enroll a sufficient number of patients, or those with required or desired characteristics to achieve diversityin a study, to complete our clinical studies in a timely manner. Patient enrollment for clinical trials for orphan and niche indications and for more prevalentconditions is affected by factors including:·severity of the disease under investigation;·design of the study protocol;·size of the patient population;·eligibility criteria for the study in question;·perceived risks and benefits of the product candidate under study;·proximity and availability of clinical study sites for prospective patients;·availability of competing therapies and clinical studies;·efforts to facilitate timely enrollment in clinical studies; and·patient referral practices of physicians.The limited patient populations in orphan and niche indications present significant recruitment challenges for clinical trials. For example, studiesestimate the prevalence of LPLD to be approximately 1:1,000,000 and the prevalence of Dravet Syndrome, or DS, to be 7,500-15,000 patients in the U.S.Many of these patients may not be suitable or available for clinical trials. This means that we or our collaborators generally will have to run multi-site andpotentially multi-national trials, which can be expensive and require close coordination and supervision. If we experience delays in completing our clinicaltrials, such delays could result in increased costs, delays in advancing our product development, delays in testing the effectiveness of our technology ortermination of the clinical studies altogether.If we fail to obtain or maintain orphan drug designation or other regulatory exclusivity for some of our product candidates, our competitive positionwould be harmed.A product candidate that receives orphan drug designation can benefit from a streamlined regulatory process as well as potential commercial benefitsfollowing approval. Currently, this designation provides market exclusivity in the U.S. and the EU for seven years and ten years, respectively, if a product isthe first such product approved for such orphan indication. This market exclusivity does not, however, pertain to indications other than those for which thedrug was specifically designated in the approval, nor does it prevent other types of drugs from receiving orphan designations or approvals in these sameindications. Further, even after an orphan drug is approved, the FDA can subsequently approve a drug with similar chemical structure for the same conditionif the FDA concludes that the new drug is clinically superior to the orphan product or a market shortage occurs.In the EU, orphan exclusivity may be reduced to six years if the drug no longer satisfies the original designation criteria or can be lost altogether if themarketing authorization holder consents to a second orphan drug application or cannot supply enough drug, or when a second applicant demonstrates itsdrug is “clinically superior” to the original orphan drug. TV-45070 has received both fast track and orphan drug designations for the treatment oferythromelalgia, or EM by the FDA. If we seek orphan drug designations for other indications or in other jurisdictions, such as for TV-45070 in the EU, wemay fail to receive such orphan drug designations and, even if we succeed, such orphan drug designations may fail to result in or maintain orphan drugexclusivity upon approval, which would harm our competitive position. 54 Results of earlier clinical trials may not be predictive of the results of later-stage clinical trials.The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials.Interpretation of results from early, usually smaller, studies that suggest a clinically meaningful response in some patients, requires caution. Results from laterstages of clinical trials enrolling more patients may fail to show the desired safety and efficacy results or otherwise fail to be consistent with the results ofearlier trials of the same product candidates. Later clinical trial results may not replicate earlier clinical trials for a variety of reasons, including differences intrial design, different trial endpoints (or lack of trial endpoints in exploratory studies), patient population, number of patients, patient selection criteria, trialduration, drug dosage and formulation and lack of statistical power in the earlier studies. These uncertainties are enhanced where the diseases under studylack established clinical endpoints and validated measures of efficacy, as is often the case with orphan diseases for which no drugs have been developedpreviously. For example, our results for two small exploratory clinical trials for primary EM pain, one using a topical formulation and the other an oralformulation of TV-45070, used novel measures of efficacy assessment. While these studies provided promising results, further larger clinical trials will benecessary to confirm and extend these observations.Changes in methods of product candidate manufacturing or formulation may result in additional costs or delay.As product candidates are developed through preclinical to late stage clinical trials towards approval and commercialization, it is common thatvarious aspects of the development program, such as manufacturing methods and formulation, are altered along the way in an effort to optimize processes andresults. Such changes carry the risk that they will not achieve these intended objectives. Any of these changes could cause our product candidates to performdifferently and affect the results of planned clinical trials or other future clinical trials conducted with the altered materials. This could delay completion ofclinical trials, require the conduct of bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of ourproduct candidates and/or jeopardize our or our collaborators’ ability to commence product sales and generate revenue.Even if we obtain and maintain approval for our product candidates from one jurisdiction, we may never obtain approval for our product candidates inother jurisdictions, which would limit our market opportunities and adversely affect our business.Sales of our approved products are, and will be, subject to U.S. and foreign regulatory requirements governing clinical trials and marketing approval,and we plan to seek regulatory approval to commercialize our product candidates in North America, the EU and in additional foreign countries. Clinical trialsconducted in one country may not be accepted by regulatory authorities in other countries and regulatory approval in one country does not ensure approvalin any other country, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval processin others. For example, approval in the U.S. by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval byone foreign regulatory authority, such as the EMA for Glybera, does not ensure approval by regulatory authorities in other countries, including by the FDA.Approval procedures vary among jurisdictions and can be lengthy and expensive, and involve requirements and administrative review periods different from,and greater than, those in the U.S., including additional preclinical studies or clinical trials. Even if our product candidates are approved, regulatory approvalfor any product may be withdrawn by the regulatory authorities in a particular jurisdiction.Even if a product is approved, the FDA or the EMA, as the case may be, may limit the indications for which the product may be marketed, requireextensive warnings on the product labeling or require expensive and time-consuming clinical trials or reporting as conditions of approval. In many countriesoutside the U.S., a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that weintend to charge for a product is also subject to approval.Regulatory authorities in countries outside of the U.S. and the EMA also have their own requirements for approval of product candidates with whichwe must comply prior to marketing in those countries. Obtaining foreign regulatory approvals and compliance with such foreign regulatory requirementscould result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our current and any future products, in certaincountries.If we fail to receive applicable marketing approvals or comply with the regulatory requirements in international markets, our target market will bereduced and our ability to realize the full market potential of our product candidates will be harmed and our business will be adversely affected. 55 We work with outside scientists and their institutions in executing our business strategy of developing product candidates using our Extreme Geneticsdiscovery platform. These scientists may have other commitments or conflicts of interest, which could limit our access to their expertise and harm ourability to leverage our discovery platform.We work with scientific advisors and collaborators at academic research institutions in connection with our Extreme Genetics discovery platform.These scientific advisors serve as our link to the various families with extreme phenotypes in that these advisors may:·identify families as potential candidates for study;·obtain their consent to participate in our research;·perform medical examinations and gather medical histories;·conduct the initial analysis of suitability of the families to participate in our research based on the foregoing; and·collect data and biological samples from the family members periodically in accordance with our study protocols.These scientists and collaborators are not our employees, rather they serve as either independent contractors or the primary investigators underresearch collaboration agreements that we have with their sponsoring academic or research institution. Such scientists and collaborators may have othercommitments that would limit their availability to us. Although our scientific advisors generally agree not to do competing work, if an actual or potentialconflict of interest between their work for us and their work for another entity arises, we may lose their services. It is also possible that some of our valuableproprietary knowledge may become publicly known through these scientific advisors if they breach their confidentiality agreements with us, which wouldcause competitive harm to our business.Risks Related to CommercializationIf, in the future, we are unable to establish our own sales, marketing and distribution capabilities or enter into licensing or collaboration agreementsfor these purposes, we may not be successful in independently commercializing any future products.We do not have a sales or marketing infrastructure and, as a company, have no sales, marketing or distribution experience. Our strategy involves, inpart, building our own commercial infrastructure to selectively commercialize future products in niche or orphan indications. Where we believe suchinvolvement would advance our business, we seek to retain the right to participate in the future development and commercialization of such products. Forexample, we have a co-promotion option for TV-45070 with Teva in the U.S.To develop internal sales, distribution and marketing capabilities, we will have to invest significant amounts of financial and management resources,some of which will need to be committed prior to any confirmation that any of our proprietary product candidates will be approved. For any future productsfor which we decide to perform sales, marketing and distribution functions ourselves, we could face a number of additional risks, including:·our inability to recruit and retain adequate numbers of effective sales and marketing personnel to or develop alternative sales channels;·the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any future products;·the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companieswith more extensive product lines; and·unforeseen costs and expenses associated with creating and maintaining an independent sales and marketing organization.Where and when appropriate, we may elect to utilize contract sales forces or distribution partners to assist in the commercialization of our productcandidates. If we enter into arrangements with third parties to perform sales, marketing and distribution services for a product, the resulting revenue or theprofitability from this revenue to us is likely to be lower than if we had sold, marketed and distributed that product ourselves. In addition, we may not besuccessful in entering into arrangements with third parties to sell, market and distribute our product candidates or may be unable to do so on terms that arefavorable to us. We likely will have little control over such third parties, and any of these third parties may fail to devote the necessary resources andattention to sell, market and distribute our current or any future products effectively. 56 Even if we receive regulatory approval to commercialize any of the product candidates that we develop independently, we will be subject to ongoingregulatory obligations and continued regulatory review, which may result in significant additional expense.Any regulatory approvals that we receive for our product candidates we commercialize will be subject to limitations on the approved indicated usesfor which the product may be marketed or subject to certain conditions of approval, and may contain requirements for potentially costly post-approval trials,including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the marketed product.For any approved product, we will need to ensure continued compliance with extensive regulations and requirements regarding the manufacturingprocesses, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product. These requirementsinclude submissions of safety and other post-approval information and reports, as well as continued compliance with current good manufacturing practices,or cGMP, and current good clinical practices, or cGCP, for any clinical trials that we or our collaborators conduct post-approval. Later discovery ofpreviously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with third-party manufacturers ormanufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:·restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market or voluntary or mandatory productrecalls;·fines, warning letters or holds on any post-approval clinical trials;·refusal by the FDA, EMA or another applicable regulatory authority to approve pending applications or supplements to approved applicationsfiled by us or our collaborators, or suspension or revocation of product license approvals;·product seizure or detention, or refusal to permit the import or export of products; and·injunctions or the imposition of civil or criminal penalties.Occurrence of any of the foregoing could have a material and adverse effect on our business and results of operations.If the market opportunities for any product that we or our collaborators develop are smaller than we believe they are, our revenue may be adverselyaffected and our business may suffer.We intend to focus our independent product development on treatments for rare diseases. Our projections of both the number of people who havethese diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based onestimates. Currently, most reported estimates of the prevalence of these diseases are based on studies of small subsets of the population in specific geographicareas, which are then extrapolated to estimate the prevalence of the diseases in the U.S. or elsewhere. For example, studies estimate the prevalence of LPLD tobe approximately 1:1,000,000, and the prevalence of Dravet Syndrome, or DS, to be 7,500-15,000 patients in the U.S. These estimates may prove to beincorrect. If the prevalence of such diseases is smaller than we have projected, then, even if our products are approved, we may not be able to successfullycommercialize them.Even if we or our collaborators receive approval to commercialize our products, unfavorable pricing regulations and challenging third-party coverageand reimbursement practices could harm our business.Our or any collaborators’ ability to commercialize any products successfully will depend, in part, on the extent to which coverage and reimbursementfor these products and related treatments will be available from government healthcare programs, private health insurers, managed care plans, and otherorganizations. Government authorities and third-party payers, such as private health insurers and health maintenance organizations, decide whichmedications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry is cost containment. Government authoritiesand third-party payers have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payers are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medicalproducts. We cannot be sure that coverage and reimbursement will be available for any product that we or any collaborator commercialize and, ifreimbursement is available, the level of reimbursement. In addition, coverage and reimbursement may impact the demand for, or the price of, any productcandidate for which we or a collaborator obtains marketing approval. If coverage and reimbursement are not available or reimbursement is available only tolimited levels, we or our collaborators may not be able to successfully commercialize any product candidate for which marketing approval is obtained. 57 There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than thepurposes for which the drug is approved by the FDA, EMA or other regulatory authorities. Moreover, eligibility for coverage and reimbursement does notimply that a drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution expenses.Interim reimbursement levels for new drugs, if applicable, may also be insufficient to cover our and any collaborator’s costs and may not be made permanent.Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already setfor lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts orrebates required by government healthcare programs or private payers and by any future relaxation of laws that presently restrict imports of drugs fromcountries where they may be sold at lower prices than in the U.S. Third-party payers often rely upon Medicare coverage policy and payment limitations insetting their own reimbursement policies. Our or any collaborator’s inability to promptly obtain coverage and profitable payment rates from bothgovernment-funded and private payers for any approved products that we or our collaborators develop could have a material adverse effect on our operatingresults, our ability to raise capital needed to commercialize products and our overall financial condition.Our target patient populations in orphan and niche indications, where we intend to selectively develop and commercialize products independently,are relatively small. In order for therapies that are designed to treat smaller patient populations to be commercially viable, the reimbursement for suchtherapies needs to be higher, on a relative basis, to account for the lack of volume. Accordingly, we will need to implement a coverage and reimbursementstrategy for any approved product that accounts for the smaller potential market size. If we are unable to establish or sustain coverage and adequatereimbursement for our current and any future products from third party payers or the government, the adoption of those products and sales revenue will beadversely affected, which, in turn, could adversely affect the ability to market or sell those products.Recently enacted and future legislation may increase the difficulty and cost for us to commercialize any products that we or our collaborators developand affect the prices we may obtain.The U.S. and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcaresystem in ways that could affect our ability to sell any of our products profitably, once such products are approved for sale. Among policy makers and payersin the U.S. and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs,improving quality and/or expanding access. In the U.S., the pharmaceutical industry has been a particular focus of these efforts and has been significantlyaffected by major legislative initiatives.In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010,collectively, PPACA, was enacted, which includes measures that have significantly changed, or will significantly change, the way healthcare is financed byboth governmental and private insurers. Among the provisions of PPACA of importance to the pharmaceutical industry are the following:·an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportionedamong these entities according to their market share in certain government healthcare programs, that began in 2011;·an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23% and 13% of the average manufacturer pricefor branded and generic drugs, respectively;·a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts to negotiatedprices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatientdrugs to be covered under Medicare Part D;·extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed careorganizations;·expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additionalindividuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal PovertyLevel beginning in 2014, thereby potentially increasing manufacturers’ Medicaid rebate liability;·expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; 58 ·new requirements under the federal Open Payments program, created under Section 6002 of the PPACA and its implementing regulations thatmanufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’sHealth Insurance Program (with certain exceptions) report annually to the U.S. Department of Health and Human Services, or HHS, informationrelated to “payments or other transfers of value” made or distributed to physicians (defined to include doctors, dentists, optometrists, podiatristsand chiropractors) and teaching hospitals and that applicable manufacturers and applicable group purchasing organizations report annually tothe HHS ownership and investment interests held by physicians (as defined above) and their immediate family members, with data collectionrequired beginning August 1, 2013 and reporting to the Centers for Medicare & Medicaid Services, or CMS, required by March 31, 2014 andby the 90th day of each subsequent calendar year, and disclosure of such information to be made on a publicly available website by September2014;·a requirement to annually report drug samples that manufacturers and distributors provide to physicians, effective April 1, 2012;·expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigativepowers, and enhanced penalties for noncompliance;·a licensure framework for follow-on biologic products;·a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research,along with funding for such research;·creation of the Independent Payment Advisory Board which, beginning in 2014, will have authority to recommend certain changes to theMedicare program that could result in reduced payments for prescription drugs and those recommendations could have the effect of law even ifCongress does not act on the recommendations; and·establishment of a Center for Medicare Innovation at CMS to test innovative payment and service delivery models to lower Medicare andMedicaid spending, potentially including prescription drug spending that began on January 1, 2011.In the EU, similar political, economic and regulatory developments may affect our ability to profitably commercialize our current or any futureproducts. In addition to continuing pressure on prices and cost containment measures, legislative developments at the EU or member state level may result insignificant additional requirements or obstacles that may increase our operating costs. In international markets, reimbursement and healthcare paymentsystems vary significantly by country, and many countries have instituted price ceilings on specific products and therapies. Glybera and our future products,if any, might not be considered medically reasonable and necessary for a specific indication or cost-effective by third-party payers, coverage, an adequatelevel of reimbursement might not be available for such products and third-party payers’ reimbursement policies might adversely affect our or ourcollaborators’ ability to sell Glybera and any future products profitably.Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities forpharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance orinterpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition,increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to morestringent product labeling and post-approval testing and other requirements.We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either inthe U.S. or abroad. If we or our collaborators are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies,or if we or our collaborators are not able to maintain regulatory compliance, our product candidates may lose any marketing approval that may have beenobtained and we may not achieve or sustain profitability, which would adversely affect our business.Foreign governments tend to impose strict price controls, which may adversely affect our future profitability.In most foreign countries, particularly those in the EU, prescription drug pricing and/or reimbursement is subject to governmental control. In thosecountries that impose price controls, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval fora product. To obtain reimbursement or pricing approval in some countries, we or our collaborators may be required to conduct a clinical trial that comparesthe cost-effectiveness of our product candidate to other available therapies. 59 Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins aftermarketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmentalcontrol even after initial approval is granted. As a result, we or our collaborators might obtain marketing approval for a product in a particular country, butthen be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenue thatare generated from the sale of the product in that country. If reimbursement of such products is unavailable or limited in scope or amount, or if pricing is set atunsatisfactory levels, or if there is competition from lower priced cross-border sales, our profitability will be negatively affected.Risks Related to Our Dependence on Third PartiesWe depend on our collaborative relationship with Teva to further develop and commercialize TV-45070, and if our relationship is not successful or isterminated, we may not be able to effectively develop and/or commercialize TV-45070, which would have a material adverse effect on our business.We depend on Teva to collaborate with us to develop and globally commercialize TV-45070. Under the agreement, Teva controls all decision-makingwith respect to the clinical development and commercialization for TV-45070.As a result of our dependence on Teva, the eventual success or commercial viability of TV-45070 is largely beyond our control. The financial returnsto us, if any, depend in large part on the achievement of development and commercialization milestones, plus a share of any revenue from sales. Therefore,our success, and any associated financial returns to us and our investors, will depend in large part on Teva’s performance under the agreement. We are subjectto a number of additional specific risks associated with our dependence on our collaborative relationship with Teva, including:·adverse decisions by Teva or the Joint Development Committee regarding the development and commercialization of TV-45070;·possible disagreements as to the timing, nature and extent of our development plans, including clinical trials or regulatory approval strategy;·loss of significant rights if we fail to meet our obligations under the agreement;·our limited control over clinical trials of TV-45070;·changes in key management personnel at Teva, including in members of the Joint Development Committee; and·possible disagreements with Teva regarding the agreement, for example, with regard to ownership of intellectual property rights.If either we or Teva fail to perform our respective obligations, any clinical trial, regulatory approval or development progress could be significantlydelayed or halted, could result in costly or time-consuming litigation or arbitration and could have a material adverse effect on our business.Decisions by Teva to emphasize other drug candidates currently in its portfolio ahead of our product candidates, or to add competitive agents to itsportfolio could result in a decision to terminate the agreement, in which event, among other things, we may be responsible for paying any remaining costs ofall ongoing or future clinical trials.In addition, Teva’s executive offices and a substantial percentage of their manufacturing capabilities are located in Israel. Teva’s Israeli operations aredependent upon materials imported from outside Israel, and Teva also exports significant amounts of products from Israel. Accordingly, our collaborationwith Teva could be materially and adversely affected by acts of terrorism or if major hostilities were to occur in the Middle East or trade between Israel and itspresent trading partners were curtailed, including as a result of acts of terrorism in the U.S. or elsewhere.Any of the above discussed scenarios could adversely affect the timing and extent of our development and commercialization activities, which couldcause significant delays and funding shortfalls for those activities and seriously harm our business.Our prospects for successful development and commercialization of our partnered products and product candidates are dependent upon the research,development and marketing efforts of our collaborators.We have no control over the resources, time and effort that our collaborators may devote to our programs and limited access to information regardingor resulting from such programs. We are dependent on uniQure, and its licensee Chiesi to successfully commercialize Glybera and on Teva, Genentech, andMerck & Co., Inc., or Merck, to fund and conduct the research and any clinical 60 development of product candidates under our collaboration with each of them, and for the successful regulatory approval, marketing and commercializationof one or more of such products or product candidates. Such success will be subject to significant uncertainty.Our ability to recognize revenue from successful collaborations may be impaired by multiple factors including:·a collaborator may shift its priorities and resources away from our programs due to a change in business strategies, or a merger, acquisition, saleor downsizing of its company or business unit;·a collaborator may cease development in therapeutic areas which are the subject of our strategic alliances;·a collaborator may change the success criteria for a particular program or product candidate thereby delaying or ceasing development of suchprogram or candidate;·a significant delay in initiation of certain development activities by a collaborator will also delay payment of milestones tied to such activities,thereby impacting our ability to fund our own activities;·a collaborator could develop a product that competes, either directly or indirectly, with our current or future products, if any;·a collaborator with commercialization obligations may not commit sufficient financial or human resources to the marketing, distribution or saleof a product;·a collaborator with manufacturing responsibilities may encounter regulatory, resource or quality issues and be unable to meet demandrequirements;·a collaborator may exercise its rights under the agreement to terminate our collaboration;·a dispute may arise between us and a collaborator concerning the research or development of a product candidate or commercialization of aproduct resulting in a delay in milestones, royalty payments or termination of a program and possibly resulting in costly litigation orarbitration which may divert management attention and resources;·a collaborator may not adequately protect the intellectual property rights associated with a product or product candidate; and·a collaborator may use our proprietary information or intellectual property in such a way as to invite litigation from a third party.If our collaborators do not perform in the manner we expect or fulfill their responsibilities in a timely manner, or at all, the clinical development,regulatory approval and commercialization efforts could be delayed, terminated or be commercially unsuccessful. Conflicts between us and our collaboratorsmay arise. In the event of termination of one or more of our collaboration agreements, it may become necessary for us to assume the responsibility of anyterminated product or product candidates at our own expense or seek new collaborators. In that event, we would likely be required to limit the size and scopeof one or more of our independent programs or increase our expenditures and seek additional funding which may not be available on acceptable terms or atall, and our business would be materially and adversely affected.We may not be successful in establishing new collaborations or maintaining our existing alliances, which could adversely affect our ability to developfuture product candidates and commercialize future products.We may seek to enter into additional product collaborations in the future, including alliances with other biotechnology or pharmaceutical companies,to enhance and accelerate the development of our future product candidates and the commercialization of any resulting products. We face significantcompetition in seeking appropriate collaborators and the negotiation process is time-consuming and complex. Moreover, we may not be successful in ourefforts to establish other collaborations or other alternative arrangements for any future product candidates because our research and development pipelinemay be insufficient, our product candidates may be deemed to be at too early of a stage of development for collaboration effort and/or third parties may viewour product candidates as lacking the requisite potential to demonstrate safety and efficacy. Even if we are successful in our efforts to establishcollaborations, the terms that we agree upon may not be favorable to us and we may not be able to maintain such collaborations if, for example, developmentor approval of a product candidate is delayed or sales of an approved product are disappointing. 61 If any of our existing collaboration agreements is terminated, or if we determine that entering into other product collaborations is in our best interestbut we either fail to enter into, delay in entering into or fail to maintain such collaborations:·the development of certain of our current or future product candidates may be terminated or delayed;·our cash expenditures related to development of our product candidates would increase significantly and we may need to seek additionalfinancing sooner than expected;·we may be required to hire additional employees or otherwise develop expertise, such as clinical, regulatory, sales and marketing expertise,which we do not currently have;·we will bear all of the risk related to the development of any such product candidates; and·the competitiveness of any product that is commercialized could be reduced.We intend to rely on third-party manufacturers to produce our clinical product candidate supplies. Any failure by a third-party manufacturer toproduce acceptable supplies for us may delay or impair our ability to initiate or complete our clinical trials or commercialize approved products.We do not currently own or operate any manufacturing facilities nor do we have any in-house manufacturing experience or personnel. We rely on ourcollaborators to manufacture product candidates licensed to them or work with multiple third party contract manufacturers to produce sufficient quantities ofmaterials required for the manufacture of our product candidates for preclinical testing and clinical trials and intend to do so for the commercial manufactureof our products. If we are unable to arrange for such third-party manufacturing sources, or fail to do so on commercially reasonable terms, we may not be ableto successfully produce, sufficient supply of product candidate or we may be delayed in doing so. Such failure or substantial delay could materially harm ourbusiness.Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates ourselves, includingreliance on the third party for regulatory compliance and quality control and assurance, volume production, the possibility of breach of the manufacturingagreement by the third party because of factors beyond our control (including a failure to synthesize and manufacture our product candidates in accordancewith our product specifications) and the possibility of termination or nonrenewal of the agreement by the third party at a time that is costly or damaging to us.In addition, the FDA, EMA and other regulatory authorities require that our product candidates be manufactured according to cGMP and similar foreignstandards. Pharmaceutical manufacturers and their subcontractors are required to register their facilities and/or products manufactured at the time ofsubmission of the marketing application and then annually thereafter with the FDA and certain state and foreign agencies. They are also subject to periodicunannounced inspections by the FDA, state and other foreign authorities. Any subsequent discovery of problems with a product, or a manufacturing orlaboratory facility used by us or our collaborators, may result in restrictions on the product or on the manufacturing or laboratory facility, including marketedproduct recall, suspension of manufacturing, product seizure, or a voluntary withdrawal of the drug from the market. Any failure by our third-partymanufacturers to comply with cGMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of productcandidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates.We rely on third parties to monitor, support, conduct and/or oversee clinical trials of the product candidates that we are developing independently and,in some cases, to maintain regulatory files for those product candidates. We may not be able to obtain regulatory approval for our product candidates orcommercialize any products that may result from our development efforts, if we are not able to maintain or secure agreements with such third parties onacceptable terms, if these third parties do not perform their services as required, or if these third parties fail to timely transfer any regulatory informationheld by them to us.We rely on entities outside of our control, which may include academic institutions, CROs, hospitals, clinics and other third-party collaborators, tomonitor, support, conduct and/or oversee preclinical and clinical studies of our current and future product candidates. We also rely on third parties to performclinical trials on our current and future product candidates when they reach that stage. As a result, we have less control over the timing and cost of thesestudies and the ability to recruit trial subjects than if we conducted these trials with our own personnel. 62 If we are unable to maintain or enter into agreements with these third parties on acceptable terms, or if any such engagement is terminated prematurely,we may be unable to enroll patients on a timely basis or otherwise conduct our trials in the manner we anticipate. In addition, there is no guarantee that thesethird parties will devote adequate time and resources to our studies or perform as required by our contract or in accordance with regulatory requirements,including maintenance of clinical trial information regarding our product candidates. If these third parties fail to meet expected deadlines, fail to transfer tous any regulatory information in a timely manner, fail to adhere to protocols or fail to act in accordance with regulatory requirements or our agreements withthem, or if they otherwise perform in a substandard manner or in a way that compromises the quality or accuracy of their activities or the data they obtain,then clinical trials of our future product candidates may be extended or delayed with additional costs incurred, or our data may be rejected by the FDA, EMAor other regulatory agencies.Ultimately, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal, regulatoryand scientific standards, and our reliance on third parties does not relieve us of our regulatory responsibilities.We and our CROs are required to comply with cGCP regulations and guidelines enforced by the FDA, the competent authorities of the member statesof the EEA and comparable foreign regulatory authorities for products in clinical development. Regulatory authorities enforce these cGCP regulationsthrough periodic inspections of clinical trial sponsors, principal investigators and clinical trial sites. If we or any of our CROs fail to comply with applicablecGCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and our submission of marketing applications may be delayed orthe FDA may require us to perform additional clinical trials before approving our marketing applications. Upon inspection, the FDA could determine that anyof our clinical trials fail or have failed to comply with applicable cGCP regulations. In addition, our clinical trials must be conducted with product producedunder the cGMP regulations enforced by the FDA, and our clinical trials may require a large number of test subjects. Our failure to comply with theseregulations may require us to repeat clinical trials, which would delay the regulatory approval process and increase our costs. Moreover, our business may beimplicated if any of our CROs violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.If any of our clinical trial sites terminates for any reason, we may experience the loss of follow-up information on patients enrolled in our ongoingclinical trials unless we are able to transfer the care of those patients to another qualified clinical trial site. Further, if our relationship with any of our CROs isterminated, we may be unable to enter into arrangements with alternative CROs on commercially reasonable terms, or at all.Switching or adding CROs or other suppliers can involve substantial cost and require extensive management time and focus. In addition, there is anatural transition period when a new CRO or supplier commences work. As a result, delays may occur, which can materially impact our ability to meet ourdesired clinical development timelines. If we are required to seek alternative supply arrangements, the resulting delays and potential inability to find asuitable replacement could materially and adversely impact our business.Risks Related to Intellectual PropertyWe could be unsuccessful in obtaining or maintaining adequate patent protection for one or more of our products or product candidates.Our commercial success will depend, in large part, on our ability to obtain and maintain patent and other intellectual property protection with respectto our product candidates. Patents might not be issued or granted with respect to our patent applications that are currently pending, and issued or grantedpatents might later be found to be invalid or unenforceable, be interpreted in a manner that does not adequately protect our current product or any futureproducts, or fail to otherwise provide us with any competitive advantage. The patent position of biotechnology and pharmaceutical companies is generallyuncertain because it involves complex legal and factual considerations. The standards applied by the U.S. Patent and Trademark Office, or USPTO, andforeign patent offices in granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regardingpatentable subject matter or the scope of claims allowable in biotechnology and pharmaceutical patents. Consequently, patents may not issue from ourpending patent applications. As such, we do not know the degree of future protection that we will have on our proprietary products and technology, if any,and a failure to obtain adequate intellectual property protection with respect to our product candidates and proprietary technology could have a materialadverse impact on our business. 63 Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to theUSPTO and various governmental patent agencies outside of the U.S. in several stages over the lifetime of the patents and/or applications. We employreputable law firms and other professionals and rely on such third parties to effect payment of these fees with respect to the patents and patent applicationsthat we own, and we rely upon our licensors or our other collaborators to effect payment of these fees with respect to the patents and patent applications thatwe license. The USPTO and various non-US governmental patent agencies require compliance with a number of procedural, documentary, fee payment andother similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply with respect to thepatents and patent applications that we own, and we rely upon our licensors or our other collaborators to effect compliance with respect to the patents andpatent applications that we license. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with theapplicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting inpartial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstancewould have a material adverse effect on our business.Our intellectual property rights will not necessarily provide us with competitive advantages.The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and maynot adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:·others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of the patents that weor our collaborators own or have exclusively licensed;·others may independently develop similar or alternative technologies without infringing our intellectual property rights;·issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid orunenforceable, as a result of legal challenges by our competitors;·we may obtain patents for certain compounds many years before we obtain marketing approval for products containing such compounds, andbecause patents have a limited life, which may begin to run prior to the commercial sale of the related product, the commercial value of ourpatents may be limited;·our competitors might conduct research and development activities in countries where we do not have patent rights and then use theinformation learned from such activities to develop competitive products for sale in our major commercial markets;·we may fail to develop additional proprietary technologies that are patentable;·the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S., or we may fail toapply for or obtain adequate intellectual property protection in all the jurisdictions in which we operate; and·the patents of others may have an adverse effect on our business, for example by preventing us from marketing one or more of our productcandidates for one or more indications.Any of the aforementioned threats to our competitive advantage could have a material adverse effect on our business.We may not be able to protect our intellectual property rights throughout the world.Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and ourintellectual property rights in some countries outside the U.S. can be less extensive than those in the U.S. In addition, the laws of some foreign countries donot protect intellectual property rights to the same extent as federal and state laws in the U.S. Consequently, we may not be able to prevent third parties frompracticing our inventions in all countries outside the U.S., or from selling or importing products made using our inventions in and into the U.S. or otherjurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further,may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the U.S. These productsmay compete with our current or future products, if any, and our patents or other intellectual property rights may not be effective or sufficient to prevent themfrom competing. 64 Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legalsystems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual propertyprotection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing ofcompeting products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result insubstantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpretednarrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits thatwe initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectualproperty rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.Our patents covering one or more of our products or product candidates could be found invalid or unenforceable if challenged.Any of our intellectual property rights could be challenged or invalidated despite measures we take to obtain patent and other intellectual propertyprotection with respect to our product candidates and proprietary technology. For example, if we were to initiate legal proceedings against a third party toenforce a patent covering one of our product candidates, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patentlitigation in the U.S. and in some other jurisdictions, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for avalidity challenge could be an alleged failure to meet any of several statutory requirements, for example, lack of novelty, obviousness or non-enablement.Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld material information fromthe USPTO or the applicable foreign counterpart, or made a misleading statement, during prosecution. A litigant or the USPTO itself could challenge ourpatents on this basis even if we believe that we have conducted our patent prosecution in accordance with the duty of candor and in good faith. The outcomefollowing such a challenge is unpredictable.With respect to challenges to the validity of our patents, for example, there might be invalidating prior art, of which we and the patent examiner wereunaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhapsall, of the patent protection on a product candidate. Even if a defendant does not prevail on a legal assertion of invalidity and/or unenforceability, our patentclaims may be construed in a manner that would limit our ability to enforce such claims against the defendant and others. The cost of defending such achallenge, particularly in a foreign jurisdiction, and any resulting loss of patent protection could have a material adverse impact on one or more of ourproduct candidates and our business.Enforcing our intellectual property rights against third parties may also cause such third parties to file other counterclaims against us, which could becostly to defend, particularly in a foreign jurisdiction, and could require us to pay substantial damages, cease the sale of certain products or enter into alicense agreement and pay royalties (which may not be possible on commercially reasonable terms or at all). Any efforts to enforce our intellectual propertyrights are also likely to be costly and may divert the efforts of our scientific and management personnel.Patent protection and patent prosecution for some of our product candidates is dependent on, and the ability to assert patents and defend them againstclaims of invalidity is maintained by, third parties.There have been and may be times in the future when certain patents that relate to our product candidates or any approved products are controlled byour licensees or licensors. Although we may, under such arrangements, have rights to consult with our collaborators on actions taken as well as back-up rightsof prosecution and enforcement, we have in the past and may in the future relinquish rights to prosecute and maintain patents and patent applications withinour portfolio as well as the ability to assert such patents against infringers. Currently, some of these rights relating to the patent portfolios for Glybera, TV-45070, GDC-0276 and some of our earlier stage product candidates are held by our collaborators.If any current or future licensee or licensor with rights to prosecute, assert or defend patents related to our product candidates fails to appropriatelyprosecute and maintain patent protection for patents covering any of our product candidates, or if patents covering any of our product candidates are assertedagainst infringers or defended against claims of invalidity or unenforceability in a manner which adversely affects such coverage, our ability to develop andcommercialize any such product candidate may be adversely affected and we may not be able to prevent competitors from making, using and sellingcompeting products. 65 We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming andunsuccessful.Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to fileinfringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or oneof our licensors is not valid or is unenforceable, or may refuse to stop the other party in such infringement proceeding from using the technology at issue onthe grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of ourpatents at risk of being invalidated, held unenforceable or interpreted narrowly, and could put any of our patent applications at risk of not yielding an issuedpatent.Interference proceedings, derivation proceedings, entitlement proceedings, ex parte reexamination, inter partes reexamination, inter partes review,post-grant review, and opposition proceedings provoked by third parties or brought by the USPTO or any foreign patent authority may be used to challengeinventorship, ownership, claim scope, or validity of our patent applications. An unfavorable outcome could require us to cease using the related technologyor to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commerciallyreasonable terms, if any license is offered at all. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs anddistract our management and other employees.We may not be able to prevent, alone or with our licensors, misappropriation of our trade secrets or confidential information, particularly in countrieswhere the laws may not protect those rights as fully as in the U.S. Furthermore, because of the substantial amount of discovery required in connection withintellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. Inaddition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts orinvestors perceive these results to be negative, it could have a substantial adverse effect on the price of our common shares.Claims that our product candidates or the sale or use of our future products infringe the patent or other intellectual property rights of third partiescould result in costly litigation or could require substantial time and money to resolve, even if litigation is avoided.Our commercial success depends upon our ability to develop product candidates and commercialize products that may be approved in the future,using our proprietary technology without infringing the intellectual property rights of others. Our product or product candidates or any uses of them may nowand in the future infringe third-party patents or other intellectual property rights. Third parties might allege that we or our collaborators are infringing theirpatent rights or that we have misappropriated their trade secrets, or that we are otherwise violating their intellectual property rights, whether with respect tothe manner in which we have conducted our research or to the composition, use or manufacture of the compounds we have developed or are developing withour collaborators. Such third parties might resort to litigation against us or other parties we have agreed to indemnify, which litigation could be based oneither existing intellectual property or intellectual property that arises in the future.It is possible that relevant patents or patent applications held by third parties will cover our product candidates at the time of launch and we may alsofail to identify, relevant patents or patent applications held by third parties that cover our product candidates. For example, applications filed beforeNovember 29, 2000, and certain applications filed after that date that will not be filed outside the U.S. remain confidential until patents issue. Other patentapplications in the U.S. and several other jurisdictions are published approximately 18 months after the earliest filing for which priority is claimed, with suchearliest filing date being commonly referred to as the priority date. Furthermore, publication of discoveries in the scientific or patent literature often lagsbehind actual discoveries. Therefore, we cannot be certain that we or our collaborators were the first to invent, or the first to file patent applications on, ourproduct candidates or for their uses, or that our product candidates will not infringe patents that are currently issued or that are issued in the future. In theevent that a third party has also filed a patent application covering one of our product candidates or a similar invention, we may have to participate in anadversarial proceeding, known as an interference, declared by the USPTO or its foreign counterpart to determine priority of invention. Additionally, pendingpatent applications and patents which have been published can, subject to certain limitations, be later amended in a manner that could cover our current orfuture products, if any, or their use.Defending against claims of patent infringement, misappropriation of trade secrets or other violations of intellectual property rights could be costlyand time consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such litigation could burden us withsubstantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time and attention of ourmanagement team, distracting them from the pursuit of other company business. Claims that our product candidates or the sale or use of our future productsinfringe, misappropriate or otherwise violate third-party intellectual property rights could therefore have a material adverse impact on our business. 66 Most of our competitors are larger than we are and have substantially greater financial resources. They are, therefore, likely to be able to sustain thecosts of complex intellectual property litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverseeffect on our ability to raise the funds necessary to conduct our clinical trials, continue our internal research programs, in-license needed technology, or enterinto strategic collaborations that would help us bring our product candidates to market.In addition, any future intellectual property litigation, interference or other administrative proceedings will result in additional expense anddistraction of our personnel. An adverse outcome in such litigation or proceedings may expose us or any future strategic collaborators to loss of ourproprietary position, expose us to significant liabilities, or require us to seek licenses that may not be available on commercially acceptable terms, if at all,each of which could have a material adverse effect on our business.Unfavorable outcomes in intellectual property litigation could limit our research and development activities and/or our ability to commercializecertain products.If third parties successfully assert their intellectual property rights against us, we might be barred from using certain aspects of our technology, orbarred from developing and commercializing certain products. Prohibitions against using certain technologies, or prohibitions against commercializingcertain products, could be imposed by a court or by a settlement agreement between us and a plaintiff. In addition, if we are unsuccessful in defending againstallegations that we have infringed, misappropriated or otherwise violated patent or other intellectual property rights of others, we may be forced to paysubstantial damage awards to the plaintiff. There is inevitable uncertainty in intellectual property litigation and we could lose, even if the case against us isweak or flawed. If litigation leads to an outcome unfavorable to us, we may be required to obtain a license from the intellectual property owner in order tocontinue our research and development programs or to market any resulting product. It is possible that the necessary license will not be available to us oncommercially acceptable terms, or at all. Alternatively, we may be required to modify or redesign our current or future products, if any, in order to avoidinfringing or otherwise violating third-party intellectual property rights. This may not be technically or commercially feasible, may render those products lesscompetitive, or may delay or prevent the entry of those products to the market. Any of the foregoing could limit our research and development activities, ourability to commercialize one or more product candidates, or both.In order to avoid or settle potential claims with respect to any patent or other intellectual property rights of third parties, we may choose or be requiredto seek a license from a third party and be required to pay license fees or royalties or both, which could be substantial. These licenses may not be available onacceptable terms, or at all. Even if we or any future collaborators were able to obtain a license, the rights may be nonexclusive, which could result in ourcompetitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced, by court orderor otherwise, to cease some or all aspects of our business operations, if, as a result of actual or threatened patent or other intellectual property claims, we areunable to enter into licenses on acceptable terms. Further, we could be found liable for significant monetary damages as a result of claims of intellectualproperty infringement. For example, we have received, and may in the future receive, offers to license and demands to license from third parties claiming thatwe are infringing their intellectual property or owe license fees and, even if such claims are without merit, we could fail to successfully avoid or settle suchclaims.If Teva, uniQure, Genentech or Merck license or otherwise acquire rights to intellectual property controlled by a third party in various circumstances,for example, where a product could not be legally developed or commercialized in a country without the third-party intellectual property right or, where it isdecided that it would be useful to acquire such third-party right to develop or commercialize the product, they are eligible under our collaborationagreements to decrease payments payable to us on a product-by-product basis and, in certain cases, on a country-by-country basis. Any of the foregoingevents could harm our business significantly. 67 If we breach any of the agreements under which we license the use, development and commercialization rights to our product candidates or technologyfrom third parties, we could lose license rights that are important to our business.The patent portfolio for Glybera is in-licensed from UBC. Under our existing license agreements, we are subject to various obligations, includingdiligence obligations such as development and commercialization obligations, as well as potential royalty payments and other obligations. If we fail tocomply with any of these obligations or otherwise breach our license agreements, our licensing partners may have the right to terminate the applicablelicense in whole or in part. Generally, the loss of any one of our current licenses, or any other license we may acquire in the future, could materially harm ourbusiness, prospects, financial condition and results of operations.Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and other proprietaryinformation, which would harm our competitive position.In addition to patents, we rely on trade secrets, technical know-how and proprietary information concerning our Extreme Genetics discovery platform,business strategy and product candidates in order to protect our competitive position, which are difficult to protect. In the course of our research anddevelopment activities and our business activities, we often rely on confidentiality agreements to protect our proprietary information. Such confidentialityagreements are used, for example, when we talk to vendors of laboratory or clinical development services or potential strategic collaborators. In addition,each of our employees and consultants is required to sign a confidentiality agreement and invention assignment agreement upon joining our company. Ouremployees, consultants, contractors, business partners or outside scientific collaborators might intentionally or inadvertently disclose our trade secretinformation in breach of these confidentiality agreements or our trade secrets may otherwise be misappropriated. Our collaborators might also have rights topublish data and we might fail to apply for patent protection prior to such publication. It is possible that a competitor will make use of such information, andthat our competitive position will be compromised. In addition, to the extent that our employees, consultants or contractors use intellectual property ownedby others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Enforcing a claim that a third party illegallyobtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the U.S.sometimes are less willing than U.S. courts to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methodsand know-how. If we cannot maintain the confidentiality of our proprietary technology and other confidential information, then our ability to obtain patentprotection or to protect our trade secret information would be jeopardized, which would adversely affect our competitive position.Patent reform legislation and recent court decisions could increase the uncertainties and costs surrounding the prosecution of our patent applicationsand the enforcement or defense of our issued patents.On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a numberof significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation.The USPTO has and continues to develop and implement regulations and procedures to govern administration of the Leahy-Smith Act, and many of thesubstantive changes to patent law associated with the Leahy-Smith Act. The full effect of these changes are currently unclear as the USPTO has not yetadopted all pertinent final rules and regulations, the courts have yet to address these provisions and the applicability of the Leahy-Smith Act and newregulations on specific patents, including our patents discussed herein, have not been determined and would need to be reviewed. Accordingly, it is not yetclear what, if any, impact the Leahy-Smith Act will have on the operation of our business. As a result, the Leahy-Smith Act and its implementation couldincrease the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents, all of which couldhave a material adverse effect on our business and financial condition. On June 13, 2013, the U.S. Supreme Court decision in Association for MolecularPathology v. Myriad Genetics, Inc., held that isolated DNA sequences are not patentable. In December 2014, the USPTO issued its Interim Guidance onPatent Subject Matter Eligibility, in which it extended Myriad's "marked difference" standard for patent subject matter eligibility to all potential naturalproducts. This standard applies to patent claims that recite not only nucleic acids (such as DNA in Myriad), but also other subject matter that could beconsidered a natural product, such as peptides, proteins, extracts, organisms, antibodies, chemicals, and minerals. As a consequence of the Myriad decisionand the USPTO’s Interim Guidance, if any of our future product candidates utilize isolated DNA, peptides, proteins or the like, we will not be able to obtainpatents in the U.S. claiming such novel gene targets that we discover, which could limit our ability to prevent third parties from developing drugs directedagainst such targets. 68 If we do not obtain protection under the Hatch-Waxman Act and similar legislation outside of the U.S. by extending the patent terms for our productcandidates, our business may be materially harmed.Depending upon the timing, duration and specifics of FDA marketing approval of our product candidates, if any, one or more U.S. patents may beeligible for limited patent term restoration under the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years ascompensation for patent term lost during clinical testing of the product and the subsequent FDA regulatory review process. However, we may not be grantedan extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failingto satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request.If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, the period during which wewill have the right to exclusively market our product will be shortened and our competitors may obtain approval of competing products following our patentexpiration, and our revenue could be reduced, possibly materially.We have not registered our corporate name as a trademark in all of our potential markets, and failure to secure those registrations could adverselyaffect our business.Our corporate name, Xenon, has not been trademarked in each market where we operate and plan to operate. Our trademark applications for ourcorporate name or the name of our products may not be allowed for registration, and our registered trademarks may not be maintained or enforced. Duringtrademark registration proceedings, we may receive rejections, which we may be unable to overcome in our responses. Third parties may also attempt toregister trademarks utilizing the Xenon name on their products, and we may not be successful in preventing such usage. In addition, in the USPTO and incomparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancelregistered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. Ifwe do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would.Intellectual property litigation may lead to unfavorable publicity that harms our reputation and causes the market price of our common shares todecline.During the course of any intellectual property litigation, there could be public announcements of the initiation of the litigation as well as results ofhearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, theperceived value of our existing products, programs or intellectual property could be diminished. Accordingly, the market price of our common shares maydecline. Such announcements could also harm our reputation or the market for our future products, which could have a material adverse effect on ourbusiness.Risks Related to Our IndustryIf product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our currentand any future products.We face an inherent risk of product liability as a result of the clinical testing of our product candidates, and we will face an even greater risk if wecommercialize any product candidates. For example, we may be sued if any of our product candidates, including any that are developed in combinationtherapies, allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liabilityclaims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liabilityand a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against productliability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense wouldrequire significant financial and management resources. There is also risk that third parties we have agreed to indemnify could incur liability. Regardless ofthe merits or eventual outcome, liability claims may result in:·decreased demand for our product candidates or any resulting products;·injury to our reputation;·withdrawal of clinical trial participants;·costs to defend the related litigation;·a diversion of management’s time and our resources;·substantial monetary awards to trial participants or patients; 69 ·product recalls, withdrawals or labeling, marketing or promotional restrictions;·loss of revenue;·the inability to commercialize our product candidates; and·a decline in our share price.We currently carry product liability insurance of $5,000,000 per occurrence and $5,000,000 aggregate limit. We believe our product liabilityinsurance coverage is appropriate in light of our current clinical programs; however, we may not be able to maintain insurance coverage at a reasonable costor in sufficient amounts to protect us against losses due to liability. If and when we obtain marketing approval for product candidates, we intend to expandour insurance coverage to include the sale of commercial products; however, we may then be unable to obtain product liability insurance on commerciallyreasonable terms or in adequate amounts. On occasion, large judgments have been awarded in class action lawsuits based on drugs or medical treatments thathad unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our common share price to declineand, if judgments exceed our insurance coverage, could adversely affect our future results of operations and business.Patients with the diseases targeted by our product candidates are often already in severe and advanced stages of disease and have both known andunknown significant pre-existing and potentially life-threatening conditions. During the course of treatment, patients may suffer adverse events, includingdeath, for reasons that may be related to our product candidates. Such events could subject us to costly litigation, require us to pay substantial amounts ofmoney to injured patients, delay, negatively impact or end our opportunity to receive or maintain regulatory approval to market those product candidates, orrequire us to suspend or abandon our commercialization efforts. Even in a circumstance in which we do not believe that an adverse event is related to ourproducts, the investigation into the circumstance may be time-consuming or inconclusive. These investigations may interrupt our sales efforts, delay ourregulatory approval process in other countries, or impact and limit the type of regulatory approvals our product candidates receive or maintain. As a result ofthese factors, a product liability claim, even if successfully defended, could have a material adverse effect on our business, financial condition or results ofoperations.Our current and future relationships with customers and third-party payers in the U.S. and elsewhere will be subject, directly or indirectly, to applicablefederal and state anti-kickback, fraud and abuse, false claims, transparency, health information privacy and security, and other healthcare laws andregulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, administrative burdens, and diminishedprofits and future earnings.Healthcare providers, physicians and third-party payers in the U.S. and elsewhere play a primary role in the recommendation and prescription of anyproduct candidates for which we obtain marketing approval. Our future arrangements with third-party payers and customers may expose us to broadlyapplicable fraud and abuse and other healthcare laws and regulations, including, without limitation, the federal Anti-Kickback Statute and the federal FalseClaims Act, that may constrain the business or financial arrangements and relationships through which we market, sell and distribute any products for whichwe obtain marketing approval. In addition, we may be subject to transparency laws and patient privacy regulation by the federal government and by the U.S.states and foreign jurisdictions in which we conduct our business. The applicable federal, state and foreign healthcare laws and regulations that may affectour ability to operate include the following:·the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving orproviding remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase,order or recommendation of, any good or service for which payment may be made under federal and state healthcare programs such as Medicareand Medicaid;·federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which impose criminal andcivil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to bepresented, to the federal government, including the Medicare and Medicaid programs, or other third party payers claims for payment that arefalse or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;·HIPAA, which imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and making falsestatements relating to healthcare matters;·HIPAA, as amended by HITECH, and their respective implementing regulations, which impose obligations on covered healthcare providers,health plans, and healthcare clearinghouses, as well as their business associates that create, receive, maintain, or transmit individuallyidentifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission ofindividually identifiable health information; 70 ·the federal Open Payments program, created under Section 6002 of PPACA and its implementing regulations requires manufacturers of drugs,devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program(with certain exceptions) to report annually to HHS information related to “payments or other transfers of value” made to physicians (defined toinclude doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and applicable manufacturers and applicablegroup purchasing organizations to report annually to HHS ownership and investment interests held by physicians (as defined above) and theirimmediate family members, with data collection required beginning August 1, 2013, reporting to the Centers for Medicare & MedicaidServices, or CMS, required by March 31, 2014 (and by the 90th day of each subsequent calendar year), and disclosure of such information to bemade on a publicly available website by September 2014; and·analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketingarrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payers, including private insurers;state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelinesand the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcareproviders; state and foreign laws that require drug manufacturers to report information related to payments to physicians and other healthcareproviders or marketing expenditures; and state and foreign laws governing the collection, export, privacy, use and security of biologicalmaterials and health information in certain circumstances, many of which differ from each other in significant ways and may not have the sameeffect, thus complicating compliance efforts.Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations may involvesubstantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes,regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any ofthese laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties,including, without limitation, damages, fines, imprisonment, exclusion from participation in government healthcare programs, such as Medicare andMedicaid, and the curtailment or restructuring of our operations, which could have a material adverse effect on our business. If any of the physicians or otherproviders or entities with whom we expect to do business, including our collaborators, is found not to be in compliance with applicable laws, it may besubject to criminal, civil or administrative sanctions, including exclusions from participation in government healthcare programs, which could alsomaterially affect our business.If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that couldhave a material adverse effect on the success of our business.Our research and development activities involve the controlled use of potentially harmful biological materials as well as hazardous materials,chemicals, and various radioactive compounds typically employed in molecular and cellular biology. For example, we routinely use cells in culture and weemploy small amounts of radioisotopes. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling, ordisposal of these materials through our maintenance of up-to-date licensing and training programs. In the event of contamination or injury, we could be heldliable for damages that result, and any liability could exceed our resources. We currently carry insurance covering certain claims arising from our use of thesematerials. However, if we are unable to maintain our insurance coverage at a reasonable cost and with adequate coverage, our insurance may not cover anyliability that may arise. We are subject to U.S. and Canadian federal, provincial, and local laws and regulations governing the use, storage, handling, anddisposal of these materials and specified waste products. Complying with regulations regarding the use of these materials could be costly, and if we fail tocomply with these regulations, it could have a material adverse effect on our operations and profitability. 71 We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity anddisaster recovery plans may not adequately protect us from serious disaster.Our headquarters are located in Burnaby, British Columbia, Canada. We are vulnerable to natural disasters such as earthquakes that could disrupt ouroperations. If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, thatdamaged critical infrastructure, such as the manufacturing facilities of our third-party contract manufacturers, or that otherwise disrupted operations, it may bedifficult or, in certain cases, impossible for us to continue our business for a substantial period of time. We do not carry insurance for earthquakes or othernatural disasters and although our business interruption insurance applies in the event of an earthquake, we may not carry sufficient business interruptioninsurance to compensate us for all losses that may occur. The disaster recovery and business continuity plans we have in place currently are limited and areunlikely to prove adequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of ourdisaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverseeffect on our business. In addition, we may lose samples or other valuable data. The occurrence of any of the forgoing could have a material adverse effect onour business.Risks Related to Our Common SharesA significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This couldcause the market price of our common shares to drop significantly, even if our business is doing well.Sales of a substantial number of our common shares in the public market could occur at any time. These sales, or the perception in the market that theholders of a large number of shares intend to sell shares, could reduce the market price of our common shares and could impair our ability to raise capitalthrough the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our commonshares. As of February 28, 2015, we had 14,219,112 common shares outstanding, of which approximately 8.8 million shares are currently restricted as a resultof securities laws or market stand standoff agreements, or lock-up agreements that prevent the holders of such shares from offering, selling, contracting to sell,pledging, or otherwise disposing (indirectly or otherwise) of any common shares or any securities convertible into or exchangeable for common shares, orentering into any swap hedge or other arrangements, subject to specified exceptions, for a period of 180 days after November 4, 2014. Our underwriters may,in their sole discretion, at any time, release all or any portion of the shares from the restrictions in the agreement with the underwriters. Moreover, holders ofapproximately 6.9 million shares of our common shares have rights, subject to some conditions, to require us to file registration statements covering theirshares or to include their shares in registration statements that we may file for ourselves or other shareholders. We have also registered all common shares thatwe may issue under our equity compensation plans. These shares can be freely sold in the public market upon issuance, subject to volume limitationsapplicable to affiliates and the lock-up provisions described above. Our stock price may be volatile, and purchasers of our common shares could incur substantial losses.Our stock price has fluctuated in the past and is likely to be volatile in the future. The stock market in general and the market for biotechnologycompanies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result ofthis volatility, investors may experience losses on their investment in our common shares. The market price for our common shares may be influenced bymany factors, including the following:·actions by any of our collaborators regarding our product candidates they are developing, including announcements regarding clinical orregulatory decisions or developments or our collaboration;·announcements by us or our competitors of new products, product candidates or new uses for existing products, significant contracts,commercial relationships or capital commitments and the timing of these introductions or announcements;·unanticipated serious safety concerns related to Glybera or to the use of any of our products and product candidates;·results from or delays of clinical trials of our product candidates;·failure to obtain or delays in obtaining product approvals or clearances from regulatory authorities;·adverse regulatory or reimbursement announcements;·announcements by us or our competitors of significant acquisitions, strategic collaborations, joint ventures or capital commitments;·the results of our efforts to discover or develop additional product candidates; 72 ·our dependence on third parties, including our collaborators, CROs, clinical trial sponsors and clinical investigators;·regulatory or legal developments in Canada, the U.S. or other countries;·developments or disputes concerning patent applications, issued patents or other proprietary rights;·the recruitment or departure of key scientific or management personnel;·our ability to successfully commercialize our future product candidates we develop independently, if approved;·the level of expenses related to any of our product candidates or clinical development programs;·actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;·actual or anticipated quarterly variations in our financial results or those of our competitors;·any change to the composition of the board of directors or key personnel;·expiration of contractual lock-up agreements with our executive officers, directors and security holders;·sales of common shares by us or our shareholders in the future, as well as the overall trading volume of our common shares;·changes in the structure of healthcare payment systems;·commencement of, or our involvement in, litigation;·general economic, industry and market conditions in the pharmaceutical and biotechnology sectors and other factors that may be unrelated toour operating performance or the operating performance of our competitors, including changes in market valuations of similar companies; and·the other factors described in this “Risk Factors” section.In addition, the stock market in general, and NASDAQ and the biopharmaceutical industry in particular, have from time to time experienced volatilitythat often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affectthe market price of our common shares, regardless of our operating performance. In several recent situations where the market price of a stock has beenvolatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our shareholders were tobring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm ouroperating results.Our executive officers, directors and principal shareholders will be able to exert significant influence over matters submitted to shareholders forapproval.As of March 6, 2015, our executive officers and directors (and their respective affiliated shareholders) in the aggregate, beneficially own sharesrepresenting approximately 21% of our outstanding common shares. As a result, if these shareholders were to choose to act together, they would be able toexert significant influence over matters submitted to our shareholders for approval, as well as our management and affairs. The interests of this group ofshareholders may not always coincide with our corporate interests or the interests of other shareholders, and they may act in a way in which you may notagree with or in a way that may not be in the best interests of other shareholders. This concentration of voting power could delay or prevent an acquisition ofour company on terms that other shareholders may desire or otherwise discourage a potential acquirer from attempting to obtain control of us, which in turncould have a material adverse effect on our share price. 73 Provisions in our corporate charter documents and Canadian law could make an acquisition of us, which may be beneficial to our shareholders, moredifficult and may prevent attempts by our shareholders to replace or remove our current management and/or limit the market price of our common shares.Provisions in our articles and our by-laws, as well as certain provisions under the Canada Business Corporations Act, or CBCA, and applicableCanadian securities laws, may discourage, delay or prevent a merger, acquisition or other change in control of us that shareholders may consider favorable,including transactions in which they might otherwise receive a premium for their common shares. These provisions could also limit the price that investorsmight be willing to pay in the future for our common shares, thereby depressing the market price of our common shares. In addition, because our board ofdirectors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our shareholders toreplace or remove our current management by making it more difficult for shareholders to replace members of our board of directors. Among other things,these provisions include the following:·shareholders cannot amend our articles unless such amendment is approved by shareholders holding at least two-thirds of the shares entitled tovote on such approval;·our board of directors may, without shareholder approval, issue preferred shares having any terms, conditions, rights, preferences and privilegesas the board of directors may determine; and·shareholders must give advance notice to nominate directors or to submit proposals for consideration at shareholders’ meetings.Any provision in our articles, by-laws, under the CBCA or under any applicable Canadian securities law that has the effect of delaying or deterring achange in control could limit the opportunity for our shareholders to receive a premium for their common shares, and could also affect the price that someinvestors are willing to pay for our common shares.U.S. civil liabilities may not be enforceable against us, our directors, or our officersWe are governed by the CBCA and our principal place of business is in Canada. Many of our directors and officers reside outside of the U.S., and all ora substantial portion of their assets as well as all or a substantial portion of our assets are located outside the U.S. As a result, it may be difficult for investorsto effect service of process within the U.S. upon us and such directors and officers or to enforce judgments obtained against us or such persons, in U.S. courts,in any action, including actions predicated upon the civil liability provisions of U.S. federal securities laws or any other laws of the U.S. Additionally, rightspredicated solely upon civil liability provisions of U.S. federal securities laws or any other laws of the U.S. may not be enforceable in original actions, oractions to enforce judgments obtained in U.S. courts, brought in Canadian courts, including courts in the Province of British Columbia.We are governed by the corporate laws of Canada which in some cases have a different effect on shareholders than the corporate laws of Delaware,U.S.We are governed by the CBCA and other relevant laws, which may affect the rights of shareholders differently than those of a company governed bythe laws of a U.S. jurisdiction, and may, together with our charter documents, have the effect of delaying, deferring or discouraging another party fromacquiring control of our company by means of a tender offer, a proxy contest or otherwise, or may affect the price an acquiring party would be willing to offerin such an instance. The material differences between the CBCA and Delaware General Corporation Law, or DGCL, that may have the greatest such effectinclude, but are not limited to, the following: (i) for material corporate transactions (such as mergers and amalgamations, other extraordinary corporatetransactions or amendments to our articles) the CBCA generally requires a two-thirds majority vote by shareholders, whereas DGCL generally only requires amajority vote; and (ii) under the CBCA a holder of 5% or more of our common shares can requisition a special meeting of shareholders, whereas such rightdoes not exist under the DGCL.An active trading market for our common shares may not be maintained.Our stock is currently traded on NASDAQ, but we can provide no assurance that we will be able to maintain an active trading market on NASDAQ orany other exchange in the future. If an active market for our common shares is not maintained, it may be difficult for our shareholders to sell the commonshares they have purchased without depressing the market price for the shares or at all. Further, an inactive market may also impair our ability to raise capitalby selling additional common shares and may impair our ability to enter into strategic collaborations or acquire companies or products by using our commonshares as consideration. 74 Complying with the laws and regulations affecting public companies will increase our costs and the demands on management and could harm ouroperating results and our ability to accurately report our financial condition, results of operations or cash flows, which may adversely affect investorconfidence in us and, as a result, the value of our common shares.As a public company, and particularly after we cease to be an “emerging growth company,” we will incur significant legal, accounting and otherexpenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the related rules andregulations subsequently implemented by the Securities and Exchange Commission, or SEC, the applicable Canadian securities regulators and NASDAQimpose numerous requirements on public companies, including requiring changes in corporate governance practices. Also, the Securities Exchange Act of1934, as amended, or the Exchange Act, requires, among other things, that we file annual, quarterly and current reports with respect to our business andoperating results. We anticipate that we may need to hire additional accounting and financial staff with appropriate public company experience and technicalaccounting knowledge to address the added burdens of operating as a public company. Our management and other personnel will need to devote asubstantial amount of time to compliance with these laws and regulations. These requirements have increased and will continue to increase our legal,accounting, and financial compliance costs and have made and will continue to make some activities more time-consuming and costly. For example, weexpect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may berequired to accept reduced policy limits and coverage or to incur substantial costs to maintain the same or similar coverage. These rules and regulations couldalso make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and theeffectiveness of our disclosure controls and procedures quarterly. In particular, commencing with our second annual report on Form 10-K, Section 404 of theSarbanes-Oxley Act, or Section 404, will require us to perform system and process evaluation and testing of our internal control over financial reporting toallow management to report on, and our independent registered public accounting firm potentially to attest to, the effectiveness of our internal control overfinancial reporting. As an “emerging growth company” we expect to avail ourselves of the exemption from the requirement that our independent registeredpublic accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404. However, we may no longer availourselves of this exemption when we cease to be an “emerging growth company.” When our independent registered public accounting firm is required toundertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Ourcompliance with applicable provisions of Section 404 will require that we incur substantial accounting expense and expend significant management time oncompliance-related issues as we implement additional corporate governance practices and comply with reporting requirements. Moreover, if we are not ableto comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifiesdeficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our common shares could declineand we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and managementresources.Furthermore, investor perceptions of our company may suffer if deficiencies are found, and this could cause a decline in the market price of ourcommon shares. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effecton our stated operating results and harm our reputation. If we are unable to implement these requirements effectively or efficiently, it could harm ouroperations, financial reporting, or financial results and could result in an adverse opinion on our internal controls from our independent registered publicaccounting firm.We are an “emerging growth company,” and any decision on our part to comply only with certain reduced reporting and disclosure requirementsapplicable to emerging growth companies could make our common shares less attractive to investors.We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue tobe an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other publiccompanies that are not “emerging growth companies,” including, but not limited to, not being required to have our independent registered public accountingfirm audit our internal control over financial reporting under Section 404, reduced disclosure obligations regarding executive compensation in our periodicreports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholderapproval of any golden parachute payments not previously approved. We could be an “emerging growth company” for up to five years following thecompletion of our initial public offering, although, if we have more than $1.0 billion in annual revenue, if the market value of our common shares held bynon-affiliates exceeds $700 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before theend of that five-year period, we would cease to be an “emerging growth company” as of the following December 31. Investors could find our common sharesless attractive if we choose to rely on these exemptions. If some investors find our common shares less attractive as a result of any choices to reduce futuredisclosure, there may be a less active trading market for our common shares and our share price may be more volatile. 75 As an “emerging growth company,” the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to publiccompanies until such pronouncements are made applicable to private companies. However, we previously decided to “opt out” of such extended transitionperiod, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required fornon-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with newor revised accounting standards is irrevocable.If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results orprevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the tradingprice of our common shares.Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosurecontrols and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in theirimplementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 or anysubsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that aredeemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for furtherattention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have anegative effect on the trading price of our common shares.We will be required to disclose changes made in our internal controls and procedures on a quarterly basis and our management will be required toassess the effectiveness of these controls annually. However, for as long as we are an “emerging growth company” under the JOBS Act, our independentregistered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404.We could be an “emerging growth company” for up to five years from the completion of our initial public offering. An independent assessment of theeffectiveness of our internal controls could detect problems that our management’s assessment might not. In addition, our management and independentregistered public accounting firm did not perform an evaluation of our internal control over financial reporting as of December 31, 2014, December 31, 2013or December 31, 2012, in accordance with the provisions of the Sarbanes-Oxley Act. Had we and our independent registered public accounting firmperformed such an evaluation, control deficiencies may have been identified by management or our independent registered public accounting firm, and thosecontrol deficiencies could have also represented one or more material weaknesses. Undetected material weaknesses in our internal controls could lead tofinancial statement restatements and require us to incur the expense of remediation.Future sales and issuances of our common shares or rights to purchase common shares, including pursuant to our equity incentive plans, could causeyou to incur dilution and could cause our share price to fall.As of December 31, 2014, options to purchase 1,484,218 of our common shares with a weighted-average exercise price of $4.20 per common sharewere outstanding. The exercise of any of these options would result in dilution to current shareholders. Further, because we will need to raise additionalcapital to fund our clinical development programs, we may in the future sell substantial amounts of common shares or securities convertible into orexchangeable for common shares. Pursuant to our equity incentive plan(s), our compensation committee (or a subset thereof) is authorized to grant equity-based incentive awards to our employees, directors and consultants. Future option grants and issuances of common shares under our share-basedcompensation plans may have an adverse effect on the market price of our common shares.These future issuances of common shares or common share-related securities, together with the exercise of outstanding options and any additionalcommon shares issued in connection with acquisitions, if any, may result in further dilution to our existing shareholders, and new investors could gain rights,preferences and privileges senior to those of holders of our common shares. 76 Our management team will have broad discretion to use the net proceeds from our initial public offering and the concurrent private placement and itsinvestment of these proceeds may not yield a favorable return. They may invest the proceeds of our initial public offering and the concurrent privateplacement in ways with which investors disagree.Our management team will have broad discretion in the application of the net proceeds from our November 2014 initial public offering and theconcurrent private placement and could spend or invest the proceeds in ways with which our shareholders disagree. Accordingly, investors will need to relyon our management team’s judgment with respect to the use of these proceeds. These uses may not yield a favorable return to our shareholders. We intend touse the proceeds from the offering to: (1) fund preclinical and early clinical development of our DS and XEN801 programs; (2) to fund genetic research anddrug discovery activities using our Extreme Genetics discovery platform; and (3) for working capital and other general corporate purposes. We may also use aportion of the net proceeds in connection with any exercise of co-development or co-promotion rights under our strategic alliances; however, no such rightsare currently exercisable. In addition, we may also use a portion of the net proceeds to acquire, license and invest in complementary products, technologies orbusinesses; however, we currently have no agreements or commitments to complete any such transaction. These uses may not yield a favorable return to ourshareholders.We cannot specify with certainty all of the particular uses for the net proceeds received from our November 2014 initial public offering and theconcurrent private placement. In addition, the amount, allocation and timing of our actual expenditures will depend upon numerous factors, includingmilestone payments received from our collaborations and royalties received on sale of our approved product and any future approved product. Accordingly,we will have broad discretion in using these proceeds. Until the net proceeds are used, they may be placed in investments that do not produce significantincome or that may lose value.We are at risk of securities class action litigation.In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. Thisrisk is especially relevant for us because biotechnology companies have experienced significant stock price volatility in recent years. If we face suchlitigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.We do not anticipate paying any cash dividends on our common shares in the foreseeable future.We do not currently intend to pay any cash dividends on our common shares in the foreseeable future. We currently intend to retain all of our futureearnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from payingdividends. As a result, capital appreciation, if any, of our common shares may be investors’ sole source of gain for the foreseeable future.NASDAQ may delist our securities from its exchange, which could limit investors’ ability to make transactions in our securities and subject us toadditional trading restrictions.Our common shares are listed on NASDAQ under the trading symbol “XENE.” Our securities may fail to meet the continued listing requirements to belisted on NASDAQ. If NASDAQ delists our common shares from trading on its exchange, we could face significant material adverse consequences, including:·significant impairment of the liquidity for our common shares, which may substantially decrease the trading price of our common shares;·a limited availability of market quotations for our securities;·a determination that our common shares is a “penny stock” which will require brokers trading in our common shares to adhere to more stringentrules and possibly resulting in a reduced level of trading activity in the secondary trading market for our common shares;·a limited amount of news and analyst coverage for our company; and·a decreased ability to issue additional securities or obtain additional financing in the future. 77 If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, our shareprice and trading volume could decline.The trading market for our common shares will be influenced by the research and reports that securities or industry analysts publish about us or ourbusiness. If too few securities or industry analysts cover our company, the trading price for our common shares would likely be negatively impacted. Ifsecurities and industry analysts who cover us downgrade our common shares or publish inaccurate or unfavorable research about our business, our share pricewould likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common sharescould decrease, which might cause our price and trading volume to decline.Item 1B.Unresolved Staff CommentsNone. Item 1B.Unresolved Staff CommentsNone.Item 2.PropertiesOur headquarters are located in Burnaby, British Columbia, where we occupy approximately 33,600 square feet of office and laboratory space. Theterm of the lease expires in March 2022. We currently pay an aggregate of approximately $77,502 per month in base rent, property tax, common areamaintenance fees and management fees, and the landlord holds a security deposit equal to approximately $77,549. We believe that our existing facilities areadequate to meet our business requirements for the near-term and that additional space will be available on commercially reasonable terms, if required.Item 3.Legal ProceedingsFrom time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are notpresently a party to any legal proceedings that, in the opinion of our management, would reasonably be expected to have a material adverse effect on ourbusiness, financial condition, operating results or cash flows if determined adversely to us. Regardless of the outcome, litigation can have an adverse impacton us because of defense and settlement costs, diversion of management resources and other factors.Item 4.Mine Safety DisclosuresNot applicable. 78 PART IIItem 5.Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationOur common shares began trading on The NASDAQ Global Market on November 5, 2014 under the symbol “XENE.” Prior to such time, there was nopublic market for our common shares. The following table sets forth the high and low sales prices per common share as reported on The NASDAQ GlobalMarket for the period indicated. High Low Year Ended December 31, 2014 Fourth Quarter (commencing November 5, 2014) $21.95 $9.21 HoldersAs of February 28, 2015, there were approximately 371 holders of record of our common shares. The actual number of shareholders is greater than thisnumber of record holders and includes shareholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.DividendsWe have never declared or paid any cash dividends on our common shares or any other securities. We currently anticipate that we will retain allavailable funds and any future earnings, if any, in the foreseeable future for use in the operation of our business and do not currently anticipate paying cashdividends in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of the board of directors, subject to applicable law andwill depend on various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the board of directors deems relevant.Canadian withholding tax at a rate of 25% (subject to reduction under the provisions of any applicable income tax treaty or convention to whichCanada is a signatory) will be payable on the gross amount of dividends on our common shares paid or credited, or deemed to be paid or credited, to a holderof our common shares who, for purposes of the Income Tax Act (Canada), is not (and is not deemed to be) resident in Canada and who does not use or hold(and will not be deemed to use or hold) our common shares in, or in the course of, carrying on a business or part of a business in Canada, or a Non-Resident ofCanada Holder. The Canadian withholding taxes will be deducted directly by us or our paying agent from the amount of the dividend otherwise payable andremitted to the Receiver General of Canada. The rate of withholding tax applicable to a dividend paid on our common shares to a Non‑Resident of CanadaHolder who is a resident of the U.S. for purposes of the Canada‑U.S. Tax Convention, or the Convention, beneficially owns the dividend and qualifies for thefull benefits of the Convention will generally be reduced to 15% or, if such a Non-Resident of Canada Holder is a corporation that owns (or, for purposes ofthe Convention, is considered to own) at least 10% of our voting shares, to 5%. Not all persons who are residents of the U.S. for purposes of the Conventionwill qualify for the benefits of the Convention. A Non‑Resident of Canada Holder who is a resident of the U.S. is advised to consult his or her tax advisor inthis regard. The rate of withholding tax on dividends is also reduced under other bilateral income tax treaties to which Canada is a signatory.Performance GraphThe following graph shows a comparison from November 5, 2014 (the date our common shares commenced trading on The NASDAQ Global Market)through December 31, 2014 of the cumulative total return for our common shares, the NASDAQ Composite Index and the NASDAQ Biotechnology Index.The graph assumes an initial investment of $100 on November 5, 2014 in each of our common shares, the NASDAQ Composite Index and the NASDAQBiotechnology Index, and assumes reinvestment of dividends, if any. The comparisons in the graph are not intended to forecast or be indicative of possiblefuture performance of our common shares. 79 Recent Sales of Unregistered SecuritiesIn 2014, we granted options under our Amended and Restated Stock Option Plan to purchase 129,889 common shares to certain of our employees atexercise prices ranging from CAD$10.78 to CAD$11.22 per share and 33,943 common shares to our directors at exercise prices ranging from of CAD$10.78to CAD$11.22 per share. In addition, in 2014 we granted options under our 2014 Equity Incentive Plan to purchase 36,008 common shares to our directors atan exercise price of USD$9.00 per share. During 2014, we issued an aggregate of 2,416 common shares that were not registered under the Securities Act to ouremployees pursuant to the exercise of options for cash consideration with aggregate exercise proceeds of approximately CAD$14,683. In addition, during2014, we issued 13,365 common shares pursuant to subscription rights issued under a research funding agreement with Genome B.C.The common shares issued pursuant to the exercise of options were offered, sold and issued pursuant to the Canadian prospectus exemption undersection 2.42 of National Instrument 45-106—Prospectus and Registration Exemptions, or NI 45-106, as such securities were offered, sold and issued inaccordance with the terms and conditions of securities that we had previously issued. The options described above were offered, sold and issued pursuant tothe Canadian prospectus exemption under section 2.24 of NI 45-106 as such securities were offered, sold and issued by us to our directors, officers, employeesand consultants. The securities issued pursuant to subscription rights were issued pursuant to the Canadian prospectus exemption under section 2.3 of NI 45-106 as such securities were issued to an accredited investor, as such term is defined in NI 45-106.Any grant of our stock options and any issuance of our common shares upon the exercise of such stock options described above that was made to aresident of the U.S. was made pursuant to written compensatory plans or arrangements with our directors, officers, employees and service providers in relianceon the exemption provided by Rule 701 promulgated under Section 3(b) of the Securities Act. All recipients either received adequate information about us orhad access, through employment or other relationships, to such information.On November 10, 2014, we completed a private placement in which we issued and sold 495,000 common shares to Roche Finance Ltd., or Roche,concurrently with the closing of our initial public offering. The sale and issuance of the common shares to 80 Roche was effected pursuant to the terms of a common share put agreement, dated as of March 19, 2014, with Roche. The aggregate purchase price of thecommon shares was USD$4,455,000, representing a per share price of USD$9.00, the price that our common shares were sold to the public in our initialpublic offering. The purchase price of the common shares was paid for by Roche in immediately available funds. The sale and issuance of the common shareswas exempt from registration under the Securities Act under Section 4(a)(2) thereof as a transaction by an issuer not involving a public offering. Rocheacquired the common shares for investment only and not with a view to or for sale in connection with any distribution of the common shares and appropriatelegends were affixed thereto.Use of ProceedsOn November 4, 2014, our registration statement on Form S-1 (No. 333-198666) was declared effective for our initial public offering, and onNovember 10, 2014 we completed the initial public offering consisting of 4,600,000 common shares for $9.00 per share. As a result of the offering, wereceived total net proceeds of approximately $34.2 million, after deducting total expenses of $7.2 million, consisting of underwriting discounts andcommissions of $2.9 million and offering-related expenses of approximately $4.3 million. No payments for such expenses were made directly or indirectly to(i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities, or (iii) any of our affiliates.Jefferies LLC and Wells Fargo Securities, LLC acted as joint book-running managers of the offering and as representatives of the underwriters. CanaccordGenuity Inc. acted as a co-manager for the offering.There has been no material change in the planned use of proceeds from our initial public offering from that described in the final Prospectus datedNovember 4, 2014 filed with the SEC pursuant to Rule 424(b)(4).Issuer Repurchases of Equity SecuritiesNone. 81 Item 6.Selected Financial DataThe following selected financial data is derived from our audited financial statements and should be read in conjunction with, and is qualified in itsentirety by, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements andSupplementary Data” contained elsewhere in this Annual Report on Form 10-K. The selected Statements of Operations data for the years ended December 31,2014, 2013 and 2012 and Balance Sheet data as of December 31, 2014 and 2013 have been derived from our audited financial statements appearingelsewhere in this Annual Report on Form 10-K. The selected Statements of Operations data for the years ended December 31, 2011 and Balance Sheet data asof December 31, 2012 and 2011 have been derived from our audited consolidated financial statements that are not included in this Annual Report on Form10-K. Historical results are not necessarily indicative of future results. Our audited annual financial statements have been prepared in U.S. dollars and inaccordance with U.S. Generally Accepted Accounting Principles. Year Ended December 31, 2014 2013 2012 2011 Statement of Operations Data: Revenue: Collaboration revenue $28,366 $27,352 $14,300 $6,915 Royalties 4 4 8 3 28,370 27,356 14,308 6,918 Operating expenses: Research and development 11,768 12,303 10,455 12,302 General and administrative 5,496 5,341 7,006 6,730 Total operating expenses 17,264 17,644 17,461 19,032 Income (loss) from operations 11,106 9,712 (3,153) (12,114)Other income (expense): Interest income 568 338 144 153 Interest expense — (64) (93) (91)Foreign exchange gain (loss) 1,344 2,035 (169) 60 Gain (loss) on write-off and disposal of assets — 11 (1,030) — Net income (loss) 13,018 12,032 (4,301) (11,992)Net income (loss) attributable to participating securities — 8,199 — — Net income (loss) attributable to common shareholders $13,018 $3,833 $(4,301) $(11,992)Net income (loss) per share—basic (1) $4.11 $2.87 $(3.24) $(9.06)Net income (loss) per share—diluted (1) $3.28 $1.91 $(3.24) $(9.06)Weighted-average common shares outstanding used in computing basic net income (loss) per share (1) 3,166 1,338 1,327 1,324 Weighted-average common shares outstanding used in computing diluted net income (loss) per share (1) 3,964 2,009 1,327 1,324 (1)See Note 3(l) to our financial statements appearing elsewhere in this report for an explanation of the method used to calculate basic and diluted netincome (loss) per common share and the weighted-average number of common shares used in computation of the per common share amounts. As of December 31, 2014 2013 2012 2011 (in thousands) Balance Sheet Data: Cash, cash equivalents and marketable securities $84,041 $49,276 $60,162 $14,924 Working capital 70,656 31,666 41,507 20,536 Total assets 87,418 54,487 63,305 30,465 Notes payable — — 1,665 1,586 Redeemable convertible preferred shares — 102,488 102,488 102,488 Total shareholders’ equity (deficit) 72,779 (78,372) (89,865) (86,316) 82 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsYou should read the following discussion and analysis together with Part II, Item 6 — “Selected Financial Data” and our financial statements andrelated notes included elsewhere in this Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties.Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including thoseset forth under the caption Part I, Item 1A — “Risk Factors.” Throughout this discussion, unless the context specifies or implies otherwise, the terms“Xenon”, “we”, “us” and “our” refer to Xenon Pharmaceuticals Inc.OverviewWe are a clinical-stage biopharmaceutical company discovering and developing a pipeline of differentiated therapeutics for orphan indications thatwe intend to commercialize on our own, and for larger market indications that we intend to partner with global pharmaceutical companies. We have built acore enabling discovery platform for the discovery of validated drug targets by studying rare human diseases with extreme traits, including diseases causedby mutations in ion channels, known as channelopathies. We have an integrated platform that includes in-house capabilities for human genetics, smallmolecule drug discovery, as well as preclinical and clinical development.Our business was founded on our proprietary discovery platform, which we refer to as Extreme Genetics. Extreme Genetics involves the study offamilies where individuals exhibit inherited severe traits, or phenotypes. By identifying and characterizing single-gene defects responsible for thesephenotypes, we gain insights into human disease biology to better select targets for therapeutic intervention. Our Extreme Genetics discovery platform hasyielded the first approved gene therapy product in the European Union, or the EU, a broad development pipeline and multiple pharmaceutical partnerships.We believe that our Extreme Genetics discovery platform enhances the likelihood of discovering a drug target that has a major effect in humans. From thesediscoveries, we can gain an improved understanding of how a drug that modulates the target might act when given to a human.Our pharmaceutical partners include Teva Pharmaceutical Industries, Ltd., or Teva (through its subsidiary, Ivax International GmbH), Genentech, Inc.,or Genentech, and Merck & Co., Inc., or Merck (through its affiliate, Essex Chemie AG). Our pharmaceutical collaborations have generated in aggregate over$150.0 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.To date, our Extreme Genetics discovery platform has yielded:·Glybera, developed by our licensee uniQure Biopharma B.V., or uniQure, the first, and currently the only, gene therapy product approved in theEU for the treatment of the orphan disorder lipoprotein lipase deficiency, or LPLD. We believe that uniQure’s commercialization partner, ChiesiFarmaceutici S.p.A., or Chiesi, plans to launch Glybera in the first quarter of 2015;·TV-45070 (formerly XEN402), a product candidate with four Phase 2 proof-of-concept clinical trials completed. Our partner Teva is conducting a300-patient, randomized Phase 2b clinical trial in osteoarthritis, or OA, of the knee, with data expected in the third quarter of 2015 and isplanning a Phase 2b clinical trial in patients with postherpetic neuralgia, or PHN, with patient enrollment expected to begin in March 2015;·GDC-0276, a product candidate being developed in collaboration with Genentech for the treatment of pain. In September 2014, Genentechinitiated a Phase 1 clinical trial for GDC-0276. The Phase 1 clinical trial has recently been expanded and is expected to complete enrollment inthe second half of 2015. GDC-0276 is a selective, oral Nav1.7 small-molecule inhibitor being developed for the treatment of pain; and·Proprietary preclinical programs, including a sodium channel inhibitor for the orphan disorder Dravet Syndrome, or DS, and XEN801, a stearoylCo-A desaturase, or SCD1, inhibitor for the treatment of acne. We anticipate filing an investigational new drug, or IND, or IND equivalentapplication for XEN801 in the second quarter of 2015 and an IND for our DS program in 2016.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 2014, 2013 and 2012, we recognized revenue for an aggregate of approximately $28.4 million, $27.4 million and $14.3 million,respectively, consisting primarily of funding from our collaborators. Though our revenue from our collaboration and license agreements has resulted in netincome of $13.0 million for the year ended December 31, 2014 and $12.0 million for the year ended December 31, 2013, we do not expect to have sustainedprofitability for the foreseeable future. We had a net loss of $4.3 million for the year ended December 31, 2012 and had an accumulated deficit of$103.7 million as of December 31, 2014, from expenses incurred in connection with our research programs and from general and administrative costsassociated with our operations. 83 We have not generated any royalty revenue or other revenue from product sales, and we expect that our revenue in the near term will be substantiallydependent on our collaboration agreements. Given the uncertain nature of clinical development of our current and future product candidates and thecommercialization of current and future products, we cannot predict when or whether we will receive further milestone payments under our current or futurecollaboration 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 willincrease substantially as we:·continue our research and preclinical and clinical development of our product candidates;·seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical trials;·make milestone and other payments under our in-license agreements;·maintain, protect and expand our intellectual property portfolio;·attract, hire and retain skilled personnel; and·create additional infrastructure to support our operations as a public company and otherwise.Recent DevelopmentsIn February 2015, we announced that our partner Teva will initiate a Phase 2b clinical trial of TV-45070 in patients with post-herpetic neuralgia,or PHN. PHN is a painful complication of Herpes zoster infection. Herpes zoster, also known as shingles, generally manifests as a painful skin rash withblisters in a limited area on one side of the body. Pain can occur both before and during the rash, and can also persist after the infection has resolved. PHN isdefined as pain that persists for 120 days or longer after the onset of rash. The Phase 2b clinical trial in PHN will be a randomized, double-blind, placebo controlled, multi-site study to evaluate the efficacy and safety ofTV-45070 in patients with PHN. The study will include three treatment groups to receive doses of 4% or 8% of TV-45070 or placebo, dosed twice daily.Approximately 330 patients will be enrolled in the study. Patients will be stratified into treatment groups based on their R1150W status, a genetic painbiomarker believed to be related to pain susceptibility. The primary endpoint of this study is the change from baseline to week 4 in the numeric rating scale,or NRS, scores. Secondary endpoints include additional pain measurement scores at specified daily time points, the percentage of patients with greater than30% and greater than 50% improvement in pain scores, quality of life measurements and adverse events measurements. The first patient is anticipated to bedosed in March 2015, and the anticipated completion date for the Phase 2b clinical trial is mid-2016. Financial Operations OverviewRevenueTo date, our revenue has been primarily derived from collaboration and licensing agreements as well as, to a lesser extent, government funding. Inaddition, we have received nominal royalties from a diagnostic license. To date, we have not generated any royalty revenue from product sales, and do nototherwise anticipate generating revenue from product sales other than from sales of Glybera under our license to uniQure for the foreseeable future, if ever.We have entered into several collaboration agreements, the most significant of which, with respect to revenue, are described at “Business – StrategicAlliances” and “Note 13” of the financial statements included elsewhere in this Annual Report on Form 10-K. 84 The following table is a summary of revenue recognized from our current collaboration and licensing agreements for each of the years endedDecember 31, 2014, 2013 and 2012 (in thousands): Year Ended December 31, 2014 2013 2012 uniQure: Milestone payment $14 $531 $198 Teva: Recognition of upfront payment 12,255 13,143 927 Research funding 333 630 — Genentech: Recognition of upfront payment 3,603 3,300 3,431 Research funding 4,248 4,514 3,517 Milestone payment 7,913 5,062 — Merck: Recognition of initial milestone payment — — 1,060 Option fee — — 2,060 Research funding — — 2,442 Genome BC: Research funding — 172 665 Total collaboration revenue $28,366 $27,352 $14,300 Through December 31, 2014, we had recognized upfront fees and milestone payments totaling CAD$1.1 million, pursuant to our sublicense andresearch agreement with uniQure. We are eligible to receive certain additional milestone payments of less than CAD$1.0 million for Glybera and for eachsubsequent product, if any, developed pursuant to the agreement.Pursuant to the terms of our collaborative development and license agreement with Teva, we received an upfront payment of $41.0 million. Wedetermined that the various deliverables under this agreement should be considered as a single unit of accounting. As such, the $41.0 million upfrontpayment is being recognized as revenue ratably over the expected period of research performance of pre-commercial activities, which is the three-year periodfrom December 2012 through December 2015.Pursuant to the terms of our December 2011 collaborative development and license agreement with Genentech, we received an upfront payment of$10.0 million. We determined that the various deliverables under this agreement should be considered as a single unit of accounting. As such, the$10.0 million upfront payment is being recognized as revenue ratably over the expected period of research performance, which was the three-year period fromDecember 2011 through December 2014. In September 2013, we received a $5.0 million milestone payment for the selection of a compound for goodlaboratory practices, or GLP, toxicology studies. We recognized the milestone payment upon achievement in August 2013. In August 2014, we received an$8.0 million milestone payment for the approval of the GDC-0276 Clinical Trial Application by Health Canada. We recognized the milestone payment uponachievement in August 2014.Pursuant to the terms of our March 2014 agreement with Genentech, we received an upfront payment of $1.5 million. We determined that the variousdeliverables under this agreement should be considered as a single unit of accounting. As such, the $1.5 million upfront payment is being recognized asrevenue ratably over the expected period of research performance, which is the two-year period from March 2014 to March 2016.Pursuant to the terms of our agreement with Merck, we received an initial milestone payment of $5.0 million in February 2010. We determined thatthis initial milestone payment was not substantive and should not be considered a separate element. As such, we recognized the initial milestone payment of$5.0 million as revenue ratably over the expected period of research performance of pre-commercial activities, which was the period from February 2010through June 2012. Since the beginning of 2011, we have received both an option fee and two milestone payments from Merck. Each of these payments wasdetermined to be substantive and at risk at the inception of the agreement and as such have been recognized as revenue in the period received. 85 As our other internal and partnered products are in various stages of clinical and preclinical development, we do not expect to generate any revenuefrom product sales other than from our share of revenue related to our agreement with uniQure for at least the next several years. We expect that revenue forthe next several years will be derived from our agreement with uniQure and our eligibility to receive a share of the compensation received by uniQurerelating to the technology or products licensed by us, and full-time equivalents, or FTEs, and milestone payments under our current collaboration agreementsand any additional collaboration agreements that we may enter into in the future. We cannot provide any assurance as to the extent or timing of futuremilestone 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 fromour existing collaborations and any future collaborations.The following table is a summary of our deferred revenue for our collaboration and licensing agreements as of December 31, 2014, 2013 and 2012 (inthousands): Year Ended December 31, 2014 2013 2012 Teva $10,897 $24,691 $39,907 Genentech 882 3,115 6,745 Total deferred revenue $11,779 $27,806 $46,652 We expect such deferred revenue remaining as of December 31, 2014 to be recognized as revenue in the applicable fiscal years ending December 31,2015 and 2016 based on our accounting policy for revenue recognition for each collaboration agreement.Operating ExpensesThe following table summarizes our operating expenses for the years ended December 31, 2014, 2013 and 2012 (in thousands): Year Ended December 31, 2014 2013 2012 Research and development $11,768 $12,303 $10,455 General and administrative 5,496 5,341 7,006 Total operating expenses $17,264 $17,644 $17,461 Research and Development ExpensesResearch and development expenses represent costs incurred to conduct research on our product candidates in collaboration with Teva andGenentech, as well as further research and development of our other proprietary product candidates.Research and development expenses consist of costs incurred in performing research and development activities, including salary, related benefits andshare-based compensation for employees engaged in scientific research and development, third-party contract costs relating to research, formulation,manufacturing, preclinical studies and clinical trial activities, third-party license and collaboration fees, laboratory consumables and allocated facility-related costs.Project-specific expenses reflect costs directly attributable to our clinical development candidates and our preclinical candidates once nominated andselected for further development. All remaining research and development expenses are reflected in early-stage discovery programs. At any given time, wehave several active early-stage research and drug discovery programs. Our personnel and infrastructure are typically deployed over multiple projects and arenot directly linked to any individual internal early-stage research or drug discovery program. Therefore, we do not maintain financial information for ourinternal 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 weadvance our proprietary product candidates into clinical development, conduct our development activities under our agreements with Teva and Genentech,advance our internal drug discovery programs into preclinical development and continue our early-stage research. The increase in expense will likely includeadded personnel and third-party contracts related to research, formulation, manufacturing, preclinical studies and clinical trial activities as well as third-partylicense and collaboration fees and laboratory consumables. 86 Clinical development timelines, likelihood of regulatory approval and commercialization and associated costs are uncertain and difficult to estimateand can vary significantly. We anticipate determining which research and development projects to pursue as well as the level of funding available for eachproject based on the scientific research and preclinical and clinical results of each product candidate and related regulatory action. We expect our researchand development expenses to continue to represent our largest category of operating expense for at least the next 12 to 24 months.General and Administrative ExpensesGeneral and administrative expenses consist primarily of salary, related benefits and share-based compensation of our executive, finance, businessdevelopment and administrative functions, travel expenses, allocated facility-related costs not otherwise included in research and development expenses, andprofessional fees for auditing, tax and legal services, including legal expenses for intellectual property protection.We expect that general and administrative expenses will increase in the future as we expand our operating activities to support increased research anddevelopment activities, and build our commercial infrastructure for the potential option for co-promotion of TV-45070 in the U.S., if and when regulatoryapproval is received.We also anticipate incurring additional general and administrative expenses as a public company, including costs of additional personnel, additionalprofessional fees for audit, accounting and legal services, director fees, enhanced business and accounting systems, costs related to investor relations andincreased premiums for directors’ and officers’ liability insurance.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 tothe levels of cash and investment balances and low interest earned on such balances. We anticipate that our interest income will continue to fluctuatedepending on timing of payments from collaborative partners, our cash and investment balances, and interest rates.Interest Expense. Interest expense consists of interest incurred on the note payable held by Isis Pharmaceuticals, Inc., or Isis, related to ourcollaboration agreement for XEN701. As we fully repaid the note payable to Isis in June 2013 and now have no other debts outstanding, we expect to havelittle or no interest expense in the future. In the fourth quarter of 2013, we discontinued development of XEN701 as the preclinical data did not support itscontinued advancement. In the first quarter of 2014, we provided formal notice of termination of the agreement to Isis.Foreign Exchange Gain (Loss). Our functional currency historically has been the Canadian dollar. For presentation purposes, our assets and liabilitiesare translated to U.S. dollars at exchange rates at the reporting date. Any resulting exchange gains and losses resulting from the translation of U.S. denominated transactions are recorded in current operations. On January 1, 2015, our functional currency changed from the Canadian dollar to the U.S. dollar basedon our analysis of the changes in the primary economic environment in which we operate. We will continue to incur substantial expenses in Canadian dollarsand will remain subject to risks associated with foreign currency fluctuations. Comparatives will not be restated and the change will be accounted forprospectively.Gain (Loss) on Write-off and Disposal of Assets. During the year ended December 31, 2012, we wrote-off leasehold improvements at our leased facilitywhich had a net book value of $1.0 million in connection with a lease extension and modification agreement made effective April 1, 2012.Critical Accounting Policies and Significant Judgments and EstimatesOur management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have beenprepared in conformity with generally accepted accounting principles in the U.S., or U.S. GAAP. The preparation of our financial statements requires us tomake 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 ofwhich form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions.While our significant accounting policies are more fully described in the notes to our financial statements appearing in this report, we believe that thefollowing accounting policies are the most critical to understanding and evaluating our reported financial results. 87 Revenue recognition:We recognize revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or serviceshave been rendered; (iii) our price to the collaborator is fixed or determinable; and (iv) collectability is reasonably assured.We are eligible to receive non-refundable upfront payments, funding for research and development services, milestone payments, other contingentpayments and royalties under our various collaboration agreements. In assessing the appropriate revenue recognition related to a collaboration agreement, wefirst determine whether an arrangement includes multiple elements, such as the delivery of intellectual property rights and research and development services.Revenues associated with multiple element arrangements are attributed to the various elements based on their relative fair values or are recognized as a singleunit of accounting when relative fair values are not determinable.Upfront payments are recorded as deferred revenue on the balance sheet and are recognized as collaboration revenue over the estimated period ofresearch performance that is consistent with the terms of the research and development obligations contained in the collaboration agreement. We periodicallyreview the estimated period of performance based on the progress made under each arrangement. Funding related to full-time equivalent staffing fundedthrough collaboration agreements is recognized as revenue on a gross basis as we perform or deliver such related services in accordance with the agreementterms, provided that we will receive payment for such services upon standard payment terms. We recognize revenue contingent upon achievement of amilestone in its entirety, in the period the milestone is achieved, only if the milestone meets certain criteria and is considered to be substantive. Share-based compensation:We grant stock options to employees, directors and consultants pursuant to a stock option plan. Compensation expense is recorded for stock optionsissued to employees and non-employees using the fair value method with a corresponding increase in additional paid-in capital. Any consideration receivedon exercise of stock options and the purchase of shares is credited to share capital.Under the fair value based method, share-based payments to non-employees are measured at the fair value of the equity instruments issued, and theawards are periodically re-measured during the vesting period as the options are earned. Any changes therein are recognized over the period and in the samemanner as if we had paid cash instead of paying with or using equity instruments. The fair value of stock-based awards to employees is measured at the grantdate and amortized over the vesting period.Stock options issued to employees are recorded at the fair value of stock options determined at the date of the grant using the Black-Scholes option-pricing model and a single option award approach and are expensed on a straight-line basis over the vesting period of the options. In determining theexpense, we deduct the number of options that are expected to be forfeited at the time of a grant and revise this estimate, if necessary, in subsequent years ifactual forfeitures differ from those estimated. Any amounts paid by employees on exercise of the stock options and subsequent purchase of shares are creditedto share capital. 88 Results of OperationsComparison of Years Ended December 31, 2014 and 2013The following table summarizes the results of our operations for the years ended December 31, 2014 and 2013 together with changes in those items (inthousands): Year Ended December 31, Change2014 vs. 2013 2014 2013 Increase/(Decrease) Collaboration revenue $28,366 $27,352 $1,014 Royalties 4 4 — Research and development expenses 11,768 12,303 (535)General and administrative expenses 5,496 5,341 155 Other: Interest income 568 338 230 Interest expense — (64) 64 Foreign exchange gain 1,344 2,035 (691)Gain on write-off and disposal of assets — 11 (11)Net income $13,018 $12,032 $986 RevenueWe recognized revenue of $28.4 million for the year ended December 31, 2014 compared to $27.4 million for the year ended December 31, 2013, anincrease of $1.0 million. The increase was primarily attributable to a $7.9 million milestone payment recognized in August 2014 from Genentech andrecognition of $0.6 million of an upfront payment recognized from Genentech for the pain genetics collaboration entered into in March 2014, partially offsetby a $5.1 million milestone payment recognized in August 2013 from Genentech and $2.1 million decrease in revenue resulting from the change in theforeign exchange rate between the U.S. and Canadian dollar. Research and Development ExpensesThe following table summarizes research and development expenses for the years ended December 31, 2014 and 2013 together with changes in thoseitems (in thousands): Year Ended December 31, Change2014 vs. 2013 2014 2013 Increase/(Decrease) Teva collaboration (TV-45070) expenses $1,115 $1,005 $110 Genentech collaboration (GDC-0276) expenses 4,788 5,072 (284)Other collaboration expenses — 133 (133)Preclinical and discovery program expenses 5,865 6,093 (228)Total research and development expenses $11,768 $12,303 $(535) Research and development expenses were $11.8 million for the year ended December 31, 2014 as compared to $12.3 million for the year endedDecember 31, 2013. The decrease of $0.5 million was primarily attributable to the change in the foreign exchange rate between the U.S. and Canadian dollaras the majority of our research and development expenses are incurred in Canadian dollars. Additionally, there was a decrease in preclinical and discoveryprogram expenses as XEN701 was discontinued in late 2013, mostly offset by an increase in spending for our other early stage research programs. 89 General and Administrative ExpensesThe following table summarizes general and administrative expenses for the years ended December 31, 2014 and 2013 together with changes in thoseitems (in thousands): Year Ended December 31, Change2014 vs. 2013 2014 2013 Increase/(Decrease) General and administrative expenses $5,496 $5,341 $155 General and administrative expenses were $5.5 million for the year ended December 31, 2014 compared to $5.3 million for the year endedDecember 31, 2013. This increase was primarily due to an increase in finance-related salaries and benefits and in overhead expenses. The increase waspartially offset by the change in the foreign exchange rate between the U.S. and Canadian dollar as the majority of our general and administrative expensesare incurred in Canadian dollars.Other IncomeThe following table summarizes our other income for the years ended December 31, 2014 and 2013 together with changes in those items (inthousands): Year Ended December 31, Change2014 vs. 2013 2014 2013 Increase/(Decrease) Other income: $1,912 $2,320 $(408) Other income was $1.9 million for the year ended December 31, 2014 as compared to $2.3 million for the year ended December 31, 2013, a decrease of$0.4 million. The decrease was primarily attributable to the change in the foreign exchange rate between the U.S. and Canadian dollar, partially offset by anincrease in interest income attributable to an increase in interest rates and balances of savings accounts.Comparison of Years Ended December 31, 2013 and 2012The following table summarizes the results of our operations for the years ended December 31, 2013 and 2012 together with changes in those items (inthousands): Year Ended December 31, Change2013 vs. 2012 2013 2012 Increase/(Decrease) Collaboration revenue $27,352 $14,300 $13,052 Royalties 4 8 (4)Research and development expenses 12,303 10,455 1,848 General and administrative expenses 5,341 7,006 (1,665)Other: Interest income 338 144 194 Interest expense (64) (93) 29 Foreign exchange gain (loss) 2,035 (169) 2,204 Gain (loss) on write-off and disposal of assets 11 (1,030) 1,041 Net income (loss) $12,032 $(4,301) $16,333 RevenueWe recognized revenue of $27.4 million for the year ended December 31, 2013 compared to $14.3 million for the year ended December 31, 2012, anincrease of $13.1 million. The increase was primarily attributable to the recognition of $12.8 million of the upfront payment and research funding from Teva,a $5.1 million milestone payment received from Genentech, $1.0 million in additional FTE funding we received from Genentech, and $0.3 million in non-royalty compensation (related to a payment) from uniQure. This was offset by a $0.5 million decrease in research funding from Genome BC and $5.6 milliondecrease in revenue from Merck for an option fee, recognition of an upfront payment, and FTE funding related to the research agreement that ended inDecember 2012. 90 Research and Development ExpensesThe following table summarizes research and development expenses for the years ended December 31, 2013 and 2012 together with changes in thoseitems (in thousands): Year Ended December 31, Change2013 vs. 2012 2013 2012 Increase/(Decrease) Teva collaboration (TV-45070) expenses $1,005 $1,951 $(946)Genentech collaboration (GDC-0276) expenses 5,072 3,652 1,420 Other collaboration expenses 133 1,717 (1,584)Preclinical and discovery program expenses 6,093 3,135 2,958 Total research and development expenses $12,303 $10,455 $1,848 Research and development expenses were $12.3 million for the year ended December 31, 2013 as compared to $10.5 million for the year endedDecember 31, 2012. The increase of $1.8 million was primarily attributable to a $3.0 million increase in preclinical and discovery program expensesconsisting of a $1.5 million increase in spending for XEN701 and a $1.5 million increase in spending for our other early stage research programs. There wasalso a $1.4 million increase in Genentech collaboration expenses due to an increase in the number of FTEs dedicated to this collaboration. The increases wereoffset in part by a $1.6 million decrease in other collaboration expenses primarily due to the Merck collaborative research program ending in December 2012and a $0.9 million decrease in spending for TV-45070 related to Teva’s assumption of the development costs of that product candidate as of January 1, 2013.General and Administrative ExpensesThe following table summarizes general and administrative expenses for the years ended December 31, 2013 and 2012 together with changes in thoseitems (in thousands): Year Ended December 31, Change2013 vs. 2012 2013 2012 Increase/(Decrease) General and administrative expenses $5,341 $7,006 $(1,665) General and administrative expenses were $5.3 million for the year ended December 31, 2013 compared to $7.0 million for the year endedDecember 31, 2012. This decrease was primarily due to a reduction in intellectual property expenses, the majority of which have been assumed by ourcollaborators.Other Income (Expense)The following table summarizes our other income (expense) for the years ended December 31, 2013 and 2012 together with changes in those items (inthousands): Year Ended December 31, Change2013 vs. 2012 2013 2012 Increase/(Decrease) Other income (expense): $2,320 $(1,148) $3,468 Interest income was $0.3 million for the year ended December 31, 2013 as compared to $0.1 million for the year ended December 31, 2012, an increaseof $0.2 million. The increase was primarily attributable to our increased cash and investment balances from our receipt of $41.0 million in December 2012from Teva.We recognized a foreign exchange gain of $2.0 million for the year ended December 31, 2013 as compared to a foreign exchange loss of $0.2 millionfor the year ended December 31, 2012. The foreign exchange gain in 2013 was due to the increased Canadian dollar to U.S. dollar exchange rate.We wrote-off leasehold improvements with a net book value of $1.0 million for the year ended December 31, 2012 in connection with a leaseextension and modification agreement made effective April 1, 2012. No such item was recorded in the year ended December 31, 2013. 91 Liquidity and Capital ResourcesTo date, we have financed our operations primarily through funding received from collaboration and license agreements, private placements of ourcommon and preferred shares and our initial public offering, as well as through the receipt of government funding. As of December 31, 2014, we had cash andcash equivalents and marketable securities of $84.0 million. We received $38.4 million of proceeds, net of underwriting discounts and commissions butbefore offering expenses, from our initial public offering and $4.1 million of proceeds, net of underwriters’ fees but before offering expenses, from theconcurrent private placement to an affiliate of Genentech. Our initial public offering and concurrent private placement each closed in November 2014.We have incurred significant operating losses since inception. Although we had $13.0 million and $12.0 million in net income for the years endedDecember 31, 2014 and 2013, respectively, we had an accumulated deficit of $103.7 million from inception through December 31, 2014. We expect tocontinue to incur significant expenses in excess of our revenue and expect to incur operating losses over the next several years. Our net losses may fluctuatesignificantly from quarter to quarter and year to year. We expect to continue to incur significant expenses and operating losses for the foreseeable future as wecontinue our research and preclinical and clinical development of our product candidates; expand the scope of our current studies for our product candidates;initiate additional preclinical, clinical or other studies for our product candidates, including under our collaboration agreements; change or add additionalmanufacturers or suppliers; seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical studies; seek toidentify and validate additional product candidates; acquire or in-license other product candidates and technologies; make milestone or other paymentsunder our in-license agreements including, without limitation, our agreements with the University of British Columbia, or UBC, and the Memorial Universityof Newfoundland, or MUN; maintain, protect and expand our intellectual property portfolio; attract and retain skilled personnel; establish a sales, marketingand distribution infrastructure to commercialize any products for which we or one of our collaborators may obtain marketing approval, and maintaincommercial rights; create additional infrastructure to support our operations as a public company and our product development and planned futurecommercialization efforts; and experience any delays or encounter issues with any of the above.Until such time as we can generate substantial product revenue, if ever, we expect to finance our cash needs through a combination of collaborationagreements and equity or debt financings. Except for any obligations of our collaborators to reimburse us for research and development expenses or to makemilestone payments under our agreements with them, we do not have any committed external sources of capital. To the extent that we raise additional capitalthrough the future sale of equity or debt, the ownership interest of our shareholders will be diluted, and the terms of these securities may include liquidationor other preferences that adversely affect the rights of our existing common shareholders. If we raise additional funds through collaboration agreements in thefuture, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not befavorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce orterminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwiseprefer to develop and market ourselves.Our future capital requirements are difficult to forecast and will depend on many factors, including:·whether our existing collaborations continue to generate research funding, milestone payments and royalties to us;·the number and stage of development of future product candidates that we choose to pursue;·the scope, progress, results and costs of research and development of our future product candidates independently, and conducting preclinicalresearch and clinical studies;·the timing and costs involved in obtaining regulatory approvals for any future product candidates we develop independently;·the cost associated with exercising our co-promotion option for TV-45070 in the U.S., should the opportunity arise and we choose to do so;·the cost of commercialization activities, if any, of any future product candidates we develop independently that are approved for sale, includingmarketing, sales and distribution costs;·the cost of manufacturing our future product candidates and any products we successfully commercialize independently;·our ability to maintain existing collaborations and to establish new collaborations, licensing or other arrangements and the financial terms ofsuch arrangements;·the costs of preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome of suchlitigation; and·the timing, receipt and amount of sales, or royalties on Glybera, TV-45070, GDC-0276 and our future product candidates, if any. 92 Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cashand cash equivalents and marketable securities as of the date of this report, and research funding that we expect to receive under our existing collaborations,will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 to 24 months. We have based this estimate onassumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Additionally, the process of testing drug candidatesin clinical trials is costly, and the timing of progress in these trials remains uncertain.Cash FlowsThe following table shows a summary of our cash flows for the years ended December 31, 2014, 2013 and 2012 (in thousands): Year Ended December 31, 2014 2013 2012 Net cash provided by (used in) operating activities $266 $(3,322) $45,573 Net cash provided by (used in) investing activities (3,244) (11,472) 491 Net cash provided by (used in) financing activities 41,124 (4,391) — Operating ActivitiesDuring the year ended December 31, 2014, net cash provided by operating activities totaled $0.3 million, compared to net cash used in operatingactivities of $3.3 million for the same period in 2013. The change was driven primarily by an increase in net income of $1.0 million and changes in timing ofcash payments of trade payables and deferred revenue.During the year ended December 31, 2013, net cash used in operating activities totaled $3.3 million. Our net income of $12.0 million was offset by asignificant decrease in deferred revenue and other changes in working capital.During the year ended December 31, 2012, operating activities provided $45.6 million of cash. This cash flow from operations resulted from the $41.0million payment received from Teva and the collection of the $10.0 million receivable for the upfront payment from the Genentech collaboration, partiallyoffset by our net loss of $4.3 million. Our accounts payable and accrued liabilities were affected by the timing of payments to our vendors and additionalaccruals for our research activities.Investing ActivitiesDuring the year ended December 31, 2014, net cash used in investing activities totaled $3.2 million, compared to net cash used in investing activitiesof $11.5 million for the same period in 2013. The change was driven primarily by a decrease in net investment in marketable securities, partially offset by anincrease in the purchase of property, plant and equipment.During the year ended December 31, 2013, net cash used in investing activities was $11.5 million and consisted primarily of purchases of marketablesecurities of $17.9 million, partially offset by proceeds from marketable securities of $6.6 million.For the year ended December 31, 2012, net cash provided by investing activities was $0.5 million and consisted primarily of cash received from thesale of marketable securities of $1.0 million, partially offset by purchases of property, plant and equipment of $0.5 million.Financing ActivitiesDuring the year ended December 31, 2014, net cash provided by financing activities totaled $41.1 million, compared to net cash used in financingactivities of $4.4 million for the same period in 2013. The change was driven primarily by an increase in proceeds from issuance of common shares related toour initial public offering and concurrent private placement in November 2014.During the year ended December 31, 2013, net cash used for financing activities was $4.4 million, which consisted of $2.7 million in deferredfinancing costs and $1.7 million for repayment of the note we issued to Isis in connection with our collaboration agreement.Net cash provided by financing activities for the year ended December 31, 2012 was related to the exercise of stock options and was less than $2,000. 93 Contractual Obligations and CommitmentsThe following summarizes our significant contractual obligations as of December 31, 2014 (in thousands): Contractual Obligations Total Less Than1 Year 1 To 3 Years 3 To 5 Years More Than5 Years Operating leases (1) $7,650 $1,002 $2,062 $2,158 $2,428 (1)Represents future minimum lease payments under an operating lease in effect as of December 31, 2014 for our current facility in Burnaby, BritishColumbia, Canada.The contractual obligations table above excludes potential future payments we may be required to make if we elect to opt into the co-developmentarrangement under our collaboration with Merck or the co-promotion for TV-45070 under our collaboration with Teva. Our potential payment obligations inthe single-digit percentage range to UBC related to amounts we receive from sales of Glybera are also excluded from the table. Additionally, the table doesnot include our potential royalty and milestone payment obligations to MUN pursuant to the Restated Collaborative Research & License Agreement by andbetween us and MUN dated December 2006. Pursuant to this agreement, we are obligated to pay MUN certain milestone payments and a single-digitpercentage royalty of net sales for products that we sell directly and a single-digit percentage of royalties we receive from sales on products under our painprogram.InflationWe do not believe that inflation has had a material effect on our business, financial condition or results of operations in the last three fiscal years.Off-Balance Sheet ArrangementsWe do not engage in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities, whichinclude special purposes entities and other structured finance entities.Related Party TransactionsFor a description of our related party transactions, see “Certain Relationships and Related Transactions, and Director Independence.”Recent Accounting PronouncementsIn July 2013, the Financial Accounting Standards Board, or FASB, issued amendments on income tax matters to include explicit guidance on thefinancial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.The amendments clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as areduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, when the uncertain tax position wouldreduce the net operating loss carryforward, a similar tax loss, or a tax credit carryforward under the tax law of the applicable jurisdiction, and when the entityintends to use the deferred tax asset for that purpose. These amendments were effective prospectively for fiscal years beginning after December 15, 2013. OnJanuary 1, 2014, we adopted these amendments. The adoption of these amendments did not have a material impact on our financial position or results ofoperations.In May 2014, the FASB issued amendments to clarify the principles of recognizing revenue and to develop a common revenue standard that wouldremove inconsistencies in revenue requirements, leading to improved comparability of revenue recognition practices across entities and industries. Theamendments stipulate that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosure will also be required about the nature,amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, andassets recognized from costs incurred to obtain or fulfill a contract. These amendments will be effective for public entities for reporting periods beginningafter December 15, 2016. We are in the process of evaluating the impact of the adoption of the amendments on our financial position, results of operationsand cash flows. 94 In August 2014, the FASB issued amendments requiring management to assess an entity’s ability to continue as a going concern. For each reportingperiod, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as agoing concern within one year from the date the financial statements are issued. These amendments will be effective for public entities for the annual periodending after December 15, 2016, and for annual periods and interim periods thereafter. The adoption of these amendments in fiscal 2017 is not expected tohave a material impact on our financial statements.The Jumpstart Our Business Startups Act of 2012, or JOBS Act, provides that an emerging growth company can take advantage of an extendedtransition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certainaccounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transitionperiod, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required fornon-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with newor revised accounting standards is irrevocable. Item 7A.Quantitative and Qualitative Disclosure About Market RiskWe are exposed to various market risks in the ordinary course of our business, including changes in interest rates and currency exchange rates. Marketrisk is the potential loss arising from adverse changes in interest rates and exchange rates.Foreign Currency Exchange RiskThe principal market risk we face is foreign currency exchange rate risk. We face this risk, in part, as a result of entering into transactions denominatedin currencies other than Canadian dollars, particularly those denominated in U.S. dollars and Euros. We also hold non-Canadian dollar denominated cash andcash equivalents, accounts receivable and accounts payable, which are primarily denominated in U.S. dollars.Changes in foreign currency exchange rates can create significant foreign exchange gains or losses to us. Our current foreign currency risk is primarilywith the U.S. dollar as a majority of our non-Canadian dollar denominated expenses are denominated in U.S. dollars. To limit our exposure to volatility incurrency markets, we estimate our anticipated expenses that will be denominated in currencies other than the Canadian dollar and then purchase acorresponding amount of the relevant foreign currency at the current spot rate. Once these estimated expense amounts are acquired, we do not hedge ourexposure and thus assume the risk of future gains or losses on the amounts of foreign currency held. The impact of an adverse change in foreign exchangerates may be offset in the event we receive a milestone payment from a foreign collaborator. At December 31, 2014, we held cash and cash equivalents of$46.5 million denominated in U.S. dollars. A hypothetical 10% increase (decrease) in the value of the U.S. dollar would result in a foreign exchange gain(loss) of $5.4 million being recorded in the Statement of Operations on the translation of these U.S. dollar cash and cash equivalent balances into theCanadian dollar functional currency.On January 1, 2015, our functional currency changed from the Canadian dollar to the U.S. dollar based on our analysis of the changes in the primaryeconomic environment in which we operate. We will continue to incur substantial expenses in Canadian dollars and will remain subject to risks associatedwith foreign currency fluctuations.Interest Rate RiskAn additional market risk we face is interest rate risk. We had cash and cash equivalents and marketable securities of $84.0 million as of December 31,2014. The goals of our investment policy are liquidity and capital preservation; we do not enter into investments for trading or speculative purposes andhave not used any derivative financial instruments to manage our interest rate exposure. We believe that we do not have any material exposure to changes inthe fair value of these assets as a result of changes in interest rates due to the short term nature of our cash, cash equivalents and marketable securities.Declines in interest rates, however, would reduce future investment income. A 10% change in interest rates during any of the periods presented would nothave had a material impact on our financial statements. Such interest-earning instruments carry a degree of interest rate risk. We had no outstanding debt as ofDecember 31, 2014. 95 Item 8.Financial Statements and Supplementary Data 96 XENON PHARMACEUTICALS INC.Index to Financial StatementsYear ended December 31, 2014 Index Report of Independent Registered Public Accounting Firm 98 Balance Sheets as of December 31, 2014 and 2013 99 Statements of Operations for the years ended December 31, 2014, 2013 and 2012 100 Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013 and 2012 101 Statements of Changes in Redeemable Convertible Preferred Shares and Shareholders’ Equity (Deficit) for the years ended December 31, 2014, 2013and 2012 102 Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 103 Notes to Financial Statements 104 97 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and Directors of Xenon Pharmaceuticals Inc.We have audited the accompanying balance sheets of Xenon Pharmaceuticals Inc. as of December 31, 2014 and December 31, 2013 and the relatedstatements of operations, comprehensive income (loss), changes in redeemable convertible preferred shares and shareholders’ equity (deficit) and cash flowsfor each of the years in the three-year period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Xenon Pharmaceuticals Inc. as ofDecember 31, 2014 and December 31, 2013, and its results of operations and its cash flows for each of the years in the three-year period ended December 31,2014 in conformity with US generally accepted accounting principles. /s/ KPMG LLPChartered Accountants March 12, 2015Vancouver, Canada 98 XENON PHARMACEUTICALS INC.Balance Sheets(Expressed in thousands of U.S. dollars except share data) December 31, December 31, 2014 2013 Assets Current assets: Cash and cash equivalents $72,026 $37,950 Marketable securities 12,015 11,326 Accounts receivable 215 440 Prepaid expenses and other current assets 686 153 84,942 49,869 Deferred financing fees — 2,739 Property, plant and equipment, net (note 6) 2,476 1,879 Total assets $87,418 $54,487 Liabilities and Shareholders’ Equity (Deficit) Current liabilities: Accounts payable and accrued expenses (note 7) 2,664 2,283 Deferred revenue (note 8) 11,622 15,920 14,286 18,203 Deferred revenue, less current portion (note 8) 157 11,886 Deferred tenant inducements 196 282 $14,639 $30,371 Redeemable convertible preferred shares (note 10): Series A Convertible Preferred shares, without par value; no shares authorized or outstanding at December 31, 2014; 1,205,761 authorized and 1,151,468 issued and outstanding at December 31, 2013. — 2,939 Series B Convertible Preferred shares, without par value; no shares authorized or outstanding at December 31, 2014; 1,028,806 authorized and 994,885 issued and outstanding at December 31, 2013. — 8,683 Series E Convertible Preferred shares, without par value; no shares authorized or outstanding at December 31, 2014; 4,370,920 authorized and 4,322,126 issued and outstanding at December 31, 2013. — 90,866 — 102,488 Shareholders’ equity (deficit): Common shares, without par value; unlimited shares authorized; 14,181,333 and 1,344,627 issued and outstanding at December 31, 2014 and December 31, 2013, respectively. 147,157 6,147 Additional paid-in capital 30,346 29,722 Accumulated deficit (103,734) (116,752)Accumulated comprehensive income (loss) (990) 2,511 $72,779 $(78,372)Total liabilities, shareholders’ equity (deficit) and redeemable convertible preferred shares $87,418 $54,487 Collaboration agreements (note 13) Commitments and contingencies (note 14) The accompanying notes are an integral part of these financial statements. -99- XENON PHARMACEUTICALS INC.Statements of Operations(Expressed in thousands of U.S. dollars except share and per share data) Year Ended December 31, 2014 2013 2012 Revenue: Collaboration revenue $28,366 $27,352 $14,300 Royalties 4 4 8 28,370 27,356 14,308 Operating expenses: Research and development 11,768 12,303 10,455 General and administrative 5,496 5,341 7,006 17,264 17,644 17,461 Income (loss) from operations 11,106 9,712 (3,153)Other income (expense): Interest income 568 338 144 Interest expense — (64) (93)Foreign exchange gain (loss) 1,344 2,035 (169)Gain (loss) on write-off and disposal of assets — 11 (1,030)Net income (loss) 13,018 12,032 (4,301)Net income attributable to participating securities — 8,199 — Net income (loss) attributable to common shareholders $13,018 $3,833 $(4,301)Net income (loss) per common share: Basic $4.11 $2.87 $(3.24)Diluted $3.28 $1.91 $(3.24)Weighted-average shares outstanding: Basic 3,165,572 1,337,662 1,327,460 Effects of dilutive securities Stock options 798,225 659,167 — Subscription rights — 12,277 — Diluted 3,963,797 2,009,106 1,327,460 The accompanying notes are an integral part of these financial statements. -100- XENON PHARMACEUTICALS INC.Statements of Comprehensive Income (Loss)(Expressed in thousands of U.S. dollars) Year Ended December 31, 2014 2013 2012 Net income (loss) $13,018 $12,032 $(4,301)Other comprehensive income (loss): Foreign currency translation adjustment (3,501) (1,236) 342 Unrealized loss on marketable securities measured at fair value — — (4)Comprehensive income (loss) $9,517 $10,796 $(3,963) The accompanying notes are an integral part of these financial statements. -101- XENON PHARMACEUTICALS INC.Statement of Changes in Redeemable Convertible Preferred Shares and Shareholders’ Equity (Deficit)(Expressed in thousands of U.S. dollars except per share data) Series A convertiblepreferred shares Series B convertiblepreferred shares Series E convertiblepreferred shares Common shares Additional paid-incapital Accumulated deficit Accumulatedcomprehensiveincome (loss) Total shareholder'sequity (deficit) Shares Amount Shares Amount Shares Amount Shares Amount Balance as ofJanuary 1,2012 1,151,468 $2,939 994,885 $8,683 4,322,126 $90,866 1,324,224 $5,986 $28,772 $(124,483) $3,409 $(86,316)Net loss forthe year (4,301) (4,301)Unrealizedloss on fairvalue of marketablesecurities (4) (4)Cumulativetranslationadjustment 342 342 Stock optioncompensationexpense 406 406 Issuance ofsubscriptionrights 8 8 Issuance ofcommonshares on conversionofsubscriptionrights 6,472 22 (22) — Balance as ofDecember31, 2012 1,151,468 $2,939 994,885 $8,683 4,322,126 $90,866 1,330,696 $6,008 29,164 $(128,784) $3,747 $(89,865)Net incomefor the year 12,032 12,032 Cumulativetranslationadjustment (1,236) (1,236)Stock optioncompensationexpense 575 575 Issuance ofsubscriptionrights 73 73 Issuance ofcommonshares on conversionofsubscriptionrights 5,602 45 (45) — Issuedpursuant toexercise ofstock options 8,329 94 (45) 49 Balance as ofDecember31, 2013 1,151,468 $2,939 994,885 $8,683 4,322,126 $90,866 1,344,627 $6,147 $29,722 $(116,752) $2,511 $(78,372)Net incomefor the year 13,018 13,018 Conversionof Series A, Band E convertiblepreferredshares (note 10) (1,151,468) (2,939) (994,885) (8,683) (4,322,126) (90,866) 7,725,924 102,488 102,488 Issuance ofcommonshares, net of issuancecosts 5,095,000 38,373 38,373 Cumulativetranslationadjustment (3,501) (3,501)Stock optioncompensationexpense 760 760 Issuance ofcommonshares on conversionofsubscriptionrights 13,365 124 (124) - Issuedpursuant toexercise ofstock options 2,417 25 (12) 13 Balance as ofDecember31, 2014 — $— — $— — $— 14,181,333 $147,157 $30,346 $(103,734) $(990) $72,779 The accompanying notes are an integral part of these financial statements. -102- XENON PHARMACEUTICALS INC.Statements of Cash Flows(Expressed in thousands of U.S. dollars) Year Ended December 31, 2014 2013 2012 Operating activities: Net income (loss) $13,018 $12,032 $(4,301)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 738 705 786 Loss (gain) on write-off of assets — (11) 1,030 Stock-based compensation 760 575 406 Non-cash compensation on issuance of subscription rights — 73 8 Interest accrued on note payable — — 77 Deferred tenant inducements (66) (115) 183 Foreign exchange loss (gain) 72 94 (34)Changes in operating assets and liabilities: Accounts receivable 209 (76) 11,230 Prepaid expenses, and other current assets (573) (14) 162 Accounts payable and accrued expenses 518 (228) 540 Deferred revenue (14,410) (16,357) 35,486 Net cash provided by (used in) operating activities 266 (3,322) 45,573 Investing activities: Purchases of property, plant and equipment (1,529) (156) (526)Sale of property, plant and equipment — 10 7 Purchase of marketable securities (15,254) (17,876) — Proceeds from marketable securities 13,539 6,550 1,010 Net cash provided by (used in) investing activities (3,244) (11,472) 491 Financing activities: Note payable — (1,701) — Deferred financing fees (1,533) (2,739) — Proceeds from issuance of common shares, net of issuance costs 42,657 49 — Net cash provided by (used in) financing activities 41,124 (4,391) — Effect of exchange rate changes on cash and cash equivalents (4,070) (3,027) 170 Increase (decrease) in cash and cash equivalents 34,076 (22,212) 46,234 Cash and cash equivalents, beginning of year 37,950 60,162 13,928 Cash and cash equivalents, end of year $72,026 $37,950 $60,162 Supplemental disclosures: Interest paid $— $201 $— Interest received 574 279 170 Supplemental disclosures of non-cash transactions: Issuance of common shares on conversion of subscription rights 124 45 22 Financing fees included in accounts payable and accrued liabilities 39 — — Conversion of convertible preferred shares into common shares 102,488 — — The accompanying notes are an integral part of these financial statements. -103- XENON PHARMACEUTICALS INC.Notes to Financial Statements(Expressed in thousands of U.S. dollars except numbers of shares) 1.Nature of the business:Xenon Pharmaceuticals Inc. (the “Company”), incorporated in 1996 under the British Columbia Business Corporations Act and continued federally in2000 under the Canada Business Corporation Act, is a clinical-stage biopharmaceutical company discovering and developing a pipeline ofdifferentiated therapeutics for orphan indications that it intends to commercialize on its own, and for larger market indications that it intends topartner with global pharmaceutical companies.On October 1, 2014, the Company effected a 1 for 4.86 reverse share split of its common and Series A, B and E redeemable convertible preferredshares. At the time of the consolidation, there were no outstanding Series C and D preferred shares and therefore such series were not included in theconsolidation. Accordingly, (i) every 4.86 common shares were combined into one common share, (ii) every 4.86 redeemable Series A, B and Econvertible preferred shares were combined into one redeemable convertible preferred share, (iii) the number of common shares into which eachoutstanding subscription right was exchangeable into common shares were proportionately decreased on a 1 for 4.86 basis, (iv) the number of commonshares into which each outstanding option to purchase common shares was exercisable were proportionately decreased on a 1 for 4.86 basis, and(v) the exercise price for each such outstanding option to purchase common shares was proportionately increased on a 1 for 4.86 basis. All of the sharenumbers, share prices, and exercise prices in these financial statements have been adjusted, on a retroactive basis, to reflect this 1 for 4.86 reverse sharesplit.On November 10, 2014, the Company completed an initial public offering (“IPO”) of 4,600,000 of its common shares at a price to the public of $9.00per share. On November 10, 2014, the Company also completed a private placement, in which the Company issued 495,000 of its common shares toan affiliate of Genentech at a price of $9.00 per share. Immediately prior to the closing of the IPO, all outstanding convertible preferred shares wereconverted into 7,725,924 common shares (note 10) and 10,201 outstanding subscription rights were converted into 10,201 common shares. Followingthe IPO, there were no preferred shares or subscription rights outstanding. As of November 10, 2014, after the completion of our IPO and concurrentprivate placement, we had a total of 14,181,333 common shares outstanding. 2.Basis of presentation:These financial statements are presented in U.S. dollars.The accompanying audited financial statements of the Company have been prepared in accordance with United States generally accepted accountingprinciples (“U.S. GAAP”).These audited financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, arenecessary for a fair presentation of the financial position of the Company as at December 31, 2014 and the result of operations and cash flows for allperiods presented. 3.Significant accounting policies:(a)Use of estimates:The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and thereported amounts of revenue and expenses during the reporting period. Significant areas of estimates include, but are not limited to, thevaluation of accounts receivable, the estimated useful lives of property, plant and equipment, the recoverability of long-lived assets, the timingof revenue recognition, the determination of stock-based compensation and the assessment of contingent liabilities. Actual results could differmaterially from those estimates. Estimates and assumptions are reviewed quarterly. All revisions to accounting estimates are recognized in theperiod in which the estimates are revised and in any future periods affected. (b)Cash and cash equivalents:Cash equivalents are highly liquid investments that are readily convertible into cash with terms to maturity of three months or less whenacquired. 104 (c)Segment and geographic information:Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by thechief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Companyviews its operations and manages its business in one operating segment. (d)Property, plant and equipment:Property, plant and equipment is stated at historical cost less accumulated depreciation and/or accumulated impairment losses, if any.Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable thatfuture economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairsand maintenance are expensed during the financial period in which they are incurred.Property, plant and equipment are recorded at cost and are amortized over their estimated useful lives using the straight-line method based onthe following rates: Asset RateResearch equipment 5 yearsOffice furniture and equipment 5 yearsComputer equipment 3 yearsLeasehold improvements Over the lesser of lease term or estimateduseful life (e)Impairment of long-lived assets:The Company monitors its long-lived assets for indicators of impairment. If such indicators are present, the Company assesses therecoverability of affected assets by determining whether the carrying value of such assets is less than the sum of the undiscounted future cashflows of the assets. If such assets are found not to be recoverable, the Company measures the amount of such impairment by comparing thecarrying value of the assets to the fair value of the assets, with the fair value generally determined based on the present value of the expectedfuture cash flows associated with the assets. Based on the Company's assessment of future cash flows and current operations, the Company hasdetermined that no impairment of long-lived assets existed as of December 31, 2014 and 2013. (f)Concentration of credit risk and of significant customers:Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cashequivalents, marketable securities, and accounts receivable. Cash and cash equivalents are invested through banks and other financialinstitutions in Canada. Such deposits may be in excess of insured limits. The Company maintains cash and cash equivalents with various highcredit quality and capitalized financial institutions.Marketable securities are highly liquid investments with terms to maturity of greater than three months, and less than twelve months, whenacquired, and include guaranteed investment certificates as well as government treasury bills and treasury notes. Marketable securities areinvested through September 2015.Accounts receivable are typically unsecured and are concentrated in the pharmaceutical industry due to the Company’s multiplecollaborations. Accordingly, the Company may be exposed to credit risk generally associated with pharmaceutical companies or specific to thecollaboration agreements with its significant pharmaceutical collaborators. To date, the Company has not experienced any material lossesrelated to its receivables.Collaborators whose collaboration research and development revenue accounted for 10% or more of total revenues were as follows: Year ended December 31, 2014 2013 2012 Genentech $15,764 $12,876 $6,948 Merck — — 5,562 Teva 12,588 13,773 — 105 (g)Financial instruments and fair value:Fair value:U.S. GAAP establishes a fair value hierarchy for inputs to be used to measure fair value of financial assets and liabilities. This hierarchyprioritizes 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 assets or liabilities that the Company has the ability to access at thebalance sheet date.·Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly orindirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similarassets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interestrates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or othermeans (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 orliability. The Company develops these inputs based on the best information available.Cash equivalents and marketable securities are reflected in the accompanying financial statements at fair value using Level 1. The carryingamount of accounts receivables and accounts payable and accrued expenses approximates fair value due to the nature and short-term of thoseinstruments.Marketable securities are highly liquid investments with terms to maturity of greater than three months when acquired. Marketable securitieshave varying maturities of less than 12 months, are classified as available-for-sale investments and are measured at their fair values under Level1 of the fair value hierarchy with unrealized holding gains or losses reported in other comprehensive income. (h)Revenue recognition:The Company recognizes revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery hasoccurred or services have been rendered; (iii) the Company’s price to the collaborator is fixed or determinable; and (iv) collectability isreasonably assured.The Company generates revenue primarily through collaboration agreements.Under these collaboration agreements, the Company is eligible to receive non-refundable upfront payments, funding for research anddevelopment services, milestone payments, other contingent payments and royalties. In assessing the appropriate revenue recognition relatedto a collaboration agreement, the Company first determines whether an arrangement includes multiple elements, such as the delivery ofintellectual property rights and research and development services. Revenues associated with multiple element arrangements are attributed tothe various elements based on their relative fair values or are recognized as a single unit of accounting when relative fair values are notdeterminable.Upfront payments are recorded as deferred revenue on the balance sheet and are recognized as collaboration revenue over the estimated periodof research performance that is consistent with the terms of the research and development obligations contained in the collaboration agreement.The Company periodically reviews the estimated period of performance based on the progress made under each arrangement.The Company recognizes funding related to full-time equivalent staffing funded through collaboration agreements as revenue on a gross basisas it performs or delivers such related services in accordance with the agreement terms, provided that it will receive payment for such servicesupon standard payment terms.The Company recognizes revenue contingent upon its achievement of a milestone in its entirety, in the period the milestone is achieved, onlyif the milestone meets certain criteria and is considered to be substantive.The Company makes judgments which affect the periods over which the Company recognized revenue, including modifying such periodsbased on any amendments to its collaboration agreements. (i)Research and development costs:Research and development costs are expensed in the period in which they are incurred. 106 (j)Development activity costs:Certain development activity costs, such as preclinical costs, manufacturing costs and clinical trial costs, are a component of research anddevelopment costs and include fees paid to contract research organizations, investigators and other vendors who conduct certain productdevelopment activities on behalf of the Company. The amount of expenses recognized in a period related to service agreements is based onestimates of the work performed using an accrual basis of accounting. These estimates are based on patient enrollment, services provided andgoods delivered, contractual terms and experience with similar contracts. The Company monitors these factors and adjusts the estimatesaccordingly. Prepaid expenses or accrued liabilities are adjusted if payments to service providers differ from estimates of the amount of servicecompleted in a given period. (k)Share-based compensation:The Company grants stock options to employees, directors and consultants pursuant to a stock option plan described in Note 11.Compensation expense is recorded for stock options issued to employees and non-employees using the fair value method with a correspondingincrease in additional paid-in capital. Any consideration received on exercise of stock options and the purchase of shares is credited to sharecapital.Under the fair value based method, share-based payments to non-employees are measured at the fair value of the equity instruments issued, andthe awards are periodically re-measured during the vesting period as the options are earned. Any changes therein are recognized over the periodand in the same manner as if the Company had paid cash instead of paying with or using equity instruments. The fair value of stock-basedawards to employees is measured at the grant date and amortized over the vesting period. Stock options issued to employees are recorded at the fair value of stock options determined at the date of the grant using the Black-Scholesoption-pricing model and a single option award approach and are expensed on a straight-line basis over the vesting period of the options. Indetermining the expense, the Company deducts the number of options that are expected to be forfeited at the time of a grant and revises thisestimate, if necessary, in subsequent years if actual forfeitures differ from those estimated. Any amounts paid by employees on exercise of thestock options and subsequent purchase of shares are credited to share capital. (l)Net income (loss) per share:Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per common share is computed by adjusting netincome (loss) attributable to common shareholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Forperiods in which the Company has reported net losses, diluted net loss per common share is the same as basic net loss per common share, sincedilutive common shares are not assumed to have been issued if their effect is anti-dilutive. For the year ended December 31, 2014, outstandingstock options of 154,057 (December 31, 2013 – 42,592) were excluded from the calculation of net income per common share because theirinclusion would be anti-dilutive. As the Company reported a net loss attributable to common shareholders for the year ended December 31,2012, all stock options and subscription rights were anti-dilutive and were excluded from the diluted weighted average shares for that period.Prior to the Company’s IPO, net income (loss) per share was calculated under the two-class method as the Company had outstanding shares thatmet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common andparticipating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-classmethod requires income available to common shareholders for the period to be allocated between common and participating securities basedupon their respective rights to receive dividends as if all income for the period had been distributed.Prior to the Company’s IPO, the Company’s then-outstanding redeemable convertible preferred shares contractually entitled the holders ofsuch shares to participate in dividends, but did not contractually require the holders of such shares to participate in losses of the Company.Accordingly, in periods in which the Company reported a net loss or a net loss attributable to common shareholders resulting from preferredshare dividends or accretion, net losses were not allocated to participating securities. All of the outstanding redeemable convertible preferredshares converted to common shares upon the consummation of the Company’s IPO. 107 (m)Foreign currency translation:The Company’s functional currency is the Canadian dollar and the Company’s reporting currency is the U.S. dollar. The Company initiallyrecords foreign currency transactions using the exchange rates prevailing at the dates of the transactions. At the balance sheet date, results ofoperations and cash flows are translated into the functional currency at average exchange rates during the period, and monetary assets andliabilities are translated at end of period exchange rates. Non-monetary assets and liabilities and equity transactions are translated at historicalexchange rates. The effects of exchange rate fluctuations on translating foreign currency monetary assets and liabilities into Canadian dollarsare included in the statement of operations as foreign exchange gain (loss).At the balance sheet date, results of operations and cash flows are translated into the U.S. dollar reporting currency at average exchange ratesduring the period, and assets and liabilities are translated at end of period exchange rates, except for equity transactions, which are translated athistorical exchange rates. The effects of exchange rate fluctuations on translating functional currency assets and liabilities into U.S. dollars areaccumulated as a separate component in other accumulated comprehensive income (loss) as cumulative translation adjustment. (n)Income taxes:Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and credit carryforwards. Deferred taxassets and liabilities are measured at rates expected to apply to taxable income in the years in which those temporary differences andcarryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized inthe statement of operations in the period that includes the enactment date. A valuation allowance is recorded when it is not more likely thannot that all, or a portion of the net deferred tax assets will be realized. (o)Deferred tenant inducements:Deferred tenant inducements, which include leasehold improvements paid for by the landlord and free rent, are recorded as liabilities on thebalance sheet and recognized as a reduction of rent expense on a straight-line basis over the term of the lease. (p)Deferred financing fees:Deferred financing fees, which primarily consist of direct incremental legal and accounting fees relating to the IPO, were capitalized. Thedeferred financing fees were offset against IPO proceeds upon consummation of the offering in November 2014. At December 31, 2013, $2,739was capitalized and deferred. There were no remaining amounts deferred at December 31, 2014. (q)Comparative figures:Certain comparative figures have been reclassified to conform to the financial statement presentation adopted for the current year. 4.Changes in significant accounting policies:In July 2013, the Financial Accounting Standards Board (“FASB”) issued amendments on income tax matters to include explicit guidance on thefinancial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforwardexists. The amendments clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financialstatements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, when the uncertaintax position would reduce the net operating loss carryforward, a similar tax loss, or a tax credit carryforward under the tax law of the applicablejurisdiction, and when the entity intends to use the deferred tax asset for that purpose. These amendments were effective prospectively for fiscal yearsbeginning after December 15, 2013. On January 1, 2014, the Company adopted these amendments. The adoption of these amendments did not have amaterial impact on the Company’s financial position or results of operations. 108 5.Future changes in accounting policies:In May 2014, the FASB issued amendments to clarify the principles of recognizing revenue and to develop a common revenue standard that wouldremove inconsistencies in revenue requirements, leading to improved comparability of revenue recognition practices across entities and industries.The amendments stipulate that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount thatreflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosure will also be requiredabout the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments andchanges in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. These amendments will be effective for public entitiesfor reporting periods beginning after December 15, 2016. The Company is in the process of evaluating the impact of the adoption of the amendmentson the Company’s financial position, results of operations and cash flows.In August 2014, the FASB issued amendments requiring management to assess an entity’s ability to continue as a going concern. For each reportingperiod, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability tocontinue as a going concern within one year from the date the financial statements are issued. These amendments will be effective for public entitiesfor the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The adoption of these amendments infiscal 2017 is not expected to have a material impact on the Company’s financial statements. 6.Property, plant and equipment:Property, plant and equipment consisted of the following: December 31, 2014 2013 Research equipment $6,815 $6,356 Office furniture and equipment 980 1,069 Computer equipment 1,887 1,780 Leasehold improvements 6,338 6,825 Less: accumulated depreciation and amortization (13,544) (14,151)Total $2,476 $1,879 During the year ended December 31, 2012, the Company wrote off leasehold improvements with a net book value of $1,030 in connection with a leaseextension and modification agreement made effective April 1, 2012.Depreciation expense was $738 for the year ended December 31, 2014 (2013 - $705, 2012 - $786). 7.Accounts payable and accrued expenses:Accounts payable and accrued expenses consisted of the following: December 31, 2014 2013 Trade payables $553 $391 Employee compensation, benefits, and related accruals 1,077 520 Consulting and contracted research 774 412 Professional fees 180 694 Other 80 266 Total $2,664 $2,283 109 8.Deferred revenue:The Company receives upfront payments under various research and collaboration agreements. In assessing the appropriate revenue recognitionrelated to a collaboration agreement, the Company first determines whether an arrangement includes multiple elements, such as the delivery ofintellectual property rights and research and development services. Upfront payments are recorded as deferred revenue in the balance sheet and arerecognized as collaboration revenue over the estimated period of the research commitment that is consistent with the terms of the research anddevelopment obligations contained in the collaboration agreement. The Company periodically reviews the estimated period of performance based onthe progress made under each arrangement. The full amount as of December 31, 2014 of $11,779 is expected to be realized as revenue as follows: Year ending December 31: 2015 $11,622 2016 157 Deferred revenue $11,779 9.Note payable:In November 2010, the Company entered into a collaboration and licensing agreement with Isis Pharmaceuticals, Inc. (“Isis”) to discover, develop andcommercialize antisense drugs that target the hepcidin-hemojuvelin pathway. Upon signing the agreement, the Company issued a convertiblepromissory note to Isis as payment of an upfront fee of $1,500. The note accrued interest at 5% per annum, compounded annually with interestpayable at the time the note became due and payable. At the option of the Company, the note was convertible into equity securities upon occurrenceof certain events specified in the note. As the number of equity securities that the note payable was potentially convertible into was variable until thetime of conversion, the note was classified as a financial liability and measured at its amortized cost.In June 2013, the Company repaid the promissory note in full in cash (together with accrued interest) for $1,701 in conjunction with the exercise of anoption to exclusively license certain product rights under the collaboration with Isis. 10.Redeemable convertible preferred shares:The rights and preferences of the shares of Series A, Series B and Series E convertible preferred shares (collectively, the “Redeemable ConvertiblePreferred Shares”) were as follows:Conversion - Each Series A, Series B, and Series E preferred share were initially convertible at any time at the option of the holder into common shareson a 1:1 basis, subject to certain adjustments for share splits, consolidations, stock dividends, and, as applicable, following certain capitalreorganizations or mergers or acquisitions with another company as well as certain adjustments based on whether any common shares were issuedduring certain specified time periods at a price per share which was lower than certain threshold amounts as set forth in the articles.Immediately prior to the closing of the Company’s IPO, all outstanding Series A and B redeemable convertible preferred shares were converted intocommon shares on a 1:1 basis and Series E redeemable convertible preferred shares were converted into common shares on a 1:1.2 basis, subject tocertain adjustments. These adjustments differ for some of the Company’s outstanding Series E preferred shares depending on the date of issue,resulting in different conversion ratios for different Series E preferred shares. The conversion of preferred shares into common shares was as follows: Preferred SharesOutstanding Conversioninto CommonShares uponInitial PublicOffering Series A 1,151,468 1,151,468 Series B 994,885 994,885 Series E 4,322,126 5,579,571 Total 6,468,479 7,725,924 110 As of December 31, 2014, no Series A, Series B and Series E convertible preferred shares were outstanding. A description of certain rights applicable tothe redeemable convertible preferred shares prior to their conversion in the IPO is as follows:Dividends - Holders of Series A, Series B and Series E preferred shares were entitled to receive non-cumulative cash dividends, in preference to anydividend payable on the common shares, at a rate of 8% per annum of the issue price of the preferred share when and as declared by the Board, butonly if any dividends were declared on the common shares. In addition, holders of the Series A, Series B and Series E preferred shares would have beenentitled to receive, when and as declared by the Board, dividends in an amount equal to any dividend per common share declared by the Board on thecommon shares multiplied by the number of common shares that would have been issued in exchange for the Series A, Series B and Series E preferredshares upon conversion. No dividends were declared prior to the conversion of the Series A, Series B and Series E preferred shares into common sharesin connection with the closing of the IPO.Redemption - There were certain redemption rights afforded the Series A, Series B and Series E preferred shares. Such preferred shares had redemptionrights in the event of a change of control event such as a merger, acquisition or consolidation of the Company, or in the event of a sale, lease or otherdisposition of all or substantially all of the assets of the Company. Such events are not solely within the control of the Company, and therefore, theredeemable convertible preferred shares were classified outside of shareholders’ equity (deficit).The Company had also authorized 4,620 Series C preferred shares and 9,376 Series D preferred shares. No Series C or D preferred shares wereoutstanding as at December 31, 2013. Immediately prior to the closing of the Company’s IPO, the Company’s articles were amended to remove allreferences to Series C and D preferred shares. 11.Stock option plans:The Company’s 2014 Equity Incentive Plan (the “2014 Plan”) permits the grant of share-based compensation awards to directors, officers, employeesand consultants of the Company. The Company’s pre-existing stock option plan (the “Amended and Restated Stock Option Plan”) was limited to thegranting of stock options as equity incentive awards whereas the 2014 Plan also allows for the issuance of restricted shares, restricted share units, shareappreciation rights and performance shares. No further options will be granted under the Company’s Amended and Restated Stock Option Plan.Under the 2014 Plan, options granted generally vest on a graduated basis over a four-year period or less. The exercise price of the options isdetermined by the Board but must at least be equal to the fair market value of the common shares on the date of grant. Options may be exercised overa maximum term of ten years. As of December 31, 2014, a total of 411,522 common shares had been reserved for issuance under the 2014 Plan. Thenumber of common shares available for issuance under the 2014 Plan includes an annual increase beginning in 2015 by an amount which will bedetermined at the discretion of the Board.The Amended and Restated Stock Option Plan provided for the grant of options for the purchase of common shares to directors, officers, employeesand service providers prior to the Company’s IPO. The options granted under the Amended and Restated Stock Option Plan vested on a graduatedbasis over a four-year period or less and each option’s maximum term was ten years. The Amended and Restated Stock Option Plan will continue togovern the options granted thereunder. 111 Summary of stock option activity is as follows: Number ofOptions Weighted Average ExercisePrice WeightedAverageRemainingContractualLife AggregateIntrinsicValue CAD $ U.S. $ In Years U.S. $ Outstanding, January 1, 2012 1,059,510 4.27 4.22 6.07 Granted 150,102 3.64 3.64 Forfeited and expired (81,175) 5.24 5.24 Outstanding, December 31, 2012 1,128,437 4.13 4.17 5.81 Granted 292,418 3.74 3.64 Exercised (8,329) 6.07 5.88 37 Forfeited and expired (79,427) 4.90 4.76 Outstanding, December 31, 2013 1,333,099 3.98 3.88 5.80 8,300 Granted 205,170 10.84 9.35 Exercised (2,417) 6.07 5.23 23 Forfeited and expired (51,634) 5.96 5.14 Outstanding, December 31, 2014 1,484,218 4.88 4.20 5.70 15,551 Exercisable as of December 31, 2014 1,116,564 3.99 3.44 4.73 12,554 The following table summarizes the stock options outstanding and exercisable at December 31, 2014: Options Outstanding Options exercisable Exercise Prices Number ofOptions WeightedAverageRemainingOption Life Weighted AverageExercise Price Number ofOptions Weighted AverageExercise Price (years) CAD $ U.S. $ CAD $ U.S. $ CAD $2.67 252,353 8.04 2.67 2.30 133,053 2.67 2.30 CAD $3.74 878,149 4.74 3.74 3.22 851,569 3.74 3.22 CAD$ 6.07 107,013 0.19 6.07 5.23 107,013 6.07 5.23 CAD$ 9.76 42,592 8.59 9.76 8.41 15,085 9.76 8.41 CAD$ 10.78 156,172 9.04 10.78 9.29 7,525 10.78 9.29 CAD$ 11.22 6,273 9.59 11.22 9.67 — — — USD$ 9.00 36,008 9.85 10.44 9.00 — — — USD$ 12.65 5,658 9.90 14.68 12.65 2,319 14.68 12.65 1,484,218 5.70 4.88 4.20 1,116,564 3.99 3.44 A summary of the Company’s non-vested stock option activity and related information for the year ended December 31, 2014 is as follows: Number of Options Weighted Average Grant Date Fair Value CAD $ U.S. $ Non-vested, January 1, 2014 388,230 3.79 3.54 Granted 205,170 7.08 6.10 Vested (223,589) 3.76 3.24 Forfeited and cancelled (2,157) 3.88 3.35 Non-vested, December 31, 2014 367,654 5.64 4.86 112 The fair value of each option issued to employees and non-employees is estimated using the Black-Scholes option-pricing model with the followingweighted-average assumptions: Years ended December 31 2014 2013 2012 Average risk-free interest rate 1.94% 1.03% 1.14%Average expected term (in years) 6.13 6.20 6.20 Expected volatility 73% 70% 70%Expected dividend yield 0.00% 0.00% 0.00%Expected forfeiture rate 0.00% 0.00% 0.00% The weighted-average fair value of options granted during the year ended December 31, 2014 was, $6.10 (2013 - $4.13, 2012 - $2.28) per option.As of December 31, 2014, the unrecognized stock-based compensation cost related to the non-vested stock options was $1,580 (2013 - $1,155, 2012 -$633), which is expected to be recognized over a weighted-average period of 2.5 years (2013 - 2.5 years, 2012 - 2.2 years).The aggregate fair value of options vested during the year ended December 31, 2014 was $722 (2013 - $374, 2012 - $565).The Company uses the “simplified method” to determine the expected term of options. Under this method, the expected term represents the average ofthe vesting period and the contractual term.The expected volatility of share options was estimated based on a historical volatility analysis of peers that were similar to the Company with respectto industry, stage of life cycle, size, and financial leverage. The risk-free interest rate of the options is based on the U.S. Treasury yield curve in effectat the date of grant for a term similar to the expected term of the option.Stock-based compensation expense is classified in the statements of operations as follows: Years ended December 31, 2014 2013 2012 Research and development $194 $147 $112 General and administrative 566 428 294 $760 $575 $406 12.Foreign exchange gain (loss):(a)Foreign Currency Exchange Risk:At December 31, 2014, the Company had U.S. dollar denominated cash and cash equivalents of $46,531 (December 31, 2013 - $6,365) andCanadian denominated cash and cash equivalents and marketable securities of CAD$43,516 (December 31, 2013 - CAD$45,641).The Company faces foreign currency exchange rate risk in part, as a result of entering into transactions denominated in currencies other thanCanadian dollars, particularly those denominated in U.S. dollars and Euros. The Company also holds non-Canadian dollar denominated cash,accounts receivable and accounts payable, which are primarily denominated in U.S. dollars.Changes in foreign currency exchange rates can create significant foreign exchange gains or losses to the Company. The Company’s currentforeign currency risk is primarily with the U.S. dollar as a majority of its non-Canadian dollar denominated expenses are denominated in U.S.dollars. To limit the Company’s exposure to volatility in currency markets, the Company maintains a natural currency hedge againstfluctuations in currency exchange rates by estimating its anticipated expenses that will be denominated in currencies other than the Canadiandollar and then purchasing a corresponding amount of the relevant foreign currency at the current spot rate. The Company does not otherwisehedge its exposure and thus assumes the risk of future gains or losses on the amounts of foreign currency held. The impact of an adverse changein foreign exchange rates may be offset in the event the Company receives a milestone payment from a foreign partner.113 (b)Interest Rate Risk:At December 31, 2014, the Company had cash and cash equivalents of $72,026 (December 31, 2013 - $37,950), which consisted of bankdeposits. At December 31, 2014, the Company had marketable securities of $12,015 (December 31, 2013 - $11,326). The goals of theCompany’s investment policy are liquidity and capital preservation; the Company does not enter into investments for trading or speculativepurposes and has not used any derivative financial instruments to manage its interest rate exposure. The Company believes that it does nothave any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short term nature of theCompany’s cash and cash equivalents. Declines in interest rates, however, would reduce future investment income. Such interest-earninginstruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been significant. The Company hadno outstanding debt as of December 31, 2014. 13.Collaboration agreements:The Company has entered into a number of collaboration agreements with multiple deliverables under which it may have received non-refundableupfront payments. The Company generally recognizes revenue from upfront payments ratably over the term of its estimated period of performance ofresearch 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 thecollaborator for development and having it approved and ultimately sold for a profit is highly uncertain. As such, the milestone payments that theCompany may earn from its collaborators involve a significant degree of risk to achieve.Research and development milestones in the Company’s collaboration agreements may include the following types of events:·completion of preclinical research and development work leading to selection of product candidates;·initiation of Phase 1, Phase 2 or Phase 3 clinical trials; and·achievement of certain other scientific or development events.Regulatory milestone payments may include the following types of events:·filing of regulatory applications for marketing approval in the U.S., Europe or Japan, including investigational new drug (“IND”) applicationsand new drug applications (“NDA”); and·marketing approval in a major market, such as the U.S., Europe or Japan.Commercialization milestone payments may include payments triggered by annual product sales that achieve pre-specified thresholds.(a)uniQure Biopharma B.V. (“uniQure”) sublicense and research agreement:Effective August 2000, the Company entered into a sublicense and research agreement with uniQure (formerly Amsterdam MolecularTherapeutics), pursuant to which the Company granted to uniQure an exclusive, worldwide sublicense under certain intellectual propertycontrolled by the Company to develop and commercialize technology and compounds related to a certain variant of lipoprotein lipase(“LPL”). Under its sublicense and research agreement with uniQure, the Company collaborated with uniQure and the University of BritishColumbia (“UBC”) on preclinical activities, and thereafter uniQure developed an LPL gene therapy product, Glybera, which contains the LPLvariant. Glybera was approved in the European Union (“EU”) in October 2012 to treat lipoprotein lipase deficiency (“LPLD”) in patients withsevere or multiple pancreatitis attacks, despite dietary fat restrictions. uniQure conducted the clinical trials and is responsible for thecommercialization of Glybera. During the year ended December 31, 2013, the Company received milestone payments of CAD$547 (2012 -CAD$198). No such milestone payments have been recognized in the year ended December 31, 2014.Under the terms of the agreement, the Company is eligible to receive certain additional milestone payments of less than CAD$1,000 forGlybera and for each subsequent product, if any, developed pursuant to the agreement with uniQure. The Company, in turn, has certainpayment obligations to its licensor, UBC, based on amounts received from uniQure or otherwise based on the exploitation of the licensedintellectual property. The Company believes that all potential milestone payments under this agreement are substantive and at risk at theinception of this agreement, and, as such, expects that future milestone payments will be recognized as revenue in the period that eachmilestone is achieved.114 The Company is also eligible to receive mid single-digit royalties on net sales of the licensed products, for sales made by uniQure and itsaffiliates. The royalty rates for sales made by uniQure and its affiliates are reduced to a low single-digit when the licensed patents expire.In July 2013, uniQure announced that it entered into a partnership with Chiesi Farmaceutici S.p.A. (“Chiesi”) for the commercialization ofGlybera in the EU and more than a dozen other countries including Brazil, China, Mexico and Russia. With respect to uniQure’s sublicense toChiesi, the Company is eligible to receive a percentage in the low twenties of all non-royalty compensation relating to the licensed technologyor products that uniQure receives from Chiesi (including, for example, upfront payments and milestone payments), a percentage in the lowtwenties of any royalties that uniQure receives from Chiesi based on sales of technology or products covered by the licensed patents, plus amid single-digit percentage of certain further royalties that uniQure receives from Chiesi based on sales of the Company’s licensed technologyor products after the expiration of all licensed patents covering the product. If uniQure grants a sublicense to a third party other than to Chiesi,then the Company is eligible to receive a percentage in the low twenties of all non-royalty compensation relating to the licensed technology orproducts that uniQure receives from such sublicensee (for example, upfront payments and milestone payments) plus a percentage in the lowtwenties of any royalties that uniQure receives from such sublicensee based on sales of technology or products covered by the licensed patents.Pursuant to the terms of the Company’s agreement with UBC, the Company must pay to UBC a single-digit percentage of amounts theCompany receives from sales of Glybera.(b)Teva Pharmaceutical Industries Ltd. (“Teva”) collaborative development and license agreement:In December 2012, the Company entered into a collaborative development and license agreement with Teva, through its subsidiary, IvaxInternational GmbH, pursuant to which the Company granted Teva an exclusive worldwide license to develop and commercialize certainproducts, including TV-45070 (formerly XEN402).Under the terms of the agreement, Teva paid the Company an upfront fee of $41,000. The Company is collaborating with Teva to furtherdevelop TV-45070, and Teva is funding all development costs with respect to the licensed products. Teva is providing funding to theCompany for certain of the Company’s full-time equivalents (“FTEs”) performing the research collaboration plan. The Company identifiedseveral deliverables under the agreement with Teva, including exclusive licenses to compounds and non-exclusive licenses to companiondiagnostic products, a commitment to participate in a joint steering committee and research and development services to be performed by theCompany on behalf of Teva. The Company concluded that the licenses did not have stand-alone value to Teva without the Company’stechnical expertise and joint steering committee participation during the initial three-year period.Therefore, the Company has determined that the various deliverables under this agreement should be considered as one single unit ofaccounting. As such the Company determined that the $41,000 upfront payment should be recognized as revenue ratably over the expectedperiod of performance, being the three-year period ending December 31, 2015.In addition, the Company is eligible to receive potential milestone payments totaling up to $335,000, comprised of a $20,000 clinicalmilestone payment, up to $285,000 in regulatory milestone payments, and a $30,000 sales-based milestone payment. If TV-45070 is approved,the Company is also eligible to receive royalties in the low teens to low twenties on net sales of licensed products for the timeframe that suchproducts are covered by the licensed patents and in certain other instances. The Company believes that potential milestone payments fordevelopment and regulatory milestones under this agreement are substantive and at risk at the inception of this agreement, and, as such,expects that these future milestone payments will be recognized as revenue in the period that each milestone is achieved. The Companybelieves that the potential sales-based milestone payments under this agreement are not substantive as the Company does not expect tocontribute effort to their achievement and expects such sales-based milestones will generally be achieved after the period of substantialinvolvement under the collaboration. Therefore, the Company expects that future sales-based contingent consideration milestone paymentswill be recognized as revenue when such milestones are achieved, assuming all other revenue recognition criteria are met. To date, no suchmilestone payments have been recognized.115 The Company has an option to a 20% to 30% co-promotion interest for products incorporating TV-45070 in the U.S. The Company’s exerciseof this option is subject to meeting objective financial conditions, staffing requirements and compliance standards to be determined in Teva’sreasonable discretion in accordance with standard industry practice. The Company’s co-promotion option is exercisable upon the filing of thefirst new drug application (“NDA”) for a TV-45070 product with the FDA, and the Company will be obligated to pay an opt-in fee to Teva,which is calculated by multiplying the Company’s co-promotion interest (as a percentage) by the amount of certain milestones paid or payableby Teva, to which is added certain past and future development costs incurred by Teva with respect to the product for the U.S. Such opt-in feeis payable as a reduction to the milestone payments or the Company’s share of operating profits that Teva would otherwise owe to theCompany, or a combination of the two. If the Company exercises this option, the Company will be eligible to receive, in lieu of royalties withrespect to such product sales in the U.S., a percentage share (equal to the Company’s co-promotion interest) of operating profits from suchproduct sales in the U.S.Teva may terminate the agreement upon 60 days advanced written notice to the Company after at least three Phase 2 (or later stage) clinicalstudies have been completed or in the event that safety or efficacy issues arise in the development of the licensed products. Either party mayterminate the agreement in the event of the other’s material breach which remains uncured for 90 business days. In certain terminationcircumstances, the Company receives licenses to Teva intellectual property relating to TV-45070 clinical development and regulatory filings.If patents within such Teva intellectual property cover the TV-45070 product, then Teva is eligible to receive royalties from the Companybased on a percentage of net product sales, within the mid single-digit range.Pursuant to the terms of the Company’s agreement with the Memorial University of Newfoundland, the Company must pay to the MemorialUniversity of Newfoundland certain milestone payments, a single-digit percentage of net sales for pain products the Company sells directlyand a single-digit percentage of royalties received for sales of pain products by the Company’s third party licensees, such as under the Tevaand Genentech agreements.(c)Genentech Inc. (“Genentech”) collaborative research and license agreement:In December 2011, the Company entered into a collaborative research and license agreement with Genentech and its affiliate, F. Hoffman-LaRoche Ltd. (“Roche”) to discover and develop small and large molecules that selectively inhibit the Nav1.7 sodium channel and companiondiagnostics for the potential treatment of pain. Pursuant to this agreement, the Company granted Genentech a worldwide exclusive license todevelop and commercialize compounds directed to Nav1.7 and products incorporating such compounds for all uses. The Company alsogranted Genentech a worldwide non-exclusive license to diagnostic products for the purpose of developing or commercializing suchcompounds.Under the terms of the agreement, Genentech paid the Company an upfront fee of $10,000. Genentech is providing funding to the Company forcertain of the Company’s FTEs performing the research collaboration plan. The Company identified several deliverables under the agreementwith Genentech, including exclusive licenses to compounds and non-exclusive licenses to diagnostic products, a commitment to participate ina joint steering committee and research and development services to be performed by the Company on behalf of Genentech. The Companyconcluded that the licenses did not have stand-alone value to Genentech without the Company’s technical expertise and joint steeringcommittee participation during the initial three year period. Therefore, the Company has determined that the various deliverables should beconsidered as a single unit of accounting. As such the Company determined that the $10,000 upfront payment should be recognized as revenueratably over the expected period of performance, being the three-year period ending December 22, 2014.The Company is eligible to receive pre-commercial and commercial milestone payments with respect to the licensed products totaling up to$621,000, comprised of up to $53,500 in preclinical and clinical milestone payments, up to $387,500 in regulatory milestone payments, andup to $180,000 in sales-based milestone payments for multiple products and indications. In addition, the Company is eligible to receiveroyalties based on net sales of the licensed products, which range from a mid single-digit percentage to ten percent for small-moleculeinhibitors for the timeframe that such products are covered by the licensed patents and a low single-digit percentage thereafter, plus a lowsingle-digit percentage for large-molecule inhibitors of Nav1.7. The Company believes that the potential milestone payments for preclinical,clinical and regulatory milestones under this agreement are substantive and at risk at inception of this agreement, and, as such, expects thatthese future milestone payments will be recognized as revenue in the period that each milestone is achieved. In the year ended December 31,2014, an $8,000 milestone payment has been recognized (2013 - $5,000; 2012 - nil).The Company believes that the potential sales-based milestone payments under this agreement are not substantive as the Company does notexpect to contribute effort to their achievement and expects such sales-based milestones will generally be achieved after the period ofsubstantial involvement under the collaboration. Therefore, the Company expects that future sales-based contingent consideration milestonepayments will be recognized as revenue when such milestones are achieved, assuming all other revenue recognition criteria are met. To date,no such milestone payments have been recognized.116 The Company’s agreement with Genentech expires on the date of the expiration of all payment obligations to the Company under theagreement. Genentech may terminate the agreement with three months advance notice anytime on or after the third anniversary of the effectivedate of the agreement, and each party may terminate the agreement in the event of a material breach by the other party that remains uncured for90 days. In the event that Genentech terminates the agreement due to the Company’s breach, Genentech retains its licenses and its paymentobligations to the Company are reduced. In the event that the Company terminates the agreement due to Genentech’s breach, the rights andlicenses granted to Genentech revert back to the Company, subject to certain rights to make and use certain large molecule product candidatesthat are retained by Genentech, and Genentech is obligated to assign certain regulatory approvals and grant certain licenses to the Company toenable the Company to develop and commercialize certain terminated products outside of the collaboration.In March 2014, the Company entered into a new agreement with Genentech for pain genetics, using the Company’s Extreme Geneticsdiscovery platform to focus on identifying genetic targets associated with rare phenotypes where individuals have an inability to perceive painor where individuals have non-precipitated spontaneous severe pain. Pursuant to the terms of this agreement, any intellectual property arisingout of the collaboration will be jointly owned by the Company and Genentech. The Company also granted Genentech a time-limited,exclusive right of first negotiation on a target-by-target basis to form joint drug discovery collaborations. Under the terms of this agreement,Genentech paid an upfront payment of $1,500. The Company is eligible for an additional $2,000 in milestone payments. At the option of theCompany, a Genentech affiliate invested $4,455 in a private placement concurrent with the IPO (note 1).The Company identified several deliverables under this agreement with Genentech, including non-exclusive licenses to certain intellectualproperty controlled by the Company, a commitment to participate in a joint steering committee and collaborative research services to beperformed by the Company. The Company concluded that the licenses did not have stand-alone value to Genentech without the Company’stechnical expertise and joint steering committee participation during the initial two year period. Therefore, the Company has determined thatthe various deliverables should be considered as a single unit of accounting. As such the Company determined that the $1,500 upfrontpayment should be recognized as revenue ratably over the expected period of performance, being the two-year period ending March 18, 2016.The Company believes that the potential milestone payments under this agreement are substantive and at risk at inception of this agreement,and, as such, expects that these future milestone payments will be recognized as revenue in the period that each milestone is achieved. To date,no such milestone payments have been recognized.(d)Isis Pharmaceuticals, Inc. (“Isis”) collaboration and licensing agreement:In November 2010, the Company entered into a collaboration and license agreement with Isis. The Company issued Isis a convertible, interest-bearing promissory note as payment of the $1,500 upfront fee required by the agreement, which was accounted for as a research anddevelopment expense. In June 2013, the Company made this payment to Isis, including accrued interest, pursuant to the terms of theconvertible promissory note. Under the terms of this agreement, the Company received an option to obtain from Isis worldwide exclusivelicenses to develop and commercialize antisense products targeting hepcidin and/or hemojuvelin, each of which is a validated target foranemia of chronic disease. Antisense products have the potential to treat diseases by binding to and inactivating the messenger RNA ofdisease-causing genes. The antisense products under this program targeted hepcidin, a liver-derived peptide hormone that regulates iron levelsin the body. The option became exercisable upon the initiation of IND-enabling toxicology studies with a development candidate compound.Isis and the Company were responsible for their own costs related to the initial research program that led to the selection of the developmentcandidate compound.During the year ended December 31, 2013, the Company exercised the option. Under the terms of the agreement, the Company paid Isis anoption exercise fee of $2,000, which was accounted for as a research and development expense for the period. In the fourth quarter of 2013, theCompany discontinued development of product candidates under this program.The Company may terminate the agreement with Isis upon 90 days’ notice to Isis. Either party may terminate the agreement in the event of amaterial breach by the other party that remains uncured for 60 days. In 2014, the Company terminated its agreement with Isis.(e)Essex Chemie AG (formerly known as Merck Sharp & Dohme GmbH), an affiliate of Merck & Co., Inc. (“Merck”), exclusive collaborativeresearch and option agreement:In June 2009, the Company entered into an exclusive collaborative research and option agreement with Merck pursuant to which the partiesconducted a research program to discover and develop novel small-molecule candidates for the potential treatment of cardiovascular disease.Merck provided payments to the Company for the Company’s FTEs who performed the Company’s activities pursuant to the research programconducted under the agreement. The Merck collaborative research program ended in December 2012.117 In addition, the Company agreed to perform certain genome sequencing work in exchange for a milestone payment of $5,000 payable uponsuccessful conclusion of such work. This payment was made by Merck in February 2010. The Company has determined that this milestonepayment was not substantive and should not be considered as a separate element. The Company identified several deliverables under theagreement with Merck, including options to obtain a license, a commitment to participate in a joint steering committee and research anddevelopment services to be performed by the Company on behalf of Merck. The Company concluded that the options to license did not havestand-alone value apart from the related research and development services to be delivered. In addition, the Company was unable to estimate afair value for the undelivered items in the agreement with Merck. Accordingly, the Company has accounted for the deliverables under thisagreement as a single unit of accounting.Under the terms of the agreement, Merck had the option to obtain an exclusive license under certain intellectual property controlled by theCompany to develop and commercialize compounds and products directed to targets in the research program. In June 2012, Merck exercisedits option and paid the Company $2,000 to obtain such a worldwide exclusive license. The option exercise was determined to be substantiveand at risk at the inception of the agreement and, as such, was recognized in the period that the option was exercised by Merck.Under the agreement with Merck, the Company is eligible to receive up to $21,000 in preclinical and clinical milestone payments and up to$43,000 in regulatory milestone payments for products directed to the licensed target, as well as royalties on future product sales at percentagesfrom the mid to high single-digit range. The Company received a milestone payment of $1,000 in 2010 and a milestone payment of $1,000 in2011 relating to research progress on two separate targets. Both research milestones were determined to be substantive and at risk at theinception of the agreement and, as such, were recognized in the respective period the milestones were achieved. The Company believes thatfuture contingent consideration milestone payments are not considered substantive as the Company is not contributing effort to theachievement of such milestones now that the period of substantial involvement is complete, there are no undelivered elements and nocontinuing research obligations under this collaboration.The Company has an option to co-fund Phase 1 and first Phase 2 clinical trials of product candidates licensed by Merck by paying Merck 50%of such development costs. Such co-funding option is available at the investigational new drug (“IND”)-filing stage for the applicable productcandidate. If the Company exercises its co-funding option, then the maximum eligible milestone amounts due to the Company increase to$86,500, and the royalties increase to the high single-digit to the sub-teen double-digit range. Through December 31, 2014, the Company hasnot yet exercised the co-funding option.The Company’s agreement with Merck expires on the date of the expiration of all royalty payment obligations to the Company under theagreement. Merck has the right to terminate the agreement upon providing certain notices to the Company. Each party may terminate theagreement in the event of a material breach by the other party that remains uncured for 90 days after notice of such breach. In the event thatMerck terminates the agreement due to the Company’s breach, the licenses granted to Merck survive and become fully paid up. In the eventthat the Company terminates the agreement due to Merck’s breach, the licenses granted to Merck terminate.(f)Genome BC collaboration agreement:In January 2009, the Company entered into a research funding agreement with Genome BC to co-fund IND-enabling studies for antisenseproducts targeting hepcidin or hemojuvelin. The deliverables of the research activities are to identify development candidates for bothhepcidin and hemojuvelin targets. Under the agreement with Genome BC, the Company carried out certain research activities with partialfunding that Genome BC provided on a quarterly basis over the term of the research program. This agreement expired at the end of its term onSeptember 30, 2013.Under the research funding agreement, the Company agreed to give to Genome BC at each quarter (and in connection with Genome BCdelivering the agreed-upon research funding for that quarter) rights to be issued in the future for a number of the Company’s common shareswithout paying cash consideration, or subscription rights. The number of shares to which Genome BC was entitled under each quarter’ssubscription rights were proportional to their funding amount paid to the Company for that quarter, calculated by: the quotient of (a) one-halfof the Genome BC funding amount to the Company for that quarter divided by (b) the greatest of: (i) CAD$51.71; (ii) the converted U.S. dollarshare price; and (iii) the most recent issue price of the Company’s common shares. The subscription rights were automatically exchangeableinto common shares of the Company on a 1:1 basis on a date three years after the subscription rights were issued without additional cashconsideration being paid by Genome BC.Immediately prior to the closing of the IPO in November 2014, all 10,201 outstanding subscription rights were converted into 10,201 commonshares. At December 31, 2014, there were no subscription rights outstanding (December 31, 2013 – 13,364) to Genome BC.118 The following table is a summary of the revenue recognized from the Company’s collaborations for each of the years ended December 31,2014, 2013 and 2012. Year Ended December 31, 2014 2013 2012 uniQure: Milestone payment $14 $531 $198 Teva: Recognition of upfront payment 12,255 13,143 927 Research funding 333 630 — Genentech: Recognition of upfront payment 3,603 3,300 3,431 Research funding 4,248 4,514 3,517 Milestone payment 7,913 5,062 — Merck: Recognition of initial payment — — 1,060 Option fee — — 2,060 Research funding — — 2,442 Genome BC: Research funding — 172 665 Total collaboration revenue $28,366 $27,352 $14,300 14.Commitments and contingencies:(a)Lease commitments:The Company entered into an amended lease agreement for research laboratories and office space in Burnaby, British Columbia, Canada for a120-month term from April 1, 2012 to March 31, 2022, which included an element of free rent and tenant inducement that will be amortizedover the term of the lease.Lease expense for the year ended December 31, 2014 was $915 (2013 - $962, 2012 - $1,017). Future minimum annual lease payments underexisting operating lease commitments are as follows: Year ending December 31: 2015 1,002 2016 1,002 2017 1,060 2018 1,079 2019 1,079 2020 and thereafter 2,428 Total $7,650 (b)Guarantees and indemnifications:The Company has entered into license and research agreements with third parties that include indemnification provisions that are customary inthe industry. These indemnification provisions generally require the Company to compensate the other party for certain damages and costsincurred 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 productliability 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 ofthese indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations forany period presented. 119 15.Income taxes:Income tax expense (recovery) varies from the amounts that would be computed by applying the expected Canadian and provincial statutory incometax rate of 26% (2013 – 25.75%, 2012- 25%) to loss before income taxes as shown in the following table: 2014 2013 2012 Computed taxes (recoveries) at Canadian federal and provincial tax rates $3,385 $3,098 $(1,075)Change in valuation allowance (2,364) (2,029) 2,710 Investment tax credits earned (1,283) (529) (1,418)Tax attributes expired/utilized 2,011 198 (356)Financing fees in equity (1,945) — — Changes in tax rates — (1,019) — Non-deductible expenditures (1,053) (374) 107 Other 1,249 655 32 Income tax expense $— $— $— Deferred income tax assets and liabilities result from the temporary differences between the amount of assets and liabilities recognized for financialstatement and income tax purposes. The significant components of the net deferred income tax assets and liabilities are as follows: 2014 2013 Deferred income tax assets Investment tax credits $20,108 $19,833 Scientific research and experimental development pool 19,648 18,592 Deferred revenues 3,063 7,230 Non-capital losses 1,390 2,755 Property, plant and equipment 2,651 2,386 Deferred financing fees 1,318 (176)Other 858 780 Less - valuation allowance (49,036) (51,400)Net deferred income tax assets $— $— The realization of deferred income tax assets is dependent upon the generation of sufficient taxable income during future periods in which thetemporary differences are expected to reverse. The valuation allowance is reviewed on a quarterly basis and if the assessment of the “more likely thannot” criteria changes, the valuation allowance is adjusted accordingly. The valuation allowance continues to be applied against deferred income taxassets where the Company has assessed that the realization of such assets does not meet the “more likely than not” criteria.At December 31, 2014, the Company has unclaimed tax deductions for scientific research and experimental development expenditures of $75,571(2013 - $71,508) with no expiry.At December 31, 2014, the Company has $17,942 (2013 - $17,068) of investment tax credits available to offset federal taxes payable and $6,891(2013 - $7,203) of provincial tax credits available to offset provincial taxes payable in the future.At December 31, 2014, the Company has non-capital losses, net of uncertain tax positions, carried forward for tax purposes, which are available toreduce taxable income of future years of approximately $5,347 (2013 - $10,596).The investment tax credits and loss carry forwards expire over various years to 2034.As of December 31, 2014, the total amount of the Company’s unrecognized tax benefits were $6,350 (2013 - $6,350). If recognized in future periods,the unrecognized tax benefits would affect our effective tax rate.120 The following table summarizes the activity related to our unrecognized tax benefits: 2014 2013 Balance as of January 1 $6,350 $6,350 Increases related to current year positions — — Balance as of December 31 $6,350 $6,350 The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within the income tax provision. Interest andpenalties have not been accrued at December 31, 2014 as none would be owing on the unrecognized tax benefits due to the availability of non-capitallosses to shelter any potential taxable income arising thereon.The Company does not currently expect any significant increases or decreases to these unrecognized tax benefits within 12 months of the reportingdate.The Company currently files an income tax return in Canada, the jurisdiction in which it is subject to tax. In jurisdictions in which the Company doesnot believe it is subject to tax and therefore does not file income tax returns, the Company can provide no certainty that tax authorities in thosejurisdictions will not subject one or more tax years (since the inception of the Company) to examination. Further, while the statute of limitations ineach jurisdiction where an income tax return has been filed generally limits the examination period, as a result of loss carry-forwards, the limitationperiod for examination generally does not expire until several years after the loss carry-forwards are utilized. Other than routine audits by taxauthorities for tax credits and tax refunds that the Company claims, the Company is not aware of any other material income tax examination currentlyin progress by any taxing jurisdiction. Tax years ranging from 2002 to 2013 remain subject to Canadian income tax examinations. 16.Related parties:Genworks Inc. (“Genworks”) is controlled by a director of the Company who is the president and principal beneficial shareholder of Genworks.Genworks provided certain scientific consulting services to the Company pursuant to a consulting agreement. The Company did not incur any cashconsulting fees to Genworks for the year ended December 31, 2014 (2013 - nil, 2012 - $307).On January 1, 2012, the Company granted Genworks an option to purchase 10,288 of its common shares at an exercise price of CAD$3.74 per shareand on January 1, 2013, the Company granted Genworks an option to purchase 30,864 of its common shares at an exercise price of CAD$2.67 pershare. Pursuant to a performance bonus awarded to Genworks in acknowledgment of services conducted prior to September 1, 2012 relating to theCompany’s sublicense agreement with uniQure, in the event that the Company receives royalty payments from uniQure satisfying certain pre-specified thresholds, Genworks has a right to receive a portion of such royalty payments, totaling up to CAD$600. As of September 1, 2012, no furtherfees or bonuses are payable to Genworks under such consulting agreement.No amounts have been accrued as of December 31, 2014 (December 31, 2013 - nil) relating to services provided by Genworks.One of the Company’s directors is a former equity holder and former director of Medpace, Inc. (“Medpace”). The Company did not incur any contractresearch organization fees to Medpace for the year ended December 31, 2014 (2013 - nil, 2012 - $151). Previously incurred contract researchorganization fees were paid to Medpace in consideration of certain clinical development services provided by Medpace by individuals other than theCompany’s director. None of these fees were paid directly to the Company’s director. No amounts have been accrued as of December 31, 2014(December 31, 2013 - nil) relating to services provided by Medpace. 17. Selected quarterly financial data (unaudited):The following table presents certain unaudited quarterly financial information for the years ended December 31, 2014 and 2013 (in thousands of U.S.dollars except per share data). This information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fairstatement of the results of the interim periods. Net income per common share has been retroactively adjusted to reflect the 1 for 4.86 reverse share spliteffected on October 1, 2014. 121 Three Months Ended March 31,2014 June 30,2014 September 30,2014 (1) December 31,2014 Revenue $5,001 $5,298 $13,193 $4,878 Income from operations 1,032 1,378 8,661 35 Net income attributable to common shareholders — — 3,595 1,224 Basic net income per common share $— $— $2.67 $0.14 Diluted net income per common share $— $— $1.69 $0.13 Three Months Ended March 31,2013 June 30,2013 September 30,2013 December 31,2013 Revenue $5,385 $5,600 $10,788 $5,583 Income (loss) from operations 1,944 (770) 6,519 2,019 Net income attributable to common shareholders — — 1,319 2,514 Basic net income per common share $— $— $0.99 $1.87 Diluted net income per common share $— $— $0.63 $1.17 (1) The financial data, including per share amounts, for all interim periods prior to and including the three month period ended September 30, 2014, do not reflect the IPO. Item 9.Changes in and Disagreements With Accountants on Accounting and Financial DisclosureNone.Item 9A.Controls and ProceduresEvaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief FinancialOfficer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2014. The term “disclosure controls and procedures,” asdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure thatinformation required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allowtimely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationshipof possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2014, our Chief Executive Officerand our Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were, in design and operation, effective at thereasonable assurance level.Internal Control over Financial Reporting. This Annual Report on Form 10-K does not include a report of management’s assessment regardinginternal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by the rules ofthe SEC for newly public companies.Changes in internal control over financial reporting. There was no change in our internal control over financial reporting identified in connectionwith the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended December 31, 2014 that hasmaterially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Item 9B.Other InformationNone 122 PART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe information required by Item 10 of Form 10-K is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Shareholders to befiled with the SEC within 120 days after the end of the fiscal year ended December 31, 2014.Item 11. Executive CompensationThe information required by Item 11 of Form 10-K is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Shareholders to befiled with the SEC within 120 days after the end of the fiscal year ended December 31, 2014.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder MattersThe information required by Item 12 of Form 10-K is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Shareholders to befiled with the SEC within 120 days after the end of the fiscal year ended December 31, 2014.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by Item 13 of Form 10-K is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Shareholders to befiled with the SEC within 120 days after the end of the fiscal year ended December 31, 2014.Item 14. Principal Accounting Fees and ServicesThe information required by Item 14 of Form 10-K is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Shareholders to befiled with the SEC within 120 days after the end of the fiscal year ended December 31, 2014. 123 PART IVItem 15.Exhibits, Financial Statement Schedules(a)(1) Financial Statements — The financial statements included in Item 8 are filed as part of this Annual Report on Form 10-K.(a)(2) Financial Statement Schedules — All schedules have been omitted because they are not applicable or required, or the information required to beset forth therein is included in the Financial Statements or notes thereto included in Item 8 of this Annual Report on Form 10-K.(a)(3) Exhibits — The exhibits required by Item 601 of Regulation S-K are listed in paragraph (b) below.(b) Exhibits — The exhibits listed on the Exhibit Index (following the Signatures section of this report) are filed herewith or are incorporated byreference to exhibits previously filed with the SEC. 124 SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. Dated: March 12, 2015 XENON PHARMACEUTICALS INC. By: /s/ Simon Pimstone Simon Pimstone President and Chief Executive OfficerPOWER OF ATTORNEYEach person whose signature appears below hereby constitutes and appoints Simon Pimstone, Ian Mortimer and Karen Corraini, and each of themseverally, as his or her true and lawful attorneys-in-fact and agents, with full power to act without the other and with full power of substitution andresubstitution, for him or her and in his or her name, place and stead, in any and all capacities (including his or her capacity as a director and/or officer ofXenon Pharmaceuticals Inc.) to sign any and all amendments and supplements to this report, and any and all other instruments necessary or incidental inconnection herewith, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Commission.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated. Signature Title Date /s/ Simon Pimstone Simon Pimstone President, Chief Executive Officer and Director(Principal Executive Officer) March 12, 2015 /s/ Ian Mortimer Ian Mortimer Chief Financial Officer (Principal Financial andAccounting Officer) March 12, 2015 /s/ Michael Tarnow Michael Tarnow Chair of the Board of Directors March 12, 2015 /s/ Mohammad Azab Mohammad Azab Director March 12, 2015 /s/ Johnston Evans Johnston Evans Director March 12, 2015 /s/ Michael Hayden Michael Hayden Director March 12, 2015 /s/ Frank Holler Frank Holler Director March 12, 2015 /s/ Gary Patou Gary Patou Director March 12, 2015 /s/ Evan Stein Evan Stein Director March 12, 2015 125 EXHIBIT INDEX ExhibitNumberDescription of DocumentIncorporated by ReferenceFormFile No.ExhibitFilingDate3.1Articles of the Company.10-Q001-366873.1December15, 20143.2Amended and Restated By-laws of the Company.10-Q001-366873.2December15, 20144.1Form of Common Share Certificate.S-1/A333-1986664.1October 6,20144.2Amended and Restated Investor Rights Agreement, dated December 6, 2006, byand among the Company and the investors listed on Exhibit A and Exhibit Bthereto, as amended.S-1/A333-1986664.2October 6,201410.1†Exclusive Collaborative Research and Option Agreement, dated June 10, 2009,by and between the Company and Merck Sharp & Dohme Research Ltd, asamended.S-1/A333-19866610.1October 6,201410.2†Sublicense and Research Agreement, dated June 18, 2001, by and between theCompany and uniQure Biopharma B.V. (formerly Amsterdam MolecularTherapeutics B.V.), as amended by the Consent of the Company and theUniversity of British Columbia to the uniQure-Chiesi Agreement, dated June 28,2013.S-1/A333-19866610.2October 6,201410.3†Collaborative Research and License Agreement, dated December 22, 2011, by andamong the Company, Genentech, Inc. and F. Hoffmann-La Roche Ltd, asamended.S-1/A333-19866610.3October 6,201410.4†Collaborative Development and License Agreement, dated December 7, 2012, byand between the Company and Ivax International GmbH, as amended.S-1/A333-19866610.4October 6,201410.5†License Agreement, dated August 1, 2000, by and between the Company and theUniversity of British Columbia, as amended.S-1/A333-19866610.5October 6,201410.6Consulting Agreement, dated January 1, 2004, by and between the Company andGenworks Inc., as amended.S-1333-19866610.6September10, 201410.7#Stock Option Plan, as amended, and form of option agreement thereunder.S-1/A333-19866610.7October 6,201410.8#2014 Equity Incentive Plan, and form of option agreement thereunder.S-1333-19866610.8September10, 201410.9#Offer Letter, dated October 3, 2014, by and between the Company and SimonPimstone.S-1/A333-19866610.9October 6,201410.10#Offer Letter, dated October 3, 2014, by and between the Company and PaulGoldberg.S-1/A333-19866610.10October 6,201410.11#Offer Letter, dated October 3, 2014, by and between the Company and IanMortimer.S-1/A333-19866610.11October 6,201410.12#Offer Letter, dated October 3, 2014, by and between the Company and KarenCorraini.S-1/A333-19866610.12October 6,201410.13#Offer Letter, dated October 3, 2014, by and between the Company and RobinSherrington.S-1/A333-19866610.13October 6,201410.14Lease, dated as of 2001, by and between the Company and Discovery ParksIncorporated, as amended through July 1, 2014.S-1333-19866610.14September10, 201410.15#Form of Director and Executive Officer Indemnification Agreement.S-1/A333-19866610.15October 6,201410.16Common Share Put Agreement, dated as of March 19, 2014, by and between theCompany and Roche Finance LTD.S-1333-19866610.16September10, 201421.1List of Subsidiaries of the Company.S-1333-19866621.1September10, 201423.1Consent of KPMG LLP, Independent Registered Public Accounting Firm. 24.1Powers of Attorney (contained on signature page). 31.1Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer 31.2Rule 13a-14(a) / 15d-14(a) Certification of Principal Financial Officer ExhibitNumberDescription of DocumentIncorporated by ReferenceFormFile No.ExhibitFiling Date32.1*Section 1350 Certification of Principal Executive Officer 32.2*Section 1350 Certification of Principal Financial Officer 101**The following financial statements from the Company’s Annual Report onForm 10-K for the year ended December 31, 2014, formatted in XBRL: (i)Statements of Cash Flows, (ii) Statements of Operations, (iii) Statements ofComprehensive Income (Loss), (iv) Balance Sheets, and (v) Notes toFinancial Statements, tagged as blocks of text and including detailed tags. Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filedseparately with the Securities and Exchange Commission. Indicates management contract or compensatory plan. The Certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K are not deemed filedwith the Securities and Exchange Commission and are not to be incorporated by reference into any filing of XenonPharmaceuticals Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in suchfiling.** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement orprospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes ofSection 18 of the Securities Exchange Act of 1934, as amended, and is not otherwise subject to liability under these Sections. Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of DirectorsXenon Pharmaceuticals Inc. We consent to the incorporation by reference in the registration statement on Form S-8 (No. 333-199860) of Xenon PharmaceuticalsInc. of our report dated March 12, 2015, with respect to the balance sheets as at December 31, 2014 and December 31, 2013, therelated statements of operations, comprehensive income (loss), changes in redeemable convertible preferred shares and shareholders’equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 2014, which report appears in theDecember 31, 2014 annual report on Form 10-K of Xenon Pharmaceuticals Inc. /s/ KPMG LLPChartered Accountants March 12, 2015Vancouver, Canada Exhibit 31.1CERTIFICATIONSI, Simon Pimstone, certify that:1.I have reviewed this Annual Report on Form 10-K of Xenon Pharmaceuticals Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d–15(e)) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andc)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: March 12, 2015 /s/ Simon Pimstone Simon Pimstone President and Chief Executive Officer(Principal Executive Officer) Exhibit 31.2CERTIFICATIONSI, Ian Mortimer, certify that:1.I have reviewed this Annual Report on Form 10-K of Xenon Pharmaceuticals Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d–15(e)) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andc)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: March 12, 2015 /s/ Ian Mortimer Ian Mortimer Chief Financial Officer(Principal Financial and Accounting Officer) Exhibit 32.1XENON PHARMACEUTICALS INC.CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Xenon Pharmaceuticals Inc. (the “Company”) on Form 10-K for the year ended December 31, 2014, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Simon Pimstone, President and Chief Executive Officer (Principal ExecutiveOfficer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to myknowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Simon PimstoneSimon PimstonePresident and Chief Executive Officer(Principal Executive Officer) Date: March 12, 2015A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will beretained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.This certification accompanies the Report to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporatedby reference into any filing of Xenon Pharmaceuticals Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended(whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing. Exhibit 32.2XENON PHARMACEUTICALS INC.CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Xenon Pharmaceuticals Inc. (the “Company”) on Form 10-K for the year ended December 31, 2014, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Ian Mortimer, Chief Financial Officer (Principal Financial and AccountingOfficer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to myknowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Ian MortimerIan MortimerChief Financial Officer(Principal Financial and Accounting Officer) Date: March 12, 2015A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will beretained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.This certification accompanies the Report to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporatedby reference into any filing of Xenon Pharmaceuticals Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended(whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.

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