XENON PHARMACEUTICALS INC.
2018 ANNUAL REPORT
To Our Shareholders:
We believe that 2018 marked a pivotal year for Xenon. Over the past 12 months, we took great care to build
and expand our diverse portfolio of therapeutic candidates, with a common focus on addressing neurological
disorders. We achieved this through thoughtful in-licensing and product acquisition activities, as well as the
advancement of promising product candidates. This important foundational work has resulted in four distinct
therapeutic candidates – XEN496, XEN1101, XEN901 and XEN007 – that are expected to be in Phase 2 or
later stage development this year.
Today, we are in the enviable position of having an exciting neurology pipeline with the flexibility to take
advantage of a variety of development strategies, including a “precision medicine” approach to address rare
pediatric disorders.
Product Pipeline Highlights
XEN496
In September 2018, we announced XEN496 as a new, “Phase 3-ready” addition to our pipeline. XEN496
contains the active ingredient ezogabine and is a Kv7 potassium channel modulator that we are developing for
the treatment of KCNQ2 epileptic encephalopathy (KCNQ2-EE), a rare, severe neurodevelopmental disorder
with a significant seizure burden and profound developmental impairment. We received orphan drug
designation (ODD) from the FDA for XEN496 as a treatment of KCNQ2-EE, and we are currently finalizing a
pediatric-specific formulation. Feedback from the FDA has indicated that it is acceptable to study XEN496 in
infants and children up to 4 years old, and that a single pivotal trial in approximately 20 patients may be
considered adequate in order to demonstrate XEN496’s efficacy in KCNQ2-EE. We expect to file an
Investigational New Drug (IND) application in the third quarter of 2019, and, based on regulatory feedback,
we expect to initiate a Phase 3 clinical trial thereafter. We have established a steering committee comprised of
many eminent pediatric epilepsy leaders, and we are excited at the prospect of applying a “precision medicine”
approach to address KCNQ2-EE, with the support of KCNQ2 experts and patient advocacy groups.
XEN1101
XEN1101 is a differentiated Kv7 potassium channel modulator being developed for the treatment of epilepsy
and potentially other neurological disorders. We have made a significant amount of progress advancing
XEN1101 in clinical development. In May 2018, we presented positive interim Phase 1 results at the 14th Eilat
Conference on New Antiepileptic Drugs and Devices, followed by the release of positive Phase 1b data from
the transcranial magnetic stimulation (TMS) study at the 13th European Congress on Epileptology in August
2018. We announced the final results of the XEN1101 Phase 1 clinical trial at the American Epilepsy Society
(AES) Annual Meeting in December 2018. We believe these encouraging Phase 1 data support the continued
clinical advancement of XEN1101, and we have now initiated a Phase 2b clinical trial of XEN1101 in adult
patients with focal epilepsy, with site selection and patient enrollment now underway in the United States,
Canada and Europe. Depending upon the rate of enrollment, top-line results from the XEN1101 Phase 2b
clinical trial are anticipated in the second half of 2020.
XEN901
XEN901 is a potent, highly selective Nav1.6 sodium channel inhibitor, for the treatment of epilepsy. Over the
past year we made considerable advancements as XEN901 moved from preclinical stage through to
completion of a Phase 1 clinical trial. At the AES Annual Meeting in December 2018, we announced results
from the XEN901 Phase 1 clinical trial and the related pilot TMS study. The next stage of clinical development
for XEN901 anticipated in 2019 includes evaluating XEN901 in a Phase 2 clinical trial as a treatment for adult
focal seizures or for rare, pediatric forms of epilepsy, including SCN8A-EE patients, depending on feedback
from planned discussions with regulatory agencies. Our pediatric formulation development and juvenile
toxicology studies are currently underway to support potential future pediatric development activities.
XEN007
XEN007 (active ingredient flunarizine) is a CNS-acting calcium channel modulator that modulates Cav2.1 and
T-type calcium channels. Other reported mechanisms include dopamine, histamine and serotonin inhibition.
Available in certain countries outside of the United States, flunarizine has been reported to have clinical
benefit in treating migraine and other neurological disorders, including hemiplegic migraine (HM), alternating
hemiplegia of childhood (AHC), vertigo, and as adjunctive treatment in certain epilepsies. We have received
ODD from the FDA for XEN007 for the treatment of both AHC and HM; additionally, the FDA has granted a
rare pediatric disease designation for the treatment of AHC with XEN007. We have entered into key exclusive
licensing agreements in order to access regulatory files and drug product manufacturing, both of which may
expedite advanced clinical development of XEN007. Various development strategies for XEN007 are now
under consideration, including the support of at least one Phase 2 (or later stage) clinical trial in an orphan
neurological indication, with initiation anticipated in 2019.
New Pipeline Opportunities
We continue to build upon the knowledge amassed from our clinical-stage products and have concentrated our
efforts on ion channel targets where we believe novel modulators might represent significant therapeutic
advances in orphan neurology indications. We expect the future expansion of our pipeline may come from both
our internal research efforts and through the acquisition or in-licensing of external candidates.
Looking Forward
Supported by a strong balance sheet, we intend to continue to operate efficiently while strategically managing
our resources and cash runway. We are anticipating a number of exciting development milestones including:
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initiating a Phase 3 clinical trial for XEN496 for the treatment of KCNQ2 epilepsy;
advancing our ongoing XEN1101 Phase 2b clinical trial in adult focal epilepsy;
initiating a Phase 2 clinical trial for XEN901 in either a pediatric or adult epilepsy indication
depending on regulatory feedback; and
initiating a Phase 2 clinical trial for XEN007 in an orphan neurological indication.
We appreciate the strategic insight that we receive from our dedicated Board members, and acknowledge that
our ongoing progress is a direct result of the efforts of our employees across all areas of the business. Finally,
we wish to thank our shareholders for their continued support as we execute upon our strategy to develop
innovative therapeutics to improve the lives of patients with neurological disorders.
/s/ Michael M. Tarnow
/s/ Simon N. Pimstone
Michael M. Tarnow
Board Chair
Simon N. Pimstone
Chief Executive Officer
Certain statements contained in this letter may constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and Canadian securities laws. A detailed discussion of such forward-looking statements and the
related risks and uncertainties is included in our Annual Report on Form 10-K included herewith.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
(cid:4) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-36687
XENON PHARMACEUTICALS INC.
(Exact Name of Registrant as Specified in its Charter)
Canada
(State or other jurisdiction of
incorporation or organization)
200-3650 Gilmore Way
Burnaby, British Columbia
(Address of principal executive offices)
98-0661854
(I.R.S. Employer
Identification No.)
V5G 4W8
(Zip Code)
Registrant’s telephone number, including area code: (604) 484-3300
Securities registered pursuant to Section 12(b) of the Act: Common Shares, No Par Value; Common shares traded on The Nasdaq stock 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 (cid:4) NO (cid:3)
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES (cid:4) NO (cid:3)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES (cid:3) NO (cid:4)
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such
files). YES (cid:3) NO (cid:4)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained,
to the best of Registrant’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. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
(cid:4)
(cid:4)
Non-accelerated filer
Emerging growth company (cid:3)
Accelerated filer
Smaller reporting company
(cid:3)
(cid:3)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:3)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES (cid:4) NO (cid:3)
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the common
shares on The NASDAQ Stock Market on June 29, 2018, was approximately $147.5 million. Common shares held by each executive officer and director and
by each other person who may be deemed to be an affiliate of the Registrant, have been excluded from this computation. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of common shares of the Registrant outstanding as of March 1, 2019 was 25,751,266.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement relating to the 2019 Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days following the end of the Registrant’s fiscal year ended December 31, 2018.
XENON PHARMACEUTICALS INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2018
Table of Contents
PART I .....................................................................................................................................................................................
Item 1.
Business .................................................................................................................................................................
Item 1A. Risk Factors ...........................................................................................................................................................
Item 1B. Unresolved Staff Comments..................................................................................................................................
Properties ...............................................................................................................................................................
Item 2.
Legal Proceedings..................................................................................................................................................
Item 3.
Mine Safety Disclosures........................................................................................................................................
Item 4.
PART II....................................................................................................................................................................................
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities...........................................................................................................................................................
Selected Financial Data .........................................................................................................................................
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ...............................
Item 7A. Quantitative and Qualitative Disclosure About Market Risk................................................................................
Financial Statements and Supplementary Data .....................................................................................................
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ..............................
Item 9A. Controls and Procedures........................................................................................................................................
Item 9B. Other Information ..................................................................................................................................................
PART III ..................................................................................................................................................................................
Directors, Executive Officers and Corporate Governance ....................................................................................
Item 10.
Executive Compensation .......................................................................................................................................
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters .............
Item 12.
Certain Relationships and Related Transactions, and Director Independence......................................................
Item 13.
Principal Accountant Fees and Services................................................................................................................
Item 14.
PART IV ..................................................................................................................................................................................
Exhibits, Financial Statement Schedules...............................................................................................................
Item 15.
Form 10-K Summary.............................................................................................................................................
Item 16.
Signatures.................................................................................................................................................................................
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PART I
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K may constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended and Canadian securities laws. The words or phrases “would be,” “will allow,” “intends to,” “may,” “believe,” “plan,” “will
likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such
words or phrases, are intended to identify “forward-looking statements.” You should read these statements carefully because they
discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking”
information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the
assumptions that underlie these statements. These forward-looking statements include, but are not limited to:
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our ability to identify additional products or product candidates either from our internal research efforts or though acquiring
or in-licensing other product candidates or technologies;
the initiation, timing, cost, progress and success of our research and development programs, pre-clinical studies, and clinical
trials;
our ability to advance product candidates into, and successfully complete, clinical trials;
our ability to recruit sufficient numbers of patients for our current and future clinical trials for orphan or more common
indications;
our ability to achieve profitability;
our ability to obtain funding for our operations, including research funding;
our ability to receive milestones, royalties and sublicensing fees under our collaborations, and the timing of such payments;
the timing and magnitude of potential milestone payments under our product acquisition and in-licensing agreements;
the implementation of our business model and strategic plans;
our ability to develop and commercialize product candidates for orphan and niche indications independently;
our ability to advance XEN007, XEN496 and potentially other future product candidates directly into Phase 2 or later stage
clinical trials;
our commercialization, marketing and manufacturing capabilities and strategy;
our ability to discover genes and drug targets;
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property
rights of others;
our expectations regarding federal, state and foreign regulatory requirements;
the therapeutic benefits, effectiveness and safety of our product candidates;
the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products and
product candidates;
the rate and degree of market acceptance and clinical utility of any future products;
the timing of, and our and our collaborators’ ability to obtain and maintain, regulatory approvals for our product candidates;
our ability to maintain and establish collaborations;
our expectations regarding market risk, including interest rate changes and foreign currency fluctuations;
our belief in the sufficiency of our cash, cash equivalents and marketable securities to meet our needs for at least the next 12
months;
our ability to engage and retain the employees required to grow our business;
our future financial performance and projected expenditures;
developments relating to our competitors and our industry, including the success of competing therapies that are or become
available; and
estimates of our expenses, future revenue, capital requirements and our needs for additional financing.
1
These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially
from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to,
those discussed in this report in Part I, Item 1A — “Risk Factors,” and elsewhere in this report. Forward-looking statements are based
on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all
statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of
future developments. In this report, “we,” “our,” “us,” “Xenon,” and “the Company” refer to Xenon Pharmaceuticals Inc. and its
subsidiary. Unless otherwise noted, all dollar amounts in this report are expressed in United States dollars.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These
statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and although we believe
such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements
should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant
information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
This Annual Report on Form 10-K includes our trademarks and registered trademarks, including the Xenon logo and other
trademarks 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.
Item 1. Business
Overview
We are a clinical stage biopharmaceutical company committed to developing innovative therapeutics to improve the lives of
patients with neurological disorders, including rare central nervous system, or CNS, conditions. We are advancing a novel product
pipeline of neurology-focused therapies to address areas of high unmet medical need, with a focus on epilepsy.
To date, our pharmaceutical collaborations have generated in aggregate over $160.0 million in non-equity funding with the
potential to provide us with future milestone payments, as well as royalties on product sales.
Our pipeline is summarized in the following figure, which shows our own proprietary product candidates and our partnered pain
program with Genentech, a member of the Roche Group:
2
Our Strategy
Our goal is to build a self-sustaining, fully-integrated, and profitable company that discovers, develops and commercializes
innovative CNS therapeutics.
Our strategy includes:
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Focusing on orphan and niche disease market opportunities that we can independently develop and commercialize.
Selectively establishing additional partnerships enabling us to access large commercial indications while leveraging the
benefits of those collaborations to expand our internal capabilities.
Further leveraging our discovery platform and insights into disease biology to identify additional product candidates.
Identifying external opportunities to expand our pipeline.
A significant focus of our discovery efforts has been on human channelopathies, enabling us to develop strong capabilities in
small molecule ion channel drug discovery. Our ion channel discovery capability is founded upon our understanding of the genetics of
channelopathies combined with our proprietary biology and medicinal chemistry assets and know-how.
While the pharmaceutical industry has shown significant interest in channelopathies, a general inability to target ion channels
selectively with a pharmaceutical agent has been a limitation to the development of more effective or safer therapeutics. We believe
we have developed a core competence in identifying and developing selective small-molecule ion channel modulators, and we believe
we can use this know-how to develop a pipeline of novel ion channel inhibitors for diseases in areas of high unmet medical need. In
addition, we have complemented our internal discovery capabilities by identifying external product candidates that target ion channels
in the CNS for the treatment of neurological conditions.
Our Product Candidates
XEN496, A Kv7 Potassium Channel Modulator for the Treatment of KCNQ2 Epilepsy
We are developing XEN496 (active ingredient ezogabine), a Kv7 potassium channel modulator, for the treatment of KCNQ2
epilepsy. Ezogabine was previously approved by the U.S. Food and Drug Administration, or FDA, as an anti-epileptic drug, or AED,
as an adjunctive treatment for adults with focal seizures with or without secondary generalization. We believe published case reports
where physicians have used ezogabine in infants and young children with KCNQ2 epileptic encephalopathy, or KCNQ2-EE (also
known as EIEE7), indicate that XEN496 may be efficacious in this often hard-to-treat pediatric patient population.
We received orphan drug designation, or ODD, from the FDA for XEN496 as a treatment of KCNQ2-EE. A steering committee
made up of key opinion leaders in the KCNQ2-EE and pediatric epilepsy fields has been established to help guide the clinical
development of XEN496. In response to our pre-IND briefing package submission, the FDA indicated that it was acceptable to study
XEN496 in infants and children up to 4 years old, and that a single pivotal trial in approximately 20 patients may be considered
adequate in order to demonstrate XEN496’s efficacy in KCNQ2-EE. We are currently finalizing a pediatric-specific formulation to
complete pre-clinical formulation testing with a final drug product expected in the second quarter of 2019. We expect to file an
Investigational New Drug, or IND, application in the third quarter of 2019, and, based on regulatory feedback, expect to initiate a
Phase 3 clinical trial thereafter. This timeline is based on our assumption that the testing of our new XEN496 pediatric formulation in
healthy adult volunteers will not be a regulatory requirement prior to initiating a Phase 3 clinical trial.
About KCNQ2-EE
KCNQ2 epileptic encephalopathy (KCNQ2-EE), otherwise known as EIEE7, is a rare, severe neurodevelopmental disorder with
a significant seizure burden and profound developmental impairment. KCNQ2-EE is uniquely characterized by multiple, daily,
refractory seizures presenting within the first week of life with a prominent tonic component and autonomic signs. Seizures are often
accompanied by clonic jerking or complex motor behavior. The electroencephalogram, or EEG, at onset of the disease shows a burst
suppression pattern later evolving into multifocal epileptiform activity. The infants usually develop a severe to profound intellectual
disability with axial hypotonia which can be accompanied by limb spasticity. The seizure activity typically decreases with age with
patients often becoming seizure free or experiencing more minor seizure burden by 3 to 5 years of age; however, thereafter seizures
can reoccur in clusters. The intellectual disability and other co-morbidities are not reversed or improved with age and patients
generally require life-long care. Patients are often non-verbal and some children may also have autistic features. Seizure-related
bradycardia and oxygen desaturation with cyanosis have been observed, and are thought to contribute to the significant risk of Sudden
Unexpected Death in Epilepsy, or SUDEP, in these children. KCNQ2-EE is rare, representing around 10% of patients with epileptic
encephalopathy with onset in the first three months of life; however, the incidence of KCNQ2-EE is approximately 2.8/100,000 live
births, which is roughly half the number of births of Dravet Syndrome, the most common genetic type of early infantile epileptic
encephalopathy.
3
XEN1101, A Kv7 Potassium Channel Modulator for the Treatment of Epilepsy
We are developing XEN1101, a differentiated Kv7 potassium channel modulator, for the treatment of epilepsy and potentially
other neurological disorders. We acquired XEN1101 from 1st Order Pharmaceuticals pursuant to an asset purchase agreement in April
2017. For a more detailed description of the terms of this agreement with 1st Order Pharmaceuticals, see “—Collaborations,
Commercial and License Agreements” below.
The Kv7 potassium channel mechanism has been clinically validated with ezogabine, an earlier generation Kv7 modulator that
was approved by the FDA as an adjunctive treatment for adults with focal seizures with or without secondary generalization.
XEN1101’s unique composition is chemically designed to improve upon potency, selectivity and pharmacokinetics, or PK, of
ezogabine, and is not expected to have ezogabine’s composition-specific tissue pigmentation effects.
Clinical Development
We announced final data from a XEN1101 Phase 1 clinical trial and the related transcranial magnetic stimulation, or TMS,
studies at the American Epilepsy Society, or AES, Annual Meeting in December 2018. The objectives of the XEN1101 Phase 1
clinical trial were to evaluate the safety, tolerability and PK of both single ascending doses, or SAD, and multiple ascending doses, or
MAD, using a powder-in-capsule formulation of XEN1101 in healthy subjects. The XEN1101 Phase 1 clinical trial also included a
pharmacodynamics, or PD, read-out from TMS studies that were designed to assess XEN1101’s ability and potency to modulate
cortical excitability, thereby demonstrating activity in the target CNS tissue. The XEN1101 Phase 1 results include data from six SAD
cohorts ranging in dose from 5 to 30 mg (n=34, placebo=8), including a crossover food effect cohort (n=10) with a single 20 mg dose.
MAD results included three cohorts ranging in once daily doses from 15 to 25 mg (n=18, placebo=6) including two cohorts of 15 mg
evaluated in a fasted and fed state over 7 and 10 days, respectively, and one cohort of 25 mg evaluated in a fed state over 10 days. The
PK profile of XEN1101 (including an effective half-life greater than 24 hours) supports a once-per-day dosing schedule with expected
steady state in approximately one week without the need for titration. The majority of adverse events, or AEs, were mild or moderate,
resolved spontaneously and were consistent with antiepileptic drugs of this class. Sedation (including somnolence and drowsiness) and
dizziness (including light-headedness and presyncope) were the most common AEs, while mild cognitive effects (including memory
and speech impairment) and blurred vision were also observed in a dose dependent manner. There were no SAEs, deaths, or clinically
significant delayed ventricular repolarization or laboratory findings. Phase 1 results suggest that that XEN1101 is generally safe and
well tolerated in the doses examined (single doses of up to 30 mg and multiple doses of up to 25 mg once daily).
The Phase 1b double-blind, placebo-controlled, randomized cross-over TMS study included 20 healthy male subjects. TMS
measurements were taken at 2 and 4 hours for all subjects and, due to a prolonged absorption phase displayed by XEN1101, an
additional TMS assessment time-point was added at 6 hours for a subset of subjects. Subjects were randomized initially to either a 20
mg dose of XEN1101 or placebo and then, after a one week wash-out period, crossed over to the other treatment arm. XEN1101
reduced corticospinal excitability, as demonstrated by a concentration dependent elevation in resting motor threshold, or RMT, the key
TMS-EMG measure. RMT increased in proportion to XEN1101 plasma concentration showing a mean ± standard error of mean
increase of 4.9 ± 0.7% (p<0.01) at 6 hours. Active motor threshold, or AMT, also increased in proportion to plasma concentration of
XEN1101 with an increase of 2.0 ± 0.4% at 6 hours. In addition, XEN1101 statistically significantly modulated TMS-evoked EEG
potentials, or TEPs, in a pattern consistent with reductions in cortical excitability. Relative to time-matched placebo, at peak plasma
levels, XEN1101 decreased the amplitude of TEPs vs placebo at 25, 45 and 180 ms after the TMS pulse. Additional measures of
cortical excitability including global mean field power were similarly impacted. XEN1101 also shifted the power spectra of resting
state EEGs toward lower frequencies. This Phase 1b TMS study provides evidence of the CNS effects of a 20 mg dose of XEN1101 as
indicated by suppression of cortical and corticospinal excitability, and helped with dose selection for our XEN1101 Phase 2b clinical
trial.
Based on the encouraging Phase 1 and Phase 1b TMS data, we have initiated a Phase 2b clinical trial in adult patients with focal
epilepsy. The Phase 2b clinical trial is designed as a randomized, double-blind, placebo-controlled, multicenter study to evaluate the
clinical efficacy, safety and tolerability of XEN1101 administered as adjunctive treatment in adult patients with focal epilepsy.
Approximately 300 patients will be randomized in a blinded manner to one of three active treatment groups or placebo in a 2:1:1:2
fashion (XEN1101 25 mg : 20 mg : 10 mg : Placebo). The primary endpoint is the median percent change in monthly focal seizure
frequency from baseline compared to treatment period of active versus placebo. An IND application for XEN1101 has been accepted
by the FDA, and site selection and patient enrollment are now underway for the XEN1101 Phase 2b clinical trial in the United States,
Canada and Europe. Depending upon the rate of enrollment, top-line results from the XEN1101 Phase 2b clinical trial are anticipated
in the second half of 2020.
4
About Focal Seizures
A focal seizure is localized within the brain and can either stay localized or spread to the entire brain, which is typically
categorized as a secondary generalized seizure. Focal seizures are the most common type of seizure experienced by people with
epilepsy. The treatment of an individual patient with focal seizures is currently focused on reduction of seizure frequency, with seizure
freedom as the ultimate goal. Focal seizures (simple, complex and secondarily generalized tonic-clonic) account for approximately
60% of seizures (GlobalData Report 2017) of which approximately 33% are considered resistant to current treatments (Epilepsy
Foundation). It is estimated that the addressable population in the United States could include approximately 460,000 adults and
70,000 pediatric epilepsy patients with refractory seizures.
XEN901, A Selective Nav1.6 Sodium Channel Inhibitor for the Treatment of Epilepsy
We are developing XEN901, a potent, highly selective Nav1.6 sodium channel inhibitor, for the treatment of epilepsy. By
selectively targeting Nav1.6, it is anticipated that XEN901 may achieve efficacy conferred by this well-validated epilepsy target, but
with a potentially improved therapeutic index compared with currently available non-selective sodium channel inhibitors.
There is strong human genetic validation supporting the rationale for treating epilepsy by blocking the Nav1.6 sodium channel.
Nav1.6 is the most highly expressed sodium channel in the excitatory pathways in the CNS. When mutations in the SCN8A gene,
which encodes the Nav1.6 sodium channel, result in a gain of function in the Nav1.6 sodium channel, children can present with a very
severe form of SCN8A Epileptic Encephalopathy, or SCN8A-EE, also known as EIEE13.
Clinical Development
In February 2018, we initiated a randomized, double-blind, placebo-controlled Phase 1 clinical trial to evaluate XEN901’s
safety, tolerability and PK in both SAD and MAD cohorts of healthy adult subjects. We announced results from the XEN901 Phase 1
clinical trial and the related pilot TMS study at the AES Annual Meeting in December 2018.
The XEN901 final Phase 1 results include data from six SAD cohorts ranging in dose from 5 to 80 mg (n=30, placebo=10) and
from four MAD cohorts ranging in dose from 15 mg twice daily to 75 mg once daily (n=23, placebo=7). A food effect cohort (n=9)
was also conducted with single doses of XEN901 in fed and fasted states in a crossover design. In addition, XEN901’s effects on TMS
measurements and EEG were assessed in two of the multiple dose cohorts. A tablet formulation of XEN901 was also assessed in a
single dose cohort of 45mg (n=6; placebo=2) and a multiple dose cohort of 45mg twice daily (n=6; placebo=2). Favorable PK data
show dose proportionality with predicted half-life of 8 to 11 hours suggesting that XEN901 could be compatible with a once or twice
daily dosing regimen. The majority of AEs for the SAD, MAD, and food effect cohorts were deemed unrelated to XEN901, were mild
or moderate, transient and resolved spontaneously. All AEs considered possibly related to XEN901 were mild; only muscle twitching,
nausea and dizziness were reported in more than 1 subject. There have been no SAEs, deaths, or clinically significant ECG, vital signs
or laboratory findings. The interim preliminary safety results suggest XEN901 is overall generally safe and well tolerated in the doses
examined.
XEN901’s effects on TMS measurements and EEG were assessed in a subset of 8 subjects from the 50 and 75 mg once daily
cohorts and compared to 3 placebo subjects. TMS measures were recorded at baseline and on Day 5/6. In this pilot study, XEN901
showed increases in RMT of 2.0% (versus 0.67% in placebo); increases in AMT of 2.25% (versus 0% in placebo); decrease in
amplitude of TEP at 180 ms (P180), and an increase in delta power in the resting state EEG. The observed changes in TMS-EMG and
TMS-EEG parameters suggest activity of XEN901 in the target CNS tissue in this exploratory pilot study.
The next steps for XEN901 include continued planning for Phase 2 or later clinical development to evaluate XEN901 as a
treatment for adult focal seizures or for rare, pediatric forms of epilepsy, including SCN8A-EE patients, depending on feedback from
planned discussions with regulatory agencies. We expect to receive regulatory feedback on the requirements to advance XEN901 into
pediatric SCN8A-EE patients in the second quarter of 2019, and pediatric formulation development and juvenile toxicology studies
are underway to support future pediatric development activities.
About SCN8A Epileptic Encephalopathy
SCN8A Epileptic Encephalopathy (SCN8A-EE), also known as EIEE13, is a rare, extremely severe, single-gene epilepsy
caused by mutations in the SCN8A gene that result in a gain-of-function in the Nav1.6 sodium channel. SCN8A-EE typically presents
with seizure onset between birth and 18 months of age. Most children diagnosed with SCN8A-EE have seizures that can occur
multiple times a day and are often difficult to treat. Other symptoms include learning difficulties, muscle spasms, low or high muscle
tone, poor coordination, developmental delay, and features similar to autism. The extent of physical disability leaves some children
able to make little or no voluntary movement. Most children will have trouble learning to speak, and some will need assistance from
feeding tubes to get the nourishment they need to grow. It is also believed that children and teenagers with SCN8A-EE are at risk for
SUDEP.
5
XEN007, A CNS-acting Calcium Channel Modulator
XEN007 (active ingredient flunarizine) is a CNS-acting calcium channel modulator that modulates Cav2.1 and T-type calcium
channels. Other reported mechanisms include dopamine, histamine and serotonin inhibition. Flunarizine is available in certain
countries outside of the United States, and has been reported to have clinical benefit in treating migraine and other neurological
disorders, including hemiplegic migraine, or HM, alternating hemiplegia of childhood, or AHC, vertigo, and as adjunctive treatment in
certain epilepsies.
The FDA has granted a rare pediatric disease, or RPD, designation for the treatment of AHC with XEN007. We previously
received ODD from the FDA for XEN007 for the treatment of both AHC and HM. In addition, we have entered into key exclusive
licensing agreements in order to access regulatory files and drug product manufacturing, both of which may enable advanced clinical
development of XEN007. Various development strategies for XEN007 are under consideration, including the support of at least one
Phase 2 (or later stage) clinical trial in an orphan neurological indication, with initiation anticipated in 2019.
New Pipeline Opportunities
Given our expertise in ion channel drug discovery, our efforts are concentrated on the identification of ion channel targets where
we believe novel modulators might represent significant therapeutic advances, with a particular focus on CNS-related orphan
indications. We intend to expand our pipeline from our internal research efforts and through the acquisition or in-licensing of other
product candidates.
Our Partnered Programs
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. Hoffman-
La Roche Ltd, or Roche, to discover and develop selective oral inhibitors of Nav1.7 for the treatment of pain. For a more detailed
description of the terms of this agreement with Genentech, see “—Collaborations, Commercial and License Agreements” below.
Based on our discovery of Nav1.7 deficiency underlying the rare human disease called congenital indifference to pain, or CIP, where
individuals with CIP are unable to feel pain, we believe that Nav1.7 is a highly-validated target for the treatment of pain. Our
Genentech collaboration is focused on discovering and developing oral drugs that selectively target Nav1.7.
Chronic pain conditions, such as severe cancer pain and neuropathic pain, are generally recognized as unmet medical needs
providing potential commercial opportunities for a new oral pain drug. Currently available pain drugs often have either a lack of
meaningful pain relief or dose limiting side effects for many patients. An orally administered, selective Nav1.7 inhibitor could present
a novel mechanism for the treatment of moderate to severe pain as a single agent or in combination with existing analgesics that work
through different mechanisms. We believe that the selective inhibition of Nav1.7 may lower the potential for dose-limiting central
nervous system side-effects and allow for an improved side-effect profile for oral administration of such an inhibitor, which could
potentially allow for the treatment of pain that has a central or deep tissue component, including cancer pain and neuropathic pain.
Genentech had been focused on the development of GDC-0310, but after completing an analysis of additional pre-clinical
studies with GDC-0310 and reviewing the totality of data available, Genentech decided to discontinue further clinical development of
GDC-0310 and elected to focus its future Nav1.7 development efforts on back-up molecules.
Additional Collaborative Work with Genentech
We formed a second collaboration with Genentech in March 2014 for pain genetics, with a focus on rare phenotypes where
individuals have an inability to perceive pain or where individuals have non-precipitated spontaneous severe pain. We believe these
phenotypes may unlock new key molecular regulators of pain signaling in humans, which we will seek to validate as targets for new
pain drugs. In March 2017, the research term for this second collaboration agreement was extended until March 2018. Under that
agreement, Genentech has paid us a $1.5 million upfront payment and two $0.25 million milestone payments related to the
identification of novel pain targets in September 2015 and July 2017. For a more detailed description of the terms of our
collaborations with Genentech, see “—Collaborations, Commercial and License Agreements” below.
6
Selective Small-Molecule Inhibitors of Targets for the Treatment of Cardiovascular Disease
We entered into a collaborative research and option agreement with Merck in June 2009 to discover novel targets and
compounds for the treatment of cardiovascular disease. For a more detailed description of the terms of our agreement with Merck, see
“—Collaborations, Commercial and License Agreements” below. In 2012, Merck exercised its option to obtain an exclusive license to
a target for cardiovascular disease and compound inhibitors that were discovered during the research collaboration. The target, when
inhibited, is predicted to provide a beneficial lipid profile with the goal of protecting from cardiovascular disease.
Collaborations, Commercial and License Agreements
Asset Purchase Agreement with 1st Order Pharmaceuticals, Inc.
In April 2017, we entered into an asset purchase agreement with 1st Order Pharmaceuticals, Inc., or 1st Order, pursuant to
which we acquired all rights with respect to XEN1101 (previously known as 1OP2198). 1st Order previously acquired 1OP2198 from
Valeant Pharmaceuticals Luxembourg S.a.r.l., an indirect subsidiary of Bausch Health Companies Inc., together with Valeant
Pharmaceuticals Ireland Limited, Bausch Health, and assumed certain obligations, including potential milestone and royalty payments.
Under the terms of the asset purchase agreement, we paid 1st Order an upfront fee of approximately $0.4 million and a $0.7 million
milestone in 2017 upon achieving a clinical development milestone.
In September 2018, we signed an agreement with Bausch Health to buy out all future milestone payments and royalties owed to
Bausch Health with respect to XEN1101, including up to $39.6 million in potential clinical development, regulatory and sales-based
milestones and a mid-to-high single digit percentage royalty on commercial sales in exchange for a one-time payment of $6.0 million.
We remain responsible for future potential payments to 1st Order of $0.5 million in clinical development milestones, up to $6.0
million in regulatory milestones for multiple indications and $1.5 million in other milestones, which may be payable pre-
commercially. There are no royalty obligations to 1st Order.
Agreements with Genentech for Selective Inhibitors of Nav1.7 and Pain Genetics
In December 2011, we entered into a collaborative research and license agreement with Genentech and its affiliate, Roche, to
discover and develop small and large molecules that selectively inhibit the Nav1.7 sodium channel and companion diagnostics for the
potential treatment of pain. Pursuant to this agreement, we granted Genentech a worldwide exclusive license to develop and
commercialize compounds directed to Nav1.7 and products incorporating such compounds for all uses. We also granted Genentech a
worldwide non-exclusive license to diagnostic products for the purpose of developing or commercializing 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 a compound for development and an $8.0 million milestone payment upon the approval by Health Canada of a CTA.
Genentech provided funding to us for certain of our full-time equivalents, or FTEs, performing the research collaboration plan, which
concluded in December 2016. We are 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 pre-clinical 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 eligible to receive royalties based on net sales of the licensed products, which
range from a 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 low single-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 percentage for large molecule inhibitors of Nav1.7 for a period of ten years from first
commercial sale on a country-by-country basis. Our pre-commercial and commercial milestone payments and royalties may be subject
to reductions based on the period in which the compound that is selected for development and commercialization was initially
conceived.
Our agreement with Genentech expires on the date of the expiration of all payment obligations to us under the agreement.
Genentech may terminate the agreement with three months advance notice anytime on or after the third 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 that remains
uncured after 90 days. In the event that Genentech terminates the agreement due to our breach, Genentech retains its licenses and its
payment obligations to us are reduced. In the event that we terminate the agreement due to Genentech’s breach, the rights and licenses
granted to Genentech revert back to us, subject to certain rights to make and use certain large-molecule product candidates that are
retained by Genentech, and Genentech is obligated to assign certain regulatory approvals and grant certain licenses to us to enable us
to develop and commercialize certain terminated products outside of the collaboration.
7
Our collaborative research and license agreement with Genentech has been amended multiple times, in May 2015, November
2015, March 2016, May 2017, July 2018 and September 2018, to either extend the term of the research program or to provide us with
greater flexibility in developing compounds that target Nav1.6. Pursuant to the current amendment, we have obtained a non-exclusive,
irrevocable, perpetual, world-wide, sublicensable license under the know-how forming part of the Genentech intellectual property
developed under the Nav1.7 collaboration that is necessary or useful to make, use, sell, offer for sale, and import compounds from our
Nav1.6 program that are above a certain potency threshold on Nav1.7 and products containing those compounds. Our license from
Genentech includes commercialization rights but we are restricted from developing or commercializing our Nav1.6 compounds below
a certain potency on Nav1.7 in the field of epilepsy and any of our Nav1.6 compounds, regardless of their potency on Nav1.7, in the
field of pain. In exchange for the rights granted to us under this amendment, Genentech is eligible to receive a low single-digit
percentage, tiered royalty on net sales of our Nav1.6 compounds, including XEN901, for a period of ten years from first commercial
sale on a country-by-country basis. Pursuant to the amendment, we granted Genentech a royalty-free, non-exclusive, world-wide
license under our Nav1.6 intellectual property to make, use, sell, offer for sale and import compounds below a certain potency on
Nav1.7 and products containing those compounds for all uses and indications except epilepsy.
In March 2014, we entered into an additional agreement with Genentech for pain genetics, which focused on identifying genetic
targets associated with rare phenotypes where individuals have an inability to perceive pain or where individuals have non-
precipitated spontaneous severe pain. Pursuant to the terms of this agreement, any intellectual property arising out of the collaboration
will be jointly owned by us and Genentech. We 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 us an upfront payment
of $1.5 million and two $0.25 million milestone payments related to the identification of novel pain targets in September 2015 and
July 2017. Genentech’s time-limited, exclusive right of first negotiation, which was exercisable throughout the research term, expired
at the same time as the agreement in March 2018. Despite such termination, we remain eligible for up to an additional $1.5 million in
milestone payments.
Agreement with Merck for Cardiovascular Disease
In June 2009, we entered into an exclusive collaborative research and option agreement with Merck, pursuant to which the
parties conducted a research program to discover and develop novel small-molecule candidates for the potential treatment of
cardiovascular disease. Merck provided payments to us for our FTEs who performed our activities pursuant to the research program
conducted under the Merck agreement. The Merck collaborative research program 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 develop and commercialize compounds and products directed to targets in the research program, which has now
expired. In June 2012, Merck exercised its option and paid us $2.0 million to obtain such a worldwide exclusive license to develop
and commercialize compound inhibitors of a target that was identified using our discovery platform. Through December 31, 2018, we
have received milestone payments and an option fee totaling $9.0 million, and we are eligible for further research, development and
regulatory milestone payments of up to $64.0 million, comprised of $21.0 million in pre-clinical and clinical milestone payments and
up to $43.0 million in regulatory milestone payments for products directed to the licensed target, as well as royalties from the 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.
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 such development costs. Such co-funding option is available at the IND-filing stage for the applicable product
candidate. If we exercise our co-funding option then the maximum eligible milestone amounts due to us increase to $86.5 million and
the royalties increase to the high single-digit to the low 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 to terminate the agreement upon providing certain notices to us. Each party may terminate the agreement 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 that Merck
terminates the agreement due to our breach, the licenses granted to Merck 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.
8
Termination Agreement with Teva
On March 7, 2018, we and Teva Pharmaceuticals International GmbH and Teva Canada Limited, or together Teva, entered into
a termination agreement terminating by mutual agreement the collaborative development and license agreement dated December 7,
2012, as amended, which subsequently closed on March 27, 2018. In connection with the termination, Teva returned and we cancelled
1,000,000 of our common shares that were owned by Teva. Pursuant to the terms of the termination agreement, Teva has also
returned, licensed or assigned to us certain intellectual property, including certain patent rights and transferred regulatory filings
related to TV-45070. The termination agreement requires us to pay a low single digit percentage royalty to Teva based on net sales of
approved products, if any, resulting from any continued development and commercialization of TV-45070 by us or a sublicensee
during the period that assigned or licensed patents cover such products. To date, no such sales have occurred.
Intellectual Property
As part of our business strategy, we generally file patent applications disclosing and claiming drug targets and their novel uses,
novel compositions that modulate such targets, methods of making and using such compositions and various therapeutic formulations
of such compositions that cover our product candidates. In some cases, we also file claims on screening assays as well as compositions
and methods for use in diagnosing certain diseases. We generally file applications in the U.S., Canada, the European Union, or EU,
and other commercially significant 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, 2018, we owned, co-owned or licensed 30 issued U.S. patents and approximately 18 pending U.S. patent
applications, including provisional and non-provisional filings. We also owned, co-owned or licensed an additional 106 pending and
granted counterpart applications worldwide, including 24 country-specific validations of four European patents.
As of December 31, 2018, we owned two issued U.S. patents and one U.S. provisional patent application related to XEN1101,
and methods of making and using XEN1101 and certain related compounds. The issued patents are expected to expire between 2028
and 2029 (absent any extensions of term). In addition, we have 13 foreign issued patents (exclusive of European patent national
validations) and have six pending corresponding applications in various foreign jurisdictions relating to XEN1101 and certain related
compounds.
As of December 31, 2018, we have filed a PCT international patent application and have an allowed U.S. non-provisional patent
application directed to XEN901 and methods of making and using XEN901 and certain related compounds. Any patents issuing from
these applications are expected to expire in 2037 (absent any extensions of term).
As of December 31, 2018, we have filed a PCT international patent application, a U.S. non-provisional patent application and
three U.S. provisional patent applications directed to certain of our selective inhibitors of Nav1.6 (exclusive of XEN901), as well as
methods of making and using the same. Any patents issuing from these applications are expected to expire between 2037 and 2039
(absent any extensions of term).
As of December 31, 2018, we, together with Genentech, co-owned four issued U.S. patents, seven pending U.S. patent
applications, two foreign issued patents (exclusive of European patent national validations) and have filed 43 pending counterpart
patent applications in various jurisdictions directed to Nav1.7 inhibitors, as well as methods of making and using the same. The issued
patents, as well as any patents issuing from these applications are expected to expire between 2034 and 2037 (absent any extensions of
term).
As provided for in our termination agreement with Teva, Teva assigned to us one issued U.S. patent, two pending U.S. patent
applications (one of which has since issued as a U.S. patent) and a further two pending PCT international patent applications related to
TV-45070 (one of which has since entered national phase in Australia, Canada, China, Europe, Japan, Israel and New Zealand). The
issued U.S. patent assigned to us is expected to expire in 2036 (absent any extensions of term) and any patents issuing from the
assigned applications are expected to expire in 2037 (absent any extensions of term). For a more detailed description of the terms of
our termination agreement with Teva, see “—Collaborations, Commercial and License Agreements” above. Excluding the patents
included in the terms of the termination agreement, as of December 31, 2018, we owned five issued U.S. patents related to TV-45070,
and methods of making and using TV-45070 and certain related compounds. The issued patents are expected to expire between 2026
and 2033 (absent any extensions of term). In addition, we have nine foreign issued patents (exclusive of European patent national
validations) and have filed two pending corresponding foreign applications relating to TV-45070 and certain related compounds.
9
Competition
The biotechnology and pharmaceutical industries are highly competitive and are characterized by rapidly advancing
technologies and a strong emphasis on proprietary products. While we believe that our technology, development experience, scientific
knowledge and drug discovery approach provide us with certain advantages, we face potential competition in our discovery and
product development efforts from many different approaches and sources, including pharmaceutical and biotechnology companies,
academic institutions and governmental agencies and public and private research institutions. Any product candidates or products that
we or our collaborators successfully develop and commercialize will compete with existing products and new products that may
become available in the future.
Many of the companies against which we are competing or against which we may compete in the future have significantly
greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products than we, or our collaborators, do. Mergers and acquisitions in the
pharmaceutical and biotechnology industries may result in even more resources 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, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any
products that we may develop. Our competitors also may obtain FDA, European Medicines Agency, or EMA, Health Canada or other
regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors
establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in
many cases by insurers or other third party payers.
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.
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 and other third party payers. Our product candidates that are in clinical development may
compete with various therapies and drugs, both in the marketplace and currently under development.
XEN496, XEN1101, and XEN901 for the Treatment of Epilepsy
If more than one of XEN496, XEN1101, or XEN901 were approved for the treatment of epilepsy, we anticipate that they could
potentially compete with each other and other AEDs, which typically can be categorized into four classes by AED mechanism:
modulation of voltage-gated ion channels, enhancement of GABA-mediated inhibitory neurotransmission, reduction of glutamate-
mediated excitatory neurotransmission, and SV2A modulation. Commonly used AEDs include phenytoin, levetiracetam,
carbamazepine, clobazam, lamotrigine, valproate, oxcarbazepine, topiramate, lacosamide, perampanel and cannabidiol. There are
currently no FDA-approved treatments specifically indicated for the early infantile epileptic encephalopathies KCNQ2-EE or SCN8A-
EE; however, a number of different AEDs are currently used in these patient populations. We are not aware of other companies that
are developing selective Nav1.6 inhibitors for the treatment of epilepsy. There are other AEDs in development that could potentially
compete with XEN496, XEN1101 or XEN901, including products in development from UCB, Inc., Zogenix, Inc., Sage Therapeutics,
Marinus Pharmaceuticals, Inc., Inc., Knopp Biosciences LLC, Upsher-Smith Laboratories, Inc., Insys Therapeutics Inc., Supernus
Pharmaceuticals Inc., Eisai Co., Ltd., Ovid Therapeutics Inc., Sunovion Pharmaceuticals Inc., and Takeda Pharmaceutical Company
Ltd.
Selective Inhibitors of Nav1.7 for the Treatment of Pain
Drug discovery and development for various pain applications is intensely competitive. There are a large number of approved
products for neuropathic pain, inflammatory pain and other pain indications. These approved products include capsaicin, celecoxib,
lidocaine, narcotic analgesics, gabapentin, and pregabalin. We are also aware of development programs at several pharmaceutical and
biotechnology companies that are developing Nav1.7 inhibitors or other sodium channel inhibitors for the treatment of pain, including
Amgen Inc., AstraZeneca PLC, Biogen Inc., Bristol-Myers Squibb Company, Dainippon Sumitomo Co., Ltd., Eli Lilly and Company,
Merck, NeuroQuest Inc., Newron Pharmaceuticals SpA, Vertex Pharmaceuticals Inc., Voyager Therapeutics, Inc. and Chromocell
Corporation in collaboration with its partner Astellas Pharma Inc. Moreover, we are aware of various other product candidates in
development that target other mechanisms of action to treat various pain indications, including calcium channel inhibitors, nerve
growth factor inhibitors, and Nav1.8 inhibitors.
10
Government Regulation
We are developing small-molecule product candidates, which are regulated as drugs by the FDA and equivalent regulatory
authorities outside the U.S. Within the FDA, the Center for Drug Evaluation and Research, or CDER, regulates drugs. Drugs are
subject to regulation under the Federal Food, Drug, and Cosmetic Act, or FD&C Act, and other federal, provincial, state, local and
foreign statutes and regulations. The FD&C Act and corresponding regulations govern, among other things, the testing,
manufacturing, safety, efficacy, labeling, packaging, storage, record keeping, distribution, import, export, reporting, advertising and
other promotional practices involving drugs. FDA approval must be obtained before clinical testing of drugs is initiated, and each
clinical study protocol for such product candidates is reviewed by the FDA prior to initiation in the U.S. FDA approval also must be
obtained before marketing of drugs in the U.S. The process of obtaining regulatory approvals and the subsequent compliance with
appropriate federal, provincial, state, local and foreign statutes and regulations require the expenditure of substantial time and financial
resources and we may not be able to obtain the required regulatory approvals.
U.S. Drug Development Process
The process required by the FDA before a drug product may be marketed in the U.S. generally involves the following:
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completion of nonclinical laboratory tests and animal studies according to good laboratory practices, or GLPs, and
applicable requirements for the 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 clinical practices, or GCPs, and any additional requirements for the protection of human research subjects and
their health information, to establish the safety and efficacy of the proposed product for its intended use;
submission to the FDA of an NDA for drug products for marketing approval that includes substantial evidence of safety and
efficacy based on large scale phase 3 clinical studies;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the product is produced to
assess compliance with good manufacturing practices, or GMP, to assure that the facilities, methods and controls are
adequate to consistently manufacture the product pursuant to regulatory requirements;
potential FDA audit of the nonclinical and clinical study sites that generated the data in support of the NDA; and
FDA review and approval of the NDA.
Human clinical studies are typically conducted in three sequential phases that may overlap or be combined:
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Phase 1. The drug is initially introduced into healthy human subjects and tested for safety. In the case of some products for
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 that have the condition or disease being studied.
Phase 2. The drug is evaluated in a limited patient population to identify possible adverse effects and safety risks, to
preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine a dose range and dosing
schedule.
Phase 3. Clinical studies are undertaken to further evaluate dosing and dosing schedule, clinical efficacy, and safety in an
expanded patient population at geographically dispersed clinical study sites. These clinical studies are intended to establish
the overall risk/benefit ratio of the product and provide 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 clinical studies are used to gain additional experience from the treatment of patients in the intended therapeutic
indication, particularly for long-term safety follow-up. During all phases of clinical development, regulatory agencies require
extensive monitoring and auditing of all clinical activities, clinical data, and clinical study investigators.
Concurrent with clinical studies, companies usually complete additional animal studies and must also develop additional
information about the physical characteristics of the drug as well as finalize a process for manufacturing the product in commercial
quantities in accordance with GMP requirements. The manufacturing process must be capable of consistently producing quality
batches of the product candidate and, among other requirements, the sponsor must develop methods for ensuring the quality of the
final drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that
the drug candidate does not undergo unacceptable deterioration over its labeled shelf life.
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U.S. Review and Approval Processes
After the completion of clinical studies of a drug, FDA approval of an NDA must be obtained before commercial marketing of
the drug. The NDA 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 the Pediatric
Research Equity Act, or PREA, an NDA or supplement to an NDA must contain data to assess the safety and effectiveness of the
product for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric
subpopulation for which 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 for an indication for which orphan designation has
been granted. The testing and approval processes require substantial time and effort and there can be no assurance that the FDA will
accept the NDA for filing and, even if filed, that any approval will be granted on a timely basis, if at all.
Under the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA must be accompanied by a substantial user fee.
PDUFA also imposes an annual product fee for drugs and an annual establishment fee on facilities used to manufacture prescription
drugs. Fee waivers 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 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 the NDA to determine if it is substantially complete
before the 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 of submission and may request additional information, including additional clinical data. In this event, the NDA
must be resubmitted with the additional information. The resubmitted application 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 substantive review of the NDA. The FDA reviews
the application to determine, among other things, whether the proposed product is safe and effective for its intended use, and whether
the product is being manufactured in accordance with GMPs. The FDA may refer applications for novel products or products that
present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts,
for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA
is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making
decisions. During the product approval process, the FDA also will determine whether 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, the sponsor of the NDA must
submit a proposed REMS; the FDA will not approve the application without a REMS, if required.
Notwithstanding the submission of relevant data and information, the FDA may ultimately decide that the NDA does not satisfy
its regulatory criteria for approval and deny approval. Data obtained from clinical studies are not always conclusive and the FDA may
interpret data differently than we interpret the same data. If the agency decides not to approve the marketing application, the FDA will
issue a Complete Response letter that usually describes all of the specific deficiencies in the application identified by the FDA. The
deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical
studies. Additionally, the Complete Response letter may include recommended actions that the applicant might take to place the
application in a condition for approval. If a Complete Response letter is issued, the applicant may either resubmit the NDA, addressing
all of the deficiencies identified in the letter, or withdraw the application.
If a product receives regulatory approval, the approval will be limited to the specific diseases and dosages studied in clinical
trials or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA
may require that certain contraindications, warnings or precautions be included in the product labeling. The FDA may impose
restrictions and conditions on product distribution, prescribing, or dispensing pursuant to a REMS request, or otherwise limit the scope
of any approval.
One of the performance goals agreed to by the FDA under the PDUFA is to complete its review of 90% of standard NDAs
within ten months from filing and 90% of priority NDAs within six months from filing, whereupon a review decision is to be made.
The FDA does not always meet its PDUFA 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 three months if the FDA requests or the application sponsor otherwise provides
additional information or clarification regarding information already provided in the submission within the last three months before
the PDUFA goal date.
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Fast Track Designation
The FDA has various programs, including Fast Track, which are intended to expedite the process for the development and
review of drugs. Even if a drug qualifies for one or 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 these programs are those for serious or life-threatening
conditions, those with the potential to address unmet medical needs, and those that offer meaningful benefits over existing treatments.
For example, Fast Track is a process designed to expedite the FDA’s review of drugs that treat serious or life-threatening diseases or
conditions and fill unmet medical needs. Under the Fast Track process, drugs that offer major advances in treatment or provide a
treatment where no 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 review time of ten months. Although Fast Track and priority review do not affect the standards for
approval of a drug, and may not result in a faster approval, if approval is granted, for Fast Track designated drugs, the FDA will also
attempt to facilitate early and frequent meetings with a sponsor of a Fast Track designated drug, to expedite such drug’s review and
development.
Orphan Drug Designation
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug intended to treat a rare disease or condition,
which is 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 is no reasonable expectation that the cost of developing and making a drug available in the U.S. for this
type of disease or condition will be recovered from sales of the product. We have received orphan drug designation from the FDA for
XEN007 (active ingredient flunarizine), a drug we are evaluating internally for the potential treatment of HM and AHC. Orphan
product designation must be requested before submitting an NDA. After the FDA grants orphan product designation, the identity of
the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan product designation does not convey any
advantage in or shorten the duration of the regulatory review and approval process.
Orphan drug products may also be eligible for RPD designation if greater than 50% of patients living with the disease are under
age 19 and the condition affects fewer than 200,000 individuals in the U.S. A priority review voucher will be given to the sponsor of a
product with an RPD designation at the time of product approval that is transferable to another company. We have received RPD
designation from the FDA for XEN007 for the treatment of AHC. There is no assurance we will receive a RPD priority review
voucher or that it will result in a faster development process, review or approval for a subsequent marketing application. Further, it is
possible that even if we obtain approval for XEN007 and qualify for such a priority review voucher, the program may no longer be in
effect at the time of approval. Although priority review vouchers may be sold or transferred to third parties, there is no guaranty that
we will be able to realize any value if we were to sell a priority review voucher.
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 such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve
any other applications to market the same drug for the same indication for seven years, except in limited circumstances, such as a
showing of clinical superiority to the product with orphan exclusivity. Competitors, however, may receive approval of different
products for the indication for which the orphan product has exclusivity or obtain approval for the same product but for a different
indication for which the orphan product has exclusivity. Orphan product exclusivity also could block the 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 is
determined to be contained within the competitor’s product for the same indication or disease. If a drug designated as an orphan
product receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan product
exclusivity. Orphan drug status in the EU has similar, but not identical, benefits, including up to ten years of exclusivity.
Post-Approval Requirements
Rigorous and extensive FDA regulation of drug continues after approval, particularly with respect 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 we may
commercialize. Manufacturers of our products are required to comply with applicable requirements in the GMP regulations, including
quality control and quality assurance and maintenance of records and documentation. Other post-approval requirements applicable to
drug manufacturers, include reporting of GMP deviations that may affect the safety, efficacy or quality of a distributed product,
record-keeping requirements, reporting of adverse effects, reporting updated safety and efficacy information, and complying with
electronic record and signature requirements.
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We also must comply with the FDA’s advertising and promotion requirements, such as those related to direct-to-consumer
advertising, the prohibition on promoting products for uses or in patient populations that are not described in the product’s approved
labeling (known as “off-label use”), and industry-sponsored scientific and educational activities. Discovery of previously unknown
problems or the failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product
or withdrawal of the product from the market as 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 corrective
advertising or communications with doctors, debarment, restitution, disgorgement of profits, or civil or criminal penalties. Any agency
or judicial enforcement action could have a material adverse effect on us.
Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register
their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and
certain state agencies for compliance with GMPs and other laws. Accordingly, manufacturers must continue to expend time, money,
and effort in the area of production 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, including withdrawal of the product
from the market. In addition, changes to the manufacturing process or facility generally require prior FDA approval before being
implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are
also subject to further FDA review and approval.
U.S. Patent Term Restoration and Marketing Exclusivity
Depending 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 eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984,
commonly referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to
five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent
term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. Only one
patent applicable 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 market exclusivity, and a product whose active ingredient was previously FDA approved, and for which the sponsor is
required to generate new clinical data is entitled to three years of market exclusivity. A drug can also obtain pediatric market
exclusivity in the U.S. and, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity,
which runs from the end of other exclusivity protection or patent term, may be granted based on the timely, voluntary, and as-agreed
upon completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study.
Additional Regulation
In addition to the foregoing, provincial, state and federal U.S. and Canadian laws regarding environmental protection and
hazardous substances affect our business. These and other laws govern our use, handling and disposal of various biological, chemical
and radioactive substances used in, and wastes generated by, our operations. If our operations result in contamination of the
environment or expose individuals to hazardous substances, we could be liable for damages and governmental fines. We believe that
we are in material compliance with applicable environmental laws and that continued compliance therewith will not have a material
adverse effect on our business. We cannot predict, however, how changes in these laws may affect our future operations.
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Global Anti-Corruption Laws
The U.S. Foreign Corrupt Practices Act and the Canadian Corruption of Foreign Public Officials Act, the U.S. Travel Act, the
OECD Anti-Bribery Convention, Title 18 United States Code section 201, and any other applicable domestic or foreign anti-
corruption or anti-bribery laws to which we are subject prohibit corporations and 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 candidate in an
attempt to obtain or retain business or to otherwise influence a person working in an official capacity. We may also be held liable for
the acts of our third party agents under the U.S. Foreign Corrupt Practices Act, Canadian Corruption of Foreign Public Officials Act,
and other applicable anti-corruption and anti-bribery laws. Noncompliance with these laws could subject us to investigations,
sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and
criminal penalties or injunctions, suspension or debarment from contracting with certain persons, the loss of export privileges,
whistleblower complaints, reputational harm, adverse media coverage, and other collateral consequences. Any investigations, actions
or sanctions or other previously mentioned harm could have a material negative effect on our business, operating results and financial
condition.
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, research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping,
promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of drugs, and
reimbursement requirements. Generally, before a new drug can be marketed, considerable data demonstrating its quality, safety and
efficacy must be obtained, organized into a format specific for each regulatory authority, submitted for review and approved by the
regulatory authority. Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory
authorities in foreign countries prior to the commencement of clinical studies or marketing of the product in those countries. Certain
countries outside of the U.S. have a similar process that requires the submission of a clinical study application much like the IND prior
to the commencement of human clinical studies. In the EU, for example, a 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. Similar requirements regarding a CTA and ethics
approval exist in Canada.
The requirements and process governing the conduct of clinical studies, product licensing, coverage, pricing and reimbursement
vary from country to country. In all cases, the clinical studies are conducted in accordance with GCP and the applicable regulatory
requirements and the ethical principles that have their origin in the Declaration of Helsinki. The EU clinical trials legislation currently
is undergoing a transition process mainly aimed at harmonizing and streamlining clinical-trial authorization, simplifying adverse-event
reporting procedures, improving the supervision of clinical trials and increasing their transparency. Recently enacted Clinical Trials
Regulation EU No 536/2014 is intended to ensure that the rules for conducting clinical trials in the EU are identical; however, it has
not yet been fully implemented.
To obtain regulatory approval of an investigational drug under EU regulatory systems, we must submit a marketing
authorization application, or MAA. The application used to file the NDA in the U.S. is similar to that required in the EU, with the
exception of, among other things, country-specific document requirements. Reimbursement approval for the drug by regulatory
authorities is also required before a drug may be commercialized. The EU also provides opportunities for market exclusivity. For
example, in the EU, upon receiving 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 the additional two-year period of market exclusivity, a generic
marketing authorization can be submitted, and the innovator’s data may be referenced, but no generic 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’s regulatory
authorities to be a new chemical entity, and products may not qualify for data exclusivity. Products receiving orphan designation in the
EU can receive ten years of market exclusivity, during which time no similar medicinal product for the same indication may be placed
on the market. An orphan product can also obtain an additional two years of market exclusivity in the EU for pediatric studies. No
extension to any supplementary protection certificate can be granted on the basis of pediatric studies for orphan indications.
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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 chronically debilitating 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 satisfactory method of diagnosis, prevention or
treatment of such condition authorized for marketing in the EU, or if such a method exists, the product will be of significant benefit to
those affected by the condition, as defined in Regulation (EC) 847/2000. Orphan medicinal products are eligible for financial
incentives such as reduction of fees or fee waivers and are, upon grant of a marketing authorization, entitled to ten years of market
exclusivity for the approved therapeutic indication. The application for orphan drug designation must be submitted before the
application for marketing authorization. The applicant will receive a fee reduction for the marketing authorization application if the
orphan drug designation has been granted, but not if the designation is 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.
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 criteria for orphan designation, for example, if the product is sufficiently profitable not to justify maintenance of
market exclusivity. Additionally, marketing authorization 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 Canada and countries in Eastern Europe, Latin America or Asia, the requirements
governing the conduct of clinical studies, product and establishment licensing, coverage, data protection, pricing and reimbursement
vary from country to country. In all cases, again, the clinical studies are conducted in accordance 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 of regulatory approvals, product recalls, inability to import or export, seizure of products, operating
restrictions and criminal prosecution.
Pharmaceutical Coverage, Pricing and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain
regulatory approval. In the U.S. and markets in other countries, sales of any products for which we receive regulatory approval for
commercial sale will depend, in part, on the availability of coverage and adequate reimbursement from third-party payers. Third-party
payers include government programs such as Medicare or Medicaid, managed care plans, private health insurers, and other
organizations. These third-party payers may deny coverage or reimbursement for a product or 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 to control costs by
limiting coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drug
products for a particular indication, and by limiting the amount of reimbursement for particular procedures or drug treatments.
The cost of pharmaceuticals continues to generate substantial governmental and third party payer interest. We expect that the
pharmaceutical industry will experience pricing pressures due to the trend toward managed healthcare, the increasing influence of
managed care organizations 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 in order to demonstrate the medical necessity and cost-effectiveness of our
products, in addition to the costs required to obtain the FDA approvals. Our product candidates may not be considered medically
necessary or cost-effective. A payer’s decision to provide coverage for a drug product does not imply that an adequate reimbursement
rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to
realize an appropriate return on our investment in product development.
Some third-party payers also require pre-approval or prior authorization of coverage for new or innovative drug therapies before
they will reimburse healthcare providers who use such therapies. While we cannot predict whether any proposed cost-containment
measures will be adopted or otherwise implemented in the future, these requirements or any announcement or adoption of such
proposals could have a material adverse effect on our ability to obtain adequate prices for our product candidates and to operate
profitably.
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In international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have
instituted price ceilings on specific products and therapies. There can be no assurance that our products will be considered medically
reasonable and necessary for a specific indication, that our products will be considered cost-effective by third-party payers, that
coverage or an adequate level of reimbursement will be available or that the third-party payers’ reimbursement policies will not
adversely affect our ability to sell our products profitably.
In addition, in many foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed.
The requirements governing drug pricing and reimbursement vary widely from country to country. For example, the EU provides
options for its member states to restrict the range of medicinal products for which their national health insurance systems provide
reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the
medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the
medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for
pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products
launched in the EU do not follow price structures of the United States and generally prices tend to be significantly lower.
Healthcare Reform
In the U.S. and foreign jurisdictions, there have been a number of legislative and regulatory changes to the healthcare system
that could affect our future 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 reduce healthcare costs.
In the U.S., the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the Medicare Modernization Act,
changed the way Medicare covers and pays for pharmaceutical products. The Medicare Modernization Act expanded Medicare
coverage for drug purchases by the elderly by establishing Medicare Part D and introduced a new reimbursement methodology based
on average sales prices for physician administered drugs under Medicare Part B. In addition, this legislation provided authority for
limiting the number of drugs that will be covered in any therapeutic class under the new Medicare Part D program. Cost reduction
initiatives and other provisions of this legislation could decrease the coverage and reimbursement rate that our customers receive for
any of our approved products. While the Medicare Modernization Act applies only to drug benefits for Medicare beneficiaries, private
payers often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any
reduction in reimbursement that results from the Medicare Modernization Act may result in a similar reduction in payments from
private payers.
Enacted in March 2010, the Patient Protection and Affordable Care Act, as amended, or PPACA, is a sweeping law intended to
broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against healthcare fraud
and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on
pharmaceutical and medical device manufacturers and 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 or import branded prescription drug
products. Substantial new provisions affecting compliance have also been enacted, which may affect our business practices with
healthcare practitioners and a significant number of provisions are not yet, or have only recently become, effective. PPACA may
continue to place 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. These new laws may result in
reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers and accordingly,
our financial operations.
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 rigorous coverage 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. The implementation of cost containment measures or other healthcare
reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our products.
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The Trump administration and Congress have made changes to current health care laws and may continue to attempt broad
sweeping changes to existing health care laws. We face uncertainties that might result from modification or repeal of any of the
provisions of the PPACA, including as a result of current and future executive orders and legislative actions. The impact of those
changes on us and the pharmaceutical industry as a whole is currently unknown. Any changes to the PPACA are likely to have an
impact on our results of operations, and may have a material adverse effect on our result of operations. We cannot predict what other
healthcare programs and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation
or regulation in the United States may have on our business.
In addition, different pricing and reimbursement schemes exist in other countries. In the European Community, governments
influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national healthcare
systems that fund a large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems
under which products may be marketed only once a reimbursement price has been agreed upon. Some of these countries may require,
as condition of obtaining reimbursement or pricing approval, the completion of clinical trials that compare the cost-effectiveness of a
particular product candidate to currently available therapies. Other member states allow companies to fix their own prices for
medicines, but monitor and control company profits. The downward pressure on healthcare costs in general, particularly prescription
drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in
some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country.
Other Healthcare Laws and Compliance Requirements
In the U.S., the research, manufacturing, distribution, sale and promotion of drug products that we are developing are subject to
regulation by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare & Medicaid
Services, other divisions of the U.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 state and local government agencies. For example, sales, marketing and
scientific/educational grant programs must comply with fraud and abuse laws such as the federal Anti-Kickback Statute, as amended,
the federal False Claims Act, as amended, and similar state laws. Pricing and rebate programs must comply with the 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 and requirements 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 knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce or
reward either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment
may be made under a federal healthcare program such as the Medicare and Medicaid 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 broadly interpreted to include
anything of value, including for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of
cash, waivers of payments, ownership interests and providing anything at less than its fair market value. Although there are a number
of statutory exemptions and regulatory safe harbors protecting certain business arrangements from prosecution, the exemptions and
safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending
may be subject to scrutiny if they do not qualify for an exemption or safe harbor. 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 PPACA, which, among other things, amends the intent requirement of the federal Anti-Kickback Statute 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 a violation. In
addition, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the
federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act (discussed below) or
the civil monetary penalties statute, which imposes fines against any person who is determined to have presented or caused to be
presented claims to a federal healthcare program that the person 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 laws similar to the federal Anti-Kickback Statute, and
some of these state prohibitions apply to referral of patients for healthcare items or services reimbursed by any third-party payer, not
only the Medicare and Medicaid programs in at least some cases, and do not contain safe harbors.
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The federal False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes
to be presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam provisions of the False Claims
Act allow a private individual to bring civil actions on behalf of the federal government alleging that the defendant has submitted a
false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought by private
individuals has increased dramatically. In addition, various states have enacted false claims laws 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 federal healthcare program. There
are many potential bases for liability under the False Claims Act. Liability arises, primarily, when an entity knowingly submits, or
causes 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 of inadequate 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 in a drug’s label), and allegations as to misrepresentations with
respect to the services rendered. Our future activities relating to the reporting of discount and rebate information and other information
affecting federal, provincial, state and third party reimbursement of our products, and the sale and marketing of our products and our
service arrangements or data purchases, among other activities, may be subject to scrutiny under these laws. We are unable to predict
whether 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 such claims, as well as any sanctions imposed, could adversely affect our financial performance. Also, the Health
Insurance Portability and Accountability Act of 1996, or HIPAA, created several new federal crimes, including healthcare fraud, and
false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to
defraud any healthcare benefit program, including private third-party payers. The false statements statute prohibits knowingly and
willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent 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 in the U.S.
and foreign jurisdictions in which we conduct our business, including jurisdictions in which we conduct our clinical trials. 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 and
protecting the security and privacy of protected health information. The American Recovery and Reinvestment Act of 2009 included
expansion of HIPAA’s privacy and security standards called the Health Information Technology for Economic and Clinical Health
Act, or HITECH. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business
associates”—independent contractors or agents of covered entities that create, receive, maintain, or transmit protected health
information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal
penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys
general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek
attorney’s fees and costs associated with pursuing federal civil actions. In addition, in May 2016, the EU formally adopted the General
Data Protection Regulation, or GDPR, which applies to all EU member states from May 25, 2018 and replaced the European Union
Data Protection Directive. The GDPR has imposed many new or additional requirements including, but not limited to, obtaining
consent of the individuals to whom the personal data relates, the nature and scope of notifications provided to the individuals, the
security and confidentiality of the personal data, data breach notification and using third party processors in connection with the
processing of the personal data. Failure to comply with the GDPR could subject us to regulatory sanctions, delays in clinical trials,
criminal prosecution and/or civil fines or penalties. Additionally, GDPR creates a direct cause of action by individual data subjects.
The GDPR is a complex law and the regulatory guidance is still evolving, including with respect to how the GDPR should be applied
in the context of clinical trials or other transactions from that we may gain access to personal data. These changes in the law will
increase our costs of compliance and result in greater legal risks. Other countries maintain different privacy laws that we are subject
to.
There are also an increasing number of federal, state and provincial “sunshine” laws that require manufacturers to make reports
to states on pricing and marketing information. 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 sales representatives, as well as to prohibit pharmacies and
other healthcare entities from providing certain physician prescribing data to pharmaceutical companies for use in sales and marketing,
and to prohibit certain other sales and marketing practices. In addition, pursuant to a similar federal requirement, manufacturers must
track and report to the federal government certain payments and other transfers of value made to physicians and other healthcare
professionals and teaching hospitals and ownership or investment interests held by physicians and their immediate family members.
The U.S. federal government discloses the reported information on a publicly available website. These laws may affect our sales,
marketing, and other promotional activities by imposing administrative and compliance burdens on us. If we fail to track and report as
required by these laws or otherwise comply with these laws, we could be subject to the penalty provisions of the pertinent state and
federal authorities.
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Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible that
some of our business activities 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 laws described above or any other governmental regulations that apply to us, we may be
subject to penalties, including criminal and significant civil monetary penalties, damages, fines, imprisonment, exclusion from
participation in government healthcare programs, injunctions, recall or seizure of products, total or partial suspension of production,
denial or withdrawal of pre-marketing product approvals, private qui tam actions brought by individual whistleblowers in the name of
the government or refusal to allow us to enter into supply contracts, including government contracts, and the curtailment or
restructuring of our operations, 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 are sold 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 of value to healthcare professionals.
Environmental Matters
Our operations require the use of hazardous materials (including biological materials) which subject us to a variety of federal,
provincial and local environmental and safety laws and regulations. Some of the regulations under the current regulatory structure
provide for strict liability, holding a party potentially liable without regard to fault or negligence. We could be held liable for damages
and fines as a result of our, or someone else’s, business operations should contamination of the environment or individual exposure to
hazardous substances occur. We cannot predict how changes in laws or development of new regulations will affect our business
operations or the cost of compliance.
Employees
As of December 31, 2018, we had 92 employees, including 89 full-time employees. Of our employees, 57 were primarily engaged
in research and development, 24 of whom hold a Ph.D. or M.D. (or equivalent) degree. None of our employees are represented by a labor
union. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
Research and Development
We have committed, and expect to continue to commit, significant resources to developing new product candidates. We have
assembled an experienced research and development team with scientific and clinical development personnel. Our research and
development expenses for the years ended December 31, 2018 and 2017 were $23.6 million and $25.6 million, respectively.
Manufacturing
We currently rely, and expect to continue to rely, on third parties and our collaborators for the manufacture of our product
candidates for pre-clinical and clinical testing, as well as for commercial manufacture if our product candidates receive marketing
approval. Accordingly, we have not internally developed 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 required for the manufacture of our product candidates can be obtained from more than one source. However, the
manufacturing processes for each of our product candidates vary and sourcing adequate supplies may be made more difficult
depending on the type of product candidate involved. Our product candidates generally can be manufactured in reliable and
reproducible synthetic processes from readily available starting materials. This chemistry generally is amenable to scale-up and does
not require unusual equipment in the manufacturing process.
Corporate Information
We were incorporated in the Province of British Columbia on November 5, 1996 under the predecessor to the Business
Corporations Act (British Columbia) under the name “Xenon Bioresearch Inc.” We continued from British Columbia to the federal
jurisdiction pursuant to Section 187 of the Canada Business 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 one wholly-owned subsidiary as at December 31,
2018, Xenon Pharmaceuticals USA Inc., which was incorporated in Delaware on December 2, 2016. Our principal executive offices
are located at 200 – 3650 Gilmore Way, Burnaby, British Columbia, Canada V5G 4W8, and our telephone number 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 stock
exchange. Our common shares trade on The NASDAQ Global Market under the symbol “XENE.”
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Where You Can Find Additional Information
We make available free of charge through our investor relations website, http://investor.xenon-pharma.com, our annual reports,
quarterly reports, current reports, proxy statements and all amendments to those reports as soon as reasonably practicable after such
material is electronically filed or furnished with the U.S. Securities and Exchange Commission, or SEC. 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 website and the information contained therein or
incorporated therein 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 furnish with 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 Public Reference Room by calling the SEC at 1-800-SEC-0330. Moreover,
the SEC maintains a website that contains reports, proxy and information statements, and other information regarding reports that we
file or furnish electronically with them at www.sec.gov. Additional information related to Xenon is also available on SEDAR at
www.sedar.com.
Item 1A. Risk Factors
You should carefully consider the following risk factors, in addition to the other information contained in this report, including
the section of this report captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
our financial statements and related notes. If any of the events described in the following risk factors and the risks described
elsewhere in this report occurs, our business, operating results and financial condition could be seriously harmed. This report on
Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.
Risks Related to Our Financial Condition and Capital Requirements
We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the
foreseeable future.
We are a clinical stage biotechnology company and, other than the years ended December 31, 2014 and 2013, we have recorded
net losses in each annual reporting period since inception in 1996, and we do not expect to have sustained profitability for the
foreseeable future. We had net losses of $34.5 million for the year ended December 31, 2018 and an accumulated deficit of $207.9
million as of December 31, 2018, which were driven by expenses incurred in connection with our research and development programs
and from general and administrative costs associated with our operations.
We have devoted most of our financial resources to research and development, including our clinical and pre-clinical
development activities. To date, we have financed our operations through the sale of equity securities, funding received from our
licensees and collaborators, debt financing and, to a lesser extent, government funding. We have not generated any significant revenue
from product sales and our product candidates will require substantial additional investment before they may provide us with any
revenue.
We expect to incur significant expenses and increasing operating losses for the foreseeable future as we:
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continue our research and pre-clinical and clinical development of our product candidates;
expand the scope of our clinical studies for our current and prospective product candidates;
initiate additional pre-clinical, clinical or other studies for our product candidates;
change or add additional manufacturers or suppliers and manufacture drug supply and drug product for clinical trials and
commercialization;
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 or other agreements, including, without limitation, payments to
Memorial University of Newfoundland, 1st Order Pharmaceuticals, Inc. and other third parties;
• maintain, protect and expand our intellectual property portfolio;
•
establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain
marketing approval;
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create additional infrastructure to support our operations and our product development and planned future
commercialization efforts; and
experience any delays or encounter issues with any of the above.
Our expenses could increase beyond expectations for a variety of reasons, including if we are required by the U.S. Food and
Drug Administration, or FDA, the European Medicines Agency, or EMA, Health Canada, or other regulatory agencies, domestic or
foreign, to perform clinical and other studies in addition to those that we currently anticipate. Our prior losses, combined with
expected future losses, have had and will continue to have an adverse effect on our shareholders’ equity.
We have not generated any significant royalty revenue from product sales and may never become profitable on a U.S. GAAP
basis.
Our ability to generate meaningful revenue and achieve profitability on a U.S. GAAP basis depends on our ability, alone or with
strategic collaborators, to successfully complete the development of, and obtain the regulatory approvals necessary to commercialize,
our product candidates. Substantially all of our revenue since inception has consisted of upfront and milestone payments associated
with our collaboration and license agreements. Revenue from these agreements is dependent on successful development of our product
candidates by us or our collaborators. We have not generated any significant royalty revenue from product sales, and do not otherwise
anticipate generating revenue from product sales for the foreseeable future, if ever. If any of our product candidates fail in clinical
trials or do not gain regulatory approval, or if any of our future products, if any, once approved, fail to achieve market acceptance or
adequate market share, we may never become profitable. Although we were profitable for the years ended December 31, 2014 and
2013, we have not been profitable since that time and may not become profitable in subsequent periods. Our ability to generate future
revenue from product sales depends heavily on our success, and the success of our collaborators, in:
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completing research, pre-clinical and clinical development of our product candidates;
seeking and obtaining regulatory and marketing approvals for product candidates for which we complete clinical studies;
commercializing products for which we obtain regulatory and marketing approval, either with a collaborator or, if launched
independently, by establishing sales, marketing and distribution infrastructure;
negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter;
obtaining market acceptance of products for which we obtain regulatory and marketing approval as therapies;
addressing any competing technological and market developments;
establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate (in amount
and quality) products and services to support clinical development and the market demand for any approved products in the
future;
developing sustainable, scalable, reproducible, and transferable manufacturing processes for any of our products approved
in the future;
• maintaining, protecting, expanding and enforcing our portfolio of intellectual property rights, including patents, trade
secrets and know-how;
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implementing additional internal systems and infrastructure, as needed; and
attracting, hiring and retaining qualified personnel.
The scope of our future revenue will also depend upon the size of any markets in which our product candidates receive approval
and the availability of insurance coverage and the availability and amount of reimbursement from third-party payers for future
products, if any. If we are unable to achieve sufficient revenue to become profitable and remain so, our financial condition and
operating results will be negatively impacted, and the market price of our common shares might be adversely impacted.
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We will likely need to raise additional funding, which may not be available on acceptable terms, if at all. Failure to obtain this
necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.
Since our inception, we have dedicated most of our resources to the discovery and development of our proprietary pre-clinical
and clinical product candidates, and we expect to continue to expend substantial resources doing so for the foreseeable future. These
expenditures will include costs associated with research and development, potential milestone payments and royalties to third parties,
manufacturing of product candidates and products approved for sale, conducting pre-clinical experiments and clinical trials and
obtaining and maintaining regulatory approvals, as well as commercializing any products later approved for sale. During the year
ended December 31, 2018, we incurred approximately $23.6 million of costs associated with research and development, exclusive of
costs incurred by our collaborators in developing our product candidates.
Our current cash and cash equivalents and marketable securities are not expected to be sufficient to complete clinical
development of any of our product candidates and prepare for commercializing any product candidate which receives regulatory
approval. Accordingly, we will likely require substantial additional capital to continue our clinical development and potential
commercialization activities. Our future capital requirements depend on many factors, including but not limited to:
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the number and characteristics of the future product candidates we pursue either from our internal research efforts or
through acquiring or in-licensing other product candidates or technologies;
the scope, progress, results and costs of independently researching and developing any of our future product candidates,
including conducting pre-clinical research and clinical trials;
• whether our existing collaborations continue to generate substantial milestone payments and, ultimately, royalties on future
approved products for us;
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the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates we develop
independently;
the timing and magnitude of potential milestone payments and royalties under our product acquisition and in-license
agreements;
the cost of commercializing any future products we develop independently that are approved for sale;
the cost of manufacturing our future product candidates and products, if any;
our ability to maintain existing collaborations and to establish new collaborations, licensing or other arrangements and the
financial terms of such agreements;
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs
and the outcome of such litigation; and
the timing, receipt and amount of sales of, or royalties on, our future products, if any.
We are unable to estimate the funds we will actually require to complete research and development of our product candidates or
the funds required to commercialize any resulting product in the future.
Based on our research and development plans and our timing expectations related to the progress of our programs, we expect
that our existing cash and cash equivalents and marketable securities as of the date of this report will enable us to fund our operating
expenses and capital expenditure requirements for at least the next 12 months.
Our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds
sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and
distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these
approaches. Raising funds in the future may present additional challenges and future financing may not be available in sufficient
amounts or on terms acceptable to us, if at all.
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We may allocate our limited resources to pursue a particular drug candidate or indication and fail to capitalize on other drug
candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and management resources, we focus on a limited number of research programs and drug
candidates. As a result, we may forgo or delay pursuit of opportunities with other drug candidates or for other indications that later
prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial
drugs or profitable market opportunities. Our spend on current and future research and development programs and drug candidates for
specific indications may not yield any commercially viable drugs. If we do not accurately evaluate the commercial potential or target
market for a particular drug candidate, we may relinquish valuable rights to that drug candidate through collaboration, licensing or
other arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization
rights.
We are party to a loan and security agreement that contains operating and financial covenants that may restrict our business
and financing activities and we may be required to repay the outstanding indebtedness in an event of default, which could have a
materially adverse effect on our business.
In December 2017, we entered into a loan and security agreement with Silicon Valley Bank pursuant to which we borrowed an
aggregate principal amount of $12 million. In August 2018, we entered into an amended and restated loan and security agreement with
Silicon Valley Bank providing for a term loan to us with an aggregate principal amount of $15.5 million, which amount was funded in
August 2018. Proceeds from the principal amount borrowed in August 2018 were used in part to refinance the amounts borrowed
under the December 2017 loan and security agreement and pay a $0.5 million final payment fee to Silicon Valley Bank in connection
with the refinancing of the December 2017 loan and security agreement.
Borrowings under our amended and restated loan and security agreement are secured by substantially all of our assets except
intellectual property and subject to certain other exceptions. The loan and security agreement restricts our ability, among other things,
to:
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sell, transfer or otherwise dispose of any of our business assets or property, subject to limited exceptions;
• make material changes to our business;
•
enter into transactions resulting in significant changes to the voting control of our stock;
• make certain changes to our organizational structure;
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consolidate or merge with other entities or acquire other entities;
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incur additional indebtedness or create encumbrances on our assets;
pay dividends, other than dividends paid solely in our common shares, or make distributions on and, in certain cases,
repurchase our capital stock;
enter into certain transactions with our affiliates;
repay subordinated indebtedness; or
• make certain investments.
In addition, we are required under our amended and restated loan agreement and security agreement to comply with various
affirmative covenants. The covenants and restrictions and obligations in our amended and restated loan and security agreement, as
well as any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in business
activities or expand or fully pursue our business strategies. Our ability to comply with these covenants may be affected by events
beyond our control, and we may not be able to meet those covenants. A breach of any of these covenants could result in a default
under the amended and restated loan and security agreement, which could cause all of the outstanding indebtedness under the facility
to become immediately due and payable.
If we are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either
when they mature, or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if
at all, which may negatively impact our business operations and financial condition.
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Raising additional capital may cause dilution to our existing shareholders, restrict our operations or require us to relinquish
rights to our technologies or product candidates.
The terms of any financing arrangements we enter into may adversely affect the holdings or the rights of our shareholders and
the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of
our common shares to decline. The sale of additional equity or convertible securities also would dilute all of our shareholders. For
example, in May 2018, we entered into a sales agreement with Stifel, Nicolaus & Company, Incorporated, or Stifel, to sell up to
$30.0 million of our common shares, from time to time, through an “at-the-market” equity offering program under which Stifel would
act as sales agent. We sold an aggregate of 3,440,000 common shares under the May 2018 sales agreement for proceeds of
approximately $29.2 million, net of commissions paid, but excluding estimated transaction expenses, before its termination by mutual
agreement between us and Stifel in July 2018, in connection with our entry into the July 2018 sales agreement with Jefferies LLC, or
Jefferies, and Stifel on the same date. Pursuant to the July 2018 sales agreement, Jefferies and Stifel would act as sales agents to sell
our common shares having aggregate gross proceeds of up to $50.0 million. We sold an aggregate of 1,600,000 common shares under
the July 2018 sales agreement for proceeds of approximately $14.8 million, net of commissions paid, but excluding estimated
transaction expenses, before its termination by mutual agreement between us, Jefferies and Stifel in September 2018. In September
2018, we completed an underwritten public offering of 4,500,000 of our common shares at a public offering price of $14.00 per share
for net proceeds of $59.2 million, net of underwriting discounts and commissions, but before other offering expenses. We are also
party to an amended and restated loan and security agreement with Silicon Valley Bank pursuant to which we have borrowed an
aggregate principal amount of $15.5 million. Our loan pursuant to the amended and restated loan and security agreement is secured by
substantially all of our assets except intellectual property and the agreement requires us to comply with various affirmative and
negative covenants. The incurrence of additional indebtedness would result in increased fixed payment obligations and, potentially,
the imposition of additional restrictive covenants. Such additional covenants could include limitations on our ability to incur additional
debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could
adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborators
or otherwise at an earlier stage than otherwise would be desirable resulting in the loss of rights to some of our product candidates or
other unfavorable terms, any of which may have a material adverse effect on our business, operating results and prospects. In addition,
any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability
to develop and commercialize our product candidates.
Unstable market and economic conditions may have serious adverse consequences on our business and financial condition.
Global credit and financial markets experienced extreme disruptions at various points over the last decade, characterized by
diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in
unemployment rates, and uncertainty about economic stability. If another such disruption in credit and financial markets and
deterioration of confidence in economic conditions occurs, our business may be adversely affected. If the equity and credit markets
were to deteriorate significantly in the future, it may make any necessary debt or equity financing more difficult to complete, more
costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material
adverse effect on our growth strategy, financial performance and the market price of our common shares could require us to delay or
abandon development or commercialization plans. In addition, there is a risk that one or more of our current collaborators, service
providers, manufacturers and other partners would not survive or be able to meet their commitments to us under such circumstances,
which could directly affect our ability to attain our operating goals on schedule and on budget.
We are subject to risks associated with currency fluctuations which could impact our results of operations.
As of December 31, 2018, approximately 7% of our cash and cash equivalents and marketable securities were denominated in
Canadian dollars. We incur significant expenses in Canadian dollars in connection with our operations in Canada. We do not currently
engage in foreign currency hedging arrangements for our Canadian dollar expenditures, and, consequently, foreign currency
fluctuations may adversely affect our earnings; however, in the future, we may engage in exchange rate hedging activities in an effort
to mitigate the impact of exchange rate fluctuations. Any hedging technique we implement may fail to be effective. If our hedging
activities are not effective, changes in currency exchange rates may have a more significant impact on the market price of our common
shares.
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Risks Related to Our Business
We, or our collaborators, may fail to successfully develop our product candidates.
Our clinical product candidates, which include XEN1101 and XEN901, along with clinical product candidates we expect to
enter clinical development, which include XEN496 and XEN007, and our pre-clinical compounds, are in varying stages of
development and will require substantial clinical development, testing and regulatory approval prior to commercialization. It may be
several more years before these product candidates or any of our other product candidates receive marketing approval, if ever. If any
of our product candidates fail to become approved products, our business, growth prospects, operating results and financial condition
may be adversely affected and a decline in the market price of our common shares could result.
We and our collaborators face substantial competition in the markets for our product candidates, which may result in others
discovering, developing or commercializing 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 on proprietary products. We face potential competition in target discovery and product development from many
different approaches and sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic
institutions, governmental agencies, as well as public and private research institutions. Any product candidates that we or our
collaborators successfully develop and commercialize will compete with existing products and any new products that may become
available in the future.
The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their efficacy,
safety, convenience and price; the effectiveness and safety of alternative products; the level of generic competition; and the
availability of coverage and adequate reimbursement from government and other third-party payers.
Many of the companies against which we are competing or against which we may compete in the future have significantly
greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products than we, or our collaborators, do. Mergers and acquisitions in the
pharmaceutical and biotechnology industries may result in even more resources 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, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any
products that we may develop. Our competitors also may obtain FDA, EMA, Health Canada or other regulatory approval for their
products more rapidly than we may obtain approval for ours, which could result in our competitors establishing 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 insurers or
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 our financial condition, results of operations and the market price of our common shares may suffer.
If XEN496, XEN1101 or XEN901 were approved for the treatment of epilepsy, we anticipate that they could potentially
compete with each other and other anti-epileptic drugs, or AEDs. Commonly used AEDs include phenytoin, levetiracetam,
carbamazepine, clobazam, lamotrigine, valproate, oxcarbazepine, topiramate, lacosamide, perampanel and cannabidiol, among others.
There are currently no FDA-approved treatments indicated for KCNQ2 epileptic encephalopathy (otherwise known as KCNQ2-EE or
EIEE7) or for SCN8A epileptic encephalopathy (otherwise known as SCN8A-EE or EIEE13), an early infantile epileptic
encephalopathy due to gain-of-function mutations in the SCN8A gene that encodes the Nav1.6 sodium channel. We are not aware of
other companies that are developing selective Nav1.6 inhibitors for the treatment of epilepsy. There are other AEDs in development
that could potentially compete with XEN496, XEN1101 or XEN901, including products in development from UCB, Inc., Zogenix,
Inc., Sage Therapeutics, Marinus Pharmaceuticals, Inc., SciFluor Lifesciences, Inc., Knopp Biosciences LLC, and Upsher-Smith
Laboratories, Inc.
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Drug discovery and development for various pain applications is intensely competitive. There are a large number of approved
products for neuropathic pain, inflammatory pain and other pain indications. These approved products include capsaicin, celecoxib,
lidocaine, narcotic analgesics, gabapentin, and pregabalin. We are also aware of development programs at several pharmaceutical and
biotechnology companies that are developing Nav1.7 inhibitors or other sodium channel inhibitors for the treatment of pain, including
Amgen Inc., AstraZeneca PLC, Biogen Inc., Bristol-Myers Squibb Company, Dainippon Sumitomo Co., Ltd., Eli Lilly and Company,
Merck, NeuroQuest Inc., Newron Pharmaceuticals SpA, Vertex Pharmaceuticals Inc., Voyager Therapeutics, Inc. and Chromocell
Corporation in collaboration with its partner Astellas Pharma Inc. Moreover, we are aware of various other product candidates in
development that target other mechanisms of action to treat various pain indications, including calcium channel inhibitors, nerve
growth factor inhibitors, and Nav1.8 inhibitors.
We have no marketed proprietary products and have not yet advanced a product candidate beyond Phase 2 clinical trials, which
makes it difficult to assess our ability to develop our future product candidates and commercialize any resulting products
independently.
As a company, we have no experience in Phase 3 and later stage clinical development, and related regulatory requirements or
the commercialization of products. We have not yet demonstrated our ability to independently and repeatedly conduct clinical
development after Phase 2, successfully conduct an international multi-center clinical trial, conduct a pivotal clinical trial, obtain
regulatory approval, manufacture drug product on a commercial scale or arrange for a third party to do so on our behalf, and
commercialize therapeutic products. We will need to develop such abilities if we are to execute on our business strategy to develop
and independently commercialize product candidates for orphan and niche indications. To execute on our business plan for the
development of independent programs, we will need to successfully:
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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 will not be able to develop and commercialize any future product
candidates independently and could fail to realize the potential advantages of doing so.
If we are not successful in discovering, acquiring or in-licensing product candidates in addition to XEN496, XEN1101,
XEN901, and XEN007, our ability to expand our business and achieve our strategic objectives may be impaired.
We have built a product development pipeline by identifying product candidates either from our internal research efforts or
though acquiring or in-licensing other product candidates. To date, our internal discovery efforts have yielded multiple development
candidates, including XEN901. Both our internal discovery efforts and our assessment of potential acquisition or in-licensing
opportunities require substantial technical, financial and human resources, regardless of whether we identify any viable product
candidates.
If we are unable to identify additional product candidates suitable for clinical development and commercialization either from
our internal research efforts or though acquiring or in-licensing other product candidates or technologies, we may not be able to obtain
product revenue in future periods, which likely would result in significant harm to our financial position and adversely impact the
market price of our common shares.
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 approach to drug discovery may not reproducibly or cost-effectively result in the discovery of product candidates and
development of commercially viable products that safely and effectively treat human disease.
Our drug discovery efforts may initially show promise in identifying additional potential product candidates yet fail to yield
viable product candidates for clinical 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 applicable regulatory criteria; and any product candidate may not be
capable of being produced in commercial quantities at an acceptable cost, or at all.
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If our discovery activities fail to identify novel targets for drug discovery, or such targets prove to be unsuitable for treating
human disease, or we are unable to develop product candidates with specificity and selectivity for such targets, we will fail to develop
viable products. If we fail to develop and commercialize viable products, we will not achieve commercial success.
If we fail to attract and retain senior management and key personnel, we may be unable to successfully develop our product
candidates, perform our obligations 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 and pharmaceutical field is intense. We are highly dependent upon our senior management, particularly Dr. Simon
Pimstone, our Chief Executive Officer, and Mr. Ian Mortimer, our President and Chief Financial Officer, as well as other employees.
The loss of services of either of these individuals or one or more of our other members of senior management could materially delay
or even prevent the successful development 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 terms given the competition among numerous pharmaceutical and biotechnology companies for
individuals with similar skill sets. The inability to recruit or loss of the 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 regulatory standards 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 commercial partners. Misconduct by these parties could include intentional failures to comply with the regulations of
the FDA, EMA, Health Canada and other regulators, provide accurate information to the FDA, EMA, Health Canada and other
regulators, comply with data privacy and security and healthcare fraud and abuse laws and regulations in the U.S. and abroad, report
financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business
arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct,
kickbacks, self-dealing and other abusive practices. Additionally, laws regarding data privacy and security, including the federal
Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for
Economic and Clinical Health Act of 2009, or HITECH, the General Data Protection Regulation (EU) 2016/679, or GDPR, and the
Personal Information Protection and Electronic Documents Act, or PIPEDA, as well as comparable laws in other jurisdictions, may
impose obligations with respect to safeguarding the privacy, use, security and transmission of individually identifiable health
information such as genetic material or information we have obtained through our direct-to-patient web-based recruitment approach
for identifying patients with rare or extreme phenotypes or patients identified for clinical trials.
Various laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales
commission, customer incentive programs and other business arrangements. Any misconduct could also involve the improper use of
information obtained in the course of clinical studies, which could result in regulatory sanctions and cause serious harm to our
reputation. We have adopted a code of conduct applicable to all of our employees, officers, directors, agents and representatives,
including consultants, but it is not always possible to identify and deter misconduct, and the precautions we take to detect and prevent
misconduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental
investigations or other actions or lawsuits stemming from a failure to comply with these laws and regulations. If any such actions are
instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant
impact on our business, including the imposition of significant fines or other sanctions, exclusion from participation in government
healthcare programs, or the curtailment or restructuring of our operations.
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
product candidates for orphan and niche indications. 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 capabilities and infrastructure for us. To achieve this, we will need to identify, hire and integrate personnel who have not
worked together as a group previously.
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As our operations expand, we expect that we will need to manage additional relationships with various strategic collaborators,
suppliers and other third parties.
Dr. Simon Pimstone devotes a small amount of his time to clinical work outside of his duties at our company, conducting,
generally, one outpatient clinic per week on average. Future growth will impose significant added responsibilities on members of
management, and our management may need to divert a disproportionate amount of its attention away from our day-to-day activities
and devote a substantial amount of time to managing these growth activities.
If we are unable 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 and compete effectively will depend, in part, on our ability to effectively manage any
future growth.
Our business and operations could suffer in the event of system failures.
Computer system, network or telecommunications failures due to events such as damage from malware, unauthorized access,
terrorism, war, or natural disasters could interrupt our internal or partner operations. For example, the loss of pre-clinical trial data,
data from completed or ongoing clinical trials for our product candidates or other confidential information could result in delays in our
regulatory filings and development efforts, significantly increase our costs and result in other adverse impacts to our business. To the
extent that any disruption or cybersecurity breach were to result in a loss of or damage to our data, or inappropriate disclosure of
confidential or proprietary information, we could incur liability and other remediation costs, and the development of our product
candidates could be delayed. While we have implemented security measures and, to date, have not detected a cybersecurity breach of
our systems nor experienced a material system failure, our internal computer systems and the external systems and services used by
our third-party contract manufacturers, or CMOs, third-party contract research organizations, or CROs, or other contractors,
consultants, directors and partners remain potentially vulnerable to damage from these events.
A variety of risks associated with international operations could materially adversely affect our business.
If we engage in significant cross-border and international activities, we will be subject to risks related to international
operations, including:
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different regulatory requirements for initiating clinical trials and maintaining approval of drugs 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;
differing and multiple payor reimbursement regimes, government payors or patient self-pay systems;
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 of doing business in another country;
• workforce uncertainty in countries where labor unrest is more common than in North America;
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likelihood of potential or actual violations of domestic and international anti-corruption laws, such as the U.S. Foreign
Corrupt Practices Act and the U.K. Bribery Act, or of U.S. and international import, export and re-export control and
sanctions laws and regulations, which likelihood may increase with an increase of operations in foreign jurisdictions;
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tighter restrictions on privacy and the collection and use of data, including clinical data and genetic material, may apply in
jurisdictions outside of North America; 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.
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U.S. holders of our common 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 our assets (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 price of our common shares and the composition of our gross income and
gross assets, we believe that we may be deemed a PFIC for the taxable years ended December 31, 2018 and 2017, and we could be a
PFIC in subsequent years. Our status as a PFIC is a fact-intensive determination made on an annual basis, and we cannot provide any
assurance regarding our PFIC status for the taxable years ending December 31, 2018 and 2017 or for future taxable years.
If we are a PFIC for any year, U.S. holders of our common shares may suffer adverse tax consequences. Gains realized by non-
corporate U.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 to dividends 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. U.S. holders should consult their own tax advisors with respect to their
particular circumstances.
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 the PFIC 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 net capital 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 net ordinary income and net capital gains. We will provide upon
request, our U.S. holders with the information that is necessary 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 each year for which we may be a PFIC. U.S. holders should
consult their own tax advisors with respect to making this election and the related reporting requirements.
A U.S. holder may also mitigate the adverse tax consequences by timely making a mark-to-market election. Generally, for each
year that we 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 common shares during each 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 election may 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 a PFIC. U.S. holders
should consult their own tax advisors with respect to the possibility of making this election. In addition, our PFIC status may deter
certain U.S. investors from purchasing our common shares, which could have an adverse impact on the market price of our common
shares.
We may become subject to income tax in jurisdictions in which we are organized or operate, which would reduce our future
earnings.
There is a risk that we may become subject to income tax in jurisdictions outside of Canada and the United States, if under the
laws of any such jurisdiction, we are considered to be carrying on a trade or business there or earn income that is considered to be
sourced there and we do not qualify for an exemption. In jurisdictions where we do not believe we are subject to tax, we can provide
no certainty that tax authorities in those jurisdictions will not subject one or more tax years to examination. Tax examinations are often
complex as tax authorities may disagree with the treatment of items reported by us, the result of which could have a material adverse
effect on our operating results and financial condition.
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 pursue strategic alliances, joint ventures or investments in complementary businesses. Any of these
transactions could be material to our financial condition and operating results and expose us to many risks, including:
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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;
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diversion of management time and focus from operating our business to management of strategic alliances or joint ventures
or acquisition integration 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 different cultures 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 result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or
amortization expenses or write-offs of goodwill, any of 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 such transactions might have on our operating results.
Risks Related to Development, Clinical Testing and Regulatory Approval of Our Product Candidates
The regulatory approval processes of the FDA, EMA, Health Canada and regulators in other jurisdictions are lengthy, time-
consuming and inherently unpredictable. If we, or our collaborators, are unable to obtain regulatory approval for our product
candidates in a timely manner, or at all, our business will be substantially harmed.
The regulatory approval process is expensive and the time required to obtain approval from the FDA, EMA, Health Canada or
other regulatory authorities in other jurisdictions to sell any product is uncertain and may take years. Whether regulatory approval will
be granted is unpredictable and depends upon numerous factors, including the substantial discretion of the regulatory authorities.
Approval policies, regulations, or the type and amount of pre-clinical and clinical data necessary to gain approval may change during
the course of a product candidate’s clinical development and may vary among jurisdictions. Moreover, pre-clinical and clinical data
are often susceptible to varying interpretations and analyses, and even if the pre-clinical studies show promising results and clinical
trials are successfully completed, we cannot guarantee that the FDA, EMA, Health Canada or other regulatory authorities in other
jurisdictions will interpret the results as we do, and more trials, manufacturing-related studies or non-clinical studies could be required
before we submit our product candidates for approval. Many companies that have believed their product candidates performed
satisfactorily in pre-clinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products. To the
extent that the results of our studies and trials are not satisfactory to the FDA, EMA, Health Canada or other regulatory authorities in
other jurisdictions for support of a marketing application, approval of our product candidates may be significantly delayed, or we may
be required to expend significant additional resources, which may not be available to us, to conduct additional trials in support of
potential approval of our product candidates. It is also possible that none of our existing product candidates or any of our future
product candidates will ever obtain regulatory approval, even if we expend substantial time and resources seeking such approval.
Our product candidates could fail to receive regulatory approval for many reasons, including the following:
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the FDA, EMA, Health Canada 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, Health Canada or other
regulatory authorities that a product candidate is safe and effective for its proposed indication;
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the results of clinical trials may not meet the level of statistical significance required by the FDA, EMA, Health Canada or
other regulatory authorities for approval;
• we, or our collaborators, may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its
safety risks;
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the FDA, EMA, Health Canada or other regulatory authorities may disagree with our or our collaborators’ interpretation of
data from pre-clinical studies or clinical trials;
the data collected from clinical trials of our product candidates may not be sufficient to support the submission of a New
Drug Application, or NDA, or other submission or to obtain regulatory approval in the U.S. or elsewhere;
the FDA, EMA, Health Canada or other regulatory authorities may fail to approve the manufacturing processes, controls or
facilities of third-party manufacturers with which we or our collaborators contract for clinical and commercial supplies; and
the approval policies or regulations of the FDA, EMA, Health Canada or other regulatory authorities may significantly
change in a manner rendering our or our collaborators’ clinical data insufficient for approval.
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Even if we, or our collaborators, obtain approval for a particular product, regulatory authorities may grant approval contingent
on the performance of costly post-approval clinical trials, or may approve a product with a label that does not include the labeling
claims necessary or desirable for the successful commercialization of that product.
In addition, because there may be approved treatments for some of the diseases for which we may seek approval, in order to
receive regulatory approval, we may need to demonstrate in clinical trials that the product candidates we develop to treat those
diseases are not only safe and effective, but may need to be compared to existing products, which may make it more difficult for our
product candidates to receive regulatory approval or adequate reimbursement.
Clinical drug development involves a lengthy and expensive process with uncertain timelines and uncertain outcomes. If
clinical trials are prolonged, delayed or not completed, 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:
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side effects or adverse events in study participants presenting an unacceptable safety risk;
inability to reach agreement with prospective CROs and clinical trial sites, or the breach of such agreements;
failure of third-party contractors, such as CROs, or investigators to comply with regulatory requirements, including GCPs;
delay or failure in obtaining the necessary approvals from regulators or institutional review boards, or IRBs, in order to
commence a clinical trial at a prospective trial site, or their suspension or termination of a clinical trial once commenced;
a requirement to undertake and complete additional pre-clinical studies to generate data required to support the continued
clinical development of a product candidate or 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, stability and distribution;
our inability to add new or additional clinical trial sites;
our inability to manufacture, or obtain from third parties, adequate supply of drug substance or drug product sufficient to
complete our pre-clinical studies and clinical trials; and
governmental or regulatory delays and changes in regulatory requirements, policy and guidelines.
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, with respect to non-orphan indications, usually involve many hundreds to thousands of patients. In addition, if the
FDA, EMA, Health Canada or another regulator disagrees with our or our collaborator’s choice of the key testing criterion, or primary
endpoint, the results for the primary endpoint are not robust or significant relative to the control group of patients not receiving the
experimental therapy, or our statistical analysis is inconclusive, such regulator may refuse to approve our product candidate in the
region in which it has jurisdiction. The FDA, EMA, Health Canada or other regulators also may require additional clinical trials as a
condition for approving 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 such trial is being conducted, by any Data Safety Monitoring Board for such trial, or by the FDA, EMA, Health
Canada or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors,
including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the
clinical trial operations or trial site by the FDA, EMA, Health Canada or other regulatory authorities resulting in the imposition of a
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 to safety concerns arising from trials or other clinical data regarding another company’s
product candidate in the same compound class as one of ours.
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Additionally, changes in applicable regulatory requirements and guidance may occur and we may need to amend clinical trial
protocols to reflect these changes or to include additional objectives that could yield important scientific information critical to our
overall development strategy. The protocol amendment process often requires review and approval by several review bodies,
including regulatory agencies and scientific, regulatory and ethics boards and IRBs. These protocol amendments may not be accepted
by the review bodies in the form submitted, or at all, which may impact costs, timing or successful completion of a clinical trial.
If we or our collaborators experience delays in the completion of, or termination of, any clinical trial of one of our product
candidates, the commercial prospects of the product candidate will be harmed, could shorten the period during which we may have the
exclusive right to commercialize our products under patent protection, 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. Any of these occurrences may harm our business,
financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or
completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.
XEN496 targets an ultra-orphan indication of KCNQ-EE and the FDA has indicated that a single, pivotal trial in approximately
20 patients may be sufficient to demonstrate effectiveness and safety in KCNQ2-EE provided that no new or unexpected safety issues
arise during drug development. Even though we believe the safety and efficacy profile of ezogabine, the active ingredient in XEN496,
in pediatric patients with KCNQ-EE generated to date by others appears promising based on published clinical case reports, the
clinical development of XEN496 may not be successful and the FDA or other regulatory authorities may require additional data in
more patients or we may not be able to generate sufficient data for approval in this patient population.
Our clinical trials may fail to demonstrate adequately the safety and efficacy of our product candidates, which could prevent or
delay regulatory approval and commercialization.
Before obtaining regulatory approvals for the commercial sale of our products, we must demonstrate through lengthy, complex
and expensive pre-clinical testing and clinical trials that the product candidate is both safe and effective for use in each target
indication. Clinical trials often fail to demonstrate safety and efficacy of the product candidate studied for the target indication. Most
product candidates that commence clinical trials are never approved as products.
In the case of some of our product candidates, we are seeking to develop treatments for diseases for which there is relatively
limited clinical experience, and our clinical trials may use novel end points and measurement methodologies or subjective patient
feedback, which adds a layer of complexity to our clinical trials and may delay regulatory approval. In addition, our focus on orphan
and niche markets may cause us to select target indications that are in more challenging therapeutic areas. Related to our collaboration
with Genentech, clinical trials for pain are inherently difficult to conduct. The primary measure of pain is based on 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, from
patient to patient, and from site to site within a clinical study. The placebo effect also tends to have a more significant impact in 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 or commercialize these product candidates and products. In such case, we would need to develop other compounds and
conduct associated pre-clinical testing and 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.
We may find it difficult to enroll patients in our clinical studies, including for ultra-orphan, orphan or niche indications, which
could delay or prevent clinical studies of 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 diversity in a study, to complete our clinical studies in a timely manner. Patient enrollment for clinical trials
for ultra-orphan, orphan and niche indications and for more prevalent conditions is affected by factors including:
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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;
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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 ultra-orphan, orphan and niche indications, such as KCNQ2-EE, SCN8A-EE, other early
infantile epileptic encephalopathies, or EIEEs, AHC and HM present significant recruitment challenges for clinical trials and a full
understanding of the size of these populations is still relatively unknown. Many of these patients may not be suitable or available to
participate in our clinical trials. This means that we or our collaborators generally will have to run multi-site and potentially multi-
national trials, which can be expensive and require close coordination and supervision. If we experience delays in completing our
clinical trials, such delays could result in increased costs, delays in advancing our product development, delays in testing the
effectiveness of our product candidates or termination of the clinical studies altogether. Even if we are successful in receiving
regulatory approval, the limited patient populations in ultra-orphan, orphan and niche indications may impact the successful
commercialization of our product candidates and reimbursement rates, which could impact revenue and our ability to achieve
profitability.
ACH, KCNQ2-EE and SCN8A-EE have no FDA-approved treatments, and the clinical endpoints required to obtain approval
are not well defined.
Given the nature of some of the rare diseases we are seeking to treat, we may have to devise novel clinical endpoints to be tested
in our studies, which can lead to some subjectivity in interpreting study results and could result in regulatory agencies not agreeing
with the validity of our endpoints, or our interpretation of the clinical data, and therefore denying approval. In post-Phase 1 trials,
given the illness of the subjects in our studies and the nature of their rare diseases, we may also be required or choose to conduct
certain studies on an open-label basis. Additionally, we may elect to review interim clinical data at multiple time points during the
studies, which could introduce bias into the study results, or result in statistical penalties being applied to the data, and potentially
result in denial of approval.
If we fail to obtain or maintain orphan drug designation or other regulatory exclusivity for some of our product candidates, our
competitive position would be harmed.
Although we may file new intellectual property to protect XEN496 and XEN007, these drug candidates are not currently
covered by any patent and we may have to rely solely on orphan drug designation to gain market exclusivity for these drug candidates.
Currently, this designation provides market exclusivity in the U.S. and the EU for seven years and ten years, respectively, if a product
is the first such product approved for such orphan indication. This market exclusivity does not, however, pertain to indications other
than those for which the drug was specifically designated in the approval, nor does it prevent other types of drugs from receiving
orphan designations or approvals in these same indications. Further, even after an orphan drug is approved, the FDA can subsequently
approve a drug with similar chemical structure for the same condition if 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 the marketing authorization holder consents to a second orphan drug application or cannot supply enough drug, or
when a second applicant demonstrates its drug is “clinically superior” to the original orphan drug. XEN007, a drug we are evaluating
for the potential treatment of HM or AHC, has received orphan drug designation from the FDA for each indication we are developing.
We have also received orphan drug designation from the FDA for XEN496, a drug we are evaluating for the treatment of KCNQ2-EE.
If we seek orphan drug designations for other indications or in other jurisdictions, we may fail to receive such orphan drug
designations and, even if we succeed, such orphan drug designations may fail to result in or maintain orphan drug exclusivity upon
approval, which would harm our competitive position. Further, not all jurisdictions, such as Canada, have orphan drug designations.
Neither orphan drug designation, nor rare pediatric disease, or RPD, designation gives the drug any advantage in the regulatory review
or approval process.
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The FDA has granted RPD designation to XEN007 for treatment of AHC; however, we may not be able to realize any value
from such designation.
Our product candidate XEN007 has received RPD designation from the FDA for the treatment of AHC. The FDA defines a
"rare pediatric disease" as a disease that affects fewer than 200,000 individuals in the U.S. primarily under the age of 18 years old.
Under the FDA's RPD priority review voucher program, upon the approval of a new drug application, NDA, or a biologics license
application, BLA, for the treatment of an RPD, the sponsor of such application would be eligible for a priority review voucher that can
be used to obtain priority review for a subsequent NDA or BLA. There is no assurance we will receive a RPD priority review voucher
or that use of the priority review voucher will result in a faster review or approval for a subsequent marketing application. Further, this
program has been subject to criticism, including by the FDA, and it is possible that even if we obtain approval for XEN007 and
qualify for such a priority review voucher, the program may no longer be in effect at the time of XEN007 approval. Also, although
priority review vouchers may be freely sold or transferred to third parties, there is no guarantee that we will be able to realize any
value if we were to sell a priority review voucher to a third party.
Results of pre-clinical studies may not be predictive of clinical trial results and results of earlier clinical trials may not be
predictive of the results of later-stage clinical trials and the results of our clinical trials may not satisfy the requirements of the
FDA, EMA, Health Canada or foreign regulatory authorities.
The results of pre-clinical studies, either generated by us, such as for XEN901, or by our CROs or by other third parties from
which we have in-licensed or acquired a drug candidate, such as for XEN1101, may not be predictive of results in clinical testing.
Moreover, pre-clinical results can often be difficult to compare across different studies for a variety of reasons, including differences
in experimental protocols and techniques, personnel, equipment and other factors, which may make the pre-clinical results less reliable
and predictive of clinical trial results. In addition, published clinical data or case reports from third parties or early clinical trial data 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 later stages 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
of earlier trials of the same product candidate. Later clinical trial results may not replicate earlier clinical trials for a variety of reasons,
including differences in trial design, different trial endpoints (or lack of trial endpoints in exploratory studies), patient population,
number of patients, patient selection criteria, trial duration, drug dosage and formulation and lack of statistical power in the earlier
studies. These uncertainties are enhanced where the diseases under study lack established clinical endpoints, validated measures of
efficacy, as is often the case with orphan diseases for which no drugs have been developed previously and where the product
candidates target novel mechanisms. For example, to our knowledge, XEN901 is the first selective Nav1.6 sodium channel inhibitor
being developed for the treatment of epilepsy and therefore standard pre-clinical studies may not be adequate to predict efficacy in a
clinical trial due to its novel molecular mechanism.
Further, our product candidates may not be approved even if they achieve their primary endpoint in our Phase 3 clinical trials.
The FDA, EMA, Health Canada or foreign regulatory authorities may disagree with our trial design and our interpretation of data from
pre-clinical studies and clinical trials. In addition, any of these regulatory authorities may change its requirements for the approval of a
product candidate even after reviewing and providing comments or advice on a protocol for a pivotal clinical trial that, if successful,
would potentially form the basis for an application for approval by the FDA, EMA, Health Canada or another regulatory authority.
Furthermore, any of these regulatory authorities may also approve our product candidates for a narrower indication than we request or
may grant approval contingent on the performance of costly post-marketing clinical trials.
Changes in methods of product candidate manufacturing or formulation may result in additional costs or delay.
As product candidates are developed through pre-clinical to late stage clinical trials towards approval and commercialization, it
is common that various aspects of the development program, such as manufacturing methods and formulation, are altered along the
way in an effort to optimize products, processes and results. Such changes carry the risk that they will not achieve these intended
objectives. Any of these changes could cause our product candidates to perform differently and affect the results of planned clinical
trials or other future clinical trials conducted with the altered materials. This could delay completion of clinical trials, require the
conduct of bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our
product candidates and/or jeopardize our or our collaborators’ ability to commence product sales and generate revenue.
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Even if we obtain and maintain approval for our product candidates from one jurisdiction, we may never obtain approval for
our product candidates in other jurisdictions, which would limit our market opportunities and adversely affect our business.
Sales of our approved products, if any, will be subject to the regulatory requirements governing marketing approval in the
countries in which we obtain regulatory approval, and we plan to seek regulatory approval to commercialize our product candidates in
North America, the EU and in additional foreign countries. Clinical trials conducted in one country may not be accepted by regulatory
authorities in other countries and regulatory approval in one country does not ensure approval in any other country, while a failure or
delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in 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 by one foreign regulatory authority does not ensure approval by the FDA, EMA, Health Canada or regulatory authorities in
other countries. 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 pre-clinical studies or clinical
trials. Even if our product candidates are approved, regulatory approval for any product may be withdrawn by the regulatory
authorities in a particular jurisdiction.
Even if a product is approved, the FDA, EMA, Health Canada, or another applicable regulatory authority, as the case may be,
may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require
expensive and time-consuming clinical trials or reporting as conditions of approval. In many countries outside 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 we
intend to charge for a product is also subject to approval.
Regulatory authorities in countries outside of the U.S. and the EU also have their own requirements for approval of product
candidates with which we must comply prior to marketing in those countries. Obtaining foreign regulatory approvals and compliance
with such foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the
introduction of our current and any future products, in certain countries.
If we fail to receive applicable marketing approvals or comply with the regulatory requirements in international markets, our
target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed and our
business will be adversely affected.
We work with outside scientists and their institutions in executing our business strategy of developing product candidates. These
scientists may have other commitments or conflicts of interest, which could limit our access to their expertise and harm our ability
to develop viable product candidates.
We work with scientific advisors and collaborators at academic institutions and other research institutions. These scientists and
collaborators are not our employees; rather, they serve as either independent contractors or the primary investigators under research
collaboration agreements that we have with their sponsoring academic or research institution. Such scientists and collaborators may
have other commitments that would limit their availability to us. Although our scientific advisors generally agree not to do competing
work, if an actual or potential conflict 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 valuable proprietary knowledge may become publicly known through these scientific
advisors if they breach their confidentiality agreements with us, which would cause competitive harm to our business.
Risks Related to Commercialization
If, in the future, we are unable to establish our own sales, marketing and distribution capabilities or enter into licensing or
collaboration agreements for 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, in part, building our own commercial infrastructure to selectively commercialize future products in niche or orphan
indications. Where we believe such involvement would advance our business, we seek to retain the right to participate in the future
development and commercialization of such products.
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 products for which we decide to perform sales, marketing and distribution functions
ourselves, we could face a number of additional risks, including:
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our inability to recruit and retain adequate numbers of qualified sales and marketing personnel or develop alternative sales
channels;
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the inability of sales personnel to obtain access to physicians or an inadequate 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 companies with 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 product candidates. If we enter into arrangements with third parties to perform sales, marketing and
distribution services for a product, the resulting revenue or the profitability 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 be successful 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 are favorable 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 and attention to sell,
market, and distribute our current or any future products effectively.
Even if we receive regulatory approval to commercialize any of the product candidates that we develop independently, we will be
subject to ongoing regulatory 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 uses for 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 manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and
recordkeeping for the product. These requirements include 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 are required to conduct post-approval. Later discovery of previously unknown problems
with a product, including adverse events of unanticipated severity or frequency, or with third-party manufacturers or manufacturing
processes, or failure to comply with regulatory requirements, may result in, among other things:
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restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market or voluntary or
mandatory product recalls;
fines, warning letters or holds on any post-approval clinical trials;
refusal by the FDA, EMA, Health Canada or another applicable regulatory authority to approve pending applications or
supplements to approved applications filed 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.
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If the market opportunities for our product candidates are smaller than we believe they are, our revenue may be adversely
affected, and our business may suffer. Because the target patient populations for some of our product candidates are small, we
must be able to successfully identify patients and acquire a significant market share to achieve profitability and growth.
Some of our product candidates focus on treatments for rare and ultra-rare diseases. Given the small number of patients who
have some of the diseases that we are targeting, our profitability and growth depend on successfully identifying patients with these
rare and ultra-rare diseases. Currently, most reported estimates of the prevalence of these diseases are based on studies of small
subsets of the population in specific geographic areas, which are then extrapolated to estimate the prevalence of the diseases in the
U.S. or elsewhere. Our projections of both the number of people who have these 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 on our internal estimates. These
estimates have been derived from a variety of sources, including scientific literature, surveys of clinics, patient foundations, and
market research, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these
diseases, and, as a result, the number of patients with these diseases may turn out to be lower than expected. Our effort to identify
patients with diseases we seek to treat is in early stages, and we cannot accurately predict the number of patients for whom treatment
might be possible. Additionally, the potentially addressable patient population for each of our product candidates may be limited or
may not be amenable to treatment with our product candidates, and new patients may become increasingly difficult to identify or gain
access to, which would adversely affect our results of operations and our business. Finally, even if we obtain significant market share
for our product candidates, because the potential target populations are very small, we may never achieve profitability despite
obtaining such significant market share.
Even if we or our collaborators receive approval to commercialize our products, unfavorable pricing regulations and
challenging third-party coverage and 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 reimbursement for these products and related treatments will be available from government healthcare programs, private
health insurers, managed care plans, and other organizations. Government authorities and third-party payers, such as private health
insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A
primary trend in the U.S. healthcare industry is cost containment. Government authorities and 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
medical products. We cannot be sure that coverage and reimbursement will be available for any product that we or any collaborator
commercialize and, if reimbursement is available, the level of reimbursement. In addition, coverage and reimbursement may impact
the demand for, or the price of, any product candidate for which we or a collaborator obtains marketing approval. If coverage and
reimbursement are not available or reimbursement is available only to limited levels, we or our collaborators may not be able to
successfully commercialize any product candidate for which marketing approval is obtained.
There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more
limited than the purposes for which the drug is approved by the FDA, EMA, Health Canada or other regulatory authorities. Moreover,
eligibility for coverage and reimbursement does not imply 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
set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by
mandatory discounts or rebates required by government healthcare programs or private payers and by any future relaxation of laws
that presently restrict imports of drugs from countries 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 in setting their own reimbursement policies. Our or any collaborator’s
inability to promptly obtain coverage and profitable payment rates from both government-funded and private payers for any approved
products that we or our collaborators develop could have a material adverse effect on our operating results, our ability to raise capital
needed to commercialize products and our overall financial condition.
Our target patient populations in orphan and niche indications, such as KCNQ2-EE, SCN8A-EE and AHC, are relatively small.
In order for therapies that are designed to treat smaller patient populations to be commercially viable, the pricing, coverage and
reimbursement for such therapies needs to be higher, on a relative basis, to account for the lack of volume. Accordingly, we will need
to implement pricing, coverage and reimbursement strategies for any approved product that accounts for the smaller potential market
size. If we are unable to establish or sustain coverage and adequate reimbursement for our current and any future products from third
party payers or the government, the adoption of those products and sales revenue will be adversely affected, which, in turn, could
adversely affect the ability to market or sell those products.
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Recently enacted and future legislation may increase the difficulty and cost for us to commercialize any products that we or our
collaborators develop and 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 healthcare system 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 payers in 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 significantly affected by major legislative initiatives.
For example, in 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010, collectively, the PPACA, was enacted and includes measures that have significantly changed, or will
significantly change, the way healthcare is financed by both governmental and private insurers. The Trump administration and
Congress, through legislation, executive orders and other measures, has taken action to repeal and replace certain provisions of the
PPACA. The impact of any such changes on us and the pharmaceutical industry as a whole is currently unknown. In addition, there
has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has
resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things,
bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform
government program reimbursement methodologies for pharmaceutical products. Congress and the Trump administration have each
indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. These and other health
reform measures that are implemented may have a material adverse effect on our result of operations.
In the EU, similar political, economic and regulatory developments may affect our ability to profitably commercialize our
current or any future products. In addition to continuing pressure on prices and cost containment measures, legislative developments at
the EU or member state level may result in significant additional requirements or obstacles that may increase our operating costs. In
international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have
instituted price ceilings on specific products and therapies. Our future products, if any, might not be considered medically reasonable
and necessary for a specific indication or cost-effective by third-party payers. An adequate level of reimbursement might not be
available for such products and third-party payers’ reimbursement policies might adversely affect our or our collaborators’ ability to
sell any future products profitably.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional
activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA
regulations, guidance or interpretations 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 more stringent 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 in the 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 been obtained 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 those countries that impose price controls, pricing negotiations with governmental authorities can take
considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some
countries, we or our collaborators may be required to conduct a clinical trial that compares the cost-effectiveness of our product
candidate to other available therapies.
Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review
period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing
remains subject to continuing governmental control even after initial approval is granted. As a result, we or our collaborators might
obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay commercial launch
of the product, possibly for lengthy time periods, and negatively impact the revenue that is 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 at unsatisfactory
levels, or if there is competition from lower priced cross-border sales, our profitability will be negatively affected.
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Risks Related to Our Dependence on Third Parties
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 regarding or resulting from such programs. We are dependent on our collaborators, including Genentech and Merck, to
fund and conduct the research and any clinical development of product candidates under our collaboration with each of them, and for
the successful regulatory approval, marketing and commercialization of 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:
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a collaborator may shift its priorities and resources away from our programs due to a change in business strategies, or a
merger, acquisition, sale or 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 such program 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 sale of a product;
a collaborator with manufacturing responsibilities may encounter regulatory, resource or quality issues and be unable to
meet demand requirements;
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,
commercialization of a product or payment of royalties or milestone payments, any of which could result in a delay in
milestones, royalty payments or termination of a program and possibly resulting in costly litigation or arbitration 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 collaborators may 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 any terminated 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 scope of one or more of our
independent programs or increase our expenditures and seek additional funding which may not be available on acceptable terms or at
all, and our business would be materially and adversely affected.
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We may not be successful in establishing new collaborations or maintaining our existing alliances, which could adversely affect
our ability to develop future product candidates and commercialize future products.
In the ordinary course, we engage with other biotechnology and pharmaceutical companies to discuss potential in-licensing, out-
licensing, alliances and other strategic transactions. We may seek to enter into these types of transactions to enhance and accelerate the
development of our future product candidates and the commercialization of any resulting products. We face significant competition in
seeking appropriate collaborators and the negotiation process is time-consuming and complex. Moreover, we may not be successful in
our efforts to establish other collaborations or other alternative arrangements for any future product candidates because our research
and development pipeline may 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 view our product candidates as lacking the requisite potential to demonstrate safety and
efficacy. Even if we are successful in our efforts to establish collaborations, 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, development or approval of a product candidate is delayed or
sales of an approved product are disappointing.
If any of our existing collaboration agreements is terminated, or if we determine that entering into other product collaborations
is in our best interest but we either fail to enter into, delay in entering into or fail to maintain such collaborations:
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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 additional financing 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
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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 to produce 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 significant in-house manufacturing experience
or personnel. We rely on our collaborators to manufacture product candidates licensed to them or work with multiple CMOs to
produce sufficient quantities of materials required for the manufacture of our product candidates for pre-clinical testing and clinical
trials and intend to do so for the commercial manufacture of 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 able to successfully produce sufficient
supply of product candidate or we may be delayed in doing so. Such failure or substantial delay could materially harm our business.
Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates
ourselves, including reliance on the third party for regulatory compliance and quality control and assurance, volume production, the
possibility of breach of the manufacturing agreement by the third party because of factors beyond our control (including a failure to
synthesize and manufacture our product candidates in accordance with 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, Health Canada
and other regulatory authorities require that our product candidates be manufactured according to cGMP and similar foreign standards.
Pharmaceutical manufacturers and their subcontractors are required to register their facilities and/or products manufactured at the time
of submission of the marketing application and then annually thereafter with the FDA, EMA, Health Canada and other regulatory
agencies. They are also subject to periodic unannounced inspections by the FDA, EMA, Health Canada and other regulatory agencies.
Any subsequent discovery of problems with a product, or a manufacturing or laboratory facility used by us or our collaborators, may
result in restrictions on the product or on the manufacturing or laboratory facility, including product recall, suspension of
manufacturing, product seizure or a voluntary withdrawal of the drug from the market. Any failure by our third-party manufacturers to
comply with cGMP or any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a delay in, or
failure to obtain, regulatory approval of any of our product candidates.
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We rely on third parties to monitor, support, conduct, and/or oversee pre-clinical studies and 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 or commercialize any products that may result from our
development efforts, if we are not able to maintain or secure agreements with such third parties on acceptable terms, if these third
parties do not perform their services as required, or if these third parties fail to timely transfer any regulatory information held 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, to monitor, support, conduct and/or oversee pre-clinical and clinical studies of our current and future product
candidates. As a result, we have less control over the timing and cost of these studies and the ability to recruit trial subjects than if we
conducted these trials with our own personnel.
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 these third 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 to us any regulatory information
in a timely manner, fail to adhere to protocols or fail to act in accordance with regulatory requirements or our agreements with them,
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, EMA, Health Canada or other regulatory agencies.
Ultimately, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable
protocol, legal, regulatory and 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 current good laboratory practices, or cGLP, cGCP and cGMP regulations and
guidelines enforced by the FDA, Health Canada, the competent authorities of the member states of the European Economic Area and
comparable foreign regulatory authorities for products in clinical development. Regulatory authorities enforce these regulations
through periodic inspections of clinical trial sponsors, principal investigators, clinical trial sites, manufacturing facilities, nonclinical
testing facilities and other contractors. If we or any of our CROs fail to comply with these applicable regulations, the clinical data
generated in our nonclinical studies and clinical trials may be deemed unreliable and our submission of marketing applications may be
delayed or the FDA, EMA, Health Canada or another regulatory authority may require us to perform additional clinical trials before
approving our marketing applications. Upon inspection, the FDA, EMA, Health Canada or another regulatory authority could
determine that any of our clinical trials fail or have failed to comply with applicable cGCP regulations. In addition, our clinical trials
must be conducted with product produced under the cGMP regulations enforced by the FDA, EMA, Health Canada and other
regulatory authorities, and our clinical trials may require a large number of test subjects. Our failure to comply with cGLP, cGCP and
cGMP regulations may require us to repeat clinical trials, which would delay the regulatory approval process and increase our costs.
Moreover, our business may be implicated 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 ongoing clinical 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 is terminated, 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 a natural transition period when a new CRO or supplier commences work. As a result, delays may occur, which can
materially impact our ability to meet our desired clinical development timelines. If we are required to seek alternative supply
arrangements, the resulting delays and potential inability to find a suitable replacement could materially and adversely impact our
business.
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Risks Related to Intellectual Property
We 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 respect to our product candidates. We evaluate our global patent portfolio in the ordinary course of business to
enhance patent protection in areas of our strategic focus and in key markets for our potential products and abandon existing patents or
patent applications related to terminated development programs or areas of low strategic importance. Patents might not be issued or
granted with respect to our patent applications that are currently pending, and issued or granted patents might later be found to be
invalid or unenforceable, be interpreted in a manner that does not adequately protect our current product or any future products, or fail
to otherwise provide us with any competitive advantage. The patent position of biotechnology and pharmaceutical companies is
generally uncertain because it involves complex legal and factual considerations. The standards applied by the U.S. Patent and
Trademark Office, or USPTO, and foreign patent offices in granting patents are not always applied uniformly or predictably. For
example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology
and pharmaceutical patents. Consequently, patents may not issue from our pending 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 material adverse
impact on our business.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be
due to be paid to the USPTO and various governmental patent agencies outside of the U.S. in several stages over the lifetime of the
patents and/or applications. The USPTO and various non-US governmental patent agencies require compliance with a number of
procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law
firms and other professionals to help us comply with respect to the patents and patent applications that we own, and we rely upon our
licensors or our other collaborators to effect compliance with respect to the patents and patent 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 the applicable rules. However,
there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial
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 circumstance would 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 may not adequately protect our business, or permit us to maintain our competitive advantage.
The following examples are illustrative:
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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 we or 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 or unenforceable, 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, and because patents have a limited life, which may begin to run out prior to the commercial sale of the related
product, the commercial value of our patents may be limited;
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our competitors might conduct research and development activities in countries where we do not have patent rights and then
use the information 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;
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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 to apply 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 product candidates for one or more indications.
43
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 our intellectual 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 do not 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 from practicing 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 other jurisdictions. 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
products may 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 them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign
jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents,
trade secrets and other intellectual property protection, particularly those relating to biotechnology products, which could make it
difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights
generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and
attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly 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 that
we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to
enforce our intellectual property 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 property protection with respect to our product candidates and proprietary technology. For example, if we were to initiate
legal proceedings against a third party to enforce a patent covering one of our product candidates, the defendant could counterclaim
that our patent is invalid and/or unenforceable. In patent litigation in the U.S. and in some other jurisdictions, defendant counterclaims
alleging invalidity and/or unenforceability are commonplace. Grounds for a validity 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 from the USPTO
or the applicable foreign counterpart, or made a misleading statement, during prosecution. A litigant or the USPTO itself could
challenge our patents 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 outcome following 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 were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or
unenforceability, we would lose at least part, and perhaps all, 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 patent claims 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 a challenge, particularly in a foreign
jurisdiction, and any resulting loss of patent protection could have a material adverse impact on one or more of our product 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 be costly to defend, particularly in a foreign jurisdiction, and could require us to pay substantial damages,
cease the sale of certain products or enter into a license agreement and pay royalties (which may not be possible on commercially
reasonable terms or at all). Any efforts to enforce our intellectual property rights 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 against claims 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 by our licensees or licensors. Although we may, under such arrangements, have rights to consult with our
collaborators on actions taken as well as back-up rights of prosecution and enforcement, we have in the past and may in the future
relinquish rights to prosecute and maintain patents and patent applications within our portfolio as well as the ability to assert such
patents against infringers. For example, currently some of the rights relating to the patent portfolio for novel Nav1.7 inhibitors are held
by Genentech.
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If any current or future licensee or licensor with rights to prosecute, assert or defend patents related to our product candidates
fails to appropriately prosecute and maintain patent protection for patents covering any of our product candidates, or if patents
covering any of our product candidates are asserted against infringers or defended against claims of invalidity or unenforceability in a
manner which adversely affects such coverage, our ability to develop and commercialize any such product candidate may be adversely
affected and we may not be able to prevent competitors from making, using and selling competing products.
We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time
consuming and unsuccessful.
Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be
required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court
may decide that a patent of ours or one of 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 on the 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 our patents at risk of being invalidated, held
unenforceable or interpreted narrowly, and could put any of our patent applications at risk of not yielding an issued patent.
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 challenge inventorship, ownership, claim scope, or validity of our patent applications. An unfavorable
outcome could require us to cease using the related technology or 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 commercially reasonable terms, if any license is offered
at all. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract 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 countries where 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 with intellectual property litigation, there is a risk that some of our confidential
information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the
results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to
be negative, it could have a substantial adverse effect on the market 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 parties could 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 now and in the future infringe third-party patents or other intellectual property rights.
Third parties might allege that we or our collaborators are infringing their patent rights or that we have misappropriated their trade
secrets, or that we are otherwise violating their intellectual property rights, whether with respect to the manner in which we have
conducted our research or to the composition, use or manufacture of the compounds we have developed or are developing with our
collaborators. Such third parties might resort to litigation against us or other parties we have agreed to indemnify, which litigation
could be based on either 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 also fail to identify, relevant patents or patent applications held by third parties that cover our product candidates.
For example, applications filed before November 29, 2000, and certain applications filed after that date that will not be filed outside
the U.S. remain confidential until patents issue. Other patent applications in the U.S. and several other jurisdictions are published
approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred
to as the priority date. Furthermore, publication of discoveries in the scientific or patent literature often lags behind 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, our
product 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 the event 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 an adversarial proceeding, known as an interference, declared by the USPTO or its foreign
counterpart to determine priority of invention. Additionally, pending patent applications and patents which have been published can,
subject to certain limitations, be later amended in a manner that could cover our current or future products, if any, or their use.
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Defending against claims of patent infringement, misappropriation of trade secrets or other violations of intellectual property
rights could be costly and 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 with substantial unanticipated costs. In addition, litigation or threatened litigation could
result in significant demands on the time and attention of our management team, distracting them from the pursuit of other company
business. Claims that our product candidates or the sale or use of our future products infringe, misappropriate or otherwise violate
third-party intellectual property rights could therefore have a material adverse impact on our business.
Most of our competitors are larger than we are and have substantially greater financial resources. They are, therefore, likely to
be able to sustain the costs of complex intellectual property litigation longer than we could. In addition, the uncertainties associated
with litigation could have a material adverse effect on our ability to raise the funds necessary to conduct our clinical trials, continue
our internal research programs, in-license needed technology, or enter into 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 and distraction of our personnel. An adverse outcome in such litigation or proceedings may expose us or any future strategic
collaborators to loss of our proprietary 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
commercialize certain products.
If third parties successfully assert their intellectual property rights against us, we might be barred from using certain aspects of
our technology or barred from developing and commercializing certain products. Prohibitions against using certain technologies, or
prohibitions against commercializing certain 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 against allegations that we have infringed, misappropriated or otherwise
violated patent or other intellectual property rights of others, we may be forced to pay substantial damage awards to the plaintiff.
There is inevitable uncertainty in intellectual property litigation and we could lose, even if the case against us is weak 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
to continue our research and development programs or to market any resulting product. It is possible that the necessary license will not
be available to us on commercially acceptable terms, or at all. Alternatively, we may be required to modify or redesign our current or
future products, if any, in order to avoid infringing or otherwise violating third-party intellectual property rights. This may not be
technically or commercially feasible, may render those products less competitive, or may delay or prevent the entry of those products
to the market. Any of the foregoing could limit our research and development activities, our ability 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 required to 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 on acceptable 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 our competitors gaining access to the same intellectual
property. Ultimately, we could be prevented from commercializing a product, or be forced, by court order or 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 are
unable to enter into licenses on acceptable terms. Further, we could be found liable for significant monetary damages as a result of
claims of intellectual property infringement. In the future, we may receive offers to license and demands to license from third parties
claiming that we 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 such claims.
If Genentech, Merck or other collaborators 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 is decided that it would be useful to acquire such third-party right to develop or
commercialize the product, they are eligible under our collaboration agreements 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 foregoing events could harm our business significantly.
If we breach any of the agreements under which we license the use, development and commercialization rights to our product
candidates or technology from third parties, we could lose license rights that are important to our business.
Under our existing license and other agreements, including those associated with our XEN1101 and XEN007 programs, we are
subject to various obligations, including diligence obligations such as development and commercialization obligations, as well as
potential milestone payments and other obligations. If we fail to comply with any of these obligations or otherwise breach our license
agreements, our licensing partners may have the right to terminate the applicable license 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 our business, prospects, financial
condition and results of operations.
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Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and other
proprietary information, which would harm our competitive position.
In addition to patents, we rely on trade secrets, technical know-how and proprietary information concerning our 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 and development activities and our business activities, we often rely on confidentiality agreements to protect
our proprietary information. Such confidentiality agreements are used, for example, when we talk to vendors of laboratory,
manufacturing 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. Our employees,
consultants, contractors, business partners or outside scientific collaborators might intentionally or inadvertently disclose our trade
secret information in breach of these confidentiality agreements or our trade secrets may otherwise be misappropriated. Our
collaborators might also have rights to publish 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, and that our competitive position will be compromised. In addition, to
the extent that our employees, consultants or contractors use intellectual property owned by 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 illegally obtained 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, methods and know-how. If we cannot maintain the confidentiality of our proprietary technology and other confidential
information, then our ability to obtain patent protection or to protect our trade secret information would be jeopardized, which would
adversely affect our competitive position.
Recent court decisions could increase the uncertainties and costs surrounding the prosecution of our patent applications and
the enforcement or defense of our issued patents.
On June 13, 2013, the U.S. Supreme Court decision in Association for Molecular Pathology v. Myriad Genetics, Inc., held that
isolated DNA sequences are not patentable. In December 2014, the USPTO issued its Interim Guidance on Patent Subject Matter
Eligibility, in which it extended Myriad's "marked difference" standard for patent subject matter eligibility to all potential natural
products. This standard applies to patent claims that recite not only nucleic acids (such as DNA in Myriad), but also other subject
matter that could be considered a natural product, such as peptides, proteins, extracts, organisms, antibodies, chemicals, and minerals.
As a consequence of the Myriad decision and 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 obtain patents in the U.S. claiming such novel gene targets that we discover,
which could limit our ability to prevent third parties from developing drugs directed against such targets.
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 product candidates, 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 be eligible for limited patent term restoration under the Hatch-Waxman Act. The Hatch-Waxman Act permits a
patent restoration term of up to five years as compensation for patent term lost during clinical testing of the product and the
subsequent FDA regulatory review process. However, we may not be granted an extension because of, for example, failing to apply
within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to 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 we will have the right to exclusively market our product will be shortened and our competitors may obtain
approval of competing products following our patent expiration, 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 adversely affect our business.
Our corporate name, Xenon, has not been trademarked in each market where we operate and plan to operate. Our trademark
applications for our corporate name or the name of our products may not be allowed for registration, and our registered trademarks
may not be maintained or enforced. During trademark registration proceedings, we may receive rejections, which we may be unable to
overcome in our responses. Third parties may also attempt to register trademarks utilizing the Xenon name on their products, and we
may not be successful in preventing such usage. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions,
third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks.
Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. If
we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we
otherwise would.
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Intellectual property litigation may lead to unfavorable publicity that harms our reputation and causes the market price of our
common shares to decline.
During the course of any intellectual property litigation, there could be public announcements of the initiation of the litigation as
well as results of hearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard
these announcements as negative, the perceived value of our existing products, programs or intellectual property could be diminished.
Accordingly, the market price of our common shares may decline. Such announcements could also harm our reputation or the market
for our future products, which could have a material adverse effect on our business.
Risks Related to Our Industry
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit
commercialization of our current and 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 we commercialize any product candidates. For example, we may be sued if any of our product candidates, including any
that are developed in combination with other therapies, allegedly causes injury or is found to be otherwise unsuitable during product
testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing,
defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims
could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability
claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful
defense would require significant financial and management resources. There is also risk that third parties we have agreed to
indemnify could incur liability. Regardless of the merits or eventual outcome, liability claims may result in:
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decreased demand for our product candidates or any resulting products;
injury to our reputation;
• withdrawal of clinical trial participants;
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costs to defend the related litigation;
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a diversion of management’s time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
loss of revenue;
the inability to commercialize our product candidates; and
a decline in the market price of our common shares.
We currently carry product liability insurance of $10,000,000 per occurrence and $10,000,000 aggregate limit. We believe our
product liability insurance coverage is appropriate relative to our current clinical programs; however, we may not be able to maintain
insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when we obtain
marketing approval for product candidates, we intend to expand our insurance coverage to include the sale of commercial products;
however, we may then be unable to obtain product liability insurance on commercially reasonable terms or in adequate amounts. On
occasion, large judgments have been awarded in class action lawsuits based on drugs or medical treatments that had unanticipated
adverse effects. A successful product liability claim or series of claims brought against us could cause the market price of our common
shares to decline and, if judgments exceed our insurance coverage, could adversely affect our future results of operations and business.
Patients with certain of the diseases targeted by our product candidates are often already in severe and advanced stages of
disease and have both known and unknown significant pre-existing and potentially life-threatening conditions. During the course of
treatment, patients may suffer adverse events, including death, for reasons that may be related to our product candidates. Such events
could subject us to costly litigation, require us to pay substantial amounts of money to injured patients, delay, negatively impact or end
our opportunity to receive or maintain regulatory approval to market those product candidates, or require 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 our products, the
investigation into the circumstance may be time-consuming or inconclusive. These investigations may interrupt our sales efforts, delay
our regulatory approval process in other countries, or impact and limit the type of regulatory approvals our product candidates receive
or maintain. As a result of these factors, a product liability claim, even if successfully defended, could have a material adverse effect
on our business, financial condition or results of operations.
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Our current and future operations in the U.S. and elsewhere will be subject, directly or indirectly, to applicable federal and state
anti-kickback, fraud and abuse, false claims, transparency, health information privacy and security, and other healthcare laws and
regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, administrative
burdens, and diminished profits 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 any product candidates for which we obtain marketing approval. Our current arrangements with health care
providers and our future arrangements with third-party payers and customers may expose us to broadly applicable fraud and abuse and
other healthcare laws and regulations, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims
Act, that may constrain the business or financial arrangements and relationships through which we market, sell and distribute any
products for which we 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 affect our ability to operate include the following:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting,
offering, receiving or providing 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 Medicare and Medicaid;
federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which
impose criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for
knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid
programs, or other third-party payers claims for payment that are false 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
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making false statements relating to healthcare matters;
the federal Open Payments program; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to
sales or marketing arrangements 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 guidelines and the relevant compliance guidance promulgated by the
federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that
require drug manufacturers to report information related to payments to physicians and other healthcare providers or
marketing expenditures; state and local laws requiring the registration of pharmaceutical sales representatives; and state and
foreign laws governing the collection, export, privacy, use and security of biological materials and health information in
certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus
complicating compliance efforts.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations
may involve substantial 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 of these 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 and Medicaid, integrity oversight and reporting
obligations, and the curtailment or restructuring of our operations, which could have a material adverse effect on our business. If any
of the physicians or other providers or entities with whom we expect to do business, including our collaborators, is found not to be in
compliance with applicable laws, it may be subject to criminal, civil or administrative sanctions, including exclusions from
participation in government healthcare programs, which could also materially affect our business.
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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 could have 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 we employ small amounts of radioisotopes. We cannot completely eliminate the risk of
accidental contamination or injury from the use, storage, handling, or disposal of these materials through our maintenance of up-to-
date licensing and training programs. In the event of contamination or injury, we could be held liable for damages that result, and any
liability could exceed our resources. We currently carry insurance covering certain claims arising from our use of these materials.
However, if we are unable to maintain our insurance coverage at a reasonable cost and with adequate coverage, our insurance may not
cover any liability that may arise. We are subject to U.S. and Canadian federal, provincial, and local laws and regulations governing
the use, storage, handling, and disposal of these materials and specified waste products. Complying with regulations regarding the use
of these materials could be costly, and if we fail to comply with these regulations, it could have a material adverse effect on our
operations and profitability.
We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our
business continuity and disaster 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 our operations. If a natural disaster, power outage, fire or other event occurred that prevented us from using all or a
significant portion of our headquarters, that damaged critical infrastructure, such as the manufacturing facilities of our CMOs, or that
otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial
period of time. Although we carry insurance for earthquakes and other natural disasters, we may not carry sufficient business
interruption insurance to compensate us for all losses that may occur. The disaster recovery and business continuity plans we have in
place may not be adequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of a natural
disaster or earthquake, which could have a material adverse effect on our business. In addition, we may lose samples or other valuable
data. The occurrence of any of the foregoing could have a material adverse effect on our business.
Risks Related to the Securities Markets and Ownership of Our Common Shares
The market price of our common shares may be volatile, and purchasers of our common shares could incur substantial losses.
The market price of our common shares has fluctuated in the past and is likely to be volatile in the future. As a result of this
volatility, investors may experience losses on their investment in our common shares. The market price for our common shares may
be influenced by many factors, including the following:
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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;
actions by any of our collaborators regarding our product candidates they are developing, including announcements
regarding clinical or regulatory decisions or developments or our collaboration;
unanticipated serious safety concerns related 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 or maintaining 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;
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;
50
•
•
•
•
•
•
•
•
•
•
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;
sales of common shares by us or our shareholders in the future, as well as the overall trading volume of our common shares;
failure to comply with covenants or make required payments under loan agreements;
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 to our 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 volatility that often has been unrelated to the operating performance of the underlying companies. These broad market
and industry fluctuations may adversely affect the market price of our common shares, regardless of our operating performance. In
several recent situations where the market price of a stock has been volatile, holders of that stock have instituted securities class action
litigation against the company that issued the stock. If any of our shareholders were to bring 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 our operating results.
Future sales of our common shares in the public market could cause the market price of our common shares to fall.
The market price of our common shares could decline as a result of sales of a large number of our common shares or the
perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for
us to sell equity securities in the future at a time and at a price that we deem appropriate.
In addition, in the future, we may issue additional common shares, preferred shares, or other equity or debt securities convertible
into common shares in connection with a financing, acquisition, litigation settlement, employee arrangements or otherwise. Any such
issuance could result in substantial dilution to our existing shareholders and could cause the market price of our common shares to
decline.
Provisions in our corporate charter documents and Canadian law could make an acquisition of us, which may be beneficial to
our shareholders, more difficult 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 applicable Canadian securities laws, may discourage, delay or prevent a merger, acquisition, tender offer 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 investors might 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 of directors is responsible for
appointing the members of our management team, these provisions may frustrate or prevent any attempts by our shareholders to
replace 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 to vote on such approval;
shareholders must give advance notice to nominate directors or to submit proposals for consideration at shareholders’
meetings; and
applicable Canadian securities laws generally require, subject to certain exceptions, a tender offer to remain open for 105
days and that more than 50% of the outstanding securities not owned by the offeror be tendered before the offeror may take
up the securities.
51
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 a change in control could limit the opportunity for our shareholders to receive a premium for their common
shares, and could also affect the price that some investors are willing to pay for our common shares.
U.S. civil liabilities may not be enforceable against us, our directors, or our officers.
We 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 or a 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 investors to effect service of process within the U.S. upon us and certain of our 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, rights predicated 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,
or actions 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 and securities laws of Canada which in some cases have a different effect on shareholders
than the corporate laws of Delaware, U.S. and U.S. securities laws.
We are governed by the CBCA and other relevant laws, which may affect the rights of shareholders differently than those of a
company governed by the laws of a U.S. jurisdiction, and may, together with our charter documents, have the effect of delaying,
deferring or discouraging another party from acquiring 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 offer in such an instance. The material differences between
the CBCA and Delaware General Corporation Law, or DGCL, that may have the greatest such effect include, but are not limited to,
the following: (i) for material corporate transactions (such as mergers and amalgamations, other extraordinary corporate transactions
or amendments to our articles) the CBCA generally requires a two-thirds majority vote by shareholders, whereas DGCL generally
only requires a majority vote; and (ii) under the CBCA holders of 5% or more of our shares that carry the right to vote at a meeting of
shareholders can requisition a special meeting of shareholders, whereas such right does not exist under the DGCL.
An active trading market for our common shares may not be maintained.
Our common shares are currently traded on Nasdaq, but we can provide no assurance that we will be able to maintain an active
trading market on Nasdaq or any 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 common shares they have purchased without depressing the market price for the common
shares or at all. Further, an inactive market may also impair our ability to raise capital by selling additional common shares and may
impair our ability to enter into strategic collaborations or acquire companies or products by using our common shares as consideration.
We are an emerging growth company and a smaller reporting company, and any decision on our part to comply only with
certain reduced reporting and disclosure requirements applicable to such 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 and a
“smaller reporting company,” as defined under the Securities Exchange Act of 1934, as amended, or the Exchange Act. For as long as
we continue to be an emerging growth company or smaller reporting company, we may choose to take advantage of exemptions from
various reporting requirements applicable to other public companies that are not emerging growth companies or smaller reporting
companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and
proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
shareholder approval of any golden parachute payments not previously approved. As an emerging growth company, the JOBS Act
allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements
are made applicable to private companies. However, we previously decided to “opt out” of such extended transition period, 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
for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition
period for complying with new or revised accounting standards is irrevocable. In addition, as a smaller reporting company, we are
only required to include two years of audited financial statements in our annual reports and, as an emerging growth company, we are
not required to have our independent registered public accounting firm audit our internal control over financial reporting under Section
404 of the Sarbanes-Oxley Act.
52
We expect to lose our status as an emerging growth company five years following the completion of our initial public offering,
or on December 31, 2019. We will remain a smaller reporting company so long as, as of June 30 of the preceding year, (i) the market
value of our common shares held by non-affiliates, or our public float, is less than $250 million; or (ii) we have annual revenues less
than $100 million and either we have no public float or our public float is less than $700 million.
Investors could find our common shares less attractive if we choose to rely on these disclosure exemptions. If some investors
find our common shares less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market
for our common shares and the market price of our common shares may be more volatile.
Complying with the laws and regulations affecting public companies will increase our costs and the demands on management
and could harm our operating results and our ability to accurately report our financial condition, results of operations or cash
flows, which may adversely affect investor confidence 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 other expenses. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the related rules and
regulations subsequently implemented by the SEC, the applicable Canadian securities regulators and Nasdaq impose numerous
requirements on public companies, including requiring changes in corporate governance practices. Also, the Exchange Act requires,
among other things, that we file annual, quarterly and current reports with respect to our business and operating results. Our
management and other personnel have and will continue to devote a substantial 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, these rules and regulations make
it difficult and expensive for us to maintain director and officer liability insurance and we may be required to accept reduced policy
limits and coverage or to incur substantial costs to maintain the same or similar coverage. These rules and regulations could also 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 the effectiveness of our disclosure controls and procedures quarterly. In particular, Section 404 of the
Sarbanes-Oxley Act, or Section 404, requires us to perform system and process evaluation and testing of our internal control over
financial reporting to allow management to report on, and our independent registered public accounting firm potentially to attest to,
the effectiveness of our internal control over financial reporting. As an emerging growth company we expect to avail ourselves of the
exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal
control over financial reporting under Section 404. However, we may no longer avail ourselves of this exemption when we cease to be
an emerging growth company, which we expect to occur on December 31, 2019. When our independent registered public accounting
firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with
Section 404 will correspondingly increase. Our compliance with applicable provisions of Section 404 will require that we incur
substantial accounting expense and expend significant management time on compliance-related issues as we implement additional
corporate governance practices and comply with reporting requirements. Moreover, if we are not able to comply with the requirements
of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies
deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our
common shares could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.
Furthermore, investor perceptions of our company may suffer if deficiencies are found, and this could cause a decline in the
market price of our common shares. Irrespective of compliance with Section 404, any failure of our internal control over financial
reporting could have a material adverse effect on our stated operating results and harm our reputation. If we are unable to implement
these requirements effectively or efficiently, it could harm our operations, financial reporting, or financial results and could result in
an adverse opinion on our internal controls from our independent registered public accounting firm.
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 or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting,
which would harm our business and the market price of our common shares.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with
adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved
controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any
testing by us conducted in connection with Section 404 or any subsequent testing by our independent registered public accounting
firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may
require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement.
Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a
negative effect on the market price of our common shares.
53
We are required to disclose changes made in our internal controls and procedures on a quarterly basis and our management is
required to assess the effectiveness of these controls annually. However, for as long as we are an emerging growth company under the
JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls
over financial reporting pursuant to Section 404. An independent assessment of the effectiveness of our internal controls could detect
problems that our management’s assessment might not. As of December 31, 2018 and 2017, our independent registered public
accounting firm did not perform an evaluation of our internal control over financial reporting in accordance with the provisions of the
Sarbanes-Oxley Act. Had our independent registered public accounting firm performed such an evaluation, control deficiencies may
have been identified, and those control deficiencies could have also represented one or more material weaknesses. Undetected material
weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.
Future sales and issuances of our common shares, preferred shares, or rights to purchase common shares, including warrants
or pursuant to our equity incentive plans, could cause you to incur dilution and could cause the market price of our common
shares to fall.
As of December 31, 2018, stock options to purchase 2,671,906 of our common shares with a weighted-average exercise price of
$6.96 per common share were outstanding and 1,016,000 of our Series 1 Preferred Shares were outstanding, which are convertible
into our common shares on a one-for-one basis at the option of the holder, subject to certain ownership limitations following a
requested conversion. During the year ended December 31, 2018, certain funds affiliated with BVF Partners L.P. exercised their
conversion rights to convert 1,852,000 Series 1 Preferred Shares into the same number of common shares. The exercise of any of these
stock options or conversion of the remaining Series 1 Preferred Shares would result in dilution to current shareholders. Further,
because we will need to raise additional capital to fund our clinical development programs, we may in the future sell substantial
amounts of common shares, preferred shares, or other securities convertible into or exchangeable for common shares. Pursuant to our
equity incentive plans, our compensation committee (or a subset or delegate thereof) is authorized to grant equity-based incentive
awards to our employees, directors and consultants. Future stock option grants and issuances of common shares under our share-based
compensation plans may have an adverse effect on the market price of our common shares.
Any future issuances of common shares, preferred shares, or securities such as warrants, notes, or preferred shares that are
convertible into, exercisable or exchangeable for, our common shares, would have a dilutive effect on the voting and economic
interests of our existing shareholders.
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. This risk is especially relevant for us because biotechnology companies have experienced significant stock price
volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and
resources, which could harm our business.
Nasdaq may delist our securities from its exchange, which could limit investors’ ability to make transactions in our securities
and subject us to additional 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 be listed 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 market price of our
common shares;
a limited availability of market quotations for our securities;
a determination that our common shares qualify as a “penny stock” which will require brokers trading in our common
shares to adhere to more stringent rules 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.
54
If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about
our business, the market price of our common shares and the trading volume of our common shares could decline.
The trading market for our common shares is influenced by the research and reports that securities or industry analysts publish
about us or our business. If too few securities or industry analysts cover our company, the market price of our common shares would
likely be negatively impacted. If securities and industry analysts who cover us downgrade our common shares or publish inaccurate
or unfavorable research about our business, the market price of our common shares would 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 shares could decrease,
which might cause the market price of our common shares and the trading volume of our common shares to decline.
Our management team has broad discretion as to the use of the net proceeds from previous public and private equity and debt
financings and the investment of these proceeds may not yield a favorable return. We may invest the proceeds in ways with which
our shareholders disagree.
We have broad discretion in the application of the net proceeds to us from previous equity and debt financings including the net
proceeds we have received pursuant to our May 2018 “at-the-market” equity offering program with Stifel; the net proceeds we have
received pursuant to our July 2018 “at-the-market” equity offering program with Jefferies and Stifel; the net proceeds from our August
2018 amended and restated loan and security agreement, pursuant to which we have borrowed an aggregate of $15.5 million of
principal; and the net proceeds from our September 2018 public offering of common shares. You may not agree with our decisions,
and our use of the proceeds and our existing cash and cash equivalents and marketable securities may not improve our results of
operation or enhance the value of our common shares. The results and effectiveness of the use of proceeds are uncertain, and we could
spend the proceeds in ways that you do not agree with or that do not improve our results of operations or enhance the value of our
common shares. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the
development of our product candidates and cause the market price of our common shares to decline. In addition, until the net proceeds
are used, they may be placed in investments that do not produce significant income or that may lose value.
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 future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future
debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common shares may be
investors’ sole source of gain for the foreseeable future.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
Our headquarters are located in Burnaby, British Columbia, where we occupy approximately 41,332 square feet of office and
laboratory space. The term of the lease expires in March 2022. We currently pay an aggregate of approximately $102,388 per month
in base rent, property tax, common area maintenance fees and management fees, and the landlord holds a security deposit equal to
approximately $67,637.
Our U.S. office is located in Boston, Massachusetts, where we occupy on a month-to-month basis approximately 215 square
feet.
We believe that our existing facilities are adequate 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 Proceedings
From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our
business. We are not presently a party to any legal proceedings that, in the opinion of our management, would reasonably be expected
to have a material adverse effect on our business, financial condition, operating results or cash flows if determined adversely to us.
Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of
management resources and other factors.
Item 4.
Mine Safety Disclosures
Not applicable.
55
PART II
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common shares have been traded on The NASDAQ Global Market since November 5, 2014 under the symbol “XENE.”
Prior to such time, there was no public market for our common shares. The following table sets forth the high and low sales prices per
common share as reported on The NASDAQ Global Market for the periods indicated.
Year Ended December 31, 2019
First Quarter (through March 1, 2019)
Year Ended December 31, 2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year Ended December 31, 2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
$
$
$
$
$
$
$
$
$
9.43 $
13.49
15.92
11.00
5.05
$
$
$
$
3.50 $
3.50 $
4.45 $
9.95 $
6.17
5.41
8.85
4.50
2.70
2.10
2.25
2.85
3.95
On March 1, 2019, the last reported sale price of our common shares was $8.94 per share.
Holders
As of March 1, 2019, there were approximately 147 holders of record of our common shares. The actual number of shareholders
is greater than this number of record holders and includes shareholders who are beneficial owners but whose common shares are held
in street name by brokers and other nominees.
Dividends
We have never declared or paid any cash dividends on our common shares or any other securities. We currently anticipate that
we will retain all available 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 cash dividends 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 and will 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 which Canada is a signatory) will be payable on the gross amount of a dividend on our common shares paid or credited,
or deemed to be paid or credited, to a holder of our common shares who, for purposes of the Income Tax Act (Canada), is not (and is
not deemed to be) resident in Canada, or a Non-Resident of Canada Holder. The Canadian withholding tax will be deducted directly
by us or our paying agent from the amount of the dividend otherwise payable and remitted 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 Canada Holder who is a resident of
the U.S. for purposes of the Canada-U.S. Tax Convention (1980), or the Convention, is the beneficial owner of the dividend and
qualifies for the full benefits of the Convention will generally be reduced to 15% or, if such a Non-Resident of Canada Holder is a
company that owns (or, for purposes of the 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 Convention will 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 in this regard. The rate of withholding tax on
dividends is also reduced under other bilateral income tax treaties to which Canada is a signatory.
56
Securities Authorized for Issuance under Equity Compensation Plans
The information concerning our equity compensation plans is incorporated by reference herein to our Proxy Statement for the
2019 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31,
2018.
Performance Graph
As a smaller reporting company, we are not required to provide the information requested by this item pursuant to Item 201(e)
of Regulation S-K.
Recent Sales of Unregistered Securities
On October 24, 2018 and December 21, 2018, we issued an aggregate of 52,000 and 500,000 common shares, respectively to
certain funds affiliated with BVF Partners L.P. upon the conversion of 52,000 and 500,000 Series 1 Preferred Shares held by such
funds. The conversion was effected in accordance with the terms of our Series 1 Preferred Shares. These issuances were exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) thereof as an exchange with an existing security
holder where no commission or other remuneration is paid or given for soliciting such exchange.
Issuer Repurchases of Equity Securities
None.
Item 6.
Selected Financial Data
As a smaller reporting company, we are not required to provide the information requested by this item pursuant to Item 301 of
Regulation S-K.
57
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis together with Part II, Item 6 — “Selected Financial Data” and our
consolidated financial statements and notes included elsewhere in this Annual Report. The following discussion contains forward-
looking statements that involve risks and uncertainties. Our actual results could differ from those expressed or implied in any
forward-looking statements as a result of various factors, including those set 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. and its subsidiary.
Overview
We are a clinical stage biopharmaceutical company committed to developing innovative therapeutics to improve the lives of
patients with neurological disorders, including rare central nervous system, or CNS, conditions. We are advancing a novel product
pipeline of neurology-focused therapies to address areas of high unmet medical need, with a focus on epilepsy. Our clinical
development pipeline includes:
• XEN496 (active ingredient ezogabine) is a Kv7 potassium channel modulator being developed for the treatment of KCNQ2
epileptic encephalopathy, or KCNQ2-EE. Ezogabine was previously approved by the U.S. Food and Drug Administration,
or FDA, as an anti-epileptic drug as an adjunctive treatment for adults with focal seizures with or without secondary
generalization. We received orphan drug designation, or ODD, from the FDA for XEN496 as a treatment of KCNQ2-EE. A
steering committee made up of key opinion leaders in the KCNQ2-EE and pediatric epilepsy fields has been established to
help guide the clinical development of XEN496. In response to our pre-IND briefing package submission, the FDA
indicated that it was acceptable to study XEN496 in infants and children up to 4 years old, and that a single pivotal trial in
approximately 20 patients may be considered adequate in order to demonstrate XEN496’s efficacy in KCNQ2-EE. We are
currently finalizing a pediatric-specific formulation to complete pre-clinical formulation testing with a final drug product
expected in the second quarter of 2019. We expect to file an Investigational New Drug application in the third quarter of
2019, and, based on regulatory feedback, expect to initiate a Phase 3 clinical trial thereafter. This timeline is based on our
assumption that the testing of our new XEN496 pediatric formulation in healthy adult volunteers will not be a regulatory
requirement prior to initiating a Phase 3 clinical trial;
• XEN1101 is a differentiated Kv7 potassium channel modulator being developed for the treatment of epilepsy and
potentially other neurological disorders. We announced final data from a XEN1101 Phase 1 clinical trial and the related
transcranial magnetic stimulation, or TMS, studies at the American Epilepsy Society, or AES, Annual Meeting in
December 2018. Based on the encouraging Phase 1 and Phase 1b TMS data, we have initiated a Phase 2b clinical trial in
adult patients with focal epilepsy. The Phase 2b clinical trial is designed as a randomized, double-blind, placebo-controlled,
multicenter study to evaluate the clinical efficacy, safety and tolerability of XEN1101 administered as adjunctive treatment
in adult patients with focal epilepsy. Approximately 300 patients will be randomized in a blinded manner to one of three
active treatment groups or placebo in a 2:1:1:2 fashion (XEN1101 25 mg : 20 mg : 10 mg : Placebo). The primary endpoint
is the median percent change in monthly focal seizure frequency from baseline compared to treatment period of active
versus placebo. An IND application for XEN1101 has been accepted by the FDA, and site selection and patient enrollment
are now underway for the XEN1101 Phase 2b clinical trial in the United States, Canada and Europe. Depending upon the
rate of enrollment, top-line results from the XEN1101 Phase 2b clinical trial are anticipated in the second half of 2020;
• XEN901 is a potent, highly selective Nav1.6 sodium channel inhibitor being developed for the treatment of epilepsy. We
announced results from a XEN901 Phase 1 clinical trial and the related pilot TMS study at the AES Annual Meeting in
December 2018. The next steps for XEN901 include continued planning for Phase 2 or later clinical development to
evaluate XEN901 as a treatment for adult focal seizures or for rare, pediatric forms of epilepsy, including SCN8A Epileptic
Encephalopathy, or SCN8A-EE, patients, depending on feedback from planned discussions with regulatory agencies. We
expect to receive feedback on the requirements to advance XEN901 into pediatric SCN8A-EE patients in the second quarter
of 2019, and pediatric formulation development and juvenile toxicology studies are underway to support future pediatric
development activities; and
• XEN007 (active ingredient flunarizine) is a CNS-acting calcium channel modulator that modulates Cav2.1 and T-type
calcium channels. Other reported mechanisms include dopamine, histamine and serotonin inhibition. Flunarizine is
available in certain countries outside of the United States, and has been reported to have clinical benefit in treating migraine
and other neurological disorders, including hemiplegic migraine, or HM, alternating hemiplegia of childhood, or AHC,
vertigo, and as adjunctive treatment in certain epilepsies. The FDA has granted a rare pediatric disease, or RPD, designation
for the treatment of AHC with XEN007. We previously received ODD from the FDA for XEN007 for the treatment of both
AHC and HM. In addition, we have entered into key exclusive licensing agreements in order to access regulatory files and
drug product manufacturing, both of which may enable advanced clinical development of XEN007. Various development
strategies for XEN007 are under consideration, including the support of at least one Phase 2 (or later stage) clinical trial in
an orphan neurological indication, with initiation anticipated in 2019.
58
We have funded our operations through the sale of equity securities, funding received from our licensees and collaborators, debt
financing and, to a lesser extent, government funding. For 2018 and 2017, we did not recognize significant revenue from our
collaboration agreements. We do not expect to have sustained profitability for the foreseeable future. We had net losses of $34.5
million for the year ended December 31, 2018 and an accumulated deficit of $207.9 million as of December 31, 2018, from expenses
incurred in connection with our research programs and from general and administrative costs associated with our operations.
We have not generated any significant royalty revenue from product sales, and do not otherwise anticipate generating revenue
from product sales for the foreseeable future, if ever. We expect that our revenue in the near term will be substantially dependent on
our collaboration agreements. Given the uncertain nature of clinical development of our current and future product candidates and the
commercialization of current and future products, we cannot predict when or whether we will receive further milestone payments
under our current or future collaboration agreements or whether we will be able to report either revenue or net income in future years.
We expect to continue to incur significant expenses and operating losses for at least the next 12 to 24 months. We anticipate that
our expenses will increase as we:
•
•
continue our research and pre-clinical and clinical development of our product candidates either from our internal research
efforts or through acquiring or in-licensing other product candidates or technologies;
seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical trials;
• make milestone and other payments under our in-license or other agreements;
• maintain, protect and expand our intellectual property portfolio;
•
attract, hire and retain skilled personnel; and
•
create additional infrastructure to support our operations and otherwise.
Financial Operations Overview
Revenue
To date, our revenue has been primarily derived from collaboration and licensing agreements as well as, to a lesser extent,
government funding. We have not generated any significant royalty revenue from product sales, and do not otherwise anticipate
generating revenue from product sales for the foreseeable future, if ever.
For the year ended December 31, 2018, we did not recognize any revenue from our collaboration agreements.
As our other internal and partnered products are in various stages of clinical and pre-clinical development, we do not expect to
generate any revenue from product sales for at least the next several years. We expect that any revenue for the next several years will
be derived from milestone payments under our current collaboration agreements and any additional collaboration agreements that we
may enter into in the future. We cannot provide any assurance as to the extent or timing of future milestone payments or royalty
payments or that we will receive any future payments at all.
We expect that any revenue we generate will fluctuate quarter to quarter as a function of the timing and amount of milestones
and other payments from our existing collaborations and any future collaborations.
As of December 31, 2018, we have recognized all deferred revenue from upfront payments received under our existing
collaboration and licensing agreements.
Operating Expenses
The following table summarizes our operating expenses for the years ended December 31, 2018 and 2017 (in thousands):
Research and development
General and administrative
Buy-out of future milestones and royalties
Total operating expenses
Year Ended December 31,
2018
2017
23,634
8,382
6,000
38,016
$
$
25,573
7,313
—
32,886
$
$
59
Research and Development Expenses
Research and development expenses represent costs incurred to conduct research and development of our proprietary product
candidates, including any acquired or in-licensed product candidates or technology.
Research and development expenses consist of costs incurred in performing research and development activities, including
salary, related benefits and stock-based compensation for employees engaged in scientific research and development, third-party
contract costs relating to research, formulation, manufacturing, pre-clinical studies and clinical trial activities, third-party acquisition,
license and collaboration fees, laboratory consumables and allocated facility-related and information technology costs.
Project-specific expenses reflect costs directly attributable to our clinical development candidates and our pre-clinical candidates
once nominated and selected for further development, including pre-clinical and discovery costs supporting a development candidate.
All remaining research and development expenses are reflected in pre-clinical, discovery and other program expenses. At any given
time, we have several active early-stage research and drug discovery programs. Our personnel and infrastructure are typically
deployed over multiple projects and are not directly linked to any individual internal early-stage research or drug discovery program.
Therefore, we do not maintain financial information for our internal early-stage research and internal drug discovery programs on a
project-specific basis.
We expense all research and development costs as incurred. We expect that our research and development expenses will
increase in the future as we advance our proprietary product candidates through clinical development, advance our internal drug
discovery programs into pre-clinical development and continue our early-stage research. The increase in expense will likely include
additional personnel and third-party contracts related to research, formulation, manufacturing, pre-clinical studies and clinical trial
activities as well as third-party acquisition, license and collaboration fees and laboratory consumables.
Clinical development timelines, likelihood of regulatory approval, and commercialization and associated costs are uncertain,
difficult to estimate, and can vary significantly. We anticipate determining which research and development projects to pursue as well
as the level of funding available for each project based on the scientific research and pre-clinical and clinical results of each product
candidate and related regulatory action. We expect our research and development expenses to continue to represent our largest
category of operating expense for at least the next 12 to 24 months.
General and Administrative Expenses
General and administrative expenses consist primarily of salary, related benefits and stock-based compensation of our executive,
finance, legal, business development and administrative functions, travel expenses, allocated facility-related and information
technology costs not otherwise included in research and development expenses, director compensation, director’s and officer’s
insurance premiums, investor relations costs and professional fees for auditing, tax and legal services, including legal expenses for
intellectual property protection. General and administrative expenses also include fair value adjustments of certain liability classified
stock option awards.
We expect that general and administrative expenses will increase in the future as we expand our operating activities to support
increased research and development activities.
Buy-out of future milestones and royalties
In September 2018, we entered into a milestone and royalty buy-out agreement with Valeant Pharmaceuticals Luxembourg
S.a.r.l. and Valeant Pharmaceuticals Ireland Limited, or together Bausch Health, under which all potential clinical development,
regulatory and sales-based milestones and royalties on commercial sales with respect to XEN1101 that may become owed to Bausch
Health were terminated in exchange for a one-time payment of $6.0 million which was expensed in the period.
Other Income (Expense)
Interest Income. Interest income consists of income earned on our cash and investment balances. We anticipate that our interest
income will continue to fluctuate depending on our cash and investment balances and interest rates.
Interest Expense. Interest expense consists of accrual of the final payment fee, amortization of debt discounts, and interest
charged on our borrowings with Silicon Valley Bank, or the Bank, which accrue interest at a floating per annum rate of 0.5% above
the prime rate. During the year ended December 31, 2018, we also recorded a charge of $0.3 million related to the unaccrued amount
of the final payment fee due in connection with entering into our amended and restated loan and security agreement. For additional
information regarding our amended and restated loan and security agreement with the Bank, see “—Contractual Obligations and
Commitments—Term Loan” below.
60
Foreign Exchange Gain (Loss). Net foreign exchange gains and losses consisted of gains and losses from the impact of foreign
exchange fluctuations on our monetary assets and liabilities that are denominated in currencies other than the U.S. dollar (principally
the Canadian dollar). We will continue to incur substantial expenses in Canadian dollars and will remain subject to risks associated
with foreign currency fluctuations.
Gain on Termination of Collaboration Agreement. In March 2018, we entered into a termination agreement terminating by
mutual agreement the collaborative development and license agreement dated December 7, 2012, as amended, with Teva
Pharmaceuticals International GmbH and Teva Canada Limited, or together Teva, that included the cancellation of 1,000,000 of our
common shares owned by Teva. We recorded a one-time gain of $4.4 million on the termination of the collaboration agreement, net of
direct costs incurred in connection with the termination and cancellation of the common shares.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated
financial statements, which have been prepared in conformity with generally accepted accounting principles in the U.S., or U.S.
GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the revenue and expenses incurred during the reported periods. We base estimates on our
historical experience, known trends and various other factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.
The significant accounting policies that we believe to be most critical in fully understanding and evaluating our financial results
are revenue recognition, research and development costs and stock-based compensation. For additional information, see note 3 of the
consolidated financial statements included in Part II, Item 8 of this report.
Revenue recognition:
Revenue recognition is a critical accounting estimate due to the magnitude and nature of the revenues we receive.
Our primary sources of historical revenue have been derived from non-refundable upfront payments, funding for research and
development services, milestone payments, and royalties under various collaboration agreements.
In contracts where we have more than one performance obligation to provide our customer with goods or services, each
performance obligation is evaluated to determine whether it is distinct. The consideration under the contract is then allocated between
the distinct performance obligations based on their respective relative stand-alone selling prices. The estimated stand-alone selling
price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold on a stand-
alone basis and is determined by reference to market rates for the good or service when sold to others or by using an adjusted market
assessment approach if selling price on a stand-alone basis is not available. We generally recognize revenue from non-refundable
upfront payments ratably over the estimated term of the performance obligation or period in which the underlying benefit is
transferred to the customer. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of
performance and related revenue recognition.
The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred to our
customer for the related goods or services. Consideration associated with at-risk substantive performance milestones, including sales-
based milestones, is recognized as revenue when we determine it is probable that a significant reversal of the cumulative revenue
recognized will not occur. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such
milestones, and if necessary, adjust our estimate of the overall transaction price. Sales-based royalties received in connection with
licenses of intellectual property are subject to a specific exception in the revenue standards, whereby the consideration is not included
in the transaction price and recognized in revenue until the customer’s subsequent sales or usages occur.
61
Research and development costs:
Research and development costs is a critical accounting estimate due to the magnitude of and the many assumptions that are
required to calculate third-party accrued and prepaid research and development expenses.
We incur development activity costs, such as pre-clinical costs, manufacturing costs and clinical trial costs paid to contract
research organizations, investigators and other vendors who conduct certain product development activities on our behalf. The amount
of expenses recognized in a period related to service agreements is based on estimates of the work performed using an accrual basis of
accounting. These estimates are based on patient enrollment, services provided and goods delivered, contractual terms and experience
with similar contracts. We monitor these factors and adjust our estimates accordingly.
Stock-based compensation:
Stock-based compensation is a critical accounting estimate due to the magnitude of and the many assumptions that are required
to calculate stock-based compensation expense.
We grant stock options to employees, directors and officers pursuant to our stock option plan. Compensation expense is
recorded using the fair value method. We calculate the fair value of stock options using the Black-Scholes option-pricing model which
requires that certain assumptions, including the expected life of the option and expected volatility of the stock, be estimated at the time
that the options are granted.
Prior to our initial public offering, our shares did not have a readily available market; therefore, we lacked company-specific
historical and implied volatility information. Consequently, in determining the expected volatility of our stock options, we base our
estimate on a combination of our available historical volatility information and a historical volatility analysis of peers that are similar
with respect to industry, stage of development, size, and financial leverage. The expected term of our stock options has been
determined utilizing our available historical data and we recognize forfeitures as they occur. We amortize the fair value of stock
options using the straight-line method over the vesting period of the options.
Results of Operations
Comparison of Years Ended December 31, 2018 and 2017
The following table summarizes the results of our operations for the years ended December 31, 2018 and 2017 together with
changes in those items (in thousands):
Collaboration revenue
Research and development expenses
General and administrative expenses
Buy-out of future milestones and royalties
Other:
Interest income
Interest expense
Foreign exchange gain (loss)
Gain on termination of collaboration agreement
Net loss
Revenue
$
$
$
—
23,634
8,382
6,000
1,216
(1,394)
(701)
4,398
(34,497) $
Year Ended December 31,
2018
2017
$
Change
2018 vs. 2017
Increase/(Decrease)
(311)
(1,939)
1,069
6,000
311
25,573
7,313
—
477
—
1,394
—
(30,704) $
739
(1,394)
(2,095)
4,398
(3,793)
We did not recognize any revenue for the year ended December 31, 2018, compared to $0.3 million for the year ended
December 31, 2017. The decrease was primarily due to a $0.25 million milestone payment recognized in July 2017 under the March
2014 genetics collaborative agreement with Genentech.
62
Research and Development Expenses
The following table summarizes research and development expenses for the years ended December 31, 2018 and 2017 together
with changes in those items (in thousands):
XEN496 expenses
XEN801 expenses
XEN901 and Nav1.6 pre-clinical and discovery
expenses
XEN1101 expenses
Pre-clinical, discovery and other program expenses
Total research and development expenses
$
$
$
1,469
5
11,392
7,883
2,885
23,634
$
Year Ended December 31,
2018
2017
Change
2018 vs. 2017
Increase/(Decrease)
1,469
(1,348)
$
—
1,353
10,157
5,885
8,178
25,573
$
1,235
1,998
(5,293)
(1,939)
Research and development expenses were $23.6 million for the year ended December 31, 2018, compared to $25.6 million for the
year ended December 31, 2017. The decrease of $2.0 million was primarily attributable to decreased spending on pre-clinical, discovery
and other internal program expenses, and XEN801, a product candidate which is no longer being developed. These decreases were
partially offset by increased spending on our XEN1101 product candidate, which was acquired in April 2017, our XEN496 product
candidate which was announced in September 2018, and XEN901 and Nav1.6 pre-clinical and discovery expenses.
General and Administrative Expenses
The following table summarizes general and administrative expenses for the years ended December 31, 2018 and 2017 together
with changes in those items (in thousands):
General and administrative expenses
$
8,382
$
7,313
Year Ended December 31,
2018
2017
Change
2018 vs. 2017
Increase/(Decrease)
1,069
$
General and administrative expenses were $8.4 million for the year ended December 31, 2018, compared to $7.3 million for the
year ended December 31, 2017. The increase of $1.1 million was primarily attributable to increased stock-based compensation
expense, salaries and benefits, legal expenses and recruitment fees.
Other Operating Expenses
The following table summarizes other operating expenses for the years ended December 31, 2018 and 2017 together with
changes in those items (in thousands):
Buy-out of future milestones and royalties
$
6,000
$
Year Ended December 31,
2018
2017
Change
2018 vs. 2017
Increase/(Decrease)
6,000
$
—
Other operating expenses increased by $6.0 million for the year ended December 31, 2018, as compared to the year ended
December 31, 2017. The increase is due to a one-time payment of $6.0 million to Bausch Health for the buy-out of all future milestone
payments and royalties owed to Bausch Health with respect to our XEN1101 program.
Other Income
The following table summarizes our other income for the years ended December 31, 2018 and 2017 together with changes in
those items (in thousands):
Other income:
$
3,519
$
63
Year Ended December 31,
2018
2017
Change
2018 vs. 2017
Increase/(Decrease)
1,648
$
1,871
Other income increased by $1.6 million for the year ended December 31, 2018, as compared to the year ended December 31,
2017. The increase in other income was primarily driven by a $4.4 million gain on the termination of the collaboration agreement with
Teva, partially offset by a change in foreign exchange gains and losses and interest expense incurred on our term loan. We recorded a
foreign exchange loss of $0.7 million for the year ended December 31, 2018 as compared to a $1.4 million foreign exchange gain for
the same period in 2017, largely due to an 8% decrease as compared to a 7% increase in the value of the Canadian dollar,
respectively.
Liquidity and Capital Resources
To date, we have financed our operations primarily through funding received from collaboration and license agreements, private
placements of our common and preferred shares, public offerings of our common shares, debt financing and government funding. As
of December 31, 2018, we had cash and cash equivalents and marketable securities of $119.3 million. In December 2017, we entered
into a loan and security agreement with the Bank pursuant to which we borrowed an aggregate principal amount of $12.0 million. In
August 2018, we entered into an amended and restated loan and security agreement with the Bank providing for a term loan to us with
an aggregate principal amount of $15.5 million, proceeds from which were used in part to refinance the amounts borrowed under the
December 2017 loan and security agreement. For additional information regarding our amended and restated loan and security
agreement with the Bank, see “—Contractual Obligations and Commitments—Term Loan” below.
We have incurred significant operating losses since inception. We had a $34.5 million net loss for the year ended December 31,
2018 and an accumulated deficit of $207.9 million from inception through December 31, 2018. We expect to continue to incur
significant expenses in excess of our revenue and expect to incur operating losses over the next several years. Our net losses may
fluctuate significantly from quarter to quarter and year to year. We expect to continue to incur significant expenses and operating
losses for the foreseeable future as we continue our research and pre-clinical and clinical development of our product candidates;
expand the scope of our current studies for our product candidates; initiate additional pre-clinical, clinical or other studies for our
product candidates, including under our collaboration agreements; change or add manufacturers or suppliers and manufacture drug
supply and drug products for clinical trials and commercialization; seek regulatory and marketing approvals for any of our product
candidates that successfully complete clinical studies; seek to identify, evaluate and validate additional product candidates; acquire or
in-license other product candidates and technologies; make milestone or other payments under our product acquisition and in-license
agreements, including, without limitation, payments to the Memorial University of Newfoundland, 1st Order Pharmaceuticals, Inc.,
and other third parties; maintain, protect and expand our intellectual property portfolio; attract and retain skilled personnel; establish a
sales, marketing and distribution infrastructure to commercialize any products for which we or one of our collaborators may obtain
marketing approval, and maintain commercial rights; create additional infrastructure to support our operations and our product
development and planned future commercialization efforts; and experience any delays or encounter issues with any of the above.
Until such time as we can generate substantial product revenue, if ever, we expect to finance our cash needs through a
combination of collaboration agreements and equity or debt financings. For example, during the year ended December 31, 2018, we
raised $103.2 million, net of commissions paid, but excluding estimated transaction expenses through a combination of “at-the-
market” equity offerings and an underwritten public offering, selling an aggregate of 9,540,000 common shares.
Except for any obligations of our collaborators to make milestone payments under our agreements with them, we do not have
any committed external sources of capital. To the extent that we raise additional capital through the future sale of equity or debt, the
ownership interest of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences
that adversely affect the rights of our existing shareholders. If we raise additional funds through collaboration agreements in the
future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses
on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we
may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to
develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Our future capital requirements are difficult to forecast and will depend on many factors, including:
•
•
the number and characteristics of the future product candidates we pursue either from our internal research efforts or
through acquiring or in-licensing other product candidates or technologies;
the scope, progress, results and costs of independently researching and developing any of our future product candidates,
including conducting pre-clinical research and clinical trials;
• whether our existing collaborations continue to generate substantial milestone payments and, ultimately, royalties on future
approved products for us;
64
•
•
•
•
•
•
•
the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates we develop
independently;
the timing and magnitude of potential milestone payments and royalties under our product acquisition and in-license
agreements;
the cost of commercializing any future products we develop independently that are approved for sale;
the cost of manufacturing our future product candidates and products, if any;
our ability to maintain existing collaborations and to establish new collaborations, licensing or other arrangements and the
financial terms of such arrangements;
the costs of preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the
outcome of such litigation; and
the timing, receipt and amount of sales of, or royalties on our future products, if any.
Based on our research and development plans and our timing expectations related to the progress of our programs, we expect
that our existing cash and cash equivalents and marketable securities as of the date of this report will enable us to fund our operating
expenses and capital expenditure requirements for at least the next 12 months. We have based this estimate on assumptions that may
prove to be wrong, and we could use our capital resources sooner than we expect. Additionally, the process of testing drug candidates
in clinical trials is costly, and the timing of progress in these trials remains uncertain.
Cash Flows
The following table shows a summary of our cash flows for the years ended December 31, 2018 and 2017 (in thousands):
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Operating Activities
$
Year Ended December 31,
2018
2017
(34,724) $
(28,987)
111,591
(28,726)
24,294
7,070
Net cash used in operating activities totaled $34.7 million in 2018 as compared to $28.7 million in 2017. The increase in cash
used in operating activities was primarily related to a one-time payment to Bausch Health of $6.0 million for the buy-out of all future
milestone payments and royalties owed to Bausch Health with respect to our XEN1101 program, interest paid on our term loan, and
an increase in general and administrative expenses. The increase in cash used in operating activities was partially offset by a decrease
in research and development expenses and an increase in interest income.
Investing Activities
Net cash used in investing activities totaled $29.0 million in 2018 as compared to net cash provided by investing activities of
$24.3 million in 2017. The change in cash provided by (used in) investing activities was driven by an increase in purchases of
marketable securities, net of redemptions.
Financing Activities
Net cash provided by financing activities totaled $111.6 million in 2018 as compared to $7.1 million in 2017. The increase in
cash provided by financing activities was primarily related to approximately $102.9 million of net proceeds from the issuance of
common shares as well as net proceeds of $8.5 million under the second tranche of our December 2017 loan and security agreement
with the Bank and subsequent refinancing in August 2018.
65
Contractual Obligations and Commitments
The following summarizes our significant contractual obligations as of December 31, 2018 (in thousands):
Contractual Obligations
Operating lease (1)
Term loan (2)
Total contractual obligations
Total
$
$
$
3,583
15,500
19,083
$
$
$
Less Than
1 Year
1 To 3 Years 3 To 5 Years
256
4,133
4,389
2,199
11,367
13,566
$
$
$
$
$
$
1,128
—
1,128
More Than
5 Years
$
$
—
—
—
(1) Represents future minimum lease payments under an operating lease in effect as of December 31, 2018 for our current
facility in Burnaby, British Columbia, Canada.
(2) Excluding expected interest payments of $0.9 million (less than one year), $1.3 million (one to three years), $0.1 million
(three to five years) based on the prime rate plus 0.5% margin at December 31, 2018. Also excluded is the final payment fee
of $1.0 million which represents 6.5% of the principal amount.
Term Loan
In December 2017, we entered into a Loan and Security Agreement, or Loan Agreement with the Bank under which we were
funded an initial tranche of $7.0 million. In June 2018, we entered into a First Loan Modification Agreement, or Modification, to the
Loan Agreement, together the Modified Loan Agreement, pursuant to which the Bank accelerated the availability of a second tranche
of $5.0 million which was funded in June 2018. Amounts funded under the Modified Loan Agreement were interest-only until
September 30, 2018 or, subject to the achievement of certain clinical milestones, or the Interest-Only Milestone, March 31, 2019.
Following the expiration of the interest-only period, the first tranche was payable in 30 equal monthly installments or, if the Interest-
Only Milestone was achieved, 24 equal monthly installments of principal plus interest, maturing on March 31, 2021. The second
tranche was payable in 24 equal monthly installments or, if the Interest-Only Milestone was achieved, 18 equal monthly installments
of principal plus interest, maturing on September 30, 2020. The interest and payment terms of the third and final tranche, if borrowed,
remained unchanged from the Loan Agreement. The Modification did not amend the Loan Agreement’s interest provisions.
On August 3, 2018, we entered into Amended and Restated Loan Agreement with the Bank, pursuant to which the Bank
extended a term loan to us with a principal amount of $15.5 million, or Term Loan, which was used to repay in full outstanding
borrowings of $12.0 million under the Modified Loan Agreement and a payment of $0.5 million, which represented the current
portion of the final payment fee due under the Modified Loan Agreement, as well as for working capital and other general corporate
purposes, including the advancement of our clinical development programs.
The Term Loan accrues interest at a floating per annum rate of 0.5% above the prime rate, which is payable monthly
commencing in September 2018. The Term Loan is interest-only until March 31, 2020, followed by 30 equal monthly installments of
principal plus interest, maturing on September 1, 2022. In addition, we are required to pay a final payment fee of 6.5% of the Term
Loan on the date on which the term loan is prepaid, paid or becomes due and payable in full.
We may prepay all, but not less than all, of the Term Loan subject to a prepayment fee of $0.3 million, which represents the
deferred portion of the final payment fee due under the Modified Loan Agreement, plus 3.0% if prepaid prior to the first anniversary
of the effective date of the Amended and Restated Loan Agreement, 2.0% if prepaid on or after the first anniversary, but prior to the
second anniversary, or 1.0%, if prepaid on or after the second anniversary but prior to the maturity date. As security for its obligations
under the Amended and Restated Loan Agreement, we granted the Bank a first priority security interest on substantially all of our
assets except its intellectual property and subject to certain other exceptions.
The Amended and Restated Loan Agreement contains customary representations and warranties, events of default (including an
event of default upon the occurrence of a material impairment on the Bank’s security interest over the collateral, and a material
adverse change in our company) and affirmative and negative covenants, including, among others, covenants that limit or restrict our
ability to incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into
certain transactions with affiliates, engage in any new line of business, pay dividends or make distributions, or repurchase stock, in
each case subject to certain exceptions. Upon the occurrence and during the continuance of an event of default, a default interest rate
will apply that is 5.0% above the otherwise applicable interest rate.
In connection with the Amended and Restated Loan Agreement, we issued a warrant to the Bank to purchase 40,000 of our
common shares at a price per common share of $9.79. The warrant is immediately exercisable, has a 10-year term and contains a
cashless exercise provision.
66
Other Commitments
The contractual obligations table above excludes the following material contractual commitments:
In August 2015, we entered into a priority access agreement with Medpace for the provision of certain clinical development
services. Under the terms of the agreement, we committed to using Medpace non-exclusively for clinical development services over
the five year term of the agreement. In consideration for priority access to Medpace resources and preferred service rates, we
committed to $7.0 million of services over the term of the agreement, $1.7 million of which was prepaid upon signing of the
agreement and an additional $1.3 million was paid in December 2015. If we do not meet the commitment to retain Medpace for $7.0
million of services during the term of the agreement, we agreed to give Medpace the exclusive right to perform all of our subsequent
outsourced clinical development work until such $7.0 million commitment has been satisfied, subject to the availability of appropriate
Medpace resources and reasonable service rates. If we decide not to retain Medpace for the provision of clinical development services,
we may satisfy our obligations under the priority access agreement by paying Medpace an amount equal to half of the unsatisfied
portion of the $7.0 million minimum commitment.
In March 2017, we entered into a license, manufacture and supply agreement with a pharmaceutical contract manufacturing
organization for the access and use of certain regulatory documents as well as for the manufacture and supply of clinical and
commercial drug product to support the development of XEN007. Under the terms of the agreement, we paid an upfront fee of $0.5
million CAD and will be required to pay a low single-digit percentage royalty on net sales of any products developed and
commercialized under the agreement.
In April 2017, we acquired XEN1101 (previously known as 1OP2198) from 1st Order pursuant to an asset purchase agreement.
1st Order previously acquired 1OP2198 from an affiliate of Bausch Health, and assumed certain financial responsibilities under that
agreement. Under the terms of the agreement, we paid an upfront fee of approximately $0.4 million and milestone payments in 2017
totaling $0.7 million, which we expensed as research and development. In September 2018, we entered into a milestone and royalty
buy-out agreement with Bausch Health under which all potential clinical development, regulatory and sales-based milestones and
royalties on commercial sales with respect to XEN1101 that may become owed to Bausch Health under the asset purchase agreement
were terminated in exchange for a one-time payment of $6.0 million which was expensed in the period. Future potential payments to
1st Order include $0.5 million in clinical development milestones, up to $6.0 million in regulatory milestones, and $1.5 million in
other milestones that may be payable pre-commercially. There are no royalty obligations to 1st Order.
In July 2017, we entered into a license agreement with a pharmaceutical company for the access and use of certain regulatory
documents to support the development of XEN007. Under the terms of the agreement, we paid an upfront fee of $1.0 million, which
we expensed as research and development. Future potential payments include $2.0 million in clinical development milestones, up to
$7.0 million in regulatory milestones, plus a low-to-mid single-digit percentage royalty on net sales of any products developed and
commercialized under the agreement.
In July 2018, we amended our collaborative research and license agreement with Genentech to provide us with greater
flexibility in developing additional compounds that target Nav1.6. Pursuant to the amendment, we obtained a non-exclusive,
irrevocable, perpetual, world-wide, sublicensable license under the know-how forming part of the Genentech intellectual property
developed under the Nav1.7 collaboration that is necessary or useful to make, use, sell, offer for sale, and import compounds from our
Nav1.6 program that are above a certain potency threshold on Nav1.7 and products containing those compounds. Our license from
Genentech includes commercialization rights but we are restricted from developing or commercializing our Nav1.6 compounds below
a certain potency threshold on Nav1.7 in the field of epilepsy and any of our Nav1.6 compounds, regardless of their potency on
Nav1.7, in the field of pain. In exchange for the rights granted to us under this amendment, Genentech is eligible to receive a low
single-digit percentage, tiered royalty on net sales of our Nav1.6 compounds, including XEN901, for a period of ten years from first
commercial sale on a country-by-country basis. Pursuant to the amendment, we granted Genentech a royalty-free, non-exclusive,
world-wide license under our Nav1.6 intellectual property to make, use, sell, offer for sale and import compounds below a certain
potency threshold on Nav1.7 and products containing those compounds for all uses and indications except epilepsy.
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations in the last
three fiscal years.
67
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable
interest entities, which include special purposes entities and other structured finance entities.
Related Party Transactions
For a description of our related party transactions, see “Certain Relationships and Related Transactions, and Director
Independence.”
Outstanding Share Data
As of March 1, 2019, we had 25,751,266 common shares issued and outstanding and outstanding stock options to purchase an
additional 2,688,345 common shares. In addition, as of March 1, 2019, we had 1,016,000 Series 1 Preferred Shares issued and
outstanding. The Series 1 Preferred Shares are convertible into common shares on a one-for-one basis subject to the holder, together
with its affiliates, beneficially owning no more than 9.99% of the total number of common shares issued and outstanding immediately
after giving effect to such conversion, or the Beneficial Ownership Limitation. The holder may reset the Beneficial Ownership
Limitation to a higher or lower number, not to exceed 19.99% of the total number of common shares issued and outstanding
immediately after giving effect to such conversion, upon providing written notice to us which will be effective 61 days after delivery
of such notice. The holders of the Series 1 Preferred Shares are entitled to vote together with the common shares on an as-converted
basis and as a single class, subject in the case of each holder of the Series 1 Preferred Shares to the Beneficial Ownership Limitation.
The Series 1 Preferred Shares may be “restricted securities” as such term is defined under applicable Canadian securities laws, as any
Series 1 Preferred Shares that are ineligible to be converted into common shares due to the Beneficial Ownership Limitation,
measured as of a given record date that applies for a shareholder meeting or ability to act by written consent, shall be deemed to be
non-voting securities. For additional information regarding our Series 1 Preferred Shares, see note 10d to our consolidated financial
statements included in Part II, Item 8 of this report.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-02,
Leases (Topic 842): Recognition and Measurement of Financial Assets and Financial Liabilities. The update requires the recognition
of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. The new
guidance retains a distinction between finance leases and operating leases, with cash payments from operating leases classified within
operating activities in the statement of cash flows. These amendments will be effective for public entities for fiscal years and interim
periods within those years, beginning after December 15, 2018. We adopted the standard on January 1, 2019 and can elect to record a
cumulative-effect adjustment as of the beginning of the year of adoption or apply a modified retrospective transition approach. We
have identified one operating lease for our premises which will be subject to the new guidance and will be recognized as an operating
lease liability and right-of-use asset upon adoption.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction
between Topic 808 and Topic 606. These amendments make targeted improvements to accounting for collaborative arrangements by
clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic
606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the
guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements. In addition,
unit-of-account guidance in Topic 808 was aligned with the guidance in Topic 606 (that is, a distinct good or service) when an entity
is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606. These amendments
will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019 and should be
applied retrospectively to the date of initial application of Topic 606. We are currently evaluating the new guidance to determine the
impact it will have on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information requested by this item pursuant to Item 301 of
Regulation S-K.
68
Item 8.
Financial Statements and Supplementary Data
XENON PHARMACEUTICALS INC.
Index to Consolidated Financial Statements
Year ended December 31, 2018
Report of Independent Registered Public Accounting Firm.............................................................................................................
Consolidated Balance Sheets as of December 31, 2018 and 2017 ...................................................................................................
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2018 and 2017 ..................
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2018, and 2017 ..........................................
Consolidated Statements of Cash Flows for the years ended December 31, 2018, and 2017 .........................................................
Notes to Consolidated Financial Statements.....................................................................................................................................
Index
70
71
72
73
74
75
69
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Xenon Pharmaceuticals Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Xenon Pharmaceuticals Inc. and subsidiary (the Company) as of
December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and
cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively, the consolidated
financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position
of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the
two-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
Chartered Professional Accountants
We have served as the Company’s auditor since 1999.
Vancouver, British Columbia
March 6, 2019
70
XENON PHARMACEUTICALS INC.
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars except share amounts)
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable
Prepaid expenses and other current assets
Prepaid expenses, long-term
Property, plant and equipment, net (note 7)
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable and accrued expenses (note 8)
Loan payable, current portion (note 9)
Loan payable, long-term (note 9)
Shareholders’ equity:
Preferred shares, without par value; unlimited shares authorized; issued and
outstanding: 1,016,000 (December 31, 2017 - nil) (note 10)
Common shares, without par value; unlimited shares authorized; issued and
outstanding: 25,750,721 (December 31, 2017 - 17,998,420) (note 10)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total liabilities and shareholders’ equity
Collaboration agreements (note 12)
Commitments and contingencies (note 13)
The accompanying notes are an integral part of these consolidated financial statements.
December 31,
2018
December 31,
2017
$
$
$
$
$
$
67,754
51,552
256
1,875
121,437
—
991
122,428
4,119
—
4,119
15,014
19,133
$
$
$
20,486
23,181
438
716
44,821
230
1,070
46,121
3,383
700
4,083
6,104
10,187
7,732
$
—
265,923
38,515
(207,885)
(990)
103,295
122,428
$
$
173,841
36,471
(173,388)
(990)
35,934
46,121
71
XENON PHARMACEUTICALS INC.
Consolidated Statements of Operations and Comprehensive Loss
(Expressed in thousands of U.S. dollars except share and per share amounts)
Revenue:
Collaboration revenue (note 12)
Operating expenses:
Research and development
General and administrative
Buy-out of future milestones and royalties (note 13d)
Loss from operations
Other income (expense):
Interest income
Interest expense
Foreign exchange gain (loss)
Gain on termination of collaboration agreement (note 12a)
Net loss and comprehensive loss
Net loss attributable to preferred shareholders
Net loss attributable to common shareholders
Net loss per common share (note 6):
Basic
Diluted
Weighted-average common shares outstanding (note 6):
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
Year Ended December 31,
2017
2018
$
— $
—
23,634
8,382
6,000
38,016
(38,016)
1,216
(1,394)
(701)
4,398
(34,497)
(2,881)
(31,616)
$
$
(1.63) $
(1.63) $
311
311
25,573
7,313
—
32,886
(32,575)
477
—
1,394
—
(30,704)
—
(30,704)
(1.71)
(1.72)
19,425,711
19,425,711
17,985,061
18,001,759
72
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XENON PHARMACEUTICALS INC.
Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
Operating activities:
Net loss
Items not involving cash:
Depreciation
Amortization of discount on term loan
Stock-based compensation
Unrealized foreign exchange (gain) loss
Gain on termination of collaboration agreement (note 12a)
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses, and other current assets
Prepaid expenses, long term
Accounts payable and accrued expenses
Net cash used in operating activities
Investing activities:
Purchases of property, plant and equipment
Purchase of marketable securities
Proceeds from marketable securities
Net cash provided by (used in) investing activities
Financing activities:
Proceeds from issuance of refinanced term loan, net of issuance costs (note 9)
Issuance of common shares, net of issuance costs (note 10a)
Issuance of common shares pursuant to exercise of stock options
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosures:
Interest paid
Interest received
Supplemental disclosures of non-cash transactions:
Fair value of stock options and warrants exercised on a cashless basis
Issuance of preferred shares in exchange for common shares (note 10d)
Conversion of preferred shares to common shares (note 10d)
Termination of Teva agreement through cancellation of common shares (note 12a)
The accompanying notes are an integral part of these consolidated financial statements.
$
$
74
Year Ended December 31,
2017
2018
$
(34,497)
$
(30,704)
586
284
2,625
646
(4,398)
175
(928)
—
783
(34,724)
(507)
(77,002)
48,522
(28,987)
8,453
102,850
288
111,591
(612)
47,268
20,486
67,754
561
1,067
1,125
21,825
14,093
4,470
$
$
649
11
2,236
(1,474)
—
(232)
613
178
(3)
(28,726)
(315)
(28,007)
52,616
24,294
6,893
—
177
7,070
753
3,391
17,095
20,486
—
740
25
—
—
—
XENON PHARMACEUTICALS INC.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars except share and per share amounts)
1.
Nature of the business:
Xenon Pharmaceuticals Inc. (the “Company”), incorporated in 1996 under the British Columbia Business Corporations Act and
continued federally in 2000 under the Canada Business Corporation Act, is a clinical stage biopharmaceutical company focused
on developing innovative therapeutics to improve the lives of patients with neurological disorders. Building upon its extensive
knowledge of human genetics and diseases caused by mutations in ion channels, known as channelopathies, the Company is
advancing a novel product pipeline of neurology-focused therapies to address areas of high unmet medical need, with a focus on
epilepsy.
The Company has incurred significant operating losses since inception. As of December 31, 2018, the Company had an
accumulated deficit of $207,885 and a $34,497 net loss for the year ended December 31, 2018. Management expects to continue
to incur significant expenses in excess of revenue and to incur operating losses for the foreseeable future. To date, the Company
has financed its operations primarily through funding received from collaboration and license agreements, private placements of
common and preferred shares, public offerings of common shares, debt financing, and government funding.
Until such time as the Company can generate substantial product revenue, if ever, management expects to finance the
Company’s cash needs through a combination of collaboration agreements, equity and debt financings. The continuation of
research and development activities and the future commercialization of its products are dependent on the Company’s ability to
successfully raise additional funds when needed. It is not possible to predict either the outcome of future research and
development programs or the Company’s ability to continue to fund these programs in the future.
2.
Basis of presentation:
These consolidated financial statements are presented in U.S. dollars and have been prepared in accordance with United States
generally accepted accounting principles (“U.S. GAAP”).
The Company has one wholly-owned subsidiary as at December 31, 2018, Xenon Pharmaceuticals USA Inc., which was
incorporated in Delaware on December 2, 2016.
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All
intercompany transactions and balances have been eliminated on consolidation.
3.
Significant accounting policies:
(a) Use of estimates:
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting
period. Significant areas of estimates include, but are not limited to, the timing of revenue recognition, the determination
of stock-based compensation and the amounts recorded as accrued liabilities. Actual results could differ materially from
those estimates. Estimates and assumptions are reviewed quarterly. All revisions to accounting estimates are recognized in
the period 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 when acquired. Cash equivalents are recorded at cost plus accrued interest. The carrying value of these
cash equivalents approximates their fair value.
(c) Marketable securities:
Marketable securities are investments with original maturities exceeding three months, and have remaining maturities of
less than one year. Marketable securities accrue interest based on a fixed interest rate for the term. The carrying value of
marketable securities is recorded at cost plus accrued interest, which approximates their fair value.
75
(d) Intellectual Property
The costs incurred in establishing and maintaining patents for intellectual property developed internally are expensed in
the period incurred.
(e) Property, plant and equipment:
Property, plant and equipment are stated at cost less accumulated depreciation and/or accumulated impairment losses, if
any. Repairs and maintenance costs are expensed in the period incurred.
Property, plant and equipment are amortized over their estimated useful lives using the straight-line method based on the
following rates:
Asset
Research equipment
Office furniture and equipment
Computer equipment
Leasehold improvements
Rate
5 years
5 years
3 years
Over the lesser of lease term or
estimated useful life
(f)
Impairment of long-lived assets:
The Company monitors its long-lived assets for indicators of impairment. If such indicators are present, the Company
assesses the recoverability of affected assets by determining whether the carrying value of such assets is less than the sum
of the undiscounted future cash flows of the assets. If such assets are found not to be recoverable, the Company measures
the amount of such impairment by comparing the carrying value of the assets to the fair value of the assets, with the fair
value generally determined based on the present value of the expected future cash flows associated with the assets. No
impairment of long-lived assets was noted during the years ended December 31, 2018 and 2017.
(g) 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 cash equivalents. Cash and cash equivalents were held at major financial institutions in Canada and the United
States. Such deposits may be in excess of insured limits in the event of non-performance by the institutions; however, the
Company does not anticipate non-performance.
(h) Financial instruments and fair value:
We measure certain financial instruments and other items at fair value.
To determine the fair value, we use the fair value hierarchy for inputs used to measure fair value of financial assets and
liabilities. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1
(highest priority), Level 2, and Level 3 (lowest priority).
•
•
•
Level 1 - Unadjusted quoted prices in active markets for identical instruments.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that
are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally
from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Inputs are unobservable and reflect the Company’s assumptions as to what market participants would use
in pricing the asset or liability. The Company develops these inputs based on the best information available.
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements.
Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the
fair value hierarchy.
The Company’s Level 1 assets include cash and cash equivalents and marketable securities with quoted prices in active
markets. The carrying amount of accounts receivables, accounts payable and accrued expenses approximates fair value
due to the nature and short-term of those instruments. The Company’s term loan bears interest at a rate that approximates
prevailing market rates for instruments with similar characteristics and, accordingly, the carrying value of the loan
approximates fair value.
76
(i) Revenue recognition:
The Company recognizes the amount of revenue to which it expects to be entitled, for the transfer of promised goods or
services to customers under a five-step model: (i) identify contract(s) with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when or as a performance obligation is satisfied.
The Company generates revenue primarily through collaboration agreements. Such agreements may require the Company
to deliver various rights and/or services, including intellectual property rights or licenses and research and development
services. Under such collaboration agreements, the Company is generally eligible to receive non-refundable upfront
payments, funding for research and development services, milestone payments, and royalties.
In contracts where the Company has more than one performance obligation to provide its customer with goods or services,
each performance obligation is evaluated to determine whether it is distinct based on whether (i) the customer can benefit
from the good or service either on its own or together with other resources that are readily available and (ii) the good or
service is separately identifiable from other promises in the contract. The consideration under the contract is then allocated
between the distinct performance obligations based on their respective relative stand-alone selling prices. The estimated
stand-alone selling price of each deliverable reflects the Company’s best estimate of what the selling price would be if the
deliverable was regularly sold on a stand-alone basis and is determined by reference to market rates for the good or
service when sold to others or by using an adjusted market assessment approach if selling price on a stand-alone basis is
not available.
The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred to
the customer for the related goods or services. Consideration associated with at-risk substantive performance milestones,
including sales-based milestones, is recognized as revenue when it is probable that a significant reversal of the cumulative
revenue recognized will not occur. Sales-based royalties received in connection with licenses of intellectual property are
subject to a specific exception in the revenue standards, whereby the consideration is not included in the transaction price
and recognized in revenue until the customer’s subsequent sales or usages occur.
(j) Research and development costs:
Research and development costs are expensed in the period incurred.
Certain development activity costs, such as pre-clinical costs, manufacturing costs and clinical trial costs, are a component
of research and development costs and include fees paid to contract research organizations, investigators and other
vendors who conduct certain product development activities on behalf of the Company. The amount of expenses
recognized in a period related to service agreements is based on estimates of the work performed using the accrual basis of
accounting. These estimates are based on patient enrollment, services provided and goods delivered, contractual terms,
and experience with similar contracts. The Company monitors these factors and adjusts the estimates accordingly.
Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as
prepaid expenses until the services are rendered.
(k) Stock-based compensation:
The Company grants stock options to employees, directors and officers pursuant to a stock option plan described in note
10c.
Employee stock-based compensation expense is measured at the grant date, based on the estimated fair value of the award,
and is recognized as an expense, net of actual forfeitures, over the requisite service period with a corresponding increase
in additional paid-in capital. Stock-based compensation expense is amortized on a straight-line basis over the requisite
service period for the entire award, which is generally the vesting period of the award. Any consideration received on
exercise of stock options is credited to share capital.
(l) Foreign currency translation:
The functional and reporting currency of the Company and its subsidiary is the U.S. dollar. Monetary assets and liabilities
denominated in a currency other than the U.S. dollar are re-measured into U.S. dollars at the exchange rate prevailing as at
the balance sheet date. Non-monetary assets and liabilities acquired in a currency other than U.S. dollars are translated at
historical exchange rates prevailing at each transaction date.
77
Revenue and expense transactions are translated at the exchange rates prevailing at each transaction date. Exchange gains
and losses on translation are included in the consolidated statements of operations and comprehensive income (loss) as
foreign exchange gain (loss).
(m) Income taxes:
Deferred income taxes are recognized for the future tax consequences attributable to differences between the carrying
amounts of assets and liabilities and their respective tax bases and net operating loss and credit carryforwards. Deferred
income tax assets and liabilities are measured at enacted rates expected to apply to taxable income in the years in which
those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred income tax
assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations and comprehensive
income (loss) in the period that includes the enactment date. A valuation allowance is provided when realization of
deferred income tax assets does not meet the more-likely-than-not criterion for recognition.
(n) Deferred tenant inducements:
Deferred tenant inducements, which include leasehold improvements paid for by the landlord and free rent, are included
in the consolidated balance sheet as accounts payable and accrued expenses and recognized as a reduction of rent expense
on a straight-line basis over the term of the lease.
(o) Segment and geographic information:
Operating segments are defined as components of an enterprise about which separate discrete information is available for
evaluation by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in
assessing performance. The Company views its operations and manages its business in one operating segment.
4.
Changes in significant accounting policies:
The Company adopted the new revenue standard (Accounting Standards Codification “ASC” 606), effective January 1, 2018,
using the modified retrospective method under which previously presented financial statements are not restated and the
cumulative effect of adopting the new revenue standard on contracts in process is recognized by an adjustment to retained
earnings at the effective date. The adoption of the new revenue standard did not change the Company’s recognized revenue
under its one ongoing significant collaborative research and license agreement with Genentech, a member of the Roche Group,
described in note 12b and no cumulative effect adjustment was required. Refer to the Company’s Revenue Recognition policy
described in note 3i.
5.
Future changes in accounting policies:
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02,
Leases (Topic 842): Recognition and Measurement of Financial Assets and Financial Liabilities. The update requires the
recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S.
GAAP. The new guidance retains a distinction between finance leases and operating leases, with cash payments from operating
leases classified within operating activities in the statement of cash flows. These amendments will be effective for public entities
for fiscal years and interim periods within those years, beginning after December 15, 2018. The Company adopted the standard
on January 1, 2019 and can elect to record a cumulative-effect adjustment as of the beginning of the year of adoption or apply a
modified retrospective transition approach. The Company has identified one operating lease for its premises which will be
subject to the new guidance and will be recognized as an operating lease liability and right-of-use asset upon adoption.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction
between Topic 808 and Topic 606. These amendments make targeted improvements to accounting for collaborative
arrangements by clarifying that certain transactions between collaborative arrangement participants should be accounted
for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of
account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement,
presentation, and disclosure requirements. In addition, unit-of-account guidance in Topic 808 was aligned with the
guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative
arrangement or a part of the arrangement is within the scope of Topic 606. These amendments will be effective for fiscal
years and interim periods within those fiscal years, beginning after December 15, 2019 and should be applied
retrospectively to the date of initial application of Topic 606. The Company is currently evaluating the new guidance to
determine the impact it will have on the Company’s consolidated financial statements.
78
6.
Net income (loss) per common share and preferred share:
Basic net income (loss) per common share is calculated using the two-class method required for participating securities which
includes the convertible preferred shares as a separate class. The preferred shares entitle the holders to participate in dividends
and in earnings and losses of the Company on an equivalent basis as common shares. Accordingly, undistributed earnings
(losses) are allocated to common shares and participating preferred shares based on the weighted-average shares of each class
outstanding during the period.
The treasury stock method is used to compute the dilutive effect of the Company’s stock options and warrants. Under this
method, the incremental number of common shares used in computing diluted net income (loss) per common share is the
difference between the number of common shares assumed issued and purchased using assumed proceeds.
The if-converted method is used to compute the dilutive effect of the Company’s convertible preferred shares. Under the if-
converted method, dividends on the preferred shares, if applicable, are added back to earnings attributable to common
shareholders, and the preferred shares and paid-in kind dividends are assumed to have been converted at the share price
applicable at the end of the period. The if-converted method is applied only if the effect is dilutive.
For the year ended December 31, 2018, all stock options, warrants and convertible preferred shares were anti-dilutive and were
excluded from the diluted weighted average common shares outstanding for the period. For the year ended December 31, 2017,
2,172,034 stock options and warrants were excluded from the calculation of diluted net loss per common share as their inclusion
would be anti-dilutive. No convertible preferred shares were outstanding for the year ended December 31, 2017.
The following is a reconciliation of the numerators and denominators of basic and diluted net loss per common share and
preferred share:
—
—
—
—
—
—
—
—
Numerator:
Allocation of loss used attributed to shareholders:
Year Ended December 31,
2018
2017
Common
Shares
Preferred
Shares
Common
Shares
Preferred
Shares
Basic
$
(31,616) $
(2,881)
$
(30,704) $
Adjustment for change in fair value of liability
classified stock options
Diluted
Denominator:
Weighted average number of shares:
—
(31,616) $
—
(2,881)
$
(187)
(30,891) $
$
Basic
Adjustment for dilutive effect of stock options
19,425,711
—
19,425,711
(1.63) $
Net loss attributable to shareholders per share - basic
$
(1.63) $
Net loss attributable to shareholders per share - diluted $
Diluted
7.
Property, plant and equipment:
Property, plant and equipment consisted of the following:
Research equipment
Office furniture and equipment
Computer equipment
Leasehold improvements
Less: accumulated depreciation and amortization
Net book value
79
1,769,900
—
1,769,900
(1.63)
(1.63)
17,985,061
16,698
18,001,759
(1.71) $
$
(1.72) $
$
December 31,
2018
2017
$
$
$
7,313
1,046
2,461
6,370
(16,199)
$
991
6,984
1,043
2,311
6,370
(15,638)
1,070
8.
Accounts payable and accrued expenses:
Accounts payable and accrued expenses consisted of the following:
Trade payables
Employee compensation, benefits, and related accruals
Consulting and contracted research
Professional fees
Other
Total
December 31,
2018
2017
$
$
665
1,728
1,404
237
85
4,119
$
$
1,253
1,017
817
252
44
3,383
9.
Term Loan:
In December 2017, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley
Bank (the “Bank”) under which the Company was funded an initial tranche of $7,000. In June 2018, the Company entered into a
First Loan Modification Amendment (the “Modification”) to the Loan Agreement (together, the “Modified Loan Agreement”),
pursuant to which the Bank accelerated the availability of a second tranche of $5,000 which was funded on the date of the
Modification. Amounts funded under the Modified Loan Agreement were interest-only until September 30, 2018 or, subject to
the achievement of certain clinical milestones (the “Interest-Only Milestone”), March 31, 2019. Following the expiration of the
interest-only period, the first tranche was payable in 30 equal monthly installments or, if the Interest-Only Milestone was
achieved, 24 equal monthly installments of principal plus interest, maturing on March 31, 2021. The second tranche was payable
in 24 equal monthly installments or, if the Interest-Only Milestone was achieved, 18 equal monthly installments of principal
plus interest, maturing on September 30, 2020. The interest and payment terms of the third and final tranche, if borrowed,
remained unchanged from the Loan Agreement. The Modification did not amend the Loan Agreement’s interest provisions.
In August 2018, the Company entered into an Amended and Restated Loan and Security Agreement (the “Amended and
Restated Loan Agreement”) with the Bank, pursuant to which the Bank agreed to extend a term loan to the Company with a
principal amount of $15,500 (the “Term Loan”). The Term Loan was used to repay in full outstanding borrowings of $12,000
under the Modified Loan Agreement and a payment of $485, which represented the current portion of the final payment fee due
under the Modified Loan Agreement, as well as for working capital and other general corporate purposes, including the
advancement of the Company’s clinical development programs. The Term Loan accrues interest at a floating per annum rate of
0.5% above the prime rate, which is payable monthly commencing in September 2018. The Term Loan is interest-only until
March 31, 2020, followed by 30 equal monthly installments of principal plus interest, maturing on September 1, 2022. In
addition, the Company is required to pay a final payment fee of 6.5% of the Term Loan on the date on which the term loan is
prepaid, paid or becomes due and payable in full.
The Company may prepay all, but not less than all, of the Term Loan subject to a prepayment fee of $295, which represents the
deferred portion of the final payment fee due under the Modified Loan Agreement, plus 3.0% if prepaid prior to the first
anniversary of the effective date of the Amended and Restated Loan Agreement, 2.0% if prepaid on or after the first
anniversary, but prior to the second anniversary, or 1.0%, if prepaid on or after the second anniversary but prior to the maturity
date. As security for its obligations under the Amended and Restated Loan Agreement, the Company granted the Bank a first
priority security interest on substantially all of the Company’s assets except its intellectual property and subject to certain other
exceptions.
In connection with the Modification, the number of common shares exercisable pursuant to the warrant issued to the Bank in
December 2017 under the Loan Agreement (the “December 2017 Warrant”) increased by 36,008 common shares. The relative
fair value of the additional common shares exercisable pursuant to the December 2017 Warrant was $247 and was classified in
equity. With this increase, the December 2017 Warrant allowed the Bank to purchase a total of 86,419 of the Company’s
common shares at a price per common share of $2.43. The December 2017 Warrant was immediately exercisable, had a 10-year
term, and contained a cashless exercise provision. In connection with the entry into the Amended and Restated Loan Agreement,
the maximum number of common shares exercisable pursuant to the December 2017 Warrant was fixed at 86,419 at a price per
common share of $2.43. In September 2018, the Company issued 72,325 common shares for the cashless exercise of the
December 2017 Warrant.
In connection with the Amended and Restated Loan Agreement, the Company issued a new warrant to the Bank to purchase
40,000 of the Company’s common shares at a price per common share of $9.79. The relative fair value of the common shares
exercisable pursuant to this warrant was $291 and was classified in equity. The warrant is immediately exercisable, has a 10-
year term and contains a cashless exercise provision. This warrant remains outstanding at December 31, 2018.
80
The debt proceeds were allocated based on the relative fair values of the debt instrument and the warrant instrument. The fair
value of the warrant and the closing costs were recorded as debt discounts and are being amortized using the effective interest
rate method over the term of the loan. At December 31, 2018, the Company determined the effective interest rate on the
Amended and Restated Loan Agreement with the Bank to be 9.53% (2017 - 9.25%). Amortization of the debt discount and
accretion of the final payment fee was $284 for the year ended December 31, 2018 (2017 - $11). Interest payments are made
monthly.
Interest expense was $1,394 and the year ended December 31, 2018 (2017 - $24).
The outstanding loan and unamortized debt discount balances as of December 31, 2018 in accordance with the repayment terms
under Amended and Restated Loan Agreement are as follows:
Term loan
Less: unamortized discount on loan
Less: current portion
Accrued portion of final payment fee
Loan payable, long-term
December 31,
2018
2017
$
$
15,500
(600)
—
114
15,014
$
$
7,000
(203)
(700)
7
6,104
Scheduled principal payments on outstanding debt as of December 31, 2018, excluding the final payment fee of $1,008, are as
follows:
2019
2020
2021
2022
Total
$
$
—
5,167
6,200
4,133
15,500
The Amended and Restated Loan Agreement contains customary representations and warranties, events of default (including an
event of default upon the occurrence of a material impairment on the Bank’s security interest over the collateral, and a material
adverse change of the Company) and affirmative and negative covenants, including, among others, covenants that limit or
restrict the Company’s ability to incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments,
make acquisitions, enter into certain transactions with affiliates, engage in any new line of business, pay dividends or make
distributions, or repurchase stock, in each case subject to certain exceptions. Upon the occurrence and during the continuance of
an event of default, a default interest rate will apply that is 5.0% above the otherwise applicable interest rate. The Company is in
compliance with these covenants at December 31, 2018.
10.
Share capital:
(a) Financing:
In May 2018, the Company entered into an at-the-market equity offering sales agreement with Stifel Nicolaus &
Company, Incorporated (“Stifel”) to sell common shares of the Company having aggregate gross proceeds of up to
$30,000, from time to time, through an “at-the-market” equity offering program under which Stifel would act as sales
agent. The Company sold 3,440,000 common shares under the sales agreement for proceeds of approximately $29,200,
net of commissions paid, but excluding estimated transaction expenses.
In July 2018, the Company entered into an at-the-market equity offering sales agreement with Jefferies LLC (“Jefferies”)
and Stifel, to sell common shares of the Company having aggregate gross proceeds of up to $50,000, from time to time,
through an “at-the-market” equity offering program under which Jefferies and Stifel would act as sales agent. The
Company sold 1,600,000 common shares under the sales agreement for proceeds of approximately $14,820, net of
commissions paid, but excluding estimated transaction expenses. In connection with the Company’s entry into the July
2018 sales agreement with Jefferies and Stifel, the May 2018 sales agreement was mutually terminated by the Company
and Stifel.
81
In September 2018, the Company entered into an underwriting agreement with Jefferies and Stifel, relating to an
underwritten public offering of 4,500,000 common shares sold by the Company at a public offering price of $14.00 per
common share. The Company received net proceeds of $59,220, net of underwriting discounts and commissions, but
before offering expenses. In connection with the Company’s entry into the September 2018 underwriting agreement with
Jefferies and Stifel, the July 2018 sales agreement was mutually terminated by the Company, Jefferies and Stifel.
(b) Authorized share capital:
The Company’s authorized share capital consists of an unlimited number of common and preferred shares without par
value.
(c) Stock-based compensation:
On June 25, 2014, the shareholders of the Company approved the 2014 Equity Incentive Plan (the “2014 Plan”) which
permits the grant of stock-based compensation awards to directors, officers, employees and consultants of the Company.
The Company’s pre-existing stock option plan (the “Amended and Restated Stock Option Plan”) was limited to the
granting of stock options as equity incentive awards whereas the 2014 Plan also allows for the issuance of restricted
shares, restricted share units, share appreciation rights and performance shares. The 2014 Plan replaced the Amended and
Restated Stock Option Plan. No further options will be granted under the Company’s Amended and Restated Stock Option
Plan.
The Amended and Restated Stock Option Plan provided for the grant of options for the purchase of common shares to
directors, officers, employees and consultants prior to the Company’s initial public offering (“IPO”). The options granted
under the Amended and Restated Stock Option Plan vest on a graduated basis over a four-year period or less and each
option’s maximum term is ten years. The Amended and Restated Stock Option Plan will continue to govern the options
granted thereunder.
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 is determined 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 over a maximum term of ten years. As of December 31, 2018, a total of 153,209
stock options remain to be granted under the 2014 Plan. The number of common shares available for issuance under the
2014 Plan was increased by 900,000, effective January 1, 2019, as approved by the Board in accordance with the terms of
the 2014 Plan.
Summary of stock option activity is as follows:
Outstanding, December 31, 2016
Granted
Exercised(1)
Forfeited, cancelled or expired
Outstanding, December 31, 2017
Granted
Exercised(1)
Forfeited, cancelled or expired
Outstanding, December 31, 2018
Exercisable, December 31, 2018
Number of
Options
1,910,823
620,950
(71,006)
(120,862)
2,339,905
706,600
(251,163)
(123,436)
2,671,906
1,566,435
Weighted Average Exercise Price
CAD $
U.S. $
9.84
8.69
3.72
9.06
9.32
6.73
4.57
13.61
9.49
10.70
7.32
6.69
2.86
6.98
7.41
5.19
3.53
10.50
6.96
7.84
Aggregate
Intrinsic Value
4,464
108
159
1,028
3,483
2,198
(1) During the year ended December 31, 2018, 49,502 (2017 – 63,425) stock options were exercised for the same
number of common shares in exchange for cash. In the same period, the Company issued 106,474 (2017 – 4,405)
common shares for the cashless exercise of 201,661 (2017 – 7,581) stock options.
82
The following table summarizes the stock options outstanding and exercisable at December 31, 2018:
Options Outstanding
Options Exercisable
Range of Exercise Prices
U.S. $
$1.96 - $2.74
$2.75 - $4.70
$4.71 - $5.35
$5.36 - $7.59
$7.60 - $8.35
$8.36 - $8.98
$8.99 - $18.70
Weighted
Average
Remaining
Contractual
Life
(years)
Number of
Options
Outstanding
529,675
237,188
508,050
391,469
269,354
365,052
371,118
2,671,906
Number of
Options
Exercisable
Weighted Average
Exercise Price
CAD $ U.S. $
Weighted Average
Exercise Price
CAD $ U.S. $
2.34 3.42 2.51 529,675 3.42 2.51
8.84 4.80 3.52
59,589 4.41 3.23
— — —
9.19 6.48 4.75
7.61 9.49 6.96 209,664 9.95 7.30
6.13 10.69 7.84 232,869 10.70 7.84
8.17 11.47 8.41 184,322 11.48 8.42
6.39 22.43 16.45 350,316 22.81 16.72
6.73 9.49 6.96 1,566,435 10.70 7.84
At December 31, 2018, there were 1,566,435 options exercisable with a weighted average remaining contractual life of
5.25 years.
A summary of the Company’s non-vested stock option activity and related information for the year ended December 31,
2018 is as follows:
Non-vested, January 1, 2018
Granted
Vested
Forfeited or cancelled
Non-vested, December 31, 2018
Number of Options Weighted Average Grant Date Fair Value
CAD $
USD $
900,604
706,600
(437,771)
(63,962)
1,105,471
7.12
4.84
8.47
6.70
5.61
5.66
3.74
6.54
5.17
4.11
The aggregate fair value of options vested during the year ended December 31, 2018 was $2,861 (2017 – $2,047 ).
The fair value of stock options at the date of grant is estimated using the Black-Scholes option-pricing model which
requires multiple subjective inputs. The risk-free interest rate of the options is based on the U.S. Treasury yield curve in
effect at the date of grant for a term similar to the expected term of the option. Prior to the Company’s IPO in November
2014, the Company’s shares did not have a readily available market; therefore, the Company lacked company-specific
historical and implied volatility information. Consequently, the expected volatility of stock options was estimated based
on a combination of the Company’s available historical volatility information and historical volatility analysis of peers
that were similar to the Company with respect to industry, stage of life cycle, size, and financial leverage. Expected life
assumptions are based on the Company’s historical data. The dividend yield is based on the fact that the Company has
never paid cash dividends and has no present intention to pay cash dividends. Forfeitures are recognized as they occur.
The weighted-average option pricing assumptions are as follows:
Average risk-free interest rate
Expected volatility
Average expected term (in years)
Expected dividend yield
Weighted average fair value of options granted
Years ended December 31
2018
2017
2.79%
75%
7.38
0.00%
$
3.74
2.35%
80%
7.37
0.00%
5.02
$
83
Stock-based compensation expense is classified in the consolidated statements of operations and comprehensive income
(loss) as follows:
Research and development
General and administrative
Years ended December 31,
2018
2017
$
$
988
1,772
2,760
$
$
985
1,251
2,236
As of December 31, 2018, the unrecognized stock-based compensation cost related to the non-vested stock options was
$3,919, which is expected to be recognized over a weighted-average period of 2.41 years.
(d) Exchange agreement with certain funds affiliated with BVF Partners L.P. (collectively, “BVF”):
In March 2018, the Company and BVF entered into an exchange agreement pursuant to which the Company issued to
BVF 2,868,000 Series 1 Preferred Shares in exchange for 2,868,000 common shares which were subsequently cancelled
by the Company.
The Company filed articles of amendment creating an unlimited number of Series 1 Preferred Shares. The Series 1
Preferred Shares are convertible into common shares on a one-for-one basis subject to the holder, together with its
affiliates, beneficially owning no more than 9.99% of the total number of common shares issued and outstanding
immediately after giving effect to such conversion (the “Beneficial Ownership Limitation”). The holder may reset the
Beneficial Ownership Limitation to a higher or lower number, not to exceed 19.99% of the total number of common
shares issued and outstanding immediately after giving effect to such conversion, upon providing written notice to the
Company which will be effective 61 days after delivery of such notice. Each Series 1 Preferred Share is also convertible
into one common share at any time at the Company’s option without payment of additional consideration, provided that
prior to any such conversion, the holder, together with its affiliates, beneficially owns less than 5.00% of the total number
of common shares issued and outstanding and such conversion will not result in the holder, together with its affiliates,
beneficially holding more than 5.00% of the total number of common shares issued and outstanding immediately after
giving effect to such conversion. In the event of a change of control, holders of Series 1 Preferred Shares shall be issued
one common share for each outstanding Series 1 Preferred Share held immediately prior to the change of control (without
regard to the Beneficial Ownership Limitation), and following such conversion, will be entitled to receive the same kind
and amount of securities, cash or property that a holder of common shares is entitled to receive in connection with such
change of control.
The Series 1 Preferred Shares rank equally to the common shares in the event of liquidation, dissolution or winding up or
other distribution of the assets of the Company among its shareholders and the holders of the Series 1 Preferred Shares are
entitled to vote together with the common shares on an as-converted basis and as a single class, subject in the case of each
holder of the Series 1 Preferred Shares to the Beneficial Ownership Limitation. Any Series 1 Preferred Shares that are
ineligible to be converted into common shares due to the Beneficial Ownership Limitation, measured as of a given record
date that applies for a shareholder meeting or ability to act by written consent, shall be deemed to be non-voting securities
of the Company. Holders of Series 1 Preferred Shares are entitled to receive dividends (without regard to the Beneficial
Ownership Limitation) on the same basis as the holders of common shares. The Company may not redeem the Series 1
Preferred Shares.
The Company recorded the issuance of Series 1 Preferred Shares and corresponding cancellation of common shares at
$7.61 per share, the estimated weighted average cost at which BVF acquired the common shares. The Series 1 Preferred
Shares are recorded wholly as equity under ASC 480, with no bifurcation of conversion feature from the host contract,
given that the Series 1 Preferred Shares cannot be cash settled and have no redemption features.
During the year ended December 31, 2018, BVF converted 1,852,000 Series 1 Preferred Shares in exchange for an equal
number of common shares of the Company.
11. Concentrations of market risk:
(a) Foreign currency risk:
At December 31, 2018, the Company had U.S. dollar denominated cash and cash equivalents and marketable securities of
$110,771 (2017 - $28,028) and Canadian denominated cash and cash equivalents and marketable securities of
CAD$11,644 (2017 - CAD$19,619).
84
The Company faces foreign currency exchange rate risk in part, as a result of entering into transactions denominated in
currencies other than U.S. dollars, particularly those denominated in Canadian dollars. The Company also holds non-U.S.
dollar denominated cash and cash equivalents, marketable securities, accounts receivable and accounts payable, which are
denominated in Canadian dollars.
Changes in foreign currency exchange rates can create significant foreign exchange gains or losses to the Company. The
Company’s current foreign currency risk is with the Canadian dollar, as a majority of non-U.S. dollar denominated
expenses are denominated in Canadian dollars and a portion of cash and cash equivalents and marketable securities are
held in Canadian dollars. The Company does not currently hedge its exposure and thus assumes the risk of future gains or
losses on the amounts of Canadian dollars held.
(b) Interest Rate Risk:
At December 31, 2018, the Company had cash and cash equivalents and marketable securities of $119,306. The
Company’s interest rate risk is primarily attributable to its cash and cash equivalents and marketable securities. The
Company believes that it does not have any material exposure to changes in the fair value of these assets as a result of
changes in interest rates due to the short term nature of cash and cash equivalents and marketable securities. The Company
does not enter into investments for trading or speculative purposes and has not used any derivative financial instruments to
manage interest rate exposure.
The Company had a total outstanding loan balance of $15,500 as of December 31, 2018, of which $nil was due within 12
months. The interest rate on borrowings under the Amended and Restated Loan Agreement with the Bank accrues at a
floating per annum rate of 0.5% above the prime rate.
12. Collaboration agreements:
The Company has entered into a number of collaboration agreements under which it may have received non-refundable upfront
payments. Each arrangement is assessed in accordance with ASC 606 under the five-step model as described in note 3i. The
Company generally recognizes revenue from non-refundable upfront payments ratably over the estimated term of the
performance obligation or period in which the underlying benefit is transferred to the customer. If non-refundable license fees
have values to the customer on a standalone basis, separate from the undelivered performance obligations, they are recognized
upon delivery. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of
performance and related revenue recognition.
Research and development milestones in the Company’s collaboration agreements may include the following types of events:
•
•
•
completion of pre-clinical 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
applications and new drug applications; 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.
The Company evaluates each arrangement that includes research and development and sales-based milestone payments to
determine whether the milestones are considered probable of being reached and estimates the amount to be included in the
transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the
associated milestone value is included in the transaction price. Milestone payments that are not within the control of the
Company are not considered probable of being achieved and the transaction price is then allocated to each performance
obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance
obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the
probability of achievement of such milestones, and if necessary, adjusts its estimate of the overall transaction price.
85
(a)
Teva Pharmaceutical Industries Ltd. (“Teva Pharmaceutical”) collaborative development and license agreement:
In December 2012, the Company entered into a collaborative development and license agreement with Teva
Pharmaceutical, through its subsidiary, Ivax International GmbH, pursuant to which the Company granted Teva
Pharmaceutical an exclusive worldwide license to develop and commercialize certain products, including TV-45070
(formerly XEN402). In the year ended December 31, 2018, no revenue has been recognized with respect to this agreement
(2017 - $59). In March 2018, the Company and Teva Pharmaceuticals International GmbH and Teva Canada Limited
(together, “Teva”), entered into a termination agreement terminating by mutual agreement the collaborative development
and license agreement. In connection with the termination, Teva returned and the Company cancelled 1,000,000 common
shares that were owned by Teva. Pursuant to the terms of the termination agreement, Teva has also returned, licensed or
assigned to the Company certain intellectual property, including certain patent rights and transferred regulatory filings
related to TV-45070 to the Company. The termination agreement requires the Company to pay a low single-digit
percentage royalty to Teva based on net sales of approved products, if any, resulting from any continued development and
commercialization of TV-45070 by the Company or a sublicensee during the period that assigned or licensed patents
cover such products. To date, no such sales have occurred. The Company recorded a gain on the termination of the
collaboration agreement of $4,398, net of direct costs incurred in connection with the termination and cancellation of
1,000,000 common shares, based on the estimated fair value represented by the market price of the common shares prior
to the closing of the transaction.
(b) 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-La Roche Ltd. to discover and develop selective oral inhibitors of Nav1.7 for the treatment of pain.
Pursuant to this agreement, the Company granted Genentech a worldwide exclusive license to develop and commercialize
compounds directed to Nav1.7 and products incorporating such compounds for all uses. The Company also granted
Genentech a worldwide non-exclusive license to diagnostic products for the purpose of developing or commercializing
such compounds.
Under the terms of the agreement, Genentech paid the Company an upfront fee of $10,000. Genentech also provided
funding to the Company for certain of the Company’s full-time equivalents performing the research collaboration plan,
which concluded in December 2016.
The Company received and recorded a $5,000 milestone payment in 2013 for the selection of a compound for
development and an $8,000 payment in 2014 upon the approval by Health Canada of the clinical trial application. No
additional milestone payments or royalties have been received to date.
The Company is eligible to receive pre-commercial and commercial milestone payments with respect to the licensed
products totaling up to an additional $613,000, comprised of up to $45,500 in pre-clinical and clinical milestone
payments, up to $387,500 in regulatory milestone payments, and up to $180,000 in sales-based milestone payments for
multiple products and indications. In addition, the Company is eligible to receive royalties based on net sales of the
licensed products, which range from a 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 low single-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 percentage for large-
molecule inhibitors of Nav1.7 for a period of ten years from first commercial sale on a country-by-country basis. The pre-
commercial and commercial milestone payments and royalties may be subject to reductions based on the period in which
the compound that is selected for development and commercialization was initially conceived.
At execution of the collaborative research and license agreement with Genentech, the transaction price included only the
$10,000 upfront consideration received. None of the at-risk substantive performance milestones, including research and
development and sales-based milestones, were included in the transaction price, as all milestone amounts are outside the
control of the Company and contingent upon Genentech’s efforts and success in future clinical trials. Consideration
associated with at-risk substantive performance milestones is recognized when it is probable that a significant reversal of
the cumulative revenue recognized will not occur. Any consideration related to sales-based royalties will be recognized
when the related sales occur as they were determined to relate predominantly to the license granted to Genentech and
therefore have also been excluded from the transaction price. The Company will re-evaluate the transaction price in each
reporting period and as uncertain events are resolved or other changes in circumstances occur.
86
The collaborative research and license agreement with Genentech was amended multiple times, in May 2015, November
2015, March 2016, May 2017, July 2018 and September 2018, to either extend the term of the research program or to
provide the Company with greater flexibility in developing compounds that target Nav1.6. Pursuant to the current
amendment, the Company obtained a non-exclusive, irrevocable, perpetual, world-wide, sublicensable license under the
know-how forming part of the Genentech intellectual property developed under the Nav1.7 collaboration that is necessary
or useful to make, use, sell, offer for sale, and import compounds from the Company’s Nav1.6 program that are above a
certain potency threshold on Nav1.7 and products containing those compounds. The Company’s license from Genentech
includes commercialization rights but we are restricted from developing or commercializing the Company’s Nav1.6
compounds below a certain potency threshold on Nav1.7 in the field of epilepsy and any of the Company’s Nav1.6
compounds, regardless of their potency on Nav1.7, in the field of pain. In exchange for the rights granted to the Company
under this amendment, Genentech is eligible to receive a low single-digit percentage, tiered royalty on net sales of the
Company’s Nav1.6 compounds, including XEN901, for a period of ten years from first commercial sale on a country-by-
country basis. Pursuant to the amendment, Genentech was granted a royalty-free, non-exclusive, world-wide license under
the Company’s Nav1.6 intellectual property to make, use, sell, offer for sale and import compounds below a certain
potency threshold on Nav1.7 and products containing those compounds for all uses and indications except epilepsy.
In March 2014, the Company entered into a new agreement with Genentech for pain genetics, which focused on
identifying genetic targets associated with rare phenotypes where individuals have an inability to perceive pain or where
individuals have non-precipitated spontaneous severe pain. Pursuant to the terms of this agreement, any intellectual
property arising out of the collaboration is 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 and two $250 milestone
payments related to the identification of novel pain targets in September 2015 and July 2017. Genentech’s time-limited,
exclusive right of first negotiation, which was exercisable throughout the research term, expired at the same time as the
agreement in March 2018. Despite such termination, the Company remains eligible for up to an additional $1,500 in
milestone payments.
Pursuant to the terms of the Company’s agreement with the Memorial University of Newfoundland, the Company must
pay to the Memorial University of Newfoundland certain milestone payments, a single-digit percentage of net sales for
pain products the Company sells directly and a single-digit percentage of royalties received for sales of pain products by
Genentech.
13. 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 a 120-month term from April 1, 2012 to March 31, 2022, which included an element of free rent
and tenant inducement that is amortized over the term of the lease.
Lease expense for the year ended December 31, 2018 was $1,194 (2017 – $1,079 ). Future minimum annual lease
payments under existing operating lease commitments are as follows:
Year ending December 31:
2019
2020
2021
2022
Total
1,128
1,130
1,069
256
3,583
$
(b) Priority access agreement with Medpace Inc. (“Medpace”):
In August 2015, the Company entered into a priority access agreement with Medpace for the provision of certain clinical
development services. Under the terms of the agreement, the Company has committed to using Medpace non-exclusively
for clinical development services over the five year term of the agreement. In consideration for priority access to Medpace
resources and preferred service rates, the Company has committed to $7,000 of services over the term of the agreement,
$3,000 of which was paid in the year ended December 31, 2015.
87
(c) License, manufacture and supply agreement:
In March 2017, the Company entered into a license, manufacture and supply agreement with a pharmaceutical contract
manufacturing organization for the access and use of certain regulatory documents as well as for the manufacture and
supply of clinical and commercial drug product to support the development of XEN007. Under the terms of the
agreement, the Company paid an upfront fee of $500 CAD and will be required to pay a low single-digit percentage
royalty on net sales of any products developed and commercialized under the agreement.
(d) Asset purchase agreement with 1st Order Pharmaceuticals, Inc. (“1st Order”):
In April 2017, the Company acquired (previously known as 1OP2198) from 1st Order pursuant to an asset purchase
agreement. 1st Order previously acquired 1OP2198 from Valeant Pharmaceuticals Luxembourg S.a.r.l., an indirect
subsidiary of Bausch Health Companies Inc. (together with Valeant Pharmaceuticals Ireland Limited, “Bausch Health”)
and the Company has assumed certain financial responsibilities under that agreement. Under the terms of the agreement,
the Company paid an upfront fee of $350 and milestone payments in 2017 totaling $700, which were expensed as research
and development.
In September 2018, the Company entered into a milestone and royalty buy-out agreement with Bausch Health under
which all potential clinical development, regulatory and sales-based milestones and royalties on commercial sales with
respect to XEN1101 that may become owed to Bausch Health under the asset purchase agreement were terminated in
exchange for a one-time payment of $6,000 which was expensed in the period.
Future potential payments to 1st Order include $500 in clinical development milestones, up to $6,000 in regulatory
milestones, and $1,500 in other milestones, which may be payable pre-commercially. There are no royalty obligations to
1st Order.
(e) License agreement:
In July 2017, the Company entered into a license agreement with a pharmaceutical company for the access and use of
certain regulatory documents to support the development of XEN007. Under the terms of the agreement, the Company
paid an upfront fee of $1,000, which was expensed as research and development. Future potential payments include
$2,000 in clinical development milestones, up to $7,000 in regulatory milestones, plus a low-to-mid single-digit
percentage royalty on net sales of any products developed and commercialized under the agreement.
(f) Guarantees and indemnifications:
The Company has entered into license and research agreements with third parties that include indemnification provisions
that are customary in the industry. These indemnification provisions generally require the Company to compensate the
other party for certain damages and costs incurred as a result of third party claims or damages arising from these
transactions.
The maximum amount of potential future indemnification is unlimited; however, the Company currently holds
commercial and product liability insurance. This insurance limits the Company’s exposure and may enable it to recover a
portion of any future amounts paid. Historically, the Company has not made any indemnification payments under such
agreements and the Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the
Company has not recognized any liabilities relating to these obligations for any period presented.
14.
Income taxes:
Income tax (recovery) expense varies from the amounts that would be computed by applying the expected Canadian and
provincial statutory income tax rate of 27% (2017 – 27% ) to loss before income taxes as shown in the following table:
Computed recoveries at Canadian federal and
provincial tax rates
Change in valuation allowance
Investment tax credits earned
Tax attributes expired/utilized
Non-deductible expenditures
Effect of tax rate increases
Other
Income tax (recovery) expense
88
2018
2017
$
$
(9,273)
10,472
(1,567)
911
(473)
—
(70)
—
$
$
(8,000)
9,210
(1,393)
683
594
(1,444)
350
—
Deferred income tax assets and liabilities result from the temporary differences between the amount of assets and liabilities
recognized for financial statement and income tax purposes. The significant components of the Company’s net deferred income
tax assets are as follows:
Deferred income tax assets
Scientific research and experimental development pool
Investment tax credits
Non-capital losses
Depreciable assets
Deferred financing fees
Other
Less - valuation allowance
Net deferred income tax assets
2018
2017
$
$
$
26,572
23,808
22,035
5,710
1,303
98
(79,526)
$
—
25,056
22,872
13,645
5,360
578
114
(67,625)
—
The realization of deferred income tax assets is dependent upon the generation of sufficient taxable income during future periods
in which the temporary differences are expected to reverse. The valuation allowance is reviewed on a quarterly basis and if the
assessment of the “more likely than not” criteria changes, the valuation allowance is adjusted accordingly. A full valuation
allowance continues to be applied against deferred income tax assets as the Company has assessed that the realization of such
assets does not meet the “more likely than not” criteria.
At December 31, 2018, the Company has unclaimed tax deductions for scientific research and experimental development
expenditures of $98,412 (2017 – $92,799) with no expiry.
At December 31, 2018, the Company has $22,253 (2017 – $21,066) of investment tax credits available to offset federal taxes
payable and $7,640 (2017 – $7,560) of provincial tax credits available to offset provincial taxes payable in the future.
At December 31, 2018, the Company has non-capital losses, net of uncertain tax positions, carried forward for tax purposes,
which are available to reduce taxable income of future years of approximately $81,611 (2017 – $50,536).
The investment tax credits and loss carry forwards expire over various years to 2038.
As of December 31, 2018, the total amount of the Company’s unrecognized tax benefits of uncertain tax positions were $6,350
(2017 – $6,350). If recognized in future periods, the unrecognized tax benefits would affect the Company’s effective tax rate.
The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within the income tax
provision. Interest and penalties have not been accrued at December 31, 2018 as none would be owing on the unrecognized tax
benefits due to the availability of non-capital losses 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 reporting date.
The Company files income tax returns in Canada and the United States, the jurisdictions in which the Company believes that it
is subject to tax. In jurisdictions in which the Company does not believe it is subject to tax and therefore does not file income
tax returns, the Company can provide no certainty that tax authorities in those jurisdictions will not subject one or more tax
years (since the inception of the Company) to examination. Further, while the statute of limitations in each jurisdiction where an
income tax return has been filed generally limits the examination period, as a result of loss carry-forwards, the limitation period
for examination generally does not expire until several years after the loss carry-forwards are utilized. Other than routine audits
by tax authorities for tax credits and tax refunds that the Company claims, the Company is not aware of any other material
income tax examination currently in progress by any taxing jurisdiction. Tax years ranging from 2002 to 2017 remain subject to
Canadian income tax examinations.
15. Related Parties:
(a) Exchange agreement with BVF:
In March 2018, the Company and BVF entered into an exchange agreement pursuant to which the Company issued
2,868,000 Series 1 Preferred Shares in exchange for 2,868,000 common shares which were subsequently cancelled by the
Company. Prior to the closing of the transactions contemplated in the exchange agreement, BVF held a number of
common shares representing approximately 19.9% of the Company’s then outstanding common shares. For additional
information regarding the Series 1 Preferred Shares, refer to note 10d.
89
(b) Termination of collaboration agreement with Teva:
In March 2018, the Company and Teva, entered into a termination agreement terminating by mutual agreement the
collaborative development and license agreement dated December 7, 2012, as amended. In connection with the
termination, the Company cancelled 1,000,000 common shares that were owned by Teva. Prior to the share cancellation,
Teva owned more than 5% of the Company’s outstanding common shares. For additional information regarding the
termination agreement and the share cancellation, refer to note 12a.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and
our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2018. The term
“disclosure controls and procedures,” as defined 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 that information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s
rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of
December 31, 2018, our Chief Executive Officer and our Chief Financial Officer concluded that, as of such date, our disclosure
controls and procedures were, in design and operation, effective at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting. Our management, with the participation of our
Chief Executive Officer and our Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over
our financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) of the Securities Exchange Act of 1934. Our
internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal
control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statements.
90
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations,
including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the
inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no
matter how well designed and operated, can only provide reasonable, not absolute, assurances. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may deteriorate. Management has assessed the effectiveness of our internal
control over financial reporting as at December 31, 2018. In making its assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013) to
evaluate the effectiveness of our internal control over financial reporting. Based on this assessment using those criteria, management
has concluded that our internal control over financial reporting was effective as of December 31, 2018.
Changes in internal control over financial reporting. There was no change in our internal control over financial reporting
identified in connection with 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, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information
We have a written code of conduct that applies to all of our directors, officers and employees. A copy of the most up-to-date
version of our code of conduct is available within the “Investors” section on our company website located at http://www.xenon-
pharma.com and on SEDAR at www.sedar.com.
91
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 of Form 10-K is incorporated by reference to our Proxy Statement for the 2019 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018.
Item 11.
Executive Compensation
The information required by Item 11 of Form 10-K is incorporated by reference to our Proxy Statement for the 2019 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by Item 12 of Form 10-K is incorporated by reference to our Proxy Statement for the 2019 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 of Form 10-K is incorporated by reference to our Proxy Statement for the 2019 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018.
Item 14.
Principal Accounting Fees and Services
The information required by Item 14 of Form 10-K is incorporated by reference to our Proxy Statement for the 2019 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018.
92
PART IV
Item 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 be set forth therein is included in the consolidated 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 by reference to exhibits previously filed with the SEC.
Item 16.
Form 10-K Summary
Not applicable.
Exhibit
Number
3.1
3.1A
3.2
4.1
4.2
4.3
10.1†
10.2†
10.3#
10.4#
10.5#
10.6#
10.7#
10.8#
EXHIBIT INDEX
Description of Document
Form
Incorporated by Reference
File No.
Exhibit
Filing Date
Articles of the Company.
10-Q
001-36687
3.1
Articles of Amendment to the Articles of the Company,
creating the Series 1 Preferred Shares.
8-K
001-36687
3.1
Amended and Restated By-laws of the Company.
10-Q
001-36687
3.2
Form of Common Share Certificate.
S-1/A 333-198666
4.1
Specimen Series 1 Preferred Share Certificate.
8-K
001-36687
4.1
December 15,
2014
March 28,
2018
December 15,
2014
October 6,
2014
March 28,
2018
8-K
001-36687
4.1
August 7, 2018
Warrant to Purchase Shares, dated August 3, 2018, by and
between Xenon Pharmaceuticals Inc. and Silicon Valley
Bank.
Exclusive Collaborative Research and Option Agreement,
dated June 10, 2009, by and between the Company and
Merck Sharp & Dohme Research Ltd, as amended.
Collaborative Research and License Agreement, dated
December 22, 2011, by and among the Company,
Genentech, Inc. and F. Hoffmann-La Roche Ltd, as
amended.
Stock Option Plan, as amended, and form of option
agreement thereunder.
S-1/A 333-198666
10.1
S-1/A 333-198666
10.3
S-1/A 333-198666
10.7
October 6,
2014
October 6,
2014
October 6,
2014
September 10,
2014
2014 Equity Incentive Plan.
S-1
333-198666
10.8
Form of Share Option Agreement, as amended, under the
2014 Equity Incentive Plan.
Offer Letter, dated October 3, 2014, by and between the
Company and Simon Pimstone.
Offer Letter, dated October 3, 2014, by and between the
Company and Ian Mortimer.
Offer Letter, dated October 3, 2014, by and between the
Company and Robin Sherrington.
10-K
001-36687
10.8A March 8, 2017
S-1/A 333-198666
10.9
S-1/A 333-198666
10.11
S-1/A 333-198666
10.13
October 6,
2014
October 6,
2014
October 6,
2014
93
Exhibit
Number
10.9
10.10#
10.11†
10.12
10.13
10.14†
10.15†
10.16#
10.17†
10.18†
10.19
10.20†
10.21
10.22
10.23
10.24†
Description of Document
Form
Incorporated by Reference
File No.
Exhibit
Filing Date
Lease, dated as of 2001, by and between the Company and
Discovery Parks Incorporated, as amended through July 1,
2014.
Form of Director and Executive Officer Indemnification
Agreement.
Amendment #4, dated May 13, 2015, to the Collaborative
Research and License Agreement, dated December 22, 2011,
by and among the Company, Genentech, Inc. and F.
Hoffman-La Roche Ltd, as amended.
S-1
333-198666
10.14
September 10,
2014
S-1/A 333-198666
10.15
10-Q
001-36687
10.1
October 6,
2014
August 13,
2015
Lease Modification Agreement, effective July 1, 2015, by
and between the Company and Redstone Enterprises Ltd.
10-Q
001-36687
10.1
November 10,
2015
Lease Modification Agreement, effective December 1, 2015,
by and between the Company and Redstone Enterprises Ltd.
Amendment #5, dated November 19, 2015, to the
Collaborative Research and License Agreement, dated
December 22, 2011, by and among the Company,
Genentech, Inc. and F. Hoffman-La Roche Ltd, as amended.
Amendment #6, dated March 9, 2016, to the Collaborative
Research and License Agreement, dated December 22, 2011,
by and among the Company, Genentech, Inc. and F.
Hoffman-La Roche Ltd, as amended.
Offer letter, effective January 1, 2017, by and between
Xenon Pharmaceuticals USA Inc. and James Empfield.
Letter Agreement to Amendment #4, dated May 8, 2017, to
the Collaborative Research and License Agreement, dated
December 22, 2011, by and among the Company,
Genentech, Inc. and F. Hoffman-La Roche Ltd, as amended.
Asset Purchase Agreement, dated April 25, 2017, by and
between the Company and 1st Order Pharmaceuticals, Inc.
Loan and Security Agreement, dated December 18, 2017, by
and among Xenon Pharmaceuticals Inc., Xenon
Pharmaceuticals USA Inc. and Silicon Valley Bank.
Termination Agreement by and among Xenon
Pharmaceuticals Inc., Teva Pharmaceuticals International
GmbH and Teva Canada Limited dated March 7, 2018.
Exchange Agreement, dated March 23, 2018, by and among
the Company and the shareholders listed in Schedule B
thereto.
At-the-Market Equity Offering Sales Agreement, dated as of
May 8, 2018, between Xenon Pharmaceuticals Inc. and
Stifel, Nicolaus & Company, Incorporated.
First Loan Modification to Loan and Security Agreement,
dated June 12, 2018, by and among Xenon Pharmaceuticals
Inc., Xenon Pharmaceuticals USA Inc. and Silicon Valley
Bank.
Letter Amendment #7, dated July 25, 2018, to the
Collaborative Research and License Agreement, dated
December 22, 2011, by and among the Company,
Genentech, Inc. and F. Hoffmann-La Roche Ltd, as
amended.
94
10-K
001-36687
10.19 March 8, 2016
10-K
001-36687
10.20 March 8, 2016
10-Q
001-36687
10.1
May 10, 2016
10-K
001-36687
10.20 March 8, 2017
10-Q
001-36687
10.1
August 3, 2017
10-Q
001-36687
10.2
August 3, 2017
8-K
001-36687
10.1
December 18,
2017
8-K
001-36687
10.1
March 7, 2018
8-K
001-36687
10.1
March 28,
2018
8-K
001-36687
1.1
May 8, 2018
8-K
001-36687
10.1
June 13, 2018
10-Q
001-36687
10.3
August 7, 2018
Exhibit
Number
10.25
10.26
10.27
10.28†
21.1
23.1
24.1
31.1
31.2
32.1*
32.2*
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Description of Document
Form
Incorporated by Reference
File No.
Exhibit
Filing Date
At-the-Market Equity Offering Sales Agreement, dated as of
July 11, 2018, by and among Xenon Pharmaceuticals Inc.,
Jefferies LLC and Stifel, Nicolaus & Company,
Incorporated.
Amended and Restated Loan and Security Agreement, dated
August 3, 2018, by and among Xenon Pharmaceuticals Inc.,
Xenon Pharmaceuticals USA Inc. and Silicon Valley Bank.
Milestone and Royalty Buy-Out Agreement, dated
September 7, 2018, by and among Xenon Pharmaceuticals
Inc., Valeant Pharmaceuticals Ireland Limited and Valeant
Pharmaceuticals Luxembourg S.a.r.l.
Amended and Restated Amendment #7, dated September 27,
2018, to the Collaborative Research and License Agreement,
dated December 22, 2011, by and among the Company,
Genentech, Inc. and F. Hoffmann-La Roche Ltd, as
amended.
8-K
001-36687
1.1
July 12, 2018
8-K
001-36687
10.1
August 7, 2018
8-K
001-36687
10.1
September 11,
2018
10-Q
001-36687
10.5
November 6,
2018
List of Subsidiaries of the Company.
10-K
001-36687
21.1
March 8, 2017
Consent of KPMG LLP, Independent Registered Public
Accounting Firm.
Powers of Attorney (contained on signature page).
Rule 13a-14(a) / 15d-14(a) Certification of Principal
Executive Officer
Rule 13a-14(a) / 15d-14(a) Certification of Principal
Financial Officer
Section 1350 Certification of Principal Executive Officer
Section 1350 Certification of Principal Financial Officer
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase
Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase
Document
† Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed
#
*
separately 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 filed with
the Securities and Exchange Commission and are not to be incorporated by 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 this Form 10-K, irrespective of any general incorporation language contained in such filing.
Item 16.
Form 10-K Summary
Not applicable.
95
SIGNATURES
Pursuant 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 on its behalf by the undersigned, thereunto duly authorized.
Dated: March 6, 2019
XENON PHARMACEUTICALS INC.
By: /s/ Simon Pimstone
Simon Pimstone
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Simon Pimstone and Ian Mortimer, and each of
them severally, 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 and resubstitution, 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 of Xenon Pharmaceuticals Inc.) to sign any and all amendments and supplements to this report,
and any and all other instruments necessary or incidental in connection 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 the Registrant and in the capacities and on the dates indicated.
Signature
/s/ Simon Pimstone
Simon Pimstone
/s/ Ian Mortimer
Ian Mortimer
/s/ Michael Tarnow
Michael Tarnow
/s/ Mohammad Azab
Mohammad Azab
/s/ Steven Gannon
Steven Gannon
/s/ Michael Hayden
Michael Hayden
/s/ Frank Holler
Frank Holler
/s/ Gary Patou
Gary Patou
/s/ Richard Scheller
Richard Scheller
/s/ Dawn Svoronos
Dawn Svoronos
Title
Chief Executive Officer (Principal
Executive Officer)
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Chair of the Board of Directors
Director
Director
Director
Director
Director
Director
Director
96
Date
March 6, 2019
March 6, 2019
March 6, 2019
March 6, 2019
March 6, 2019
March 6, 2019
March 6, 2019
March 6, 2019
March 6, 2019
March 6, 2019