Xenon Pharmaceuticals Inc. — Q3 2015 Form 10-Q
Business context and reporting period
Clinical-stage biopharmaceutical company developing treatments for orphan and larger-market indications, with larger-market programs generally partnered. This unaudited report covers the three and nine months ended September 30, 2015; amounts below are U.S. dollars unless stated otherwise.
Programs included Teva’s TV-45070 for pain, Genentech’s GDC-0276 and GDC-0310 for pain, and Xenon’s XEN801 for acne. Xenon initiated a Phase 1 trial of XEN801 in September. Its proprietary preclinical pipeline included a Nav1.6 program for Dravet syndrome.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $4.294m | $13.193m | $12.350m | $23.492m |
| Operating expenses | $5.114m | $4.532m | $19.108m | $12.421m |
| Operating income (loss) | ($0.820m) | $8.661m | ($6.758m) | $11.071m |
| Net income (loss) | ($3.827m) | $9.191m | ($11.815m) | $11.794m |
| Research and development expense | $3.793m | $3.216m | $10.889m | $8.315m |
| General and administrative expense | $1.321m | $1.316m | $8.219m | $4.106m |
Revenue fell about 67% for Q3 and 47% for the nine-month period year over year. Operating margin was approximately negative 19% for Q3 and negative 55% for the nine-month period, compared with positive approximately 66% and 47%, respectively, in 2014. The company reported no product-sales revenue and only nominal diagnostic royalties.
- At September 30, cash and cash equivalents were $65.469m; there were no marketable securities, versus $12.015m at December 31, 2014. Total assets were $69.944m, total liabilities $5.485m, shareholders’ equity $64.459m, and accumulated deficit $115.754m.
- Cash used in operating activities was $12.856m for the first nine months, compared with $3.217m provided in the prior-year period. Investing activities provided $10.337m, largely from marketable-security proceeds; financing activities provided $0.240m. Cash decreased by $6.557m to $65.469m.
- No outstanding debt was reported. Management expected available cash and expected collaboration research funding to support operating and capital needs for at least 12–24 months, while cautioning that assumptions could prove wrong.
- Foreign-exchange losses were $3.137m in Q3 and $5.502m for the nine-month period, primarily reflecting Canadian-dollar exposure after the functional currency changed to the U.S. dollar on January 1, 2015. A hypothetical 10% Canadian-dollar move was estimated to affect earnings by about $4.5m on the reported Canadian-dollar cash and securities balance.
Material changes versus the prior comparable period
- Lower collaboration revenue reflected the absence of the $8.0m Genentech milestone recognized in 2014, completion of recognition of an earlier Genentech upfront payment, lower collaborator FTE funding, and foreign-exchange effects.
- Nine-month R&D expense increased $2.574m, mainly from XEN801 clinical preparation and increased preclinical and discovery spending, partly offset by reduced Teva and Genentech program expenses.
- Nine-month G&A expense increased $4.113m. The company cited public-company costs, one-time severance and accelerated share-based compensation, and a $1.7m expense from stock-option fair-value accounting changes. Q3 included a $1.0m recovery related to those options.
- The year-over-year earnings comparison also reflects the substantial Genentech milestone revenue in 2014 and the 2015 foreign-exchange loss.
Outlook, risks, contingencies, and unusual items
- Management expected significant expenses and operating losses for at least the next 12–24 months, with R&D expected to remain the largest expense. No specific revenue or earnings guidance was provided.
- In July 2015, TV-45070 did not show a statistically significant efficacy difference from placebo in a Phase 2b osteoarthritis-of-the-knee study; no further development for that indication was planned. Development for postherpetic neuralgia continued, with Teva results expected in the second half of 2016.
- Genentech initiated a Phase 1 trial of GDC-0310 in October 2015. Xenon reported a $0.25m milestone earned in September for identifying a novel pain target. GDC-0276 Phase 1 enrollment was expected to complete by year-end 2015.
- For XEN801, Xenon said a Phase 2 trial could begin by the end of 2015 or early 2016 if Phase 1 results supported it. It anticipated an IND filing for its Dravet syndrome program in the second half of 2016.
- The Medpace priority-access agreement commits Xenon to $7.0m of services over five years, with $1.7m prepaid and another $1.3m due during the remainder of 2015. Medpace is a related party; an officer and director of Medpace beneficially owned more than 5% of Xenon.
- Glybera’s EU approval was subject to exceptional circumstances and post-approval obligations. The filing describes an EMA review of follow-up data and notes that an adverse outcome could lead to additional studies or loss of approval. Commercialization and reimbursement remained uncertain.
- Management concluded disclosure controls and procedures were ineffective as of September 30, 2015, following a restatement of the March 2015 quarter. The filing reported no material changes in internal control over financial reporting during Q3.
- Management reported no legal proceedings expected to have a material adverse effect. Collaboration milestones and future revenue remain uncertain; the company also identified clinical, regulatory, financing, currency, collaborator, intellectual-property, and commercialization risks.
Important facts for investors to verify
- Whether the cash runway estimate remains supported by actual spending, trial plans, and collaboration funding; the estimate was not a guarantee.
- Progress and data from XEN801, TV-45070 in postherpetic neuralgia, and Genentech’s pain programs, including expected trial timing.
- Whether Glybera’s EU approval and commercialization prospects change following the follow-up-data review and reimbursement efforts.
- The composition and currency exposure of cash holdings, and the effect of further Canadian-dollar movements on reported results.
- Remediation of the disclosure-control weaknesses associated with the prior-quarter restatement and the accounting effects of stock-option classification changes.
- Performance and remaining payment obligations under the Medpace agreement, including the related-party relationship.