Xenon Pharmaceuticals Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial amounts below are in U.S. dollars; financial statement figures are in thousands unless noted. Xenon is a clinical-stage biopharmaceutical company whose revenue is primarily from collaborations and licensing, not product sales.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $413 | $4,046 | $1,014 | $8,056 |
| Research and development expense | $5,103 | $3,669 | $9,467 | $7,096 |
| General and administrative expense | $1,676 | $178 | $3,571 | $6,898 |
| Operating loss | $(6,366) | $199 | $(12,024) | $(5,938) |
| Net income (loss) | $(6,016) | $1,168 | $(9,279) | $(7,988) |
| Basic loss per share | $(0.42) | $0.08 | $(0.64) | $(0.56) |
- At June 30, cash and cash equivalents were $35.2 million and marketable securities were $15.5 million, totaling $50.7 million. Current assets were $53.4 million and current liabilities were $2.9 million. Total assets were $55.7 million; shareholders’ equity was $52.7 million.
- There was no outstanding debt. Gross margin is not meaningful for this development-stage business, which reported no material product sales.
- For the six months, operating cash use was $10.4 million, investing cash use was $15.5 million, and financing cash inflow was $0.08 million. Investing outflow mainly reflected $15.3 million of marketable-security purchases. Cash and cash equivalents fell $23.4 million; this figure excludes the shift into marketable securities.
- Accumulated deficit was $129.0 million. Management expects significant expenses and operating losses to continue for at least the next 12–24 months and says available cash, securities and expected collaboration research funding should cover operating and capital needs for at least 12–24 months from the report date. The estimate depends on assumptions and could prove insufficient.
Material changes versus prior periods
- Revenue fell $3.6 million in Q2 and $7.1 million in the first half year over year. The principal reason was that Teva’s $41 million upfront payment had been fully recognized by December 2015 and Genentech’s $1.5 million upfront payment by March 2016; Genentech research funding also declined as Xenon shifted resources toward proprietary programs.
- R&D expense increased $1.4 million in Q2 and $2.4 million in the first half, mainly from preclinical and discovery work, including the Nav1.6 program, and Phase 2 development of XEN801. Lower collaboration expenses partly offset the increases.
- Q2 net results moved from income to loss, chiefly reflecting lower collaboration revenue and higher R&D expense. First-half net loss widened by $1.3 million; a $4.9 million year-over-year improvement in foreign-exchange results partly offset lower revenue and higher R&D expense.
- Period comparisons in general and administrative expense are affected by prior-year stock-option fair-value items and one-time severance and consultant compensation charges. The company recorded a $2.7 million option-related expense in first-half 2015; Q2 2015 included a $2.2 million recovery from a decline in the fair value of liability-classified options.
Business, outlook, risks and unusual items
- Programs and stated milestones: Teva was conducting a Phase 2b TV-45070 trial in post-herpetic neuralgia, with results expected in the first half of 2017. Genentech’s Phase 1 trials of GDC-0276 and GDC-0310 were ongoing; a Phase 2 start in late 2016 or early 2017 was contemplated subject to full review of results. Xenon began a Phase 2 XEN801 acne trial in February 2016 and anticipated topline results in Q1 2017. Xenon expected to select a Nav1.6 development candidate in 2016 and file an IND in the first half of 2017.
- TV-45070 did not show statistically significant efficacy versus placebo in a Phase 2b osteoarthritis-of-the-knee study reported in 2015; no further development for that indication was planned, while PHN development continued.
- Xenon does not expect sustained profitability or meaningful product revenue for the foreseeable future. Near-term revenue depends on collaboration funding, milestones, and potential royalties; the timing and receipt of future payments are uncertain. The company states that it has no committed external capital source other than collaborator obligations.
- Cash and securities are exposed to currency movements: approximately $35.9 million was denominated in Canadian dollars. Xenon reported a $2.5 million first-half foreign-exchange gain and estimated that a 10% Canadian-dollar move would produce an approximately $3.6 million gain or loss on those balances. It does not hedge that exposure once currency is acquired.
- Commitment and related-party item: Xenon committed to $7.0 million of Medpace clinical-development services over five years, of which $3.0 million had been paid in 2015. Medpace is affiliated with a beneficial owner of more than 5% of Xenon’s shares. First-half 2016 service fees were $941,000; prepaid amounts for future services were $2.0 million at June 30.
- Management identified no material change in contractual commitments from the 2015 Form 10-K. Indemnification obligations under certain agreements have no stated maximum, but management considered their fair value minimal; no liability was recorded. Xenon reported no material pending legal proceedings.
- Management cited clinical, regulatory, patient-enrollment, manufacturing, collaboration, intellectual-property, commercialization, reimbursement, financing and foreign-exchange risks. It also noted that Glybera’s EU approval is subject to post-approval obligations and that its near-term royalty contribution is not expected to be significant.
- Disclosure controls and procedures were assessed as effective; no material change in internal control over financial reporting was reported during the quarter.
Most important facts for investors to verify
- Whether cash burn and collaboration receipts support the stated 12–24 month runway, especially as proprietary clinical and preclinical spending rises.
- Progress and results for the TV-45070 PHN, XEN801 Phase 2, and Genentech Nav1.7 programs, including whether stated timelines were met.
- Whether any new collaboration, milestone, licensing or financing proceeds are secured, given revenue’s sharp decline after upfront-payment recognition ended.
- Actual foreign-exchange exposure and the effect of Canadian-dollar movements on reported earnings and available liquidity.
- Medpace service spending, prepaid balances and the related-party relationship, as well as the remaining contractual commitment.