Xenon Pharmaceuticals Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless noted. Xenon is a clinical-stage biopharmaceutical company focused on neurological disorders, particularly epilepsy. It had no product-sales revenue.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $0.5m | $2.2m | $9.3m | $6.6m |
| Operating expenses | $30.9m | $24.7m | $57.0m | $45.1m |
| Operating loss | $30.3m | $22.5m | $47.7m | $38.6m |
| Net loss | $31.2m | $22.1m | $50.8m | $37.9m |
| Basic and diluted loss per share | $0.55 | $0.51 | $0.91 | $0.94 |
Six-month revenue included $7.1m of Neurocrine milestone revenue; the comparative 2021 period included $3.0m of Pacira milestone revenue. Q2 revenue fell year over year as Neurocrine research and development services revenue declined. Research and development spending increased, primarily with higher headcount, stock-based compensation and internal discovery costs. General and administrative expense also rose, reflecting compensation, recruitment and insurance costs. The company reported no product-sales revenue, so conventional product gross margins are not applicable.
- Cash and investments: $788.2m at June 30, 2022, comprising $370.0m of cash and cash equivalents and $418.3m of marketable securities, versus $551.8m combined at December 31, 2021.
- Cash flows, six months: $35.3m used in operating activities, $47.6m used in investing activities and $277.8m provided by financing activities. Cash and cash equivalents increased by $194.3m to $370.0m.
- Capital raise: June public offering generated $269.9m net proceeds. Financing cash flow also included the January Neurocrine share purchase. Common shares outstanding were 62.2m at June 30; 3.1m pre-funded warrants were outstanding separately.
- Debt and obligations: The filing reports no material debt financing arrangements currently in place. Total liabilities were $21.6m, including $7.9m of long-term operating lease liability; future minimum lease payments were $11.1m before imputed interest and lease incentives.
- Runway: Management expected cash, cash equivalents and marketable securities to fund operating and capital needs for at least 12 months from the report date, while cautioning that estimates could prove incorrect and additional funding may be needed.
Material changes and business developments
- Six-month revenue increased 41% year over year, mainly because of Neurocrine milestone revenue, partly offset by lower collaboration-service revenue and the absence of Pacira milestone revenue recognized in 2021. Q2 revenue decreased 76% year over year.
- Six-month operating expenses increased 26%; net loss widened by $13.0m. Higher operating costs and $4.7m of unrealized losses on marketable securities contributed to the larger six-month net loss.
- The June 2022 offering strengthened liquidity but increased share count and potential dilution. The March 2022 at-the-market program permits up to $250m of gross share sales; none had been sold under it by June 30.
- In March 2022, the remaining 1.016m Series 1 preferred shares converted into common shares.
Outlook, management commentary and risks
- XEN1101: Following an FDA end-of-Phase 2 meeting, Xenon planned two parallel Phase 3 focal-onset seizure trials, X-TOLE2 and X-TOLE3, with X-TOLE2 expected to start in the second half of 2022. It planned to initiate the PGTCS Phase 3 trial, X-ACKT, after X-TOLE2. Topline results from the Phase 2 MDD trial, X-NOVA, were anticipated in 2023.
- XEN496: The EPIK Phase 3 trial for pediatric KCNQ2-DEE was ongoing, with completion anticipated in 2023. Xenon disclosed that it did not have sufficient drug supply to complete the trial at that time and was relying on its contract manufacturer to provide additional supply.
- Partnered programs: Neurocrine was conducting Phase 2 trials of NBI-921352, with data expected in 2023. A Phase 1b trial of Pacira’s PCRX301 was underway. Future milestones and royalties depend on development, regulatory and commercial outcomes, and are uncertain.
- Management expected significant expenses and operating losses to continue for the foreseeable future; expenses were expected to rise as clinical programs advance. Xenon anticipated relying on collaborations and equity or debt financings until substantial product revenue, if any, is generated.
- Principal risks include clinical-trial failure or delay, regulatory uncertainty, patient enrollment, manufacturing and supply constraints, reliance on collaborators and third parties, intellectual-property challenges, and the need for future financing. COVID-19 could affect enrollment, sites and supply chains. Xenon also cited foreign-exchange and interest-rate exposure; it did not hedge Canadian-dollar exposure.
- No legal proceedings were reported that management expected to have a material adverse effect. Disclosure controls and procedures were reported effective, and there were no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether X-TOLE2 and X-TOLE3 began on the planned timetable, and whether clinical results support the intended NDA path.
- Whether XEN496 supply constraints were resolved and whether EPIK remains on track for completion in 2023.
- Actual cash burn and runway relative to management’s at-least-12-month estimate, including the pace of rising research and development costs.
- Progress and data from Neurocrine’s NBI-921352 trials, and the potential timing and conditions for future milestones or royalties.
- Potential dilution from outstanding options and pre-funded warrants, and any future use of the $250m at-the-market program.