Xenon Pharmaceuticals Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in U.S. dollars unless stated otherwise.
Business context
Xenon is a clinical-stage biopharmaceutical company developing neurological therapies, including candidates for epilepsy, migraine and pain. It has no marketed proprietary products and relies mainly on financing and collaboration-related funding. Its principal programs include XEN496, XEN1101, XEN901 and XEN007; Genentech discontinued clinical development of GDC-0310 and shifted its Nav1.7 efforts to backup molecules.
Financial highlights
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $0 | $264,000 | $0 | $295,000 |
| Research and development expense | $6.240 million | $7.164 million | $17.228 million | $19.176 million |
| General and administrative expense | $1.938 million | $1.744 million | $6.354 million | $5.643 million |
| Total operating expenses | $14.178 million | $8.908 million | $29.582 million | $24.819 million |
| Net loss | $14.383 million | $7.742 million | $25.939 million | $22.639 million |
| Net loss per common share, basic | $0.63 | $0.43 | $1.34 | $1.26 |
No meaningful sales margin is reported because the company had no revenue in 2018. Q3 operating expenses included a one-time $6.0 million XEN1101 milestone-and-royalty buyout. Nine-month results also included a $4.398 million gain from terminating the Teva collaboration. Interest expense was $1.037 million for the first nine months; foreign exchange was a $276,000 loss, compared with a $1.503 million gain in the prior-year period.
At September 30, cash and cash equivalents were $87.962 million and marketable securities were $39.166 million, totaling $127.128 million. Current assets were $129.493 million and current liabilities $4.413 million. The term loan had $15.5 million principal outstanding and a $14.886 million carrying value, net of discount and including accrued final fee; no principal was classified current. The loan bears interest at 0.5% above prime, is interest-only through March 31, 2020, and matures September 1, 2022. Substantially all assets other than intellectual property secure the loan.
For the nine months, operating cash use was $27.482 million, investing cash use was $16.431 million, and financing provided $111.557 million. Cash increased by $67.476 million to $87.962 million. Operating cash use rose from $21.888 million in the comparable 2017 period.
Material changes and unusual items
- Net loss increased by $6.641 million in Q3 and $3.300 million for the nine-month period. The Q3 increase principally reflects the $6.0 million XEN1101 buyout; lower R&D partly offset this.
- R&D declined year over year for the nine months, mainly due to lower preclinical, discovery and other program spending and reduced XEN801 spending, partly offset by increased XEN1101 investment.
- The company raised $102.842 million net from common-share issuance during the nine months, including an underwritten offering of 4.5 million shares at $14 per share that generated $59.2 million net of underwriting discounts and commissions, before offering expenses. ATM sales also generated approximately $44.0 million net of commissions, before estimated transaction expenses.
- In March, Xenon exchanged 2.868 million common shares for Series 1 preferred shares; BVF converted 1.3 million preferred shares into common shares in September. At September 30, 1.568 million preferred shares remained outstanding, convertible one-for-one subject to ownership limits.
- The company adopted ASC 606 on January 1, 2018; adoption did not change recognized revenue and required no cumulative adjustment.
Outlook, commentary and risks
- Management expected significant expenses and operating losses for at least the next 12 to 24 months. It stated that cash, cash equivalents and marketable securities as of the report date were expected to fund operating and capital needs for at least 12 months, while cautioning that assumptions could prove wrong and funds could be used sooner.
- XEN496: management was developing a pediatric formulation and targeting Phase 3 initiation around mid-2019; an IND submission was expected in the first half of 2019. The FDA had indicated that a single pivotal study of approximately 20 patients might be considered adequate.
- XEN1101: after encouraging Phase 1 and TMS findings, management anticipated a Phase 2 adult focal-seizure study in Q4 2018. XEN901: a Phase 2 study was expected as soon as feasible after planned regulatory discussions.
- Key risks include clinical, regulatory and enrollment uncertainty; dependence on collaborators and third-party manufacturers; lack of product revenue and need for future funding; dilution from equity financing; loan covenants and default risk; foreign-exchange exposure; and intellectual-property, competition and reimbursement risks.
- The filing reports no material legal proceedings and states that disclosure controls and procedures were effective at the reasonable-assurance level.
Investor verification priorities
- Confirm subsequent clinical milestones and trial progress for XEN496, XEN1101 and XEN901 against the stated timelines.
- Track cash burn, available liquidity and whether the stated at-least-12-month runway remains adequate as development spending changes.
- Review the loan’s interest, final payment fee, repayment schedule, collateral and covenants, including compliance and any potential default triggers.
- Assess dilution and voting implications from outstanding options and convertible preferred shares, and any additional share issuance.
- Verify the financial and strategic effects of the XEN1101 royalty buyout and Teva termination, including any remaining milestone, royalty or other obligations.