Xenon Pharmaceuticals Inc. 10-K

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.” On February 24, 2023, the last reported sale price of our common shares was $38.73 per share. Holders As of February 24, 2023, there were approximately 91 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. 69 Stock Performance Graph This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference into any filing of Xenon Pharmaceuticals Inc. under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. The following graph shows a comparison of the total cumulative returns of an investment of $100 in cash from December 31, 2017 through December 31, 2022 in (i) our common shares, (ii) the Nasdaq Biotechnology Index, and (iii) the Nasdaq Composite Index. The comparisons in the graph are required by the SEC and are not intended to forecast or be indicative of the possible future performance of our common stock. The graph assumes that all dividends have been reinvested (to date, we have not declared any dividends). Recent Sales of Unregistered Securities On January 23, 2023, we issued an aggregate of 425,000 common shares, no par value per share (the “Warrant Net Exercise Shares”), to pre-funded warrant holders upon the exercise of outstanding pre-funded warrants to purchase an aggregate of 425,003 common shares, no par value per share, pursuant to a net exercise mechanism under the warrants. Each pre-funded warrant had an exercise price of $0.0001 per share. The issuances of the Warrant Net Exercise Shares 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. Ite m 6. [Reserved] 70 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis together with 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. We are advancing a novel product pipeline of neurology-focused therapies to address areas of high unmet medical need, with a focus on epilepsy. XEN1101 XEN1101 is a differentiated Kv7 potassium channel opener being developed for the treatment of epilepsy and other neurological disorders, including major depressive disorder, or MDD. XEN1101 for Epilepsy (Focal Onset Seizures) We have initiated our XEN1101 Phase 3 development program, which includes two identical Phase 3 clinical trials to be run in parallel, called X-TOLE2 and X-TOLE3, that are designed closely after the Phase 2b X-TOLE clinical trial. These multicenter, randomized, double-blind, placebo-controlled trials will evaluate the clinical efficacy, safety, and tolerability of XEN1101 administered as adjunctive treatment in approximately 360 patients per study with focal onset seizures, or FOS. The primary efficacy endpoint is the median percent change, or MPC, in monthly seizure frequency from baseline through the double-blind period, or DBP, of XEN1101 compared to placebo. XEN1101 for Epilepsy (Primary Generalized Tonic Clonic Seizures) We have initiated a Phase 3 clinical trial, called X-ACKT, to support potential regulatory submissions in an additional epilepsy indication of primary generalized tonic clonic seizures, or PGTCS. This multicenter, randomized, double-blind, placebo-controlled study will evaluate the clinical efficacy, safety, and tolerability of XEN1101 administered as adjunctive treatment in approximately 160 patients with PGTCS. The primary efficacy endpoint is the MPC in monthly PGTCS frequency from baseline through the DBP of XEN1101 compared to placebo. Upon completion of the DBP in X-TOLE2, X-TOLE3, or X-ACKT, eligible patients may enter an open-label extension, or OLE, study for up to three years. In addition, the ongoing X-TOLE Phase 2b OLE continues to generate important long-term data for XEN1101. XEN1101 for Major Depressive Disorder Based on promising pre-clinical data with XEN1101 and published clinical data generated using ezogabine, we are evaluating the clinical efficacy, safety and tolerability of XEN1101 administered as monotherapy in approximately 150 patients with MDD in a Phase 2 clinical trial called X-NOVA. Designed as a randomized, double-blind, placebo-controlled, multicenter clinical study, the primary objective is to assess the efficacy of XEN1101 compared to placebo on improvement of depressive symptoms in subjects diagnosed with moderate to severe MDD, using the Montgomery-Åsberg Depression Rating Scale, or MADRS, score change through week six. Topline results from the X-NOVA study are anticipated in the third quarter of this year. In addition, we are collaborating with the Icahn School of Medicine at Mount Sinai to support an ongoing investigator-sponsored Phase 2 proof-of-concept, randomized, parallel-arm, placebo-controlled multi-site study of XEN1101 for the treatment of MDD in approximately 60 subjects. The primary objective of the study is to investigate the effect of XEN1101 on the brain reward circuit as measured by the change in bilateral ventral striatum activity as assessed by functional MRI, or fMRI. The secondary objectives are to test the effect of XEN1101 compared to placebo on clinical measures of depression and anhedonia using the MADRS and Snaith-Hamilton Pleasure Scale, or SHAPS, respectively. 71 Additional Proprietary and Partnered Programs XEN496 XEN496, a Kv7 potassium channel opener, is a proprietary pediatric formulation of the active ingredient ezogabine being developed for the treatment of KCNQ2 developmental and epileptic encephalopathy, or KCNQ2-DEE. A Phase 3 randomized, double-blind, placebo-controlled, parallel group, multicenter clinical trial, called EPIK, is ongoing to evaluate the efficacy, safety, and tolerability of XEN496 administered as adjunctive treatment in approximately 40 pediatric patients aged one month to less than six years with KCNQ2-DEE. We anticipate that the EPIK study will be completed in 2024. NBI-921352 We have an ongoing collaboration with Neurocrine Biosciences to develop treatments for epilepsy. Neurocrine Biosciences has an exclusive license to XEN901, now known as NBI-921352, a selective Nav1.6 sodium channel inhibitor. Neurocrine Biosciences is conducting a Phase 2 clinical trial evaluating NBI-921352 in adult patients with focal onset seizures, with data expected in the second half of this year. In addition, a Phase 2 clinical trial is underway evaluating NBI-921352 in patients aged between 2 and 21 years with SCN8A developmental and epileptic encephalopathy, or SCN8A-DEE. Pursuant to the terms of the agreement, we have the potential to receive certain clinical, regulatory, and commercial milestone payments, as well as future sales royalties. We have funded our operations primarily through the sale of equity securities, funding received from our licensees and collaborators, and debt financing. We recognized revenue of $9.4 million, $18.4 million and $32.2 million for the years ended December 31, 2022, 2021 and 2020, respectively, in connection with our collaboration and licensing agreements. To date, we have not had any products approved for sale and have not generated any revenue from product sales. We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for a product candidate, which we expect will take a number of years, if ever, and the outcome of which is subject to significant uncertainty. We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We have incurred net losses in each year since inception and expect to continue to incur net losses for the foreseeable future. Our net losses were $125.4 million, $78.9 million, and $28.8 million for the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022, we had an accumulated deficit of $482.7 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We anticipate that our operating expenses will increase substantially, particularly as we: • continue our research and pre-clinical and clinical development of our product candidates; • seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical trials; • require the manufacture of larger quantities of our product candidates for clinical development and potential commercialization; • attract, hire and retain skilled personnel; • acquire or in-license other assets and technologies; • maintain, protect and expand our intellectual property portfolio; and • create additional infrastructure to support our operations, our product development and planned future commercialization efforts. 72 Financial Operations Overview Revenue To date, our revenue has been primarily derived from collaboration and licensing agreements and we have not generated any revenue from product sales. If our development efforts for our product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates. We may also generate revenue in the future from payments as a result of license or collaboration agreements for any of our product candidates or intellectual property, such as our license and collaboration agreement with Neurocrine Biosciences, or the Neurocrine Collaboration, described in “Business — Collaborations, Commercial and License Agreements” and “Note 13” of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We cannot provide assurance as to the timing of future milestone or royalty payments under the Neurocrine Collaboration, or that we will receive any of these payments at all. The following table is a summary of revenue recognized for the years ended December 31, 2022, 2021 and 2020 (in thousands): Year Ended December 31, 2022 2021 2020 Neurocrine Biosciences: Recognition of the transaction price $ 372 $ 3,715 $ 26,810 Research and development services 1,938 6,452 5,356 Milestone payments 7,124 5,270 — Pacira BioSciences: Milestone payments — 3,000 — Total revenue $ 9,434 $ 18,437 $ 32,166 Pursuant to the terms of the Neurocrine Collaboration, we received an upfront cash payment of $30.0 million and a $20.0 million equity investment in our common shares in December 2019. The overall transaction price of the arrangement was measured and allocated to the performance obligations and revenue was recognized as the performance obligations were completed. In September 2021, based on the regulatory approval of a clinical trial application in Europe for NBI-921352 for focal-onset seizures in adults, we received an aggregate milestone payment of $10.0 million in the form of $4.5 million cash and a $5.5 million equity investment in our common shares. Further, in January 2022, based on the U.S. Food and Drug Administration’s (“FDA”) approval to expand the SCN8A-DEE study population to include subjects aged between 2 and 11 years, we received an aggregate milestone payment of $15.0 million in the form of $6.75 million cash and $8.25 million equity investment in our common shares. In each instance, the equity investment was measured at fair value on the date of issuance and the resulting premium with the cash payment, was recognized as revenue in the respective period. Research and development services were recognized into revenue at fair market value as the services were rendered. The research collaboration was completed in June 2022. In the year ended December 31 2021, we recognized revenue of $3.0 million in connection with our agreement with Pacira BioSciences, or the Pacira Agreement, for the global rights to develop and commercialize PCRX301 which included a $1.0 million milestone for the clearance of an investigational new drug application by the FDA and a $2.0 million milestone for the initiation of a Phase 1b clinical trial. No revenue was recognized in the years ended December 31, 2022 and December 31, 2020 in connection with the Pacira Agreement. In November 2022, Pacira BioSciences made the strategic decision to no longer pursue the clinical development of PCRX-301. Operating Expenses The following table summarizes our operating expenses for the years ended December 31, 2022, 2021 and 2020 (in thousands): Year Ended December 31, 2022 2021 2020 Research and development $ 105,767 $ 75,463 $ 50,523 General and administrative 32,810 21,967 12,944 Total operating expenses $ 138,577 $ 97,430 $ 63,467 73 Research and Development Expenses Research and development expenses represent costs incurred to conduct development of our proprietary product candidates and our drug discovery efforts, including any acquired or in-licensed product candidates or technology, and costs to support our partnered product candidates. Research and development expenses consist of costs incurred in performing research and development activities, including: • personnel-related expenses, consisting of salaries, benefits and stock-based compensation for employees engaged in scientific research and development; • third-party expenses incurred in connection with the pre-clinical and clinical development of our product candidates, including under agreements with CROs; • third-party expenses relating to formulation, process development and manufacture of drug substance and drug product for use in our pre-clinical testing and clinical trials; • third-party acquisition, license and collaboration fees; • laboratory consumables; and • certain indirect costs incurred in support of overall research and development activities, including facilities, depreciation and information technology costs. Project-specific expenses reflect costs directly attributable to our clinical development candidates for which we have incurred significant expenses. All remaining research and development expenses are reflected in pre-clinical, discovery and other internal 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. Payments we make for research and development services prior to the services being rendered are recorded as prepaid assets in our consolidated balance sheets and are expensed as the services are provided. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and third-party service providers. We expect that our research and development expenses will increase substantially in the future as we continue to invest in research and development activities related to developing our product candidates, including investments in manufacturing, as our programs advance into later stages of development and we continue to conduct clinical trials, advance our internal drug discovery programs into pre-clinical development and continue our early-stage research. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size, scope and duration of later-stage clinical trials. Clinical development timelines, likelihood of regulatory approval, and commercialization and associated costs are uncertain, difficult to estimate, and can vary significantly. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we cannot accurately estimate or know the nature, timing and costs that will be necessary to complete the pre-clinical and clinical development for any of our product candidates or when and to what extent we may generate revenue from the commercialization and sale of any of our product candidates or achieve profitability. General and Administrative Expenses General and administrative expenses consist primarily of personnel-related expenses, consisting of salaries, benefits and stock-based compensation for our employees engaged in executive, finance, legal, business development, commercial and administrative functions, insurance costs, professional fees for auditing, tax and legal services, costs related to maintenance and filing of intellectual property, costs incurred as we prepare for commercialization, and allocated facility-related and information technology costs not otherwise included in research and development expenses. We expect that general and administrative expenses will increase in the future as we expand our operating activities to support our continued research activities and development of our product candidates, and as we prepare for commercialization. We will also continue to incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company. 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. 74 Unrealized fair value (loss) gain on trading securities. Trading securities are recorded at fair value. Unrealized fair value (loss) gain on trading securities is related to changes in market pricing on the investments during the period. We anticipate that unrealized fair value (loss) gain on trading securities will continue to fluctuate depending on our investment balance and market yields. 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. In May 2020, we repaid the total outstanding term loan balance ahead of the maturity date. Foreign exchange (loss) gain. 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. Loss on repayment of term loan. In May 2020, we repaid the total outstanding balance of our term loan with Silicon Valley Bank ahead of the maturity date. We recorded a one-time loss of $1.0 million on the repayment of the term loan, inclusive of repayment fees. 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 historical and future performance are revenue recognition, research and development costs and stock-based compensation. For additional information, see “Note 3” of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Revenue recognition: Revenue recognition is a critical accounting estimate due to the magnitude and nature of the revenues we receive. Our primary sources of revenue are derived from non-refundable upfront payments, funding for research and development services, milestone payments, and royalties under license and 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 standalone selling prices. The estimated standalone selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold on a standalone 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 standalone basis is not available. We generally recognize revenue from non-refundable upfront payments 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 in exchange for research and development services performed by us on behalf of the licensee is recognized upon performance of such activities at rates consistent with prevailing market rates. 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. 75 Research and development costs: Research and development costs is a critical accounting policy due to the magnitude of the costs and the requirement to estimate the proportionate performance of vendors to calculate third-party accrued and prepaid research and development expenses. We accrue for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of pre-clinical studies and clinical trials, and manufacturing activities. Third-party service providers generally provide estimates of proportionate performance to allow us to determine an appropriate accrual. When determining the adequacy of an accrual, we analyze progress based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs. 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. Our historical prepaid and accrual estimates have not been materially different from the actual costs. 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, consultants, directors and officers pursuant to our stock option plans. 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. The expected volatility is based on the historical volatility of our common shares calculated based on a period of time commensurate with the expected term assumption. 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, 2022, 2021 and 2020 The following table summarizes the results of our operations for the years ended December 31, 2022, 2021 and 2020 together with changes in those items (in thousands): Year Ended December 31, Change 2022 vs. 2021 Change 2021 vs. 2020 2022 2021 2020 Increase/(Decrease) Increase/(Decrease) Revenue $ 9,434 $ 18,437 $ 32,166 $ (9,003 ) $ (13,729 ) Research and development expenses 105,767 75,463 50,523 30,304 24,940 General and administrative expenses 32,810 21,967 12,944 10,843 9,023 Other: Interest income 8,713 466 2,279 8,247 (1,813 ) Unrealized fair value (loss) gain on trading securities (2,934 ) (719 ) 4 (2,215 ) (723 ) Interest expense — — (484 ) — 484 Foreign exchange (loss) gain (1,891 ) 358 1,396 (2,249 ) (1,038 ) Loss on repayment of term loan — — (988 ) — 988 Loss before income taxes $ (125,255 ) $ (78,888 ) $ (29,094 ) $ (46,367 ) $ (49,794 ) Revenue Revenue decreased by $9.0 million in the year ended December 31, 2022 as compared to the same period in 2021. The decrease was primarily due to the Neurocrine Collaboration; all performance obligations associated with an upfront payment were completed in March 2022, resulting in a decrease in revenue of $3.3 million and the research component of our collaboration was completed in June 2022, resulting in a decrease in research and development services revenue of $4.5 million. In addition, we recognized a $3.0 million milestone under our Pacira Agreement in 2021, whereas no milestones were recognized under this agreement in 2022. Revenue decreased by $13.7 million in the year ended December 31, 2021 as compared to the same period in 2020. The decrease was primarily due to the completion of performance obligations under the Neurocrine Collaboration, resulting in a decrease in revenue of $23.1 million. The decrease was partially offset by the recognition of a $5.3 million of milestone revenue under our Neurocrine Collaboration, as well as a $3.0 million milestone under our Pacira Agreement in 2021, whereas no milestones were recognized under these agreements in 2020. 76 Research and Development Expenses The following table summarizes research and development expenses for the years ended December 31, 2022, 2021 and 2020 together with changes in those items (in thousands): Year Ended December 31, Change 2022 vs. 2021 Change 2021 vs. 2020 2022 2021 2020 Increase/(Decrease) Increase/(Decrease) Direct external costs: XEN1101 $ 37,367 $ 21,664 $ 17,353 $ 15,703 $ 4,311 XEN496 14,765 13,017 7,986 1,748 5,031 NBI-921352 146 995 1,176 (849 ) (181 ) Pre-clinical, discovery and other programs 12,565 12,347 5,042 218 7,305 Indirect costs: Personnel-related (including stock-based compensation) 32,447 21,225 14,316 11,222 6,909 Facilities and other unallocated research and development expenses 8,477 6,215 4,650 2,262 1,565 Total research and development expenses $ 105,767 $ 75,463 $ 50,523 $ 30,304 $ 24,940 Research and development expenses increased by $30.3 million in the year ended December 31, 2022 as compared to the same period in 2021. The increase was primarily attributable to our XEN1101 program and personnel-related costs due to increased headcount to support late-stage development and stock-based compensation expense due to an increase in the number of options granted at a higher fair value. The increase for XEN1101 includes expenses related to the initiation of our Phase 3 epilepsy clinical trials, ongoing costs to support the X-TOLE open label extension, and our ongoing Phase 2 X-NOVA clinical trial. Research and development expenses increased by $24.9 million in the year ended December 31, 2021 as compared to the same period in 2020. The increase was primarily attributable to our pre-clinical, discovery and other internal programs related to an increase in efforts for future product candidates, personnel-related costs due to increased headcount and stock-based compensation expense, and ongoing costs to support the XEN496 EPIK clinical trial and EPIK open label extension as well as the XEN1101 X-TOLE clinical trial and X-TOLE open label extension. General and Administrative Expenses The following table summarizes general and administrative expenses for the years ended December 31, 2022, 2021 and 2020 together with changes in those items (in thousands): Year Ended December 31, Change 2022 vs. 2021 Change 2021 vs. 2020 2022 2021 2020 Increase/(Decrease) Increase/(Decrease) Personnel-related (including stock-based compensation) $ 22,814 $ 14,123 $ 8,468 $ 8,691 $ 5,655 Professional and consulting fees 5,189 4,367 1,685 822 2,682 Other 4,807 3,477 2,791 1,330 686 General and administrative $ 32,810 $ 21,967 $ 12,944 $ 10,843 $ 9,023 General and administrative expenses increased by $10.8 million in the year ended December 31, 2022 as compared to the same period in 2021. The increase was primarily attributable to personnel-related costs due to increased headcount to support our expanding research and development activities and stock-based compensation expense due to an increase in the number of options granted at a higher fair value, recruitment fees, insurance premiums, expenses supporting intellectual property protection and professional fees. General and administrative expenses increased by $9.0 million for the year ended December 31, 2021 as compared to the same period in 2020. The increase was primarily attributable to personnel-related costs due to increased headcount to support our expanding research and development activities and stock-based compensation expense due to an increase in the number of options granted at a higher fair value, market research costs and expenses supporting intellectual property protection. 77 Other Income The following table summarizes our other income for the years ended December 31, 2022, 2021 and 2020 together with changes in those items (in thousands): Year Ended December 31, Change 2022 vs. 2021 Change 2021 vs. 2020 2022 2021 2020 Increase/(Decrease) Increase/(Decrease) Other income $ 3,888 $ 105 $ 2,207 $ 3,783 $ (2,102 ) Other income increased by $3.8 million in the year ended December 31, 2022 as compared to the same period in 2021. The increase was primarily attributable to an $8.2 million increase in interest income driven by a higher balance of marketable securities and an increase in market yields on investments. The increase was partially offset by a $2.2 million increase in foreign exchange loss due to a higher balance of cash and cash equivalents and marketable securities denominated in Canadian dollars and a decline in the value of the Canadian dollar, and a $2.2 million increase in the unrealized loss on the fair value of trading securities due to a higher balance of trading securities and increase in market yields on investments. Other income decreased by $2.1 million in the year ended December 31, 2021 as compared to the same period in 2020. The decrease was primarily driven by a $1.8 million decrease in interest income due to a decline in market yields on investments and an unrealized loss on the fair value of trading securities of $0.7 million in 2021 due to changes in market yields on investments. The decrease was also attributable to a decrease of $1.0 million in foreign exchange gain, largely due to an increase in the value of the Canadian dollar. These were partially offset by a decrease in interest expense and a one-time loss of $1.0 million due to the repayment of our term loan in May 2020. Liquidity and Capital Resources Sources of Liquidity To date, we have financed our operations primarily through the sale of equity securities, funding received from collaboration and license agreements, and debt financing. Since our initial public offering through December 31, 2022, we have raised aggregate net cash proceeds of more than $1.0 billion primarily from the issuance of equity securities. As of December 31, 2022, we had cash and cash equivalents and marketable securities of $720.8 million . 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. 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. We entered into an “at-the-market” equity offering sales agreement in August 2020, amended as of March 2022, with Jefferies LLC, or Jefferies, and Stifel, Nicolaus & Company, Incorporated, or Stifel, pursuant to which we may sell our common shares from time to time. In January 2021, we sold an aggregate of 733,000 common shares for proceeds of $10.7 million, net of commissions and transaction expenses pursuant to a prospectus supplement filed with the SEC on August 6, 2020, or the August 2020 ATM. We may sell common shares having gross proceeds of up to $250.0 million, from time to time, pursuant to a new prospectus supplement filed with the SEC on March 1, 2022, or the March 2022 ATM, replacing the August 2020 ATM. As of December 31, 2022, no common shares have been sold under the March 2022 ATM. 78 Funding Requirements We have incurred significant operating losses since inception. As of December 31, 2022, we had an accumulated deficit of $482.7 million. 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 incur significant expenses and increasing 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 studies for our current and prospective product candidates; initiate additional pre-clinical, clinical or other studies for our product candidates; 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; hire and retain additional personnel; 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 1st Order Pharmaceuticals, Inc and other third parties; maintain, protect and expand our intellectual property portfolio; establish a sales, marketing, distribution and other commercial infrastructure to commercialize any products for which we may obtain marketing approval; create additional infrastructure and incur additional costs 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 future capital requirements are difficult to forecast and will depend on many factors, including: • the scope, progress, results and costs of researching and developing our current product candidates, as well as other additional product candidates we may develop and pursue in the future; • the timing of, and the costs involved in, obtaining marketing approvals for our product candidates and any other additional product candidates we may develop and pursue in the future; • the number of future product candidates that we may pursue and their development requirements; • if approved, the costs of commercialization activities for any product candidate that receives regulatory approval to the extent such costs are not the responsibility of an existing or future collaborator, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities; • subject to the receipt of regulatory approval, revenue, if any, received from commercial sales of our product candidates and any other additional product candidates we may develop and pursue in the future; • whether our existing collaborations generate substantial milestone payments and, ultimately, royalties on future approved products for us; • our ability to maintain existing collaborations and to establish new collaborations, licensing or other arrangements and the financial terms of such agreements; • our headcount growth and associated costs as we expand our research and development and initiate pre-commercial and commercial activities; • the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome of such litigation; and • the ongoing costs of operating as a public company. 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. However, our estimates and assumptions may prove to be wrong, and we cannot guarantee that our existing capital resources will be sufficient to conduct and complete all of our anticipated research and development efforts and future commercialization efforts. Additionally, the process of testing drug candidates in clinical trials is costly, and the timing of progress in these trials remains uncertain. Further, inflation may affect our use of capital resources by increasing our cost of labor and research and development expenses. Our long-term funding requirements will consist of operational, capital, and manufacturing expenditures, including those contractual commitments described below. Because of the inherent risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of capital outflows and operating expenditures associated with our long-term anticipated pre-clinical studies and clinical trials. 79 Contractual Commitments In April 2017, we acquired XEN1101 (previously known as 1OP2198) from 1st Order Pharmaceuticals, Inc., or 1st Order, pursuant to an asset purchase agreement. In August 2020, we and 1st Order amended the asset purchase agreement to amend certain definitions in the agreement and to modify the payment schedule for certain milestones. Through December 31, 2022, we have paid $0.6 million based on progress against these milestones. Also in February 2023, an additional $1.4 million was paid for the achievement of clinical and other milestones. Future potential payments to 1st Order include up to $6.0 million in regulatory milestones. There are no royalty obligations to 1st Order. We have operating leases for research laboratories and office space in Burnaby, British Columbia and office space in Needham, Massachusetts. The terms of the leases expire in June 2032 and November 2027, respectively. Amounts related to future lease payments for operating lease obligations as of December 31, 2022 totaled $13.9 million, with $1.6 million expected to be paid within the next 12 months. Cash Flows The following table shows a summary of our cash flows for the years ended December 31, 2022, 2021 and 2020 (in thousands): Year Ended December 31, 2022 2021 2020 Net cash used in operating activities $ (98,430 ) $ (69,502 ) $ (48,124 ) Net cash used in investing activities (296,003 ) (246,770 ) (16,824 ) Net cash provided by financing activities 278,471 447,543 85,795 Operating Activities For the year ended December 31, 2022, net cash used in operating activities totaled $98.4 million, compared to $69.5 million in the same period in 2021. The increase was primarily related to higher research and development and general and administrative expenses, and lower revenue recognized in connection with the Neurocrine Collaboration and Pacira Agreement. This was partially offset by higher interest income and changes in operating assets and liabilities. For the year ended December 31, 2021, net cash used in operating activities totaled $69.5 million, compared to $48.1 million in the same period in 2020. The increase was primarily related to higher research and development and general and administrative expenses and lower interest income, partially offset by milestone revenue recognized in connection with our Neurocrine Collaboration and Pacira Agreement in 2021. Investing Activities For the year ended December 31, 2022, net cash used in investing activities totaled $296.0 million, compared to $246.8 million in the same period in 2021. The change was driven primarily by an increase in purchases of marketable securities, net of redemptions. For the year ended December 31, 2021, net cash used in investing activities totaled $246.8 million, compared to $16.8 million in the same period in 2020. The change was driven primarily by an increase in purchases of marketable securities, net of redemptions. Financing Activities For the year ended December 31, 2022, net cash provided by financing activities totaled $278.5 million, compared to $447.5 million in the same period in 2021. The decrease was primarily related to net proceeds of $277.8 million in 2022 as compared to net proceeds of $447.3 million in 2021 from the issuance of common shares and pre-funded warrants. For the year ended December 31, 2021, net cash provided by financing activities totaled $447.5 million, compared to $85.8 million in the same period in 2020. The increase was primarily related to net proceeds of $447.3 million from the issuance of common shares and pre-funded warrants in 2021 as compared to net proceeds of $102.5 million from the issuance of common shares, partially offset by repayment of our term loan, in 2020. Related Party Transactions For a description of our related party transactions, see “Certain Relationships and Related Transactions, and Director Independence.” 80 Outstanding Share Data As of February 24, 2023, we had 63,037,991 common shares issued and outstanding, outstanding pre-funded warrants to purchase an additional 2,678,861 common shares, outstanding stock options to purchase an additional 7,046,669 common shares and an outstanding warrant to purchase an additional 40,000 common shares. Item 7A. Quantitative and Qualitat ive Disclosures About Market Risk We are exposed to various market risks, including changes in currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices. Foreign currency risk As of December 31, 2022, we had U.S. dollar denominated cash and cash equivalents and marketable securities of $676.0 million and Canadian dollar denominated cash and cash equivalents of CAD$60.7 million. We are subject to 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. We also hold Canadian dollar denominated cash and cash equivalents, accounts receivable and accounts payable. Changes in foreign currency exchange rates can create significant foreign exchange gains or losses to us. We do not currently hedge our exposure and thus assume the risk of future gains or losses on the amounts of Canadian dollars held. While we have experienced increased foreign exchange fluctuations in recent periods, we do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to the Canadian dollar would have a material effect on our operating results. Interest rate sensitivity As of December 31, 2022, we had cash and cash equivalents and marketable securities of $720.8 million. Our interest rate sensitivity is primarily attributable to our cash and cash equivalents and marketable securities. A 100 basis point, or 1%, unfavorable change in interest rates would have resulted in approximately a $3.5 million decrease in the fair value of our marketable securities as of December 31, 2022. Due to the short-term nature of our investment portfolio, a hypothetical 10% increase or decrease in interest rates or in investment returns would not have a material effect on our interest income. We do not enter into investments for speculative purposes and have not used any derivative financial instruments to manage interest rate exposure. Inflation risk Inflation may generally affect us by increasing our cost of labor and research and development expenses. While we have experienced increased operating expenses in recent periods, which we believe are due in part to the recent growth in inflation, we do not believe that inflation has had a material effect on our business, financial condition or results of operations during the year ended December 31, 2022; however, operating expenses may continue to increase in future periods due to inflation. 81