Xenon Pharmaceuticals Inc. 10-Q

Item 1. Financial Statements 3 Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 3 Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022 4 Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2023 and 2022 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 202 2 6 Notes to Consolidated Financial Statements 7 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 Item 4. Controls and Procedures 23 PART II. OTHER INFORMATION 24 Item 1. Legal Proceedings 24 Item 1A. Risk Factors 24 Item 6. Exhibits 65 SIGNATURES 66 In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Xenon,” and “the Company” refer to Xenon Pharmaceuticals Inc. and its subsidiary. “Xenon” and the Xenon logo are the property of Xenon Pharmaceuticals Inc. and are registered in the United States and used or registered in various other jurisdictions. This report contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this report may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies. - 1 - Risk Factors Summary Our business is subject to numerous risks and uncertainties, including those highlighted in the section of this report captioned “Risk Factors.” The following is a summary of the principal risks we face: • We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future. • We will need to raise additional funding, which may not be available on acceptable terms, if at all. Failure to obtain necessary capital when needed may force us to delay, limit or terminate our product discovery and development programs or commercialization efforts or other operations. • Our business and operations could suffer in the event of an actual or perceived information security incident such as a cybersecurity breach, system failure, or other compromise of our systems or those of a third-party or other contractor or vendor. • Our business substantially depends upon the successful development of XEN1101. If we are unable to obtain regulatory approval for, and successfully commercialize, XEN1101, our business may be materially harmed. • Clinical trials may fail to demonstrate adequately the safety and efficacy of our, or our collaborators’, product candidates at any stage of clinical development. Terminating the development of any of our, or our collaborators’, product candidates could materially harm our business and the market price of our common shares. • We, or our collaborators, may find it difficult to enroll patients in our clinical trials, including for ultra-orphan, orphan or niche indications, which could delay or prevent the successful completion of clinical trials of our product candidates. • We, or our collaborators, may incur unexpected costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our, or our collaborators’, product candidates. • The regulatory approval processes of the FDA, EMA and regulators in other foreign jurisdictions are lengthy, time-consuming and inherently unpredictable. If we, or our collaborators, are unable to obtain regulatory approval for our product candidates in a timely manner, or at all, our business will be substantially harmed. • If, in the future, we are unable to establish our own sales, marketing and distribution capabilities or enter into agreements for these purposes, we may not be successful in independently commercializing any future products. • Our prospects for successful development and commercialization of our partnered products and product candidates are dependent upon the research, development and marketing efforts of our collaborators. • We depend on our collaborative relationship with Neurocrine Biosciences Inc., or Neurocrine Biosciences, to further develop and commercialize NBI-921352, and if our relationship is not successful or is terminated, we may not be able to effectively develop and/or commercialize NBI-921352. • Our reliance on third parties to manufacture our product candidates may increase the risk that we will not have sufficient quantities of our product candidates, raw materials, APIs or drug products when needed or at an acceptable cost. • We rely on third parties to conduct our pre-clinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties including to comply with applicable laws and regulations or meet expected deadlines, our business could be substantially harmed. • We could be unsuccessful in obtaining or maintaining adequate patent protection for one or more of our products or product candidates. • We may not be able to protect our intellectual property rights throughout the world. • The market price of our common shares may be volatile, and purchasers of our common shares could incur substantial losses. • Future sales and issuances of our common shares or securities convertible into or exchangeable for common shares would cause our shareholders to incur dilution and could cause the market price of our common shares to fall. Our Risk Factors are not guarantees that no such conditions exist as of the date of this report and should not be interpreted as an affirmative statement that such risks or conditions have not materialized, in whole or in part. - 2 - PART I. FINANCI AL INFORMATION Item 1. Fina ncial Statements XENON PHARMACEUTICALS INC. Consolidated Ba lance Sheets (Unaudited) (Expressed in thousands of U.S. dollars except share amounts) March 31, December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 69,512 $ 57,242 Marketable securities (note 5) 457,531 534,845 Accounts receivable 2,222 986 Prepaid expenses and other current assets 4,086 7,225 533,351 600,298 Marketable securities, long-term (note 5) 160,265 128,682 Operating lease right-of-use asset, net (note 6) 10,097 10,406 Property, plant and equipment, net 7,975 6,500 Deferred tax assets 221 509 Prepaid expenses, long-term 7,959 7,751 Total assets $ 719,868 $ 754,146 Liabilities and shareholders’ equity Current liabilities: Accounts payable and accrued expenses (note 7) $ 21,297 $ 22,214 Operating lease liability (note 6) 1,194 488 22,491 22,702 Operating lease liability, long-term (note 6) 10,433 9,947 Total liabilities $ 32,924 $ 32,649 Shareholders’ equity: Common shares, without par value; unlimited shares authorized; issued and outstanding: 63,107,020 (December 31, 2022 - 62,587,701 ) (note 8) $ 1,073,150 $ 1,065,136 Additional paid-in capital 140,088 142,108 Accumulated deficit ( 524,474 ) ( 482,747 ) Accumulated other comprehensive loss ( 1,820 ) ( 3,000 ) Total shareholders' equity $ 686,944 $ 721,497 Total liabilities and shareholders’ equity $ 719,868 $ 754,146 Commitments and contingencies (note 10) The accompanying notes are an integral part of these financial statements. - 3 - XENON PHARMACEUTICALS INC. Consolidated St atements of Operations and Comprehensive Loss (Unaudited) (Expressed in thousands of U.S. dollars except share and per share amounts) Three Months Ended March 31, 2023 2022 Revenue (note 9) $ — $ 8,766 Operating expenses: Research and development 39,516 19,360 General and administrative 9,535 6,775 49,051 26,135 Loss from operations ( 49,051 ) ( 17,369 ) Other income (expense): Interest income 5,423 368 Unrealized fair value gain (loss) on trading securities 1,878 ( 3,362 ) Foreign exchange gain 313 299 7,614 ( 2,695 ) Loss before income taxes ( 41,437 ) ( 20,064 ) Income tax (expense) recovery ( 290 ) 394 Net loss ( 41,727 ) ( 19,670 ) Net loss attributable to preferred shareholders — ( 299 ) Net loss attributable to common shareholders $ ( 41,727 ) $ ( 19,371 ) Other comprehensive loss: Unrealized gain on available-for-sale securities (note 5) $ 1,180 $ — Comprehensive loss $ ( 40,547 ) $ ( 19,670 ) Net loss per common share (note 3): Basic and diluted $ ( 0.63 ) $ ( 0.35 ) Weighted-average common shares outstanding (note 3): Basic and diluted 65,724,681 54,852,792 The accompanying notes are an integral part of these financial statements. - 4 - XENON PHARMACEUTICALS INC. Consolidated Statements of Shareholders’ Equity (Unaudited) (Expressed in thousands of U.S. dollars except share amounts) Convertible preferred shares Common shares Additional paid-in capital Accumulated deficit Accumulated other comprehensive loss Total shareholders' equity Shares Amount Shares Amount Balance as of December 31, 2021 1,016,000 $ 7,732 51,634,752 $ 783,170 $ 117,495 $ ( 357,374 ) $ ( 990 ) $ 550,033 Net loss for the period — — — — — ( 19,670 ) — ( 19,670 ) Issuance of common shares, net of issuance costs (note 8a) — — 258,986 7,876 — — — 7,876 Conversion of preferred shares to common shares (note 8b) ( 1,016,000 ) ( 7,732 ) 1,016,000 7,732 — — — — Stock-based compensation expense — — — — 3,614 — — 3,614 Issued pursuant to exercise of stock options — — 149,311 1,529 ( 1,529 ) — — — Balance as of March 31, 2022 — $ — 53,059,049 $ 800,307 $ 119,580 $ ( 377,044 ) $ ( 990 ) $ 541,853 Balance as of December 31, 2022 — $ — 62,587,701 $ 1,065,136 $ 142,108 $ ( 482,747 ) $ ( 3,000 ) $ 721,497 Net loss for the period — — — — — ( 41,727 ) — ( 41,727 ) Conversion of pre-funded warrants to common shares (note 8c) — — 425,000 7,379 ( 7,379 ) — — — Stock-based compensation expense — — — — 5,994 — — 5,994 Issued pursuant to exercise of stock options — — 94,319 635 ( 635 ) — — — Other comprehensive income (note 5) — — — — — — 1,180 1,180 Balance as of March 31, 2023 — $ — 63,107,020 $ 1,073,150 $ 140,088 $ ( 524,474 ) $ ( 1,820 ) $ 686,944 The accompanying notes are an integral part of these financial statements. - 5 - XENON PHARMACEUTICALS INC. Consolidated Statements of Cash Flows (Unaudited) (Expressed in thousands of U.S. dollars) Three Months Ended March 31, 2023 2022 Operating activities: Net loss $ ( 41,727 ) $ ( 19,670 ) Items not involving cash: Depreciation 354 376 Deferred income tax expense 288 258 Stock-based compensation 5,994 3,614 Unrealized foreign exchange gain ( 5 ) ( 142 ) Unrealized fair value (gain) loss on trading securities ( 1,878 ) 3,362 Changes in operating assets and liabilities: Accounts receivable 226 ( 155 ) Prepaid expenses and other current assets 2,931 ( 272 ) Accounts payable and accrued expenses ( 594 ) ( 5,799 ) Net cash used in operating activities ( 34,411 ) ( 18,428 ) Investing activities: Purchases of property, plant and equipment ( 2,206 ) ( 212 ) Purchases of marketable securities ( 108,282 ) ( 68,956 ) Proceeds from marketable securities 157,110 20,280 Net cash provided by (used in) investing activities 46,622 ( 48,888 ) Financing activities: Issuance of common shares, net of issuance costs (note 8a) — 7,876 Net cash provided by financing activities — 7,876 Effect of exchange rate changes on cash and cash equivalents 59 293 Increase (decrease) in cash and cash equivalents 12,270 ( 59,147 ) Cash and cash equivalents, beginning of period 57,242 175,688 Cash and cash equivalents, end of period $ 69,512 $ 116,541 Supplemental disclosures: Interest received $ 3,098 $ 1,682 Cash paid for operating lease 406 203 Supplemental disclosures of non-cash transactions: Fair value of stock options exercised on a cashless basis 635 1,529 Fair value of pre-funded warrants exercised 7,379 — Increase in operating lease liability and accounts receivable related to lease incentives claimed in the period 1,482 — The accompanying notes are an integral part of these financial statements. - 6 - XENON PHARMACEUTICALS INC Notes to C onsolidated Financial Statements (Unaudited) (Expressed in thousands of U.S. dollars except share and per share amounts) 1. Nature of the business: Xenon Pharmaceuticals Inc. (the “Company”), incorporated in 1996 under the predecessor to the Business Corporations Act (British Columbia) and continued federally in 2000 under the Canada Business Corporations Act, is a clinical stage biopharmaceutical company focused on developing innovative therapeutics to improve the lives of patients with neurological disorders, with a focus on epilepsy. The Company has incurred significant operating losses since inception. As of March 31, 2023 , the Company had an accumulated deficit of $ 524,474 and a net loss of $ 41,727 for the three months ended March 31, 2023. Management expects to continue to incur significant expenses in excess of revenue and to incur operating losses for the foreseeable future. To date, the Company has financed its operations primarily through the sale of equity securities, funding received from collaboration and license agreements, and debt financings. Until such time as the Company can generate substantial product revenue, if ever, management expects to finance the Company’s cash needs through a combination of collaboration agreements, equity and debt financings. The continuation of research and development activities and the future commercialization of its products are dependent on the Company’s ability to successfully raise additional funds when needed. It is not possible to predict either the outcome of future research and development programs or the Company’s ability to continue to fund these programs in the future. 2. Basis of presentation: These unaudited interim consolidated financial statements are presented in U.S. dollars and include the accounts of the Company and its wholly-owned subsidiary, Xenon Pharmaceuticals USA Inc., a Delaware corporation. All intercompany transactions and balances have been eliminated on consolidation. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, these consolidated financial statements do not include all of the information and footnotes required for complete consolidated financial statements and should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2022 included in the Company’s 2022 Annual Report on Form 10-K filed with the SEC and with the securities commissions in British Columbia, Alberta and Ontario on March 1, 2023. These unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods presented. The results of operations for the three months ended March 31, 2023 and 2022 are not necessarily indicative of results that can be expected for a full year. These unaudited interim consolidated financial statements follow the same significant accounting policies as those described in the notes to the audited consolidated financial statements of the Company included in the Company’s 2022 Annual Report on Form 10-K for the year ended December 31, 2022 . 3. Net income (loss) per common share: Basic net income (loss) per common share is calculated using the two-class method required for participating securities which includes the Series 1 Preferred Shares as a separate class for the three months ended March 31, 2022. The convertible preferred shares entitle the holders to participate in dividends and in earnings and losses of the Company on an equivalent basis as common shares. Accordingly, undistributed earnings (losses) are allocated to common shares and participating preferred shares based on the weighted-average shares of each class outstanding during the period. In March 2022, the outstanding 1,016,000 Series 1 Preferred Shares were converted and exchanged for an equal number of common shares of the Company (note 8b). The weighted average number of common shares used in the basic and diluted net income (loss) per common share calculations includes the weighted-average pre-funded warrants outstanding during the period as they are exercisable at any time for nominal cash consideration. The treasury stock method is used to compute the dilutive effect of the Company’s stock options and warrants. Under this method, the incremental number of common shares used in computing diluted net income (loss) per common share is the difference between the number of common shares assumed issued and purchased using assumed proceeds. - 7 - The if-converted method is used to compute the dilutive effect of the Company’s convertible preferred shares. Under the if-converted method, dividends on the preferred shares, if applicable, are added back to earnings attributable to common shareholders, and the preferred shares and paid-in kind dividends are assumed to have been converted at the share price applicable at the end of the period. The if-converted method is applied only if the effect is dilutive. For the three months ended March 31, 2023 and 2022, diluted net loss per share attributable to common shareholders is the same as basic net loss per share attributable to common shareholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. 4. Fair value of financial instrument s: The fair value hierarchy consists of the following three levels: • Level 1 - Unadjusted quoted prices in active markets for identical instruments. • Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs). • Level 3 - Inputs are unobservable and reflect the Company’s assumptions as to what market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available. The Company’s cash and cash equivalents and marketable securities are measured at fair value on a recurring basis. The level of the fair value hierarchy utilized to determine such fair values consisted of the following: March 31, 2023 December 31, 2022 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Cash and cash equivalents Cash and money market fund $ 69,512 $ — $ — $ 69,512 $ 57,242 $ — $ — $ 57,242 Marketable securities Guaranteed investment certificates 15,161 — — 15,161 14,953 — — 14,953 U.S. treasuries 289,139 — — 289,139 322,851 — — 322,851 U.S. government securities — 65,006 — 65,006 — 32,479 — 32,479 Commercial paper — 131,002 — 131,002 — 150,560 — 150,560 Corporate debt securities — 117,488 — 117,488 — 142,684 — 142,684 Total $ 373,812 $ 313,496 $ — $ 687,308 $ 395,046 $ 325,723 $ — $ 720,769 The fair values of the Company’s U.S. government securities, commercial paper and corporate debt securities are based on prices obtained from independent pricing sources. Securities with validated quotes from pricing services are reflected within Level 2, as they are primarily based on observable pricing for similar assets or other market observable inputs. Typical inputs used by these pricing services include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers or estimates of cash flow, prepayment spreads and default rates. As of March 31, 2023 and December 31, 2022, the Company does not hold any securities classified as Level 3, which are securities valued using unobservable inputs. - 8 - 5. Marketable securities As of March 31, 2023, the Company had $ 170,184 of trading securities and $ 447,612 of available-for-sale securities (December 31, 2022 – $ 276,642 and $ 386,885 , respectively). Amortized cost, unrealized losses recognized in accumulated other comprehensive loss and fair value of available-for-sale securities consisted of the following: March 31, 2023 December 31, 2022 Amortized Cost Unrealized Gain/(Loss) Fair Value Amortized Cost Unrealized Loss Fair Value Contractual maturity of 0 to 1 years: Guaranteed investment certificates $ 15,161 $ — $ 15,161 $ 14,953 $ — $ 14,953 U.S. treasuries 106,527 ( 721 ) 105,806 78,880 ( 837 ) 78,043 U.S. government securities 26,498 60 26,558 5,793 ( 20 ) 5,773 Commercial paper 131,002 — 131,002 150,560 — 150,560 Corporate debt securities 8,866 ( 46 ) 8,820 8,942 ( 68 ) 8,874 Contractual maturity of 1 to 3 years: U.S. treasuries 67,140 ( 327 ) 66,813 60,354 ( 958 ) 59,396 U.S. government securities 38,307 141 38,448 26,741 ( 35 ) 26,706 Corporate debt securities 54,941 63 55,004 42,672 ( 92 ) 42,580 Total $ 448,442 $ ( 830 ) $ 447,612 $ 388,895 $ ( 2,010 ) $ 386,885 Allowance for credit losses or impairment on these marketable securities have not been recognized as these securities are high credit quality, investment grade securities that the Company does not intend to sell and will not be required to sell prior to their anticipated recovery, and the decline in fair value is primarily due to changes in interest rates. 6. Leases: The Company has an operating lease for research laboratories and office space in Burnaby, British Columbia which expires on June 30, 2032 . In July 2022, the Company entered into an additional operating lease agreement for office space in Needham, Massachusetts ("Needham Lease"), which commenced on October 1, 2022. The Needham Lease is for a 62-month term and an option to terminate one year prior to the expiry date , which was not considered in the determination of the right-of-use asset and lease liability. The cost components of the operating leases were as follows for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 Lease Cost Operating lease expense $ 412 $ 238 Variable lease expense (1) 197 192 Lease Term and Discount Rate Weighted average remaining lease term (years) 7.98 10.25 Weighted average discount rate 3.92 % 3.42 % (1) Variable lease costs are payments that vary because of changes in facts or circumstances and include common area maintenance and property taxes related to the premises. Variable lease costs are excluded from the calculation of minimum lease payments. - 9 - Future minimum lease payments as of March 31, 2023 were as follows: Year ending December 31: 2023 $ 1,218 2024 1,680 2025 1,748 2026 1,816 2027 1,803 2028 and thereafter 5,300 Total future minimum lease payments $ 13,565 Less: imputed interest ( 1,938 ) Present value of lease liabilities $ 11,627 7. Accounts payable and accrued expenses: Accounts payable and accrued expenses consisted of the following: March 31, December 31, 2023 2022 Trade payables $ 11,412 $ 8,491 Employee compensation, benefits, and related accruals 2,668 5,823 Consulting and contracted research 5,617 7,148 Professional fees 836 411 Other 764 341 Total $ 21,297 $ 22,214 8. Share capital: (a) Financing: In August 2020, the Company entered into an “at-the-market” equity offering sales agreement, amended as of March 2022, with Jefferies LLC and Stifel, Nicolaus & Company, Incorporated and a new prospectus supplement was filed in March 2022 (“the March 2022 ATM") under which the Company may sell common shares having gross proceeds of up to $ 250,000 , from time to time. As of March 31, 2023, no common shares have been sold under the March 2022 ATM. In January 2022, in connection with the License and Collaboration Agreement with Neurocrine Biosciences Inc. (“Neurocrine Biosciences”) entered in December 2019 and amended in January 2021 (the "Neurocrine Collaboration Agreement"), the Company executed a Share Purchase Agreement ("SPA") pursuant to which the Company issued 258,986 common shares for an aggregate purchase price of $ 8,250 , or $ 31.855 per common share, which represents a premium of $ 374 when compared to the fair value of common shares on the date of issuance. The SPA contains certain other customary terms and conditions, including mutual representations, warranties and covenants. For additional information regarding the Neurocrine Collaboration Agreement, refer to note 9. (b) Exchange agreement with certain funds affiliated with BVF Partners L.P. (collectively, “BVF”): In March 2018, the Company and BVF entered into an exchange agreement pursuant to which the Company issued to BVF 2,868,000 Series 1 Preferred Shares in exchange for 2,868,000 common shares which were subsequently cancelled by the Company. The Series 1 Preferred Shares were convertible into common shares on a one-for-one basis, subject to certain restrictions. The Series 1 Preferred Shares ranked equally to the common shares in the event of liquidation, dissolution or winding up or other distribution of the assets of the Company among its shareholders and the holders of the Series 1 Preferred Shares were entitled to vote together with the common shares on an as-converted basis and as a single class, subject to certain restrictions. The Series 1 Preferred Shares were recorded wholly as equity under ASC 480, with no bifurcation of conversion feature from the host contract, given that the Series 1 Preferred Shares cannot be cash settled and have no redemption features. During the year ended December 31, 2018, BVF converted 1,852,000 Series 1 Preferred Shares in exchange for an equal number of common shares. In March 2022, the remaining outstanding 1,016,000 Series 1 Preferred Shares were exchanged for an equal number of common shares. - 10 - (c) Pre-funded warrants: The following table summarizes the pre-funded warrants activity for the three months ended March 31, 2023 and 2022: Date of issuance March 2021 October 2021 June 2022 Total Outstanding, December 31, 2021 1,081,081 1,694,915 — 2,775,996 Exercised — — — — Outstanding, March 31, 2022 1,081,081 1,694,915 — 2,775,996 Outstanding, December 31, 2022 1,081,081 1,694,915 327,868 3,103,864 Exercised ( 425,003 ) — — ( 425,003 ) Outstanding, March 31, 2023 656,078 1,694,915 327,868 2,678,861 In connection with underwritten public offerings completed in March 2021, October 2021 and June 2022, the Company issued pre-funded warrants to purchase the equivalent number of common shares at $ 18.4999 , $ 29.4999 and $ 30.4999 , per pre-funded warrant, respectively, with each pre-funded warrant having an exercise price of $ 0.0001 . The pre-funded warrants are exercisable at the holder’s discretion from the date of issuance until the date the pre-funded warrant is exercised in full. The Company may not affect the exercise of any pre-funded warrant, and a holder will not be entitled to exercise any portion of any pre-funded warrant that, upon giving effect to such exercise, would cause: (i) the aggregate number of common shares beneficially owned by such holder, together with its affiliates, to exceed 4.99% of the total number of common shares outstanding immediately after giving effect to the exercise; or (ii) the combined voting power of the Company’s securities beneficially owned by such holder, together with its affiliates, to exceed 4.99% of the combined voting power of all of the Company’s securities immediately outstanding after giving effect to the exercise, which percentage may be changed at the holder’s election to a higher or lower percentage not in excess of 19.99% upon at least 61 days’ notice to the Company. Since the pre-funded warrants meet the condition for equity classification, net proceeds from issuances of the pre-funded warrants are recorded in additional paid-in capital. Upon exercise of the pre-funded warrants, the historical costs recorded in additional paid-in capital along with the exercise price collected from holder is recorded in common shares. In January 2023, the Company issued 425,000 common shares upon the exercise of 425,003 (March 31, 2022 – nil) pre-funded warrants pursuant to a net exercise mechanism under the warrants. Pre-funded warrants to purchase 2,678,861 (March 31, 2022 – 2,775,996 ) common shares are not included in the number of issued and outstanding common shares as of March 31, 2023. (d) Stock-based compensation: The following table presents stock option activity for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 Outstanding, beginning of period 7,117,782 5,638,232 Granted 1,866,548 1,659,845 Exercised (1) ( 113,677 ) ( 219,107 ) Forfeited, cancelled or expired ( 73,400 ) ( 3,897 ) Outstanding, end of period 8,797,253 7,075,073 Exercisable, end of period 4,104,317 3,231,657 (1) During the three months ended March 31, 2023 , the Company issued 94,319 ( 2022 – 149,311 ) common shares for the cashless exercise of 113,677 ( 2022 – 219,107 ) stock options. - 11 - The fair value of each stock option granted is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: Three Months Ended March 31, 2023 2022 Average risk-free interest rate 3.87 % 1.94 % Expected volatility 69 % 70 % Average expected term (in years) 6.13 6.28 Expected dividend yield 0 % 0 % Weighted average fair value of stock options granted $ 22.19 $ 19.23 9. Revenue: Revenue was as follows for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 Neurocrine Biosciences: Recognition of the transaction price $ — $ 372 Research and development services — 1,270 Milestone payments — 7,124 Total revenue $ — $ 8,766 In December 2019, the Company entered into the Neurocrine Collaboration Agreement with Neurocrine Biosciences. Pursuant to this agreement, the Company granted an exclusive license to XEN901, now known as NBI-921352, and an exclusive license to pre-clinical compounds for development, XEN393, XPC’535 and XPC’391 (collectively, the “DTCs”). The agreement also includes a two-year research collaboration to discover, identify and develop additional novel Nav1.6 and Nav1.2/1.6 inhibitors (“Research Compounds”). The Company and Neurocrine Biosciences are collaborating on the conduct of two collaboration programs: (a) a joint research collaboration to discover, identify and preclinically develop Research Compounds (the “Research Program”), which completed in June 2022, and (b) a collaborative development program for NBI-921352 and two DTCs selected by the joint steering committee (the “Initial Development Program”). At execution of the agreement, Neurocrine Biosciences paid the Company an upfront cash payment of $ 30,000 and a $ 20,000 equity investment in the Company. The equity investment was measured at fair value of $ 16,667 on the date of issuance and the resulting premium of $ 3,333 , together with the upfront cash payment totaling $ 33,333 , was the transaction price of the arrangement for allocation to certain performance obligations under the agreement. None of the at-risk substantive performance milestones, including development, regulatory and sales-based milestones, were included in the transaction price at the inception of the agreement, as all milestone amounts are outside the control of the Company and contingent upon Neurocrine Biosciences’s efforts and success in future clinical trials. The overall transaction price of the arrangement was measured and allocated to certain performance obligations and revenue was recognized as those performance obligations were performed; all such performance obligations were completed as of March 2022. The Neurocrine Collaboration Agreement also includes research and development services for the Research Program and Initial Development Program to be performed on behalf of Neurocrine Biosciences. These services were excluded from the initial transaction price allocation because the consideration and performance were contingent upon Neurocrine Biosciences requesting performance of the services and these services were priced at an estimated fair value. During the three months ended March 31, 2022 , the Company recognized $ 1,270 of revenue for research and development services provided during the period. In January 2022, based on the receipt of the U.S. Food and Drug Administration’s full IND acceptance for NBI-921352, the Company received an aggregate milestone payment of $ 15,000 in the form of $ 6,750 in cash and a $ 8,250 equity investment in the Company (note 8a) . The equity investment was measured at fair value of $ 7,876 on the date of issuance and the resulting premium of $ 374 , with the cash payment of $ 6,750 , was recognized as revenue in the period as the Company did no t have any remaining performance obligations in relation to this milestone on the date it was achieved. - 12 - The Company is eligible to receive pre-commercial and commercial milestone payments with respect to the licensed products totaling up to an additional $ 1,667,500 , comprised of up to $ 1,067,500 in additional development and regulatory milestone payments related to NBI-921352 and other licensed Nav1.6 or Nav1.2/1.6 inhibitor products, and up to $ 600,000 in additional sales-based milestone payments for multiple products. In addition, the Company is eligible to receive royalties on net sales in and outside the U.S., ranging from (a) for NBI-921352, a low double-digit percentage to a mid-teen percentage and a high-single digit percentage to low double-digit percentage, respectively; (b) for DTCs, a high-single digit percentage to a low double-digit percentage and a mid-single digit percentage to a high-single digit percentage, respectively; and (c) for Research Compounds, a mid-single digit percentage to a high-single digit percentage and a tiered mid-single digit percentage, respectively. Royalty rates are subject to customary reductions. These additional amounts will be recognized as determinable. The Company has an option to co-fund 50 % of the development costs of NBI-921352 or another product candidate in the U.S., exercisable upon achievement of certain milestones, in exchange for increased U.S. royalties. The Company has not exercised this option as of March 31, 2023. 10. Commitments and contingencies: (a) Asset purchase agreement with 1st Order Pharmaceuticals, Inc. (“1st Order”): In April 2017, the Company acquired XEN1101 (previously known as 1OP2198) from 1st Order pursuant to an asset purchase agreement. In August 2020, the Company 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 March 31, 2023, the Company has paid $ 2,000 based on progress against these milestones. Future potential payments to 1st Order related to the XEN1101 program include up to $ 6,000 in regulatory milestones. There are no royalty obligations to 1st Order. (b) Guarantees and indemnifications: The Company has entered into license and research agreements with third parties that include indemnification provisions that are customary in the industry. These indemnification provisions generally require the Company to compensate the other party for certain damages and costs incurred as a result of third-party claims or damages arising from these transactions. The maximum amount of potential future indemnification is unlimited; however, the Company currently holds commercial and product liability insurance. This insurance limits the Company’s exposure and may enable it to recover a portion of any future amounts paid. Historically, the Company has not made any indemnification payments under such agreements and the Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented. - 13 - ITEM 2. MANAGE MENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section should be read in conjunction with our unaudited interim consolidated financial statements and related notes included in Part I, Item 1 of this report and our audited consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2022 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 1, 2023 and with the securities commissions in British Columbia, Alberta and Ontario on March 1, 2023. Forward-Looking Statements Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and Canadian securities laws. The words or phrases “would be,” “will allow,” “intends to,” “may,” “believe,” “plan,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to : • our ability to identify additional products or product candidates either from our internal research efforts or through acquiring or in-licensing other product candidates or technologies; • the initiation, timing, cost, progress and success of our research and development programs, pre-clinical studies, and clinical trials; • our ability to advance product candidates into, and successfully complete, clinical trials; • our ability to recruit sufficient numbers of patients for our current and future clinical trials; • our ability to obtain funding for our operations in sufficient amounts or on terms acceptable to us, including funding necessary to complete further development, approval and, if approved, commercialization of our product candidates; • our ability to independently develop and commercialize product candidates; • developments relating to our competitors and our industry, including the success of competing therapies that are or become available; • our pre-commercial, commercialization, marketing and manufacturing capabilities and strategy; • our ability to obtain and maintain intellectual property protection for our product candidates and the duration of such protection; • the therapeutic benefits, effectiveness and safety of our product candidates; • the timing of, and our and our collaborators’ ability to obtain and maintain, regulatory approvals for our product candidates; • the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products and product candidates and our ability to serve those markets, either alone or in partnership with others; • the rate and degree of market acceptance and clinical utility of any future products; • the pricing and reimbursement of our product candidates, if approved; • our expectations regarding federal, state and foreign regulatory requirements; • our ability to establish and maintain collaborations; • our expectations regarding market risk, including interest rate changes and foreign currency fluctuations; • our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; • our ability to engage and retain the employees required to grow our business; • our future financial performance; and • the direct and indirect impact of COVID-19 on our business and operations, including supply chain, manufacturing, research and development costs, clinical trial conduct, clinical trial data and employees. - 14 - These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A — “Risk Factors,” and elsewhere in this report. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments, except as required by law. In this report, “we,” “our,” “us,” “Xenon,” and “the Company” refer to Xenon Pharmaceuticals Inc. and its subsidiary. Unless otherwise noted, all dollar amounts in this report are expressed in United States dollars. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements. 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) Our XEN1101 Phase 3 epilepsy program includes two identical Phase 3 clinical trials, 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 are evaluating 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) Our Phase 3 X-ACKT clinical trial is intended 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 is evaluating 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. The last patient in the X-NOVA study is expected to be screened in June 2023, with topline results anticipated in the fourth 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. - 15 - XEN496 XEN496, a Kv7 potassium channel opener, is a proprietary pediatric formulation of the active ingredient ezogabine. Given the prioritized focus on the pediatric development plans for XEN1101, we will no longer pursue the clinical development of XEN496. For all patients currently on XEN496, we intend to work with study investigators to offer an option for continued access to XEN496 through a transition period. 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 fourth quarter 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. For the three months ended March 31, 2023 and 2022, we recognized revenue of nil and $8.8 million, respectively, in connection with our agreement with Neurocrine Biosciences. 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. We had a net loss of $41.7 million and $19.7 million for the three months ended March 31, 2023 and 2022. As of March 31, 2023, we had an accumulated deficit of $524.5 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 and any future commercialization efforts. Financial Operations Overview Revenue To date, our revenue has been primarily derived from collaboration and licensing agreements and we do not generate any revenue or royalty 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. 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. - 16 - The following table is a summary of revenue recognized for the three months ended March 31, 2023 and 2022 (in thousands): Three Months Ended March 31, 2023 2022 Neurocrine Biosciences: Recognition of the transaction price $ — $ 372 Research and development services — 1,270 Milestone payments — 7,124 Total revenue $ — $ 8,766 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 certain performance obligations and revenue was recognized as those performance obligations were completed. In January 2022, based on the U.S. Food and Drug Administration’s 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. 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. Research and development services were recognized as revenue at fair market value as the services were rendered. The research collaboration was completed in June 2022. Operating Expenses The following table summarizes our operating expenses for the three months ended March 31, 2023 and 2022 (in thousands): Three Months Ended March 31, 2023 2022 Research and development $ 39,516 $ 19,360 General and administrative 9,535 6,775 Total operating expenses $ 49,051 $ 26,135 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 contract research organizations, or 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 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. - 17 - 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. Unrealized fair value gain (loss) on trading securities. Trading securities are recorded at fair value. Unrealized fair value gain (loss) on trading securities is related to changes in market pricing on the investments during the period. We anticipate that unrealized fair value gain (loss) on trading securities will continue to fluctuate depending on our investment balance and market yields. Foreign exchange gain (loss). 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. 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. Critical accounting policies and significant judgments and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and significant estimates include those related to: • revenue recognition; - 18 - • research and development costs; and • stock-based compensation. There have been no material changes in our critical accounting policies and significant judgments and estimates during the three months ended March 31, 2023, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Critical Accounting Policies and Significant Judgments and Estimates” included in our 2022 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, or SEC, and with the securities commissions in British Columbia, Alberta and Ontario, or the Canadian Securities Commissions, on March 1, 2023. We believe that the accounting policies discussed in the Annual Report are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Results of Operations Comparison of three months ended March 31, 2023 and 2022 The following table summarizes the results of our operations for the three months ended March 31, 2023 and 2022 together with changes in those items (in thousands): Three Months Ended March 31, Change 2023 vs. 2022 2023 2022 Increase/(Decrease) Revenue $ — $ 8,766 $ (8,766 ) Research and development expenses 39,516 19,360 20,156 General and administrative expenses 9,535 6,775 2,760 Other: Interest income 5,423 368 5,055 Unrealized fair value gain (loss) on trading securities 1,878 (3,362 ) 5,240 Foreign exchange gain 313 299 14 Loss before income taxes $ (41,437 ) $ (20,064 ) $ (21,373 ) Revenue Revenue decreased by $8.8 million in the three months ended March 31, 2023 as compared to the same period in 2022. The decrease was primarily due to recognition of a $7.1 million milestone and $1.3 million of research and development services revenue under the Neurocrine Collaboration in 2022, whereas no milestones were recognized in 2023 and the research component of the collaboration ended in June 2022. Research and Development Expenses The following table summarizes research and development expenses for the three months ended March 31, 2023 and 2022 together with changes in those items (in thousands): Three Months Ended March 31, Change 2023 vs. 2022 2023 2022 Increase/(Decrease) Direct external costs: XEN1101 $ 21,100 $ 4,232 $ 16,868 XEN496 2,523 3,476 (953 ) Pre-clinical, discovery and other programs 2,640 2,708 (68 ) Indirect costs: Personnel-related (including stock-based compensation) 10,733 7,068 3,665 Facilities and other unallocated research and development expenses 2,520 1,876 644 Total research and development expenses $ 39,516 $ 19,360 $ 20,156 - 19 - Research and development expenses increased by $20.2 million in the three months ended March 31, 2023, compared to the same period in 2022. 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 our Phase 3 epilepsy clinical trials and our ongoing Phase 2 X-NOVA clinical trial. General and Administrative Expenses The following table summarizes general and administrative expenses for the three months ended March 31, 2023 and 2022 together with changes in those items (in thousands): Three Months Ended March 31, Change 2023 vs. 2022 2023 2022 Increase/(Decrease) Personnel-related (including stock-based compensation) $ 6,954 $ 4,730 $ 2,224 Professional and consulting fees 1,685 894 791 Other 896 1,151 (255 ) General and administrative $ 9,535 $ 6,775 $ 2,760 General and administrative expenses increased by $2.8 million in the three months ended March 31, 2023, compared to the same period in 2022. 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, as well as an increase in legal compliance fees and market research costs. Other Income (Expense) The following table summarizes our other income (expense) for the three months ended March 31, 2023 and 2022 together with changes in those items (in thousands): Three Months Ended March 31, Change 2023 vs. 2022 2023 2022 Increase/(Decrease) Other income (expense) $ 7,614 $ (2,695 ) $ 10,309 Other income (expense) increased by $10.3 million in the three months ended March 31, 2023, compared to the same period in 2022. The increase was primarily attributable to a $5.2 million increase in the fair value gain on trading securities in 2023 due to changes in market yields on trading securities, partially offset by a lower balance of trading securities. In addition, we recognized a $5.1 million increase in interest income driven by an increase in market yields on investments and a higher balance of marketable securities. 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 March 31, 2023, we have raised aggregate net cash proceeds of more than $1.0 billion primarily from the issuance of equity securities. As of March 31, 2023, we had cash and cash equivalents and marketable securities of $687.3 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 and Stifel, Nicolaus & Company, Incorporated and a new prospectus supplement was filed with the SEC on March 1, 2022, or the March 2022 ATM, pursuant to which we may sell common shares having gross proceeds of up to $250.0 million, from time to time. As of March 31, 2023, no common shares have been sold under the March 2022 ATM. - 20 - Funding Requirements We have incurred significant operating losses since inception. As of March 31, 2023, we had an accumulated deficit of $524.5 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. - 21 - 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. Cash Flows The following table shows a summary of our cash flows for the three months ended March 31, 2023 and 2022 (in thousands): Three Months Ended March 31, 2023 2022 Net cash used in operating activities $ (34,411 ) $ (18,428 ) Net cash provided by (used in) investing activities 46,622 (48,888 ) Net cash provided by financing activities — 7,876 Operating Activities For the three months ended March 31, 2023, net cash used in operating activities totaled $34.4 million, compared to $18.4 million for the same period in 2022. The increase in cash used in operating activities was primarily related to higher research and development and general and administrative expenses, and no revenue recognized in connection with the Neurocrine Collaboration in 2023. This was partially offset by higher interest income and changes in operating assets and liabilities. Investing Activities For the three months ended March 31, 2023, net cash provided by investing activities totaled $46.6 million, compared to net cash used of $48.9 million for the same period in 2022. The change was driven primarily by an increase in the redemption of marketable securities, net of purchases. Financing Activities For the three months ended March 31, 2023, net cash provided by financing activities was nil, compared to $7.9 million for the same period in 2022. The cash provided by financing activities during the three months ended March 31, 2022 was related to net proceeds from the issuance of common shares in connection with a milestone achieved under the Neurocrine Collaboration. Contractual Obligations and Commitments Our future significant contractual obligations as of December 31, 2022 were reported in our Annual Report on Form 10-K, filed with the SEC and the Canadian Securities Commissions on March 1, 2023. As of March 31, 2023, there have been no material changes from the contractual commitments previously disclosed in the Annual Report on Form 10-K. Off-Balance Sheet Arrangements We do not engage in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities, which include special purposes entities and other structured finance entities. Outstanding Share Data As of May 5, 2023, we had 63,562,303 common shares issued and outstanding, outstanding pre-funded warrants to purchase an additional 2,253,858 common shares, outstanding stock options to purchase an additional 8,762,750 common shares and an outstanding warrant to purchase an additional 40,000 common shares. - 22 -