Xenon Pharmaceuticals Inc. 10-Q

Item 1. Financial Statements XENON PHARMACEUTICALS INC. Consolidated Balance Sheets (Unaudited) (Expressed in thousands of U.S. dollars except share amounts) March 31, December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 116,541 $ 175,688 Marketable securities 421,399 376,086 Accounts receivable 2,923 2,765 Prepaid expenses and other current assets 4,753 4,481 545,616 559,020 Operating lease right-of-use asset, net (note 5) 7,900 8,056 Property, plant and equipment, net 4,336 4,466 Deferred tax assets 207 465 Total assets $ 558,059 $ 572,007 Liabilities and shareholders’ equity Current liabilities: Accounts payable and accrued expenses (note 6) $ 7,982 $ 13,717 Operating lease liability (note 5) — 605 7,982 14,322 Operating lease liability, long-term (note 5) 8,224 7,652 $ 16,206 $ 21,974 Shareholders’ equity: Preferred shares, without par value; unlimited shares authorized; issued and outstanding: nil (December 31, 2021 - 1,016,000 ) (note 7) $ — $ 7,732 Common shares, without par value; unlimited shares authorized; issued and outstanding: 53,059,049 (December 31, 2021 - 51,634,752 ) (note 7) 800,307 783,170 Additional paid-in capital 119,580 117,495 Accumulated deficit ( 377,044 ) ( 357,374 ) Accumulated other comprehensive loss ( 990 ) ( 990 ) $ 541,853 $ 550,033 Total liabilities and shareholders’ equity $ 558,059 $ 572,007 Commitments and contingencies (note 9) The accompanying notes are an integral part of these financial statements. -3- XENON PHARMACEUTICALS INC. Consolidated Statements of Operations and Comprehensive Loss (Unaudited) (Expressed in thousands of U.S. dollars except share and per share amounts) Three Months Ended March 31, 2022 2021 Revenue (note 8) $ 8,766 $ 4,358 Operating expenses: Research and development 19,360 16,308 General and administrative 6,775 4,109 26,135 20,417 Loss from operations ( 17,369 ) ( 16,059 ) Other income (expense): Interest income 368 146 Unrealized fair value loss on marketable securities ( 3,362 ) ( 74 ) Foreign exchange gain 299 155 Loss before income taxes ( 20,064 ) ( 15,832 ) Income tax recovery 394 68 Net loss and comprehensive loss ( 19,670 ) ( 15,764 ) Net loss attributable to preferred shareholders ( 299 ) ( 423 ) Net loss attributable to common shareholders $ ( 19,371 ) $ ( 15,341 ) Net loss per common share (note 3): Basic and diluted $ ( 0.35 ) $ ( 0.42 ) Weighted-average common shares outstanding (note 3): Basic and diluted 54,852,792 36,824,619 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 (1) Total shareholders' equity Shares Amount Shares Amount Balance as of December 31, 2020 1,016,000 $ 7,732 35,012,125 $ 397,748 $ 45,357 $ ( 278,492 ) $ ( 990 ) $ 171,355 Net loss for the period — — — — — ( 15,764 ) — ( 15,764 ) Issuance of common shares and pre-funded warrants, net of issuance costs (note 7a and note 7c) — — 5,868,135 99,846 18,769 — — 118,615 Stock-based compensation expense — — — — 1,965 — — 1,965 Issued pursuant to exercise of stock options — — 82,455 740 ( 634 ) — — 106 Balance as of March 31, 2021 1,016,000 $ 7,732 40,962,715 $ 498,334 $ 65,457 $ ( 294,256 ) $ ( 990 ) $ 276,277 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 7a) — — 258,986 7,876 — — — 7,876 Conversion of preferred shares to common shares (note 7b) ( 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 (1 ) The accumulated other comprehensive loss is entirely related to historical cumulative translation adjustments from the application of U.S. dollar reporting when the functional currency of the Company was the Canadian dollar. 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, 2022 2021 Operating activities: Net loss $ ( 19,670 ) $ ( 15,764 ) Items not involving cash: Depreciation 376 196 Deferred income tax recovery 258 9 Stock-based compensation 3,614 1,965 Unrealized foreign exchange gain ( 142 ) ( 204 ) Unrealized fair value loss on marketable securities 3,362 74 Changes in operating assets and liabilities: Accounts receivable ( 155 ) ( 3,238 ) Prepaid expenses and other current assets ( 272 ) ( 533 ) Accounts payable and accrued expenses ( 5,799 ) ( 3,213 ) Net cash used in operating activities ( 18,428 ) ( 20,708 ) Investing activities: Purchases of property, plant and equipment ( 212 ) ( 404 ) Purchases of marketable securities ( 68,956 ) ( 100,655 ) Proceeds from marketable securities 20,280 45,955 Net cash used in investing activities ( 48,888 ) ( 55,104 ) Financing activities: Issuance of common shares and pre-funded warrants, net of issuance costs (note 7a) 7,876 118,615 Issuance of common shares pursuant to exercise of stock options — 106 Net cash provided by financing activities 7,876 118,721 Effect of exchange rate changes on cash and cash equivalents 293 67 Increase (decrease) in cash and cash equivalents ( 59,147 ) 42,976 Cash and cash equivalents, beginning of period 175,688 45,009 Cash and cash equivalents, end of period $ 116,541 $ 87,985 Supplemental disclosures: Interest received $ 1,682 $ 651 Cash paid for operating lease 203 202 Supplemental disclosures of non-cash transactions: Fair value of stock options exercised on a cashless basis 1,529 448 The accompanying notes are an integral part of these financial statements. -6- XENON PHARMACEUTICALS INC Notes to Consolidated 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, 2022, the Company had an accumulated deficit of $ 377,044 and a $ 19,670 net loss for the three months ended March 31, 2022. 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 funding received from collaboration and license agreements, private placements of common and preferred shares, public offerings of common shares and pre-funded warrants 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 consolidated financial statements are presented in U.S. dollars. The Company has one wholly-owned subsidiary as of March 31, 2022, Xenon Pharmaceuticals USA Inc., which was incorporated in Delaware on December 2, 2016 . These unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated on consolidation. Certain information has been reclassified to conform with the financial presentation adopted for the current year. 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, 2021 included in the Company’s 2021 Annual Report on Form 10-K filed with the SEC and with the securities commissions in British Columbia, Alberta and Ontario on March 1, 2022. 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, 2022 and 2021 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 2021 Annual Report on Form 10-K for the year ended December 31, 2021. 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 and 2021. 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 preferred shares were converted and exchanged for an equal number of common shares of the Company (note 7b). 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 . -7- 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. 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, 2022 and 2021, all stock options, warrants and convertible preferred shares were anti-dilutive and were excluded from the diluted weighted average common shares outstanding for the period. 4 . Fair value of financial instruments: The Company measures certain financial instruments and other items at fair value. To determine the fair value, the Company uses the fair value hierarchy for inputs used to measure fair value of financial assets and liabilities. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 (highest priority), Level 2, and Level 3 (lowest priority). • 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. Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company’s Level 1 assets include cash and cash equivalents and marketable securities with quoted prices in active markets. The carrying amount of accounts receivables, accounts payable and accrued expenses approximates fair value due to the nature and short-term of those instruments. 5 . Leases: The Company has one operating lease for research laboratories and office space in Burnaby, British Columbia. In October 2020, the Company entered into a lease amendment for a 21–month committed term from October 1, 2020 to June 30, 2022 and a renewal option for a portion of the facility for a 5-year term that was reasonably certain of exercise was included in the determination of the right-of-use asset and lease liability. In November 2021, the Company entered into an agreement to extend the lease for an additional 10-year term to June 30, 2032 . -8- The cost components of the operating lease were as follows for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 Lease Cost Operating lease expense $ 238 $ 139 Variable lease expense (1) 192 184 Lease Term and Discount Rate Remaining lease term (years) 10.25 6.25 Discount rate 3.42 % 2.45 % (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. Future minimum lease payments as of March 31, 2022 were as follows: Year ending December 31: 2022 $ 682 2023 942 2024 985 2025 1,040 2026 1,095 2027 and thereafter 6,868 Total future minimum lease payments $ 11,612 Less: imputed interest ( 1,904 ) Less: future lease incentives reasonably certain of use (1) ( 1,484 ) Present value of lease liabilities $ 8,224 (1) The future lease incentives are expected to be utilized within the next twelve months. 6. Accounts payable and accrued expenses: Accounts payable and accrued expenses consisted of the following: March 31, December 31, 2022 2021 Trade payables $ 1,659 $ 3,824 Employee compensation, benefits, and related accruals 2,106 5,940 Consulting and contracted research 3,780 3,550 Professional fees 155 285 Other 282 118 Total $ 7,982 $ 13,717 7 . 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 (“Jefferies”) and Stifel, Nicolaus & Company, Incorporated (“Stifel”) pursuant to which the Company may sell common shares from time to time. In January 2021, the Company sold an aggregate of 733,000 common shares for proceeds of $ 10,693 , net of commissions and transaction expenses pursuant to a prospectus supplement filed in August 2020 (“August 2020 ATM"). The Company may sell common shares having gross proceeds of up to $ 250,000 , from time to time, pursuant to a new prospectus supplement filed in March 2022 (“March 2022 ATM"), replacing the August 2020 ATM. As of March 31, 2022, no common shares have been sold under the March 2022 ATM. -9- In March 2021, the Company entered into an underwriting agreement with Jefferies and Stifel, relating to an underwritten public offering of 5,135,135 common shares, including 810,810 common shares sold upon the full exercise of the underwriters’ over-allotment option, at a public offering price of $ 18.50 per common share and pre-funded warrants to purchase 1,081,081 common shares at $ 18.4999 per pre-funded warrant (note 7c), with each pre-funded warrant having an exercise price of $ 0.0001 . The public offering was completed in March 2021, and the Company received proceeds of $ 107,922 , net of underwriting discounts, commissions and offering expenses. In January 2022, in connection with the License and Collaboration Agreement 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 8a. (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 had 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. (c) Pre-Funded Warrants: In connection with the underwritten public offerings completed in March and October 2021, the Company issued 1,081,081 pre-funded warrants at a price of $ 18.4999 per pre-funded warrant which grants the holder the right to purchase up to 1,081,081 common shares at an exercise price of $ 0.0001 per share and 1,694,915 pre-funded warrants at a price of $ 29.4999 per pre-funded warrant which grants the holder the right to purchase up to 1,694,915 common shares at an exercise price of $ 0.0001 per share, respectively (together, the “Pre-Funded Warrants”). 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 will be recorded in common shares. As of March 31, 2022, no Pre-Funded Warrants have been exercised. Pre-funded Warrants to purchase 2,775,996 (March 31, 2021 – 1,081,081 ) common shares are not included in the number of issued and outstanding common shares as of March 31, 2022. -10- (d) Stock-based compensation: The following table presents stock option activity for the period: Three Months Ended March 31, 2022 2021 Outstanding, beginning of period 5,638,232 4,758,997 Granted 1,659,845 1,111,950 Exercised (1) ( 219,107 ) ( 122,403 ) Forfeited, cancelled or expired ( 3,897 ) ( 5,936 ) Outstanding, end of period 7,075,073 5,742,608 Exercisable, end of period 3,231,657 2,769,438 (1) During the three months ended March 31, 2022, no stock options were exercised for cash (2021 – 46,296 ). In the same period, the Company issued 149,311 (2021 – 36,159 ) common shares for the cashless exercise of 219,107 (2021 – 76,107 ) stock options. 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, 2022 2021 Average risk-free interest rate 1.94 % 1.15 % Expected volatility 70 % 68 % Average expected term (in years) 6.28 6.53 Expected dividend yield 0 % 0 % Weighted average fair value of stock options granted $ 19.23 $ 12.86 8 . Revenue: Revenue was as follows for the three months ended March 31, 2022 and 2021 : Three Months Ended March 31, 2022 2021 Neurocrine Biosciences: Recognition of the transaction price $ 372 $ — Research and development services 1,270 1,358 Milestone payments 7,124 — Pacira BioSciences: Milestone payments — 3,000 Total collaboration revenue $ 8,766 $ 4,358 (a) Neurocrine Biosciences license and collaboration agreement : 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”) which has been extended to June 2022. 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”) and (b) a collaborative development program for NBI-921352 and two DTCs selected by the joint steering committee (the “Initial Development Program”). -11- 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 the performance obligati ons. The agreement includes the following performance obligations: (i) an exclusive license to NBI-921352 with associated technology and know-how transfer, (ii) an exclusive license to the DTCs with associated know-how transfer, (iii) a license to Research Compounds and research services under the Research Program, (iv) development services under the Initial Development Program for NBI-921352 , and (v) development services under the Initial Development Program for the DTCs. The total transaction price of $ 33,333 was allocated to performance obligation (v) based on its estimated standalone selling price determined based on internal development plans and budget, with the balance allocated to performance obligations (i) and (ii) by the residual approa ch. The Company allocated the transaction price as follows: $ 28,807 to performance obligations (i) and (ii), completed as of December 2020 , and $ 5,025 , which includes $ 499 of variable consideration, to performance obligation (v ), which was complete d as of March 2022 . The arrangement consideration related to the services under performance obligations (iii) and (iv) to be performed on behalf of Neurocrine Biosciences were excluded from the initial transaction price allocation because the consideration and performance are contingent upon Neurocrine Biosciences requesting performance of the services and these services are priced at an estimated fair value. 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. In January 2022, based on the receipt of the U.S. Food and Drug Administration’s (“FDA”) 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 7a) . 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. During the three months ended March 31, 2022 and 2021, the Company recognized $ 1,270 and $ 1,358 of revenue, respectively, for the research and development services under (iii) the Research Program and (iv) the Initial Development Program for NBI-921352. As of March 31, 2022, there is $ 1,418 of accounts receivable outstanding from Neurocrine Biosciences. 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, 2022. (b) Asset Purchase Agreement with Flexion Therapeutics, Inc., which was subsequently acquired by Pacira BioSciences, Inc. In September 2019, the Company entered into an agreement with Flexion Therapeutics Inc. (“Flexion”), which was acquired by Pacira BioSciences, Inc. (“Pacira BioSciences”) in November 2021, pursuant to which Flexion acquired all rights with respect to XEN402, and a related compound (collectively “XEN402”), including certain regulatory documentation, intellectual property rights, reports, data and all quantities of XEN402, now known as PCRX301, owned or controlled by the Company. During the three months ended March 31, 2021, the FDA cleared the first investigational new drug application for PCRX301 and Flexion initiated a Phase 1b clinical trial, resulting in milestone payments of $ 1,000 and $ 2,000 paid to the Company, respectively. Pursuant to terms of the agreement, the Company will also be eligible for a development milestone payment of $ 5,000 upon initiation of a Phase 2 proof-of-concept clinical trial. Following successful proof-of-concept, the Company may be entitled to future clinical development and global regulatory approval milestone payments of up to $ 40,750 , commercial milestone payments of up to $ 75,000 , as well as future royalties ranging from mid-single to low-double digit percentages. These additional amounts will be recognized as determinable. -12- 9 . Commitments and contingencies: (a) Priority access agreement with Medpace Inc. (“Medpace”): In August 2015, the Company entered into a priority access agreement with Medpace for the provision of certain clinical development services, under which the Company has committed to using Medpace non-exclusively for clinical development services over the five-year term of the agreement which ended in August 2020. The Company has committed to $ 7,000 of services over the term of the agreement of which $ 4,208 of services have been received and $ 2,792 remains committed as of March 31, 2022. As the Company did not meet the commitment to retain Medpace for $7,000 of services prior to August 2020, the Company is required to provide Medpace the exclusive right to perform all subsequent outsourced clinical development work until such $7,000 commitment has been satisfied, subject to the availability of appropriate Medpace resources and reasonable service rates. If the Company decides not to retain Medpace for the provision of clinical development services, the Company may satisfy its obligations under the priority access agreement by paying Medpace an amount equal to half of the unsatisfied portion. The Company intends to continue to utilize Medpace for clinical development work where suitable in order to fulfill the remaining commitment; therefore, no liability has been recognized as of March 31, 2022 with respect to the unsatisfied portion under the priority access agreement. (b) 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. Future potential payments to 1st Order related to the XEN1101 program include up to $ 900 in clinical development milestones, up to $ 6,000 in regulatory milestones, and $ 500 in other milestones. To date, the Company has paid $ 600 based on progress against these milestones. There are no royalty obligations to 1st Order. (c) 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, 2021 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 1, 2022 and with the securities commissions in British Columbia, Alberta and Ontario on March 1, 2022. 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 for orphan or more common indications; • our ability to achieve profitability; • our ability to obtain funding for our operations; • our ability to receive milestones, royalties and sublicensing fees under our collaborations, and the timing of such payments; • the timing and magnitude of potential milestone payments under our product acquisition and in-licensing agreements; • the implementation of our business model and strategic plans; • our ability to develop and commercialize product candidates for orphan and niche indications or more common indications independently; • our pre-commercial, commercialization, marketing, and manufacturing capabilities and strategy; • our ability to identify drug targets; • our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; • our expectations regarding federal, state and foreign regulatory requirements; • the therapeutic benefits, effectiveness and safety of 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; • the rate and degree of market acceptance and clinical utility of any future products; • the timing of, and our and our collaborators’ ability to obtain and maintain, regulatory approvals for our product candidates; • our ability to maintain and establish collaborations; • our expectations regarding market risk, including interest rate changes and foreign currency fluctuations; • our belief in the sufficiency of our cash, cash equivalents and marketable securities to meet our needs for at least the next 12 months; -14- • our ability to engage and retain the employees required to grow our business; • our future financial performance and projected expenditures; • 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; • developments relating to our competitors and our industry, including the success of competing therapies that are or become available; and • estimates of our expenses, future revenue, capital requirements and our needs for additional financing. 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 . Proprietary Programs XEN1101 for Epilepsy XEN1101 is a differentiated Kv7 potassium channel opener being developed for the treatment of epilepsy and major depressive disorder, or MDD. In October 2021, we announced positive results from our Phase 2b X-TOLE clinical trial, which evaluated the clinical efficacy, safety and tolerability of XEN1101 administered as an adjunctive treatment for adult patients with focal epilepsy. The topline data showed all primary and secondary seizure reduction endpoints were statistically significant across all dose groups, including the primary endpoint of median reduction from baseline in monthly seizure frequency and in the key secondary endpoint of patients with at least a 50% reduction in monthly focal seizure frequency from baseline, with p-values of <0.001 for both the 20 mg and 25 mg dose groups. We will participate in an “end-of-Phase 2” meeting with the U.S. Food and Drug Administration, or FDA, in the second quarter of this year to support the initiation of our Phase 3 XEN1101 clinical program in adult patients with focal epilepsy, estimated in the second half of the year. The ongoing X-TOLE open-label extension also continues to generate important long-term data for XEN1101. We are also evaluating other potential epilepsy indications for the future development of XEN1101. -15- XEN1101 for MDD Based on promising pre-clinical data with XEN1101 and published clinical data generated from both an open-label study and a randomized, placebo-controlled clinical trial that explored the targeting of KCNQ channels as a treatment for MDD using ezogabine, we are evaluating the efficacy, safety and tolerability of XEN1101 for the treatment of MDD in a Phase 2 randomized, double-blind, placebo-controlled, multicenter clinical study – called the “X-NOVA” clinical trial. Following a 4-week screening period, approximately 150 subjects with MDD will be randomized (on a 1:1:1 basis) for once-daily dosing of XEN1101 (10 mg), XEN1101 (20 mg) or placebo for 6 weeks. The primary objective is to assess the efficacy of 10 mg and 20 mg doses 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. Secondary endpoints include improvement of anhedonia symptoms assessed by the Snaith-Hamilton Pleasure Scale, or SHAPS, score change through week six, as well as improvement of anxiety symptoms measured by the Beck Anxiety Inventory, or BAI, score change through week six. Topline results from the X-NOVA study are anticipated in 2023. In addition, we are collaborating with the Icahn School of Medicine at Mount Sinai to conduct 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 SHAPS scales. 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 the “EPIK” study, 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 2023. Partnered Programs NBI-921352 We have an ongoing collaboration with Neurocrine Biosciences Inc., or 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 2023. 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. PCRX301 (formerly FX301) In November 2021, Pacira BioSciences, Inc., or Pacira BioSciences, completed its acquisition of Flexion Therapeutics, Inc., or Flexion, which included Flexion’s global rights to develop and commercialize XEN402, a Nav1.7 inhibitor also known as funapide. XEN402 has been formulated for extended release from a thermosensitive hydrogel and is now known as PCRX301 (previously FX301). A Phase 1b proof-of-concept trial is underway evaluating the safety and tolerability of PCRX301 administered as a single-dose, popliteal fossa block in patients undergoing bunionectomy. 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, 2022 and 2021, we recognized revenue of $8.8 million and $4.4 million, respectively, in connection with our agreements with Neurocrine Biosciences and Pacira BioSciences. We had a net loss of $19.7 million for the three months ended March 31, 2022 and an accumulated deficit of $377.0 million as of March 31, 2022, from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We do not generate any revenue or royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales for the foreseeable future, if ever . We expect that our revenue in the near term will be substantially dependent on our collaboration agreements. Given the uncertain nature of clinical development of our current and future product candidates and the commercialization of current and future products, we cannot predict when or whether we will receive further milestone payments under our current or future collaboration agreements or whether we will be able to report either revenue or net income in future years. -16- We expect to continue to incur significant expenses and operating losses for the foreseeable future . We anticipate that our expenses will increase as we: • continue our research and pre-clinical and clinical development of our product candidates either from our internal research efforts or through acquiring or in-licensing other product candidates or technologies; • seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical trials; • make milestone and other payments under our in-license or other agreements; • maintain, protect and expand our intellectual property portfolio; • attract, hire and retain skilled personnel; and • create additional infrastructure to support our operations. Financial Operations Overview Revenue To date, our revenue has been primarily derived from collaboration and licensing agreements. We do not generate any revenue or royalty revenue from product sales , and do not otherwise anticipate generating revenue from product sales for the foreseeable future, if ever. The following table is a summary of revenue recognized from our current collaboration and licensing agreements for the three months ended March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Neurocrine Biosciences: Recognition of the transaction price $ 372 $ — Research and development services 1,270 1,358 Milestone payments 7,124 — Pacira BioSciences: Milestone payments — 3,000 Total collaboration revenue $ 8,766 $ 4,358 Pursuant to the terms of our license and collaboration agreement with Neurocrine Biosciences, we received an upfront cash payment of $30.0 million and a $20.0 million equity investment in our common shares at the inception of the agreement in December 2019. The equity investment was measured at fair value on the date of issuance and the resulting premium, together with the upfront cash payment and variable consideration which is probable that a significant reversal of the cumulative revenue recognized will not occur, is the transaction price of the arrangement at the inception of the agreement for allocation to the performance obligations. The allocation was based on the relative estimated standalone selling prices of each obligation under the agreement including: (i) an exclusive license to NBI-921352 with associated technology and know-how transfer, (ii) an exclusive license to pre-clinical compounds for development, XEN393, XPC’535 and XPC’391, collectively referred to as the development track candidates, or the DTCs, with associated know-how transfer, and (iii) development services under the initial development program for the DTCs. In the three months ended March 31, 2022, we recognized $0.4 million of the transaction price allocated to performance obligation (iii) which was completed as of March 31, 2022. In January 2022, based on the FDA’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 a $8.25 million equity investment in our common shares. The equity investment was measured at fair value of $7.9 million on the date of issuance and the resulting premium of $0.3 million, with the cash payment of $6.75 million, was recognized as revenue in the period. Performance obligations (i) and (ii) were completed as of December 31, 2021 . Research and development services are recognized into revenue at fair market value as the services are rendered. In the three months ended March 31, 2021, we recognized revenue of $3.0 million in connection with our agreement with Pacira BioSciences 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 for the three months ended March 31, 2022 in connection with our agreement with Pacira BioSciences. -17- As our internal and partnered products are in various stages of clinical and pre-clinical development, we do not expect to generate any revenue from product sales for at least the next several years. We expect that any revenue for the next several years will be derived from milestone payments and research and development funding under our current collaboration agreements and any additional collaboration agreements that we may enter into in the future. We cannot provide any assurance as to the extent or timing of future milestone payments or royalty payments or that we will receive any future payments at all . We expect that any revenue we generate will fluctuate quarter to quarter as a function of the timing and amount of milestones and other payments from our existing collaborations and any future collaborations. Operating Expenses The following table summarizes our operating expenses for the three months ended March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Research and development $ 19,360 $ 16,308 General and administrative 6,775 4,109 Total operating expenses $ 26,135 $ 20,417 Research and Development Expenses Research and development expenses represent costs incurred to conduct research and development of our proprietary product candidates, 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 salary, related benefits and stock-based compensation for employees engaged in scientific research and development, third-party contract costs relating to research, formulation, process development and manufacturing, pre-clinical studies and clinical trial activities, third-party acquisition, license and collaboration fees, laboratory consumables and allocated facility-related 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. We expect that our research and development expenses will increase in the future as we advance our proprietary product candidates through clinical development, advance our internal drug discovery programs into pre-clinical development and continue our early-stage research. The increase in expense will likely include added personnel and third-party contracts related to research, formulation, process development and manufacturing, pre-clinical studies and clinical trial activities as well as third-party acquisition, license and collaboration fees and laboratory consumables. Clinical development timelines, likelihood of regulatory approval, and commercialization and associated costs are uncertain, difficult to estimate, and can vary significantly. We anticipate determining which research and development projects to pursue as well as the level of funding available for each project based on the scientific research and pre-clinical and clinical results of each product candidate and related regulatory action. We expect our research and development expenses to continue to represent our largest category of operating expenses for at least the next 12 to 24 months. General and Administrative Expenses General and administrative expenses consist primarily of salary, related benefits and stock-based compensation of our executive, finance, legal, business development, commercial and administrative functions, travel expenses, allocated facility-related and information technology costs not otherwise included in research and development expenses, director compensation, director’s and officer’s insurance premiums, investor relations costs, recruitment costs and professional fees for auditing, tax and legal services, including legal expenses for intellectual property protection. We expect that general and administrative expenses will increase in the future as we expand our operating activities to support increased research and development activities and the potential commercialization of our product candidates. -18- 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 marketable securities. Marketable securities are recorded at quoted prices in active markets, which approximate the fair value. Unrealized fair value gain (loss) on marketable securities is related to changes in market pricing on the investments during the period. We anticipate that unrealized fair value gain (loss) on marketable 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; • 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, 2022, 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 2021 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, 2022. 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. -19- Results of Operations Comparison of Three Months Ended March 31, 2022 and 2021 The following table summarizes the results of our operations for the three months ended March 31, 2022 and 2021 together with changes in those items (in thousands): Three Months Ended March 31, Change 2022 vs. 2021 2022 2021 Increase/(Decrease) Revenue $ 8,766 $ 4,358 $ 4,408 Research and development expenses 19,360 16,308 3,052 General and administrative expenses 6,775 4,109 2,666 Other: Interest income 368 146 222 Unrealized fair value loss on marketable securities (3,362 ) (74 ) (3,288 ) Foreign exchange gain 299 155 144 Loss before income taxes $ (20,064 ) $ (15,832 ) $ (4,232 ) Revenue Revenue increased by $4.4 million in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. Revenue for the three months ended March 31, 2022 related to recognition of $7.1 million of milestone revenue as well as $1.6 million for research and development services under our license and collaboration agreement with Neurocrine Biosciences, as compared to recognition of $1.4 million for research and development services under our license and collaboration agreement in the three months ended March 31, 2021. Revenue for the three months ended March 31, 2021 also included $3.0 million in milestone revenue recognized in connection with our agreement with Pacira BioSciences, whereas no revenue was recognized in connection with this agreement for the three months ended March 31, 2022. Research and Development Expenses The following table summarizes research and development expenses for the three months ended March 31, 2022 and 2021 together with changes in those items (in thousands): Three Months Ended March 31, Change 2022 vs. 2021 2022 2021 Increase/(Decrease) XEN1101 $ 7,438 $ 6,469 $ 969 XEN496 5,552 5,677 (125 ) NBI-921352 200 356 (156 ) Pre-clinical, discovery and other programs 6,170 3,806 2,364 Total research and development $ 19,360 $ 16,308 $ 3,052 Research and development expenses increased by $3.1 million in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The increase was primarily attributable to increased spending on our pre-clinical, discovery and other internal programs as well as increased spending on XEN1101. -20- General and Administrative Expenses The following table summarizes general and administrative expenses for the three months ended March 31, 2022 and 2021 together with changes in those items (in thousands): Three Months Ended March 31, Change 2022 vs. 2021 2022 2021 Increase/(Decrease) General and administrative $ 6,775 $ 4,109 $ 2,666 General and administrative expenses increased by $2.7 million in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The increase was primarily attributable to increased stock-based compensation expense due to an increase in the number of options granted at a higher fair value, higher salaries and benefits due to increased headcount to support our expanding research and development activities, increased recruitment fees, and increased market research costs . Other Income (Expense) The following table summarizes our other income (expense) for the three months ended March 31, 2022 and 2021 together with changes in those items (in thousands): Three Months Ended March 31, Change 2022 vs. 2021 2022 2021 Increase/(Decrease) Other income (expense) $ (2,695 ) $ 227 $ (2,922 ) Other income (expense) decreased by $2.9 million in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The decrease was primarily driven by an unrealized loss on the fair value of marketable securities of $3.4 million for the three months ended March 31, 2022 due to changes in market yields on investments. This was partially offset by an increase in interest income of $0.2 million due to an increase in marketable securities. Liquidity and Capital Resources Sources of Liquidity To date, we have financed our operations primarily through funding received from collaboration and license agreements, private placements of our common and preferred shares, public offerings of our common shares and pre-funded warrants, and debt financing . As of March 31, 2022, we had cash and cash equivalents and marketable securities of $537.9 million. -21- Except for any obligations of our collaborators to make milestone payments and research and development funding 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. For example, we entered into an “at-the-market” equity offering sales agreement in August 2020, amended as of March 2022, wi th 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 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 March 2022 ATM, replacing the August 2020 ATM . As of March 31, 2022, no common shares have been sold under the March 2022 ATM. In January 2022, pursuant to the terms of our license and collaboration agreement w ith Neurocrine Biosciences, we received a cash payment of $6.75 million and we issued 258,986 common shares to Neurocrine Biosciences for an aggregate purchase price of $8.25 million. In addition, in October 2021, we completed an underwritten public offering of 10,000,000 common shares, including 1,525,423 common shares sold upon the full exercise of the underwriters’ over-allotment option, at a public offering price of $29.50 per common share, and pre-funded warrants to purchase 1,694,915 common shares at $29.4999 per pre-funded warrant, with each pre-funded warrant having an exercise price of $0.0001. The public offering was completed on October 8, 2021, and we received proceeds of $323.9 million, net of underwriting discounts and commissions and offering expenses. In September 2021, pursuant to the terms of our license and collaboration agreement with Neurocrine Biosciences, we received a cash payment of $4.5 million and we issued 275,337 common shares to N eurocrine Biosciences for an aggregate purchase price of $5.5 million. In March 2021, we entered into an underwriting agreement with Jefferies and Stifel relating to an underwritten public offering of 5,135,135 common shares, including 810,810 shares sold upon the full exercise of the underwriters’ option to purchase additional shares, and pre-funded warrants to purchase 1,081,081 common shares. The common shares were offered at a public offering price of $18.50 per common share and the pre-funded warrants were offered at a price of $18.4999 per pre-funded warrant, for proceeds of $107.9 million, net of underwriting discounts, commissions and offering expenses. Funding Requirements We have incurred significant operating losses since inception. We had a $19.7 million net loss for the three months ended March 31, 2022 and an accumulated deficit of $377.0 million from inception through March 31, 2022. 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; change or add additional manufacturers or suppliers and 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; 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 and distribution 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 number and characteristics of the future product candidates we pursue either from our internal research efforts or through acquiring or in-licensing other product candidates or technologies; • the scope, progress, results and costs of independently researching and developing any of our future product candidates, including conducting pre-clinical research and clinical trials; • whether our existing collaborations continue to generate substantial milestone payments and, ultimately, royalties on future approved products for us; • the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates we develop independently; • the timing and magnitude of potential milestone payments and royalties under our product acquisition and in-license agreements; • the cost of pre-commercial activities in advance of product commercialization as well as commercializing any future products we develop independently that are approved for sale; • the cost of manufacturing our future product candidates and products, if any; -22- • our ability to maintain existing collaborations and to establish new collaborations, licensing or other arrangements and the financial terms of such agreements; • the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome of such litigation; and • the timing, receipt and amount of sales of, or royalties on our future products, if any. 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. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. 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 preclinical studies and clinical trials. Cash Flows The following table shows a summary of our cash flows for the three months ended March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Net cash used in operating activities $ (18,428 ) $ (20,708 ) Net cash used in investing activities (48,888 ) (55,104 ) Net cash provided by financing activities 7,876 118,721 Operating Activities For the three months ended March 31, 2022, net cash used in operating activities totaled $18.4 million, compared to $20.7 million for the same period in 2021. The decrease in cash used in operating activities was primarily related to $7.1 million in milestone revenue recognized in connection with our agreement with Neurocrine Biosciences in the three months ended March 31, 2022, and changes in operating assets and liabilities, partially offset by higher research and development and general and administrative expenses for the three months ended March 31, 2022 as compared to the same period in 2021. Investing Activities For the three months ended March 31, 2022, net cash used in investing activities totaled $48.9 million, compared to $55.1 million for the same period in 2021. The change in cash used in investing activities was driven primarily by a decrease in purchases of marketable securities, net of redemptions. Financing Activities For the three months ended March 31, 2022, net cash provided by financing activities totaled $7.9 million, compared to $118.7 million for the same period in 2021. The decrease in cash provided by financing activities was primarily related to a decrease of net proceeds from the issuance of common shares and pre-funded warrants. Contractual Obligations and Commitments Our future significant contractual obligations as of December 31, 2021 were reported in our Annual Report on Form 10-K, filed with the SEC and the Canadian Securities Commissions on March 1, 2022. As of March 31, 2022, 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. -23- Outstanding Share Data As of May 6, 2022, we had 53,105,718 common shares issued and outstanding, outstanding pre-funded warrants to purchase an additional 2,775,996 common shares, outstanding stock options to purchase an additional 7,038,375 common shares and an outstanding warrant to purchase an additional 40,000 common shares.