Xenon Pharmaceuticals Inc. 10-Q

ITEM 2. MANAGEMENT’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; -15- • 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 (Focal Onset Seizures) 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. In June 2022, we announced the successful completion of an End-of-Phase 2, or EOP2, meeting with the U.S. Food & Drug Administration, or FDA. Based on the EOP2 meeting, we aligned with the FDA on key elements of the Phase 3 program to support a New Drug Application, or NDA, submission. We plan to submit an NDA upon completion of the first XEN1101 Phase 3 clinical trial (X-TOLE2), if successful, and use the existing data package from the Phase 2b X-TOLE clinical trial along with additional safety data from other clinical trials to meet regulatory requirements. We plan to initiate two identical Phase 3 clinical trials called X-TOLE2 and X-TOLE3, which are designed closely after the Phase 2b X-TOLE clinical trial. X-TOLE2 is expected to be initiated in the second half of 2022 followed by the initiation of X-TOLE3 and both studies will run in parallel. These multicenter, randomized, double-blind, placebo-controlled trials will evaluate the clinical efficacy, safety, and tolerability of XEN1101 administered as adjunctive treatment in approximately 360 patients per study with focal onset seizures, or FOS. The primary efficacy endpoint is the median percent change, or MPC, in monthly seizure frequency from baseline through the double-blind period, or DBP, of XEN1101 compared to placebo. On completion of the DBP in X-TOLE2 and X-TOLE3, eligible patients may enter an open-label extension, or OLE, study for up to three years. In addition, the ongoing X-TOLE OLE also continues to generate important long-term data for XEN1101 in FOS. XEN1101 for Epilepsy (Primary Generalized Tonic Clonic Seizures) Alignment was obtained with the FDA at the EOP2 meeting on key elements of a single Phase 3 clinical trial to pursue an additional epilepsy indication of primary generalized tonic clonic seizures, or PGTCS. Following the initiation of X-TOLE2, we plan to initiate a Phase 3 clinical trial, called X-ACKT, to support potential regulatory submissions in PGTCS. This multicenter, randomized, double-blind, placebo-controlled study will evaluate the clinical efficacy, safety, and tolerability of XEN1101 administered as adjunctive treatment in approximately 160 patients with PGTCS. The primary efficacy endpoint is the MPC in monthly PGTCS frequency from baseline through the DBP of XEN1101 compared to placebo. On completion of the DBP in X-ACKT, eligible patients may enter an OLE study for up to three years. -16- 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 clinical efficacy, safety and tolerability of XEN1101 administered as monotherapy in approximately 150 patients with MDD in a Phase 2 clinical trial, called X-NOVA. Designed as a randomized, double-blind, placebo-controlled, multicenter clinical study, the primary objective is to assess the efficacy of XEN1101 compared to placebo on improvement of depressive symptoms in subjects diagnosed with moderate to severe MDD, using the Montgomery-Åsberg Depression Rating Scale, or MADRS, score change through week six. Topline results from the X-NOVA study are anticipated in 2023. In addition, we are collaborating with the Icahn School of Medicine at Mount Sinai to support an ongoing investigator-sponsored Phase 2 proof-of-concept, randomized, parallel-arm, placebo-controlled multi-site study of XEN1101 for the treatment of MDD in approximately 60 subjects. The primary objective of the study is to investigate the effect of XEN1101 on the brain reward circuit as measured by the change in bilateral ventral striatum activity as assessed by functional MRI, or fMRI. The secondary objectives are to test the effect of XEN1101 compared to placebo on clinical measures of depression and anhedonia using the MADRS and SHAPS scales. XEN1101 – Additional Supporting Data In June 2022, we announced new, compelling efficacy data supporting the late-stage, Phase 3 development of XEN1101. A sub-group analysis of Phase 2b X-TOLE data showed that XEN1101 rapidly reduced FOS frequency within one week for all doses compared with placebo. At Week 1, the median percent reduction in monthly focal onset seizure frequency was 55.4% in the 25 mg group (p<0.001), 41.5% in the 20 mg group (p=0.039), and 39.1% in the 10 mg group (p=0.002) compared to 20.2% in the placebo group. Based on the strength of data from this time course to efficacy analysis, a key secondary endpoint in the Phase 3 trials will include the median percent change of weekly FOS at Week 1. Subjects remaining in the X-TOLE OLE for at least 3 months and 12 months experienced a greater than 70% and 80% reduction, respectively, in median monthly seizure frequency when compared to the DBP baseline. XEN496 XEN496, a Kv7 potassium channel opener, is a proprietary pediatric formulation of the active ingredient ezogabine being developed for the treatment of KCNQ2 developmental and epileptic encephalopathy, or KCNQ2-DEE. A Phase 3 randomized, double-blind, placebo-controlled, parallel group, multicenter clinical trial, called EPIK, is ongoing to evaluate the efficacy, safety, and tolerability of XEN496 administered as adjunctive treatment in approximately 40 pediatric patients aged one month to less than six years with KCNQ2-DEE. We anticipate that the EPIK study will be completed in 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. 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 six months ended June 30, 2022 and 2021, we recognized revenue of $9.3 million and $6.6 million, respectively, in connection with our agreements with Neurocrine Biosciences and Pacira BioSciences. We had a net loss of $50.8 million for the six months ended June 30, 2022 and an accumulated deficit of $408.2 million as of June 30, 2022, from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. -17- 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 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. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our cash needs through a combination of equity offerings, debt financings or collaborations . 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; • require the manufacture of larger quantities of our product candidates for clinical development and potential commercialization; • maintain, protect and expand our intellectual property portfolio; • attract, hire and retain skilled personnel; 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 generate revenue 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. The following table is a summary of revenue recognized from our current collaboration and licensing agreements for the three and six months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Neurocrine Biosciences: Recognition of the transaction price $ — $ 617 $ 372 $ 617 Research and development services 536 1,601 1,806 2,959 Milestone payments — — 7,124 — Pacira BioSciences: Milestone payments — — — 3,000 Total collaboration revenue $ 536 $ 2,218 $ 9,302 $ 6,576 -18- 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 was probable that a significant reversal of the cumulative revenue recognized would not occur, was 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 and six months ended June 30, 2022, we recognized nil and $0.4 million, respectively, of the transaction price allocated to performance obligation (iii) which was completed as of March 31, 2022 compared to $0.6 million for the three and six months ended June 30, 2021. 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 six months ended June 30, 2022. Performance obligations (i) and (ii) were completed as of December 31, 2020 . Research and development services are recognized into revenue at fair market value as the services are rendered. The research collaboration ended in June 2022. In the six months ended June 30, 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 in the three and six months ended June 30, 2022 in connection with our agreement with Pacira BioSciences. Operating Expenses The following table summarizes our operating expenses for the three and six months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Research and development $ 22,146 $ 18,377 $ 41,506 $ 34,685 General and administrative 8,705 6,339 15,480 10,448 Total operating expenses $ 30,851 $ 24,716 $ 56,986 $ 45,133 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 substantially in the future as we advance our proprietary product candidates into later stages of 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. -19- 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, professional fees for auditing, tax and legal services, including legal expenses for intellectual property protection, and costs incurred as we prepare for commercialization. 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. 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 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 -20- There have been no material changes in our critical accounting policies and significant judgments and estimates during the six months ended June 30, 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. Results of Operations Comparison of Three and Six Months Ended June 30, 2022 and 2021 The following table summarizes the results of our operations for the three and six months ended June 30, 2022 and 2021 together with changes in those items (in thousands): Three Months Ended June 30, Change 2022 vs. 2021 Six Months Ended June 30, Change 2022 vs. 2021 2022 2021 Increase/(Decrease) 2022 2021 Increase/(Decrease) Revenue $ 536 $ 2,218 $ (1,682 ) $ 9,302 $ 6,576 $ 2,726 Research and development expenses 22,146 18,377 3,769 41,506 34,685 6,821 General and administrative expenses 8,705 6,339 2,366 15,480 10,448 5,032 Other: Interest income 816 72 744 1,184 219 965 Unrealized fair value loss on marketable securities (1,288 ) (17 ) (1,271 ) (4,650 ) (92 ) (4,558 ) Foreign exchange gain (411 ) 117 (528 ) (112 ) 272 (384 ) Loss before income taxes $ (31,198 ) $ (22,326 ) $ (8,872 ) $ (51,262 ) $ (38,158 ) $ (13,104 ) Revenue Revenue decreased by $1.7 million and increased by $2.7 million in the three and six months ended June 30, 2022 as compared to the three and six months ended June 30, 2021, respectively. Revenue for the three and six months ended June 30, 2022 related to recognition of $0.5 million and $1.8 million, respectively, for research and development services under our license and collaboration agreement with Neurocrine Biosciences, as compared to recognition of $1.6 million and $3.0 million, respectively, for research and development services in the comparative period . Revenue for the six months ended June 30, 2022 also included $7.1 million of milestone revenue from Neurocrine Biosciences as compared to $3.0 million of milestone revenue recognized in connection with our agreement with Pacira BioSciences in the comparative period. Research and Development Expenses The following table summarizes research and development expenses for the three and six months ended June 30, 2022 and 2021 together with changes in those items (in thousands): Three Months Ended June 30, Change 2022 vs. 2021 Six Months Ended June 30, Change 2022 vs. 2021 2022 2021 Increase/(Decrease) 2022 2021 Increase/(Decrease) XEN1101 $ 9,426 $ 8,533 $ 893 $ 16,864 $ 15,002 $ 1,862 XEN496 5,125 4,237 888 10,677 9,914 763 NBI-921352 26 377 (351 ) 226 733 (507 ) Pre-clinical, discovery and other internal programs 7,569 5,230 2,339 13,739 9,036 4,703 Total research and development $ 22,146 $ 18,377 $ 3,769 $ 41,506 $ 34,685 $ 6,821 Research and development expenses increased by $3.8 million and $6.8 million in the three and six months ended June 30, 2022 as compared to the three and six months ended June 30, 2021 , respectively . The increases were primarily attributable to higher salaries and benefits due to increased headcount, higher stock-based compensation expense due to an increase in the number of options granted at a higher fair value and higher information technology costs allocated amongst research and development programs, as well as increased external costs related to our pre-clinical, discovery and other internal programs. The increases were partially offset by lower external costs related to our XEN1101 program. -21- General and Administrative Expenses The following table summarizes general and administrative expenses for the three and six months ended June 30, 2022 and 2021 together with changes in those items (in thousands): Three Months Ended June 30, Change 2022 vs. 2021 Six Months Ended June 30, Change 2022 vs. 2021 2022 2021 Increase/(Decrease) 2022 2021 Increase/(Decrease) General and administrative $ 8,705 $ 6,339 $ 2,366 $ 15,480 $ 10,448 $ 5,032 General and administrative expenses increased by $2.4 million and $5.0 million in the three and six months ended June 30, 2022 as compared to the three and six months ended June 30, 2021, respectively. The increases were 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 insurance premiums. Other Income (Expense) The following table summarizes our other income (expense) for the three and six months ended June 30, 2022 and 2021 together with changes in those items (in thousands): Three Months Ended June 30, Change 2022 vs. 2021 Six Months Ended June 30, Change 2022 vs. 2021 2022 2021 Increase/(Decrease) 2022 2021 Increase/(Decrease) Other income (expense) $ (883 ) $ 172 $ (1,055 ) $ (3,578 ) $ 399 $ (3,977 ) Other income (expense) decreased by $1.1 million and $4.0 million in the three and six months ended June 30, 2022 as compared to the three and six months ended June 30, 2021, respectively. The decreases were primarily driven by an unrealized loss on the fair value of marketable securities of $1.3 million and $4.7 million for the three and six months ended June 30, 2022, respectively, due to changes in market yields on investments. This was partially offset by an increase in interest income of $0.8 million and $1.2 million for the three and six months ended June 30, 2022 as compared to the three and six months ended June 30, 2021, respectively, due to an increase in marketable securities and an increase in market yields on investments. 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 June 30, 2022, we have raised aggregate net cash proceeds of $1,020.6 million primarily from the issuance of equity securities. As of June 30, 2022, we had cash and cash equivalents and marketable securities of $788.2 million. Except for any obligations of our collaborators to make milestone payments under our agreements with them, we do not have any committed external sources of capital. Until such time as we can generate substantial product revenue, if ever, we expect to finance our cash needs through a combination of collaboration agreements and equity or debt financings. We entered into an “at-the-market” equity offering sales agreement in August 2020, amended as of March 2022, with Jefferies LLC, or Jefferies, and Stifel, Nicolaus & Company, Incorporated, or Stifel, pursuant to which we may sell our common shares from time to time. In January 2021, we sold an aggregate of 733,000 common shares for proceeds of $10.7 million, net of commissions and transaction expenses pursuant to a prospectus supplement filed with the SEC on August 6, 2020, or 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 June 30, 2022, no common shares have been sold under the March 2022 ATM. -22- Funding Requirements We have incurred significant operating losses since inception. We had a $50.8 million net loss for the six months ended June 30, 2022 and an accumulated deficit of $408.2 million from inception through June 30, 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; • 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. 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. -23- Cash Flows The following table shows a summary of our cash flows for the six months ended June 30, 2022 and 2021 (in thousands): Six Months Ended June 30, 2022 2021 Net cash used in operating activities $ (35,296 ) $ (33,785 ) Net cash used in investing activities (47,571 ) (46,912 ) Net cash provided by financing activities 277,766 118,832 Operating Activities For the six months ended June 30, 2022, net cash used in operating activities totaled $35.3 million, compared to $33.8 million for the same period in 2021. The increase in cash used in operating activities was primarily related to higher research and development and general and administrative expenses for the six months ended June 30, 2022 as compared to the same period in 2021. This was partially offset by $7.1 million in milestone revenue recognized in connection with our agreement with Neurocrine Biosciences in the six months ended June 30, 2022 as compared to $3.0 million in milestone revenue recognized in connection with our agreement with Pacira BioSciences during the six months ended June 30, 2021, changes in operating assets and liabilities and higher interest income for the six months ended June 30, 2022 as compared to the same period in 2021. Investing Activities For the six months ended June 30, 2022, net cash used in investing activities totaled $47.6 million, compared to $46.9 million for the same period in 2021. The change in cash used in investing activities was driven primarily by an increase in purchases of marketable securities, net of redemptions. Financing Activities For the six months ended June 30, 2022, net cash provided by financing activities totaled $277.8 million, compared to $118.8 million for the same period in 2021. The increase in cash provided by financing activities was primarily related to net proceeds of $277.8 million from the issuance of common shares and pre-funded warrants during the six months ended June 30, 2022 as compared to $118.6 million for the same period in 2021. 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 June 30, 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. Outstanding Share Data As of August 5, 2022, we had 62,263,463 common shares issued and outstanding, outstanding pre-funded warrants to purchase an additional 3,103,864 common shares, outstanding stock options to purchase an additional 7,223,766 common shares and an outstanding warrant to purchase an additional 40,000 common shares.