S-1 1 d582812ds1.htm FORM S-1 Prepared by R.R. Donnelley Financial -- Form S-1
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Index to Financial Statements

As filed with the Securities and Exchange Commission on September 10, 2014.

Registration No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

XENON PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

 

 

 

Canada   2834   98-0661854
(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial Classification Code Number)   (I.R.S. Employer Identification Number)

200 – 3650 Gilmore Way

Burnaby, British Columbia V5G 4W8

Canada

(604) 484-3300

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Simon N. Pimstone

President and Chief Executive Officer

Xenon Pharmaceuticals Inc.

200 – 3650 Gilmore Way

Burnaby, British Columbia V5G 4W8

Canada

(604) 484-3300

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

 

 

Jeffrey D. Saper

Steven V. Bernard

Bryan D. King

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Ian C. Mortimer

Karen G. Corraini

Xenon Pharmaceuticals Inc.

200 – 3650 Gilmore Way

Burnaby, British Columbia V5G 4W8

Canada

(604) 484-3300

 

Charles S. Kim

Andrew S. Williamson

David G. Peinsipp

Cooley LLP

4401 Eastgate Mall

San Diego, California 92121

(858) 550-6000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨   Accelerated filer   ¨   Non-accelerated filer (Do not check if a smaller reporting company)  x   Smaller reporting company  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

TITLE OF EACH CLASS OF
SECURITIES TO BE REGISTERED
 

PROPOSED MAXIMUM

AGGREGATE
OFFERING PRICE (1)

 

AMOUNT OF

REGISTRATION FEE

Common Shares, no par value per share

  $51,750,000   $6,665.40

 

 

(1)   

Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes shares that the underwriters have the option to purchase.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 2014

 

PRELIMINARY PROSPECTUS

             Shares

 

LOGO

Xenon Pharmaceuticals Inc.

Common Shares

 

 

We are offering                  of our common shares. This is our initial public offering and no public market currently exists for our common shares. We expect the initial public offering price to be between $         and $         per share.

We intend to apply to list our common shares on The NASDAQ Global Market under the symbol “XENE”. We are an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

Investing in our common shares involves a high degree of risk. See “Risk Factors” beginning on page 13 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     PER SHARE      TOTAL  

Initial Public Offering Price

   $                    $                

Underwriting Discounts and Commissions(1)

   $         $     

Proceeds, before expenses, to us

   $         $     

 

 

(1)   

The underwriters will also be reimbursed for certain expenses incurred in this offering. See “Underwriting” for details.

 

 

Delivery of the common shares purchased in this offering is expected to be made on or about                     , 2014. We have granted the underwriters an option for a period of 30 days to purchase up to              additional common shares. If the underwriters exercise the option in full, the total underwriting discounts and commissions will be $         and the total proceeds to us, before expenses, will be $        .

Joint Book-Running Managers

 

Jefferies    Wells Fargo Securities

Prospectus dated                     , 2014


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TABLE OF CONTENTS

 

 

 

     PAGE  

Prospectus Summary

     1   

Risk Factors

     13   

Cautionary Note Regarding Forward-Looking Statements

     50   

Market, Industry and Other Data

     52   

Use of Proceeds

     53   

Dividend Policy

     54   

Capitalization

     55   

Dilution

     57   

Selected Financial Data

     59   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     61   

Business

     85   

Management

     127   

Executive Compensation

     138   

Certain Relationships and Related Party Transactions

     147   

Principal Shareholders

     149   

Description of Share Capital

     152   

Material Differences Between the Canada Business Corporations Act and the Delaware General Corporation Law

     158   

Shares Eligible for Future Sale

     164   

United States and Canadian Income Tax Considerations

     167   

Underwriting

     175   

Legal Matters

     180   

Experts

     180   

Where You Can Find More Information

     180   

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     F-1   

 

 

We and the underwriters have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

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Until                     , 2014, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

In this prospectus, unless otherwise specified or the context otherwise requires, all dollar amounts are expressed in U.S. dollars.

As of June 30, 2014, the exchange rate for the conversion of Canadian dollars into U.S. dollars was 0.9372, based on the Bank of Canada’s closing rate. Except as otherwise noted, all amounts referred to in this prospectus as “$        , as converted” shall mean the U.S. dollar amount applying the conversion rate from Canadian dollars as of June 30, 2014.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. It does not contain all of the information that may be important to you and your investment decision. You should carefully read this entire prospectus, including the matters set forth under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes.

Unless the context requires otherwise, in this prospectus the terms “Xenon,” “we,” “us,” “our” and “our company” refer to Xenon Pharmaceuticals Inc.

Xenon Pharmaceuticals Inc.

Overview

We are a clinical-stage biopharmaceutical company discovering and developing a pipeline of differentiated therapeutics for orphan indications that we intend to commercialize on our own, and for larger market indications that we intend to partner with global pharmaceutical companies. We have built a core enabling discovery platform for the discovery of validated drug targets by studying rare human diseases with extreme traits, including diseases caused by mutations in ion channels, known as channelopathies. We have an integrated platform that includes in-house capabilities for human genetics, small molecule drug discovery and preclinical and clinical development.

Our business was founded on our proprietary discovery platform, which we refer to as Extreme Genetics. Extreme Genetics involves the study of families where individuals exhibit inherited severe traits, or phenotypes. By identifying and characterizing single-gene defects responsible for these phenotypes, we gain insights into human disease biology to better select targets for therapeutic intervention. Our Extreme Genetics discovery platform has yielded the first approved gene therapy product in the European Union, or the EU, a broad development pipeline and multiple pharmaceutical partnerships.

Our pharmaceutical partners include Teva Pharmaceutical Industries Ltd., or Teva, Genentech, Inc., or Genentech, and Merck & Co., Inc., or Merck, (through its affiliate, Essex Chemie AG). Our pharmaceutical collaborations have generated in aggregate over $140.0 million in non-equity funding to date with the potential to provide us with over $1.0 billion in future milestone payments, as well as royalties and co-promotion income on product sales.

Our most advanced product candidate is TV-45070 (formerly XEN402), which we have partnered with Teva (through its subsidiary, Ivax International GmbH). Teva is currently conducting a 300-patient, randomized Phase 2b clinical trial of TV-45070 in osteoarthritis, or OA, of the knee and is currently planning additional development of TV-45070 in neuropathic pain indications. A second product candidate, GDC-0276, is being developed in collaboration with Genentech, for the treatment of pain. In August 2014, Genentech received approval from Health Canada to initiate a Phase 1 clinical trial for GDC-0276.

We have coupled our Extreme Genetics discovery platform with our integrated drug discovery capabilities, including significant ion channel expertise, to build our product pipeline. Our pipeline is balanced with both proprietary assets for orphan indications that we believe we can develop and commercialize independently and partnered assets in larger therapeutic markets that require significant commercial capabilities. We have implemented our strategic alliance model to establish well-structured partnerships that have front-loaded our product pipeline with near-to-mid-term market opportunities, and that have provided significant non-equity funding to date as well as substantial potential future milestone payments. Since inception, we believe that we have operated in a capital-efficient manner, and, as of June 30, 2014, we have cash, cash equivalents and marketable securities of $44.7 million, which figure excludes an $8.0 million milestone payment we received in August 2014 from Genentech. Since our last equity financing in 2006, we have funded our operations and expanded our platform, product pipeline and infrastructure through a combined strategy, including deploying our own resources and establishing our partnerships. We focus on execution of our corporate goals and partnering obligations, and, as a

 

 

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result, we believe we are well-positioned for potential value-creating inflection points in the near-term in both our partnered and proprietary programs, including the potential receipt of up to $40.5 million in milestone payments under our existing collaboration agreements, over the next 24 months, which includes an $8.0 million milestone payment received from Genentech in August 2014 for the approval of the GDC-0276 Clinical Trial Application, or CTA, from Health Canada.

The following chart summarizes our current product pipeline, including partnered and proprietary Xenon programs:

 

LOGO

Our Programs

Approved Product

Glybera: Glybera is the first and currently the only gene therapy product to receive commercial approval in the EU. Glybera, developed by our licensee uniQure Biopharma B.V., or uniQure, is specifically indicated for the treatment of a subset of adult patients diagnosed with the orphan lipid disorder lipoprotein lipase deficiency, or LPLD, confirmed by genetic testing and suffering from severe or multiple pancreatitis attacks, despite dietary fat restrictions. LPLD is a severe metabolic disease of inadequate lipid metabolism, resulting in pancreatitis and, in some cases, death. Together with collaborators from the University of British Columbia, or UBC, we demonstrated that humans with a single gene variant of the lipoprotein lipase, or LPL, gene called LPLS447X, resulted in increased LPL enzyme activity leading to reduced triglyceride levels. Under our sublicense and research agreement with uniQure, we collaborated with uniQure and UBC on preclinical activities, and thereafter uniQure developed an LPL gene therapy product, Glybera, which contains the LPLS447X variant. We believe that the introduction of the therapeutic LPLS447X gene through administration of Glybera provides a clinical benefit for a subset of LPLD patients.

Glybera is the first product whose active ingredient was derived from our platform to receive commercial approval. The goal of Glybera therapy is to treat LPLD in order to achieve sustained improvement of clearance of triglyceride-rich lipid particles known as chylomicrons, and to significantly reduce the risk of pancreatitis

 

 

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attacks in patients suffering from multiple recurrent pancreatitis and abdominal pain events. Glybera was developed by our licensee, uniQure. In 2012, Glybera was approved in the EU and, in July 2013, uniQure announced that it had entered into a partnership with Chiesi Farmaceutici S.p.A., or Chiesi, for the commercialization of Glybera in the EU and more than a dozen other countries, including Brazil, China, Mexico and Russia. We believe that Chiesi plans to launch Glybera in the fourth quarter of 2014 or the first quarter of 2015 in Europe, and that uniQure is pursuing a U.S. product approval strategy, with plans to file a Biologics License Application, or BLA, with the U.S. Food and Drug Administration, or FDA, in 2017. Glybera has received orphan drug designation for the treatment of LPLD in both the EU and the U.S.

We are eligible to receive mid single-digit royalties on net sales of the licensed products, for sales made by uniQure and its affiliates. The royalty rates are reduced to a low single-digit for sales made by uniQure and its affiliates in countries where a licensed technology or a licensed product is not covered by a valid patent claim. With respect to uniQure’s sublicense to Chiesi, we are eligible to receive a percentage in the low twenties of all non-royalty compensation relating to the licensed technology or products that uniQure receives from Chiesi (for example, upfront payments and milestone payments), a percentage in the low twenties of any royalties that uniQure receives from Chiesi based on sales of technology or products covered by the licensed patents, plus a mid single-digit percentage of certain further royalties that uniQure receives from Chiesi based on sales of our licensed technology or products after the expiration of all licensed patents covering the product.

Product Candidates in Development

TV-45070 for the Treatment of Pain: TV-45070 (formerly XEN402) is a small-molecule inhibitor of the sodium channel Nav1.7 and other sodium channels, including those that are expressed in the pain-sensing peripheral nervous system. TV-45070 has potentially broad application in nociceptive pain, mediated by damage or injury to tissues, including the pain sensitivity caused by inflammation, and neuropathic pain mediated by damage, dysfunction or injury of nerves. TV-45070 is partnered with Teva. Pursuant to the terms of the agreement, Teva is obligated to complete three Phase 2 or later stage clinical trials. Using a topical ointment formulation of TV-45070, Teva has initiated a 300-patient, randomized Phase 2b clinical trial in OA of the knee with data expected in the third quarter of 2015. Teva is also developing topical TV-45070 in neuropathic pain indications, and is planning a Phase 2b clinical trial in patients with postherpetic neuralgia, or PHN, that is expected to start in the first half of 2015. In addition, we are working with Teva to evaluate the opportunity to develop TV-45070 for the orphan disease erythromelalgia, or EM. TV-45070 has received both fast track and orphan designations from the FDA for the treatment of EM.

We selected Nav1.7 as a drug target for pain after we discovered that the Nav1.7 protein is deficient in the rare genetic disorder congenital indifference to pain, or CIP, sufferers of which are unable to feel pain. We have observed promising evidence of activity for TV-45070 in four Phase 2 proof-of-concept clinical trials, including two trials in EM, one trial in PHN and one trial in dental pain, a form of nociceptive pain.

In December 2012, we entered into a collaborative development and license agreement with Teva, pursuant to which we granted Teva an exclusive worldwide license to develop and commercialize TV-45070. Under the terms of the agreement, Teva made an upfront payment to us of $41.0 million. In addition, we are eligible to receive potential milestone payments totaling up to $335.0 million, comprised of a $20.0 million clinical milestone payment, up to $285.0 million in regulatory milestone payments, and a $30.0 million sales-based milestone payment. If TV-45070 is approved, we are also eligible to receive royalties in the low teens to the low twenties on net sales of the licensed products for the timeframe that such products are covered by the licensed patents and in certain other instances. We have an option to obtain a 20% to 30% co-promotion interest for products incorporating TV-45070 in the U.S., which is exercisable upon the filing of the first new drug application, or NDA, for a TV-45070 product. If we exercise this option, upon paying an opt-in fee to Teva, we will be eligible to receive, in lieu of royalties with respect to such product sales in the U.S., a share of operating profits from any product sales in the U.S. that is equal to our percent interest of detailing activities and co-promotion expenses.

 

 

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GDC-0276 and Other Selective Inhibitors of Nav1.7 for the Treatment of Pain: In December 2011, we entered into a collaborative research and license agreement with Genentech and its affiliate, F. Hoffmann-La Roche Ltd, or Roche, to discover and develop selective oral inhibitors of Nav1.7 for the treatment of pain. Based on our discovery of Nav1.7 deficiency underlying CIP, we believe that Nav1.7 is a highly-validated target for the treatment of pain. Our Genentech collaboration is focused on discovering and developing selective oral Nav1.7 inhibitors, which is in contrast to our Teva partnership that is focused on developing a topical drug that targets a number of different sodium channels, including Nav1.7. The first small-molecule, preclinical product candidate that was selected for development under our collaboration is GDC-0276. In August 2014, Genentech received approval from Health Canada to initiate a Phase 1 clinical trial for GDC-0276.

Under the terms of the agreement, Genentech paid us an upfront fee of $10.0 million, a $5.0 million milestone payment for the selection of GDC-0276 for development and an $8.0 million milestone payment upon the approval by Health Canada of the Clinical Trial Application, or CTA, for GDC-0276. We are also eligible to receive pre-commercial and commercial milestone payments with respect to the licensed products totaling up to an additional $613.0 million, comprised of up to $45.5 million in preclinical and clinical milestone payments, up to $387.5 million in regulatory milestone payments, and up to $180.0 million in sales-based milestone payments for multiple products and indications. In addition, we are also eligible to receive royalties based on net sales of the licensed products, which range from a mid single-digit percentage to ten percent for small-molecule inhibitors for the timeframe that such products are covered by the licensed patents and a low single-digit percentage thereafter, plus a low single-digit percentage for large-molecule inhibitors of Nav1.7.

Chronic pain conditions, such as severe cancer pain and neuropathic pain, are generally recognized as unmet medical needs providing potential commercial opportunities for a new oral pain drug. Currently available pain drugs often have either a lack of meaningful pain relief or dose-limiting side effects for many patients. An orally administered selective Nav1.7 inhibitor could present a novel mechanism for the treatment of moderate to severe pain as a single agent or in combination with existing analgesics that work through different mechanisms.

Xenon’s Proprietary Preclinical Product Candidates

We are leveraging our core expertise in the genetics of rare diseases and ion channel disorders to identify novel targets and discover differentiated, proprietary product candidates. We are focusing on orphan and niche disease product candidates which we believe we can develop and commercialize independently. We expect our independent development to expand the therapeutic and commercial value of our proprietary pipeline and advance our goals of building a self-sustaining, fully-integrated and profitable company.

Selective Small-Molecule Sodium Channel Inhibitors for the Treatment of Dravet Syndrome

We are developing selective inhibitors of the voltage-gated sodium channel Nav1.6 as a treatment for the orphan disease Dravet Syndrome, or DS. We have developed considerable expertise in voltage-gated sodium channel biology and have accumulated significant experience in the development of selective channel inhibitors. We are leveraging this expertise and chemistry know-how for the development of selective inhibitors of Nav1.6. for the treatment of DS.

DS is a severe form of childhood epilepsy that typically causes mental retardation and, in approximately 10% of cases, premature death before the age of 12 years. The frequency of DS in the U.S. has been estimated to be one in 20,000 to 40,000 births, which, when applied to U.S. federal census data, correlates to approximately 7,500 to 15,000 patients with DS in the U.S.

Based on our experience and know-how in developing selective ion channel inhibitors, we have identified potent, selective Nav1.6 inhibitors. We expect to have preclinical proof-of-concept data in the second half of 2014 in animal models of DS. We anticipate filing an IND for a drug candidate to treat DS in 2016. Given the orphan nature of this disorder, we believe that DS may represent an attractive opportunity for us to advance independently.

 

 

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XEN801 for the Treatment of Acne

XEN801 is a selective, small molecule inhibitor of stearoyl Co-A desaturase, or SCD1, being developed for the treatment of moderate to severe acne. SCD1 is an enzyme involved in lipid synthesis that is expressed in sebaceous glands in the skin. Mice deficient in SCD1 have a marked phenotype of sebaceous gland atrophy suggesting that inhibition of SCD1 activity in the skin may provide a novel treatment option for disorders of enlarged or overactive sebaceous glands, including acne. We have discovered and developed novel small-molecule SCD1 inhibitors to which we have sole rights. In multiple animal models, we have shown that our SCD1 inhibitors can reduce the size and number of sebaceous glands. XEN801 has demonstrated good properties for topical administration, including formulation in a light gel and adequate skin penetration in multiple animal species.

We anticipate selecting a development candidate for IND-enabling studies in the second half of 2014 and filing an IND in the first half of 2015 to initiate clinical development. We believe a selective, small-molecule inhibitor of SCD1 has therapeutic potential for skin disorders such as moderate to severe acne, seborrhoea and sebaceous hyperplasia.

Selective Small-Molecule Inhibitors of Targets for the Treatment of Cardiovascular Disease

We entered into a collaborative research and option agreement with Merck in June 2009 to discover novel targets and compounds for the treatment of cardiovascular disease using our Extreme Genetics discovery platform. In 2012, Merck exercised its option to obtain an exclusive license to a target for the treatment of cardiovascular disease and compound inhibitors that were discovered during the research collaboration. The target, when inhibited, is predicted to provide a beneficial lipid profile with the goal of protecting from cardiovascular disease.

New Pipeline Opportunities

Given the commercial opportunity and the pharmaceutical industry’s interest in the pain market, we are using our Extreme Genetics discovery platform and specialized insights into the biology of pain to identify new drug targets for this common medical problem. We formed a second collaboration with Genentech in March 2014 for pain genetics, pursuant to which we intend to focus on rare phenotypes where individuals have an inability to perceive pain or where individuals have non-precipitated spontaneous severe pain. We believe these phenotypes may unlock new key molecular regulators of pain signaling in humans, which we will seek to validate as targets for new pain drugs. For example, we are analyzing CIP families that are not explained by Nav1.7 deficiency as well as families with severe pain phenotypes, such as paroxysmal extreme pain disorder, or PEPD, inherited EM and cluster headache.

In addition to our study of rare human disorders of extreme pain or the absence of pain, we are studying other rare disorders with extreme phenotypes that we believe could yield new drug targets in disorders where high medical need exists, such as neurological disorders like essential tremor.

In addition, given our expertise in ion channel drug discovery, we are also focusing our discovery efforts on the identification of ion channel targets where we believe novel selective inhibitors might represent significant therapeutic advances with a focus on orphan indications.

Strategic Alliances

We have strategically and selectively established multiple collaborations with leading pharmaceutical companies, including uniQure, Teva, Genentech and Merck.

These collaborations have validated our discovery platform and allowed us to expand and augment our internal discovery and development capabilities and know-how while providing us with significant, non-dilutive funding as well as the potential for future milestone payments, royalty income and commercial participation.

We believe that we have successfully implemented our partnering model by leveraging collaborations to front-load our product pipeline with clinical programs in large market opportunities that are of broad strategic value to our

 

 

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partners, that leverage their established therapeutic expertise and commercial focus, and that they are advancing into later stages of development. At the same time, these partnerships have provided us with the resources to independently advance our proprietary programs in orphan indications into development, and potentially commercialization. We believe that these partnerships enable us to build on our core competencies with greater focus, speed and capital efficiency than we could have achieved independently, and have positioned us to potentially reach a number of near-term value-creating milestones. For additional information regarding our collaborations, please see the section of this prospectus captioned “Business — Strategic Alliances.”

Our Strategy

Our goal is to build a self-sustaining, fully-integrated and profitable company that discovers, develops and commercializes innovative therapeutics, including novel selective ion channel inhibitors, by applying our expertise in the genetics of rare human diseases.

Since our inception, we believe we have operated in a capital-efficient manner to build our capabilities and assets through phased growth, expansion and value creation. Since our last equity financing in 2006, we have funded our operations and expanded our platform, product pipeline and infrastructure through a strategy that combines the deployment of our own resources and the establishment of broadly enabling and well-structured pharmaceutical partnerships with industry leaders.

Our strategy is to:

 

  n  

Expand our pipeline and advance multiple discovery and development programs, focusing on orphan and niche disease market opportunities that we can independently develop and commercialize ourselves.

 

  n  

Selectively establish additional partnerships enabling us to access large commercial indications while leveraging the benefits of those collaborations to expand our internal capabilities.

 

  n  

Further leverage our discovery platform and insights into disease biology to identify novel targets and develop next-generation products.

For additional information about our business, please see the section of this prospectus captioned “Business.”

Risks Associated with Our Business

Our ability to implement our current business strategy is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, among others:

 

  n  

We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.

 

  n  

We have not generated any royalty revenue from product sales and may never become profitable from royalty revenue.

 

  n  

We will likely need to raise additional funding, which may not be available on acceptable terms, if at all.

 

  n  

Our existing collaborations are important to our business, and future collaborations may also be important to us. If we are unable to maintain any of these collaborations, or if these collaborations are not successful, our business could be adversely affected.

 

  n  

Clinical drug development involves a lengthy and expensive process with uncertain timelines and outcomes. If clinical trials are prolonged or delayed, we, or our collaborators, may be unable to commercialize our product candidates on a timely basis.

 

  n  

The regulatory approval processes of the FDA, the European Medicines Agency, or EMA, and regulators in other jurisdictions are lengthy, time-consuming and inherently unpredictable. If we, or our collaborators, are unable to obtain timely regulatory approval for our product candidates, our business will be substantially harmed.

 

 

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  n  

We and our collaborators face substantial competition in the markets for our product candidates.

 

  n  

The novelty of gene therapy products and their lack of a commercial track record may hinder market acceptance of Glybera.

 

  n  

Our approach to drug discovery is unproven, and we do not know whether we will be able to develop any products of commercial value.

 

  n  

We could be unsuccessful in obtaining or maintaining adequate patent protection for one or more of our products or product candidates.

 

  n  

The limited patient population for orphan and niche indications may prevent us from accurately estimating the market opportunity for our product candidates or enrolling sufficient patients for our clinical trials.

For additional information about the risks we face, please see the section of this prospectus captioned “Risk Factors.”

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These provisions include:

 

  n  

a requirement to have only two years of audited financial statements and only two years of related management’s discussion and analysis;

 

  n  

an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal controls over financial reporting;

 

  n  

an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

  n  

reduced disclosure about our executive compensation arrangements; and

 

  n  

exemptions from the requirements to obtain a non-binding advisory vote on executive compensation or a shareholder approval of any golden parachute arrangements.

Under the JOBS Act, we will remain an “emerging growth company” until the earliest of:

 

  n  

the last day of the fiscal year during which we have total annual gross revenue of $1.0 billion or more;

 

  n  

the last day of the fiscal year following the fifth anniversary of the effective date of the registration statement of which this prospectus forms a part;

 

  n  

the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or

 

  n  

the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act (we will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700.0 million in outstanding common equity held by our non-affiliates and (ii) been public for at least 12 months; the value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter).

We may choose to take advantage of some of the available benefits under the JOBS Act, and have taken advantage of some reduced reporting requirements in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other U.S. public companies in which you hold stock.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging

 

 

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growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Corporate Information

We were incorporated in the Province of British Columbia on November 5, 1996 under the predecessor to the Business Corporations Act (British Columbia) under the name “Xenon Bioresearch Inc.” We continued from British Columbia to the federal jurisdiction pursuant to Section 187 of the Canada Business Corporations Act, or the CBCA, on May 17, 2000 and concurrently changed our name to “Xenon Genetics Inc.” We registered as an extra-provincial company in British Columbia on July 10, 2000 and changed our name to “Xenon Pharmaceuticals Inc.” on August 24, 2004. We have no subsidiaries. Our principal executive offices are located at 200 – 3650 Gilmore Way, Burnaby, British Columbia, Canada V5G 4W8, and our telephone number is (604) 484-3300. Our website address is http://www.xenon-pharma.com. We are currently not a reporting issuer, or the equivalent, in any province or territory of Canada and our shares are not listed on any recognized Canadian stock exchange. The information contained in, or that can be accessed through, our website is not part of this prospectus.

The Xenon logo, “Extreme Genetics and other trademarks or service marks of Xenon appearing in this prospectus are trademarked and are the property of Xenon as is the Xenon corporate name. This prospectus contains references to our trademarks and service marks and to those belonging to other entities, including “Glybera®,” which is the property of uniQure. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.

 

 

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The Offering

 

Common shares offered by us

             common shares

 

Common shares to be outstanding after this offering

             common shares (or              if the underwriters exercise their option to purchase additional common shares in full)

 

Option to purchase additional common shares

We have granted the underwriters an option for 30 days from the date of this prospectus to purchase up to              additional common shares.

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $         million, or approximately $         million if the underwriters exercise in full their option to purchase additional common shares, at an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We currently expect to use the net proceeds from this offering: (1) to fund preclinical and early clinical development of our DS and XEN801 programs; (2) to fund genetic research and drug discovery activities using our Extreme Genetics discovery platform; and (3) for working capital and general corporate purposes. We may also use a portion of the net proceeds in connection with any exercise of co-development or co-promotion rights under our strategic alliances; however, no such rights are currently exercisable. In addition, we may also use a portion of the net proceeds to acquire, license and invest in complementary products, technologies or businesses; however, we currently have no agreements or commitments to complete any such transaction. See “Use of Proceeds.”

 

Proposed ticker symbol on The NASDAQ Global Market

“XENE”

The number of common shares to be outstanding after this offering is based on 44,152,979 common shares outstanding as of June 30, 2014 and excludes the following:

 

  n  

7,013,578 common shares issuable upon exercise of options outstanding as of June 30, 2014, with a weighted-average exercise price of CAD$0.96 per common share, or $0.90 per common share, as converted; and

 

  n  

2,000,000 common shares reserved for future issuance under our 2014 Equity Incentive Plan, as amended, which will become effective on the business day immediately prior to the effective date of the registration statement of which this prospectus forms a part, and any future automatic increase in common shares reserved for issuance under such plan.

Except as otherwise indicated, this prospectus:

 

  n  

reflects the conversion of all outstanding preferred shares into an aggregate of 37,549,041 common shares upon the closing of this offering, including the conversion of all of our outstanding Series A preferred shares and Series B preferred shares into 10,431,507 common shares and the conversion of

 

 

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all of our outstanding Series E preferred shares into 27,117,534 common shares, based upon an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) and the adjustment provisions relating to our Series E preferred shares described in “Description of Share Capital;”

 

  n  

reflects the automatic conversion of 51,810 subscription rights into the same number of common shares immediately prior to the closing of this offering;

 

  n  

assumes the filing of certain amendments to our articles of continuance prior to the closing of this offering;

 

  n  

assumes no exercise by the underwriters of their option to purchase additional common shares;

 

  n  

reflects a          for          reverse share split of our common and preferred shares to be effected prior to the closing of this offering; and

 

  n  

with respect to financial measures, is presented in accordance with U.S. generally accepted accounting principles, or U.S. GAAP.

 

 

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Summary Financial Data

We have derived the following summary of statements of operations data for the years ended December 31, 2011, 2012 and 2013 from audited financial statements appearing elsewhere in this prospectus. We derived the following statements of operations data for the six months ended June 30, 2013 and 2014 and the balance sheet data as of June 30, 2014 from unaudited interim financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited interim financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the financial statements. Historical results are not necessarily indicative of the results that may be expected in the future and the results for the six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full year or any other period. The summary financial data set forth below should be read together with the financial statements and the related notes to those statements, as well as the sections of this prospectus captioned “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our audited annual financial statements and unaudited interim financial statements have been prepared in accordance with U.S. GAAP.

 

    YEAR ENDED DECEMBER 31,     SIX MONTHS ENDED JUNE 30,  
          2011                 2012               2013             2013             2014      
          (unaudited)  
    (in thousands, except per share data)  

Statement of Operations Data:

         

Revenue:

         

Collaboration revenue

  $ 6,915      $ 14,300      $ 27,352      $ 10,985      $ 10,297   

Royalties

    3        8        4        —          2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    6,918        14,308        27,356        10,985        10,299   

Operating expenses:

         

Research and development

    12,302        10,455        12,303        6,983        5,099   

General and administrative

    6,730        7,006        5,341        2,828        2,790   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    19,032        17,461        17,644        9,811        7,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (12,114     (3,153     9,712        1,174        2,410   

Other income (expense):

         

Interest income

    153        144        338        76        278   

Interest expense

    (91     (93     (64     (41     —     

Foreign exchange gain (loss)

    60        (169     2,035        1,920        (85

Gain (loss) on write-off and disposal of assets

           (1,030     11        11        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (11,992     (4,301     12,032        3,140        2,603   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to participating securities

                  8,199        3,140        2,603   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common shareholders

  $ (11,992   $ (4,301   $ 3,833      $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share—basic

  $ (1.86   $ (0.67   $ 0.59      $ 0.00      $ 0.00   

Net income (loss) per share—diluted

  $ (1.86   $ (0.67   $ 0.39      $ 0.00      $ 0.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding used in computing basic net income (loss) per share

    6,433        6,452        6,501        6,478        6,548   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding used in computing diluted net income (loss) per share

    6,433        6,452       
9,765
  
    6,478        6,548   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share—basic(1)

      $ 0.27        $ 0.06   

Pro forma net income (loss) per share—diluted(1)

      $ 0.25        $ 0.05   
     

 

 

     

 

 

 

Weighted-average common shares outstanding used in computing the proforma net income (loss) per share—basic (1)

        44,110          44,155   
     

 

 

     

 

 

 

Weighted-average common shares outstanding used in computing the proforma net income (loss) per share—diluted (1)

        47,314          47,765   
     

 

 

     

 

 

 

 

 

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     AS OF JUNE 30, 2014  
     ACTUAL     PRO FORMA
AS  ADJUSTED(2)
 
    

(unaudited)

 
     (in thousands)  

Balance Sheet Data:

    

Cash, cash equivalents and marketable securities

   $ 44,710      $                    

Working capital

     27,977     

Total assets

     50,712     

Redeemable convertible preferred shares

     102,488          

Total shareholders’ deficit

     (75,382  

 

(1) 

Pro forma net income (loss) per share represents net income (loss) divided by the pro forma weighted-average shares outstanding, and reflects (i) the conversion of all outstanding preferred shares into an aggregate of 37,549,041 common shares, including the conversion of all of our outstanding Series A preferred shares and Series B preferred shares into 10,431,507 common shares and the conversion of all of our outstanding Series E preferred shares into 27,117,534 common shares, based upon an assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus) and the adjustment provisions relating to our Series E preferred shares described in “Description of Share Capital,” upon the closing of this offering, and (ii) the conversion of the weighted-average number of outstanding subscription rights for the period into common shares.

(2) 

Reflects, on a pro forma basis, the automatic conversion described in footnote (1) and, on an as adjusted basis, the sale and issuance by us of             common shares hereunder at an assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover of this prospectus) after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, would increase (decrease) each of cash, cash equivalents and marketable securities, working capital, total assets and total shareholders’ deficit by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of             in the number of shares offered by us would increase (decrease) each of cash, cash equivalents and marketable securities, working capital, total assets and total shareholders’ deficit by approximately $             million, assuming that the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

 

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RISK FACTORS

Investing in our common shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common shares. If any of the following risks actually occur, our business, growth prospects, operating results and financial condition could suffer materially, the trading price of our common shares could decline and you could lose all or part of your investment.

Risks Related to Our Financial Condition and Capital Requirements

We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.

We are a clinical-stage biotechnology company and, other than the year ended December 31, 2013 and the six months ended June 30, 2014, we have recorded net losses in each reporting period since inception in 1996, and we do not expect to have sustained profitability for the foreseeable future. We had net losses of $12.0 million and $4.3 million for the years ended December 31, 2011 and 2012, respectively, and had an accumulated deficit of $114.1 million as of June 30, 2014.

We have devoted most of our financial resources to research and development, including our clinical and preclinical development activities. To date, we have financed our operations through the sale of equity securities and funding received from our licensees and collaborators. We have not generated any royalty revenue from product sales and our product candidates will require substantial additional investment before they will provide us with any product royalty revenue.

We expect to incur significant expenses and increasing operating losses for the foreseeable future as we:

 

  n  

continue our research and preclinical and clinical development of our product candidates;

  n  

expand the scope of our clinical studies for our current and prospective product candidates;

  n  

initiate additional preclinical, clinical or other studies for our product candidates, including under our collaboration agreements;

  n  

change or add additional manufacturers or suppliers;

  n  

seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical studies;

  n  

seek to identify and validate additional product candidates;

  n  

acquire or in-license other product candidates and technologies;

  n  

make milestone or other payments under our in-license agreements including, without limitation, our agreements with the University of British Columbia, or UBC, and the Memorial University of Newfoundland;

  n  

maintain, protect and expand our intellectual property portfolio;

  n  

establish a sales, marketing and distribution infrastructure to commercialize any products for which we or one of our collaborators may obtain marketing approval, and for which we have maintained commercial rights;

  n  

create additional infrastructure to support our operations as a public company and our product development and planned future commercialization efforts; and

  n  

experience any delays or encounter issues with any of the above.

Our expenses could increase beyond expectations for a variety of reasons, including if we are required by the U.S. Food and Drug Administration, or FDA, the European Medicines Agency, or EMA, or other regulatory agencies, domestic or foreign, to perform clinical and other studies in addition to those that we currently anticipate. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our shareholders’ equity.

We have not generated any royalty revenue from product sales and may never become profitable on a U.S. GAAP basis.

Our ability to generate meaningful revenue and achieve profitability on a U.S. GAAP basis depends on our ability, alone or with strategic collaborators, to successfully complete the development of, and obtain the regulatory

 

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approvals necessary to commercialize, our product candidates. Substantially all of our revenue since inception has consisted of upfront and milestone payments associated with our collaboration and license agreements. Revenue from these agreements is dependent on successful development of our product candidates by us or our collaborators. To date, we have not generated any royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales other than from sales of Glybera under our license to uniQure Biopharma B.V., or uniQure, for the foreseeable future, if ever. If any of our product candidates fail in clinical trials or do not gain regulatory approval, or if Glybera or any of our future products, if any, once approved, fails to achieve market acceptance or adequate market share, we may never become profitable. Although we were profitable for the year ended December 31, 2013 and the six months ended June 30, 2014, we may not be able to sustain profitability in subsequent periods. Our ability to generate future revenue from product sales depends heavily on our success, and the success of our collaborators, in:

 

  n  

completing research, preclinical and clinical development of our product candidates;

 

  n  

seeking and obtaining regulatory and marketing approvals for product candidates for which we complete clinical studies;

 

  n  

commercializing products for which we obtain regulatory and marketing approval, either with a collaborator or, if launched independently, by establishing sales, marketing and distribution infrastructure;

 

  n  

negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter;

 

  n  

obtaining market acceptance of products for which we obtain regulatory and marketing approval as therapies;

 

  n  

addressing any competing technological and market developments;

 

  n  

establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate (in amount and quality) products and services to support clinical development and the market demand for any approved products in the future;

 

  n  

developing a sustainable, scalable, reproducible, and transferable manufacturing processes for any of our products approved in the future;

 

  n  

maintaining, protecting, expanding and enforcing our portfolio of intellectual property rights, including patents, trade secrets and know-how;

 

  n  

implementing additional internal systems and infrastructure, as needed; and

 

  n  

attracting, hiring and retaining qualified personnel.

The scope of our future revenue will also depend upon the size of any markets in which our product candidates receive approval and the availability of insurance coverage and the availability and amount of reimbursement from third-party payers for Glybera and future products, if any. If we are unable to achieve sufficient revenue to become profitable and remain so, our financial condition and operating results will be negatively impacted, and our trading price might be harmed.

Even if this offering is successful, we will likely need to raise additional funding, which may not be available on acceptable terms, if at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.

Since our inception, we have dedicated most of our resources to the discovery and development of our proprietary preclinical and clinical product candidates, and we expect to continue to expend substantial resources doing so for the foreseeable future. These expenditures will include costs associated with research and development, manufacturing of product candidates and products approved for sale, conducting preclinical experiments and clinical trials and obtaining and maintaining regulatory approvals, as well as commercializing any products later approved for sale. During the six months ended June 30, 2014, we incurred approximately $5.1 million of costs associated with research and development, exclusive of costs incurred by our collaborators in developing our current product and product candidates.

 

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The anticipated net proceeds from this offering are not expected to be sufficient to complete clinical development of any of our product candidates and prepare for commercializing any product candidate which receives regulatory approval. Accordingly, we will likely require substantial additional capital beyond the expected proceeds of this offering to continue our clinical development and potential commercialization activities. Our future capital requirements depend on many factors, including but not limited to:

 

  n  

the number and characteristics of the future product candidates we pursue;

 

  n  

the scope, progress, results and costs of independently researching and developing any of our future product candidates, and conducting preclinical research and clinical trials;

 

  n  

whether our existing collaborations continue to generate substantial milestone payments and, ultimately, royalties on future products for us;

 

  n  

the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates we develop independently;

 

  n  

the cost of future commercialization activities, including activities required pursuant to our option to co-promote TV-45070, if exercised by us, and the cost of commercializing any future products we develop independently that are approved for sale;

 

  n  

the cost of manufacturing our future products, if any;

 

  n  

our ability to maintain existing collaborations and to establish new collaborations, licensing or other arrangements and the financial terms of such agreements;

 

  n  

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome of such litigation; and

 

  n  

the timing, receipt and amount of sales of, or royalties on, Glybera, and our future products, if any.

We are unable to estimate the funds we will actually require to complete research and development of our product candidates or the funds required to commercialize any resulting product in the future.

Upon the completion of this offering, based upon our anticipated operating expenditures, we expect that the net proceeds from this offering, research funding that we expect to receive under our existing collaborations and our existing cash, cash equivalents and marketable securities will be sufficient to fund our current operations for at least the next 12 to 24 months. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. Raising funds in the future may present additional challenges and future financing may not be available in sufficient amounts or on terms acceptable to us, if at all.

Raising additional capital may cause dilution to our existing shareholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

The terms of any financing arrangements we enter into may adversely affect the holdings or the rights of our shareholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our shareholders. The incurrence of indebtedness would result in increased fixed payment obligations and, potentially, the imposition of restrictive covenants. Those covenants may include limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborators or otherwise at an earlier stage than otherwise would be desirable resulting in the loss of rights to some of our product candidates or other unfavorable terms, any of which may have a material adverse effect on our business, operating results and prospects. In addition, any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates.

 

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Unstable market and economic conditions may have serious adverse consequences on our business and financial condition.

Global credit and financial markets experienced extreme disruptions at various points over the last decade, characterized by diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. If another such disruption in credit and financial markets and deterioration of confidence in economic conditions occurs, our business may be adversely affected. If the equity and credit markets were to deteriorate significantly in the future, it may make any necessary debt or equity financing more difficult to complete, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and share price and could require us to delay or abandon development or commercialization plans. In addition, there is a risk that one or more of our current collaborators, service providers, manufacturers and other partners would not survive or be able to meet their commitments to us under such circumstances, which could directly affect our ability to attain our operating goals on schedule and on budget.

We are subject to risks associated with currency fluctuations, and changes in foreign currency exchange rates could impact our results of operations.

Approximately 19% of our cash and cash equivalents as of June 30, 2014 was denominated in U.S. dollars. Historically, a portion of our operating expenses and a substantial portion of our revenue has been denominated in U.S. dollars. Because our functional currency is the Canadian dollar, changes in the exchange rate between the Canadian dollar and the U.S. dollar could materially impact our reported results of operations and distort period to period comparisons. In particular, because of the difference in the amount of our revenue and expenses that are in U.S. dollars relative to Canadian dollars, depreciation in the U.S. dollar relative to the Canadian dollar could result in a material increase in reported expenses relative to revenue, and therefore could cause our operating income (expense) to appear to decline materially, particularly relative to prior periods. The converse is true if the U.S. dollar were to appreciate relative to the Canadian dollar. Fluctuations in foreign currency exchange rates also impact the reporting of our receivables and payables in non-Canadian currencies. Translation gains or losses related to the translation of our net assets from our Canadian functional currency into the U.S. reporting currency are included as a component of accumulated comprehensive income on our balance sheet. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our common shares could be adversely affected.

From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. For example, we maintain a natural currency hedge against fluctuations in the U.S./Canadian foreign exchange rate by matching the amount of U.S. dollar and Canadian dollar investments to the expected amount of future U.S. dollar and Canadian dollar obligations, respectively. Any hedging technique we implement may fail to be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on the trading price of our common shares.

Risks Related to Our Business

We, or our collaborators, may fail to successfully develop our product candidates.

Our product candidates, including TV-45070 and GDC-0276 and compounds in our preclinical and discovery pipeline, are in varying stages of development and will require substantial clinical development, testing and regulatory approval prior to commercialization. It may be several more years before these product candidates or any of our other product candidates receive marketing approval, if ever. If any of our product candidates fail to become approved products, our business, growth prospects, operating results and financial condition may be adversely affected and a decline of our common share price could result. For example, in June 2013, we paid Isis Pharmaceuticals, Inc., or Isis, an option exercise fee of $2.0 million to obtain an exclusive license to develop, manufacture and commercialize antisense products under our collaboration and license agreement with Isis; however, in the fourth quarter of 2013, we discontinued development of product candidates under this program as the preclinical data did not support the continued advancement of any product candidates.

 

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Our near-term operating revenue is partially dependent upon the regulatory and marketing efforts of uniQure, or its sublicensee, for the development and commercialization of Glybera.

Under the terms of our license agreement with uniQure, we rely on uniQure, or its sublicensees, to market Glybera and to obtain regulatory approval of Glybera. In July 2013, uniQure announced that it had granted to Chiesi Farmaceutici, S.p.A., or Chiesi, an Italian pharmaceutical firm, an exclusive license to commercialize Glybera in the European Union, or the EU, and certain other countries outside of North America and Japan. Despite the efforts of uniQure and Chiesi, Glybera may not gain market acceptance among physicians, patients, healthcare payers and the medical community. The commercial success of Glybera will depend on a number of factors, including:

 

  n  

establishment and demonstration of clinical efficacy and safety and acceptance of the same by the medical community;

 

  n  

commercialization of competing products;

 

  n  

sufficient commercial supply of Glybera;

 

  n  

cost-effectiveness of Glybera;

 

  n  

the availability of coverage and adequate reimbursement from third parties, including governmental payers, managed care organizations, and private health insurers;

 

  n  

the relative cost, safety and efficacy of therapies that exist now or may be developed in the future;

 

  n  

whether the product can be manufactured in commercial quantities at acceptable cost;

 

  n  

marketing and distribution support for Glybera;

 

  n  

the effect of current and future healthcare laws;

 

  n  

the acceptance of gene therapies as a class of treatment; and

 

  n  

any market or regulatory exclusivities applicable to the product.

To date, the FDA has never approved any gene therapy product as a treatment for any indication in the U.S. and the FDA may never approve Glybera. Any failure of uniQure or its sublicensee to successfully commercialize Glybera could have a material adverse effect on our business, growth prospects, operating results and financial condition and could result in a substantial decline in the price of our common shares.

We and our collaborators face substantial competition in the markets for our product candidates, which may result in others discovering, developing or commercializing products before us or doing so more successfully than we or our collaborators do.

The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We face potential competition in target discovery and product development from many different approaches and sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research institutions. Any product candidates that we or our collaborators successfully develop and commercialize will compete with existing products and any new products that may become available in the future.

The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be

their efficacy, safety, convenience and price; the effectiveness of alternative products; the level of generic competition; and the availability of coverage and adequate reimbursement from government and other third-party payors.

With respect to target discovery activities, competitors and other third parties, including academic and clinical researchers, may access rare families and identify novel targets for drug development before we do.

Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we, or our collaborators, do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaboration arrangements with large and established companies.

Our commercial opportunities could be reduced or eliminated if our competitors develop and commercialize products or therapies that are safer, more effective, have fewer or less severe side effects, are more convenient or are less

 

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expensive than any products that we may develop. Our competitors also may obtain FDA, EMA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected by decisions made by insurers or other third party payors.

To the extent that we are unable to compete effectively against one or more of our competitors in these areas, our business will not grow and our financial condition, results of operations and common share price may suffer.

There are no approved gene therapies currently on the market for lipoprotein lipase deficiency, or LPLD, in the U.S. The current management of LPLD consists of strict adherence to an extremely low-fat diet, but compliance with such a diet is challenging. Lipid-lowering drugs are generally not effective for treating LPLD. We are not aware of any other drugs or therapies currently in development that treat LPLD by using the lipoprotein lipase, or LPL, sequence containing the LPLS447X genetic variant or otherwise.

Drug discovery and development for various pain applications is intensely competitive. There are a large number of approved products for neuropathic pain, inflammatory pain and other pain indications. These approved products include capsaicin, celecoxib, lidocaine, narcotic analgesics and pregabalin. We are also aware of clinical-stage development programs at several pharmaceutical and biotechnology companies that are targeting Nav1.7 inhibitors to develop products to treat various pain indications, including Bioline Rx Ltd., Convergence Pharmaceuticals Limited, Dainippon Sumitomo Co., Ltd. and Pfizer, Inc. Moreover, we are aware of various other product candidates in development that target other mechanisms of action to treat various pain indications. We are not aware of any drugs or therapies currently approved specifically for treating primary erythromelalgia, or EM.

The novelty of gene therapy products and their lack of a commercial track record may hinder market acceptance of Glybera among physicians, patients, healthcare payers and the medical community.

Glybera is the first gene therapy product approved in the EU and no gene therapy product has been approved in the U.S. Because Glybera is likely to be the first gene therapy to be marketed in the EU, gaining market acceptance and overcoming any safety or efficacy concerns may be more challenging than for a more traditional therapy. Glybera’s commercial success will depend, in part, on the success of efforts to educate the market regarding gene therapy products. In particular, the success of Glybera will depend upon physicians who treat patients with LPLD, prescribing Glybera. With respect to Glybera and any other gene therapy products we or a collaborator may develop, public perception may be influenced by claims that gene therapy is unsafe, and, if so, gene therapy may not gain the acceptance of the public or the medical community. More restrictive government regulations or negative public opinion could have a negative effect on our business or financial condition and may delay or impair the commercialization of Glybera. If Glybera is not successfully commercialized, our ability to generate near term revenue could be impaired.

We have no marketed products and have not yet advanced a product candidate beyond Phase 2 clinical trials, which makes it difficult to assess our ability to develop our future product candidates and commercialize any resulting products independently.

We have no experience in Phase 3 and later stage clinical development, and related regulatory requirements or the commercialization of products. uniQure controls and has been responsible for the development and commercialization of Glybera, Teva Pharmaceutical Industries Ltd., or Teva, is responsible for the on-going clinical development of TV-45070, and Genentech Inc., or Genentech, is responsible for the ongoing clinical development of GDC-0276. Accordingly, we have not yet demonstrated our ability to independently and repeatedly conduct clinical development after Phase 2, obtain regulatory approval and commercialize therapeutic products. We will need to develop such abilities if we are to execute on our business strategy to selectively develop and independently commercialize product candidates for orphan and niche indications. To execute on our business plan for the development of independent programs, we will need to successfully:

 

  n  

execute our clinical development plans for later-stage product candidates;

 

  n  

obtain required regulatory approvals in each jurisdiction in which we will seek to commercialize products;

 

  n  

build and maintain appropriate sales, distribution and marketing capabilities;

 

  n  

gain market acceptance for our future products, if any; and

 

  n  

manage our spending as costs and expenses increase due to clinical trials, regulatory approvals and commercialization activities.

 

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If we are unsuccessful in accomplishing these objectives, we would not be able to develop and commercialize any future orphan and niche disease product candidates independently, and could fail to realize the potential advantages of doing so.

If we are not successful in leveraging our Extreme Genetics discovery platform to discover product candidates in addition to TV-45070 and GDC-0276, our ability to expand our business and achieve our strategic objectives may be impaired.

We rely on our Extreme Genetics discovery platform to identify validated drug targets and develop new product candidates. To date, our Extreme Genetics discovery platform has yielded one approved product, Glybera, and our announced development candidates TV-45070 and GDC-0276. Use of our discovery platform requires substantial technical, financial and human resources, regardless of whether we identify any novel drug targets. Our Extreme Genetics discovery platform may initially show promise in identifying additional potential product candidates, yet fail to yield viable product candidates for clinical development or commercialization. Such failure may occur for many reasons, including the following: any product candidate may, on further study, be shown to have serious or unexpected side effects or other characteristics that indicate it is unlikely to be safe or otherwise does not meet applicable regulatory criteria; and any product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all.

If we are unable to identify additional product candidates suitable for clinical development and commercialization, we may not be able to obtain product revenue in future periods, which likely would result in significant harm to our financial position and adversely impact our trading price.

Our approach to drug discovery is unproven, and we do not know whether we will be able to develop any products of commercial value.

Our Extreme Genetics discovery platform may not reproducibly or cost-effectively result in the discovery of product candidates and development of commercially viable products that safely and effectively treat human disease.

There are various challenges in utilizing our Extreme Genetics discovery platform to successfully identify novel drug targets, including locating families suffering from rare disorders and severe phenotypes, entering into agreements with foreign collaborators, complying with various domestic and foreign privacy laws, accessing required technologies in a timely manner and transporting DNA across national borders.

To date, only Glybera has been both developed using our Extreme Genetics discovery platform and approved for commercial sale. If the use of our Extreme Genetics discovery platform fails to identify novel targets for drug discovery, or such targets prove to be unsuitable for treating human disease, or we are unable to develop product candidates with specificity and selectivity for such targets, we will fail to develop viable products. If we fail to develop and commercialize viable products, we will not achieve commercial success.

We may encounter difficulties in managing our growth, including headcount, and expanding our operations successfully.

Our business strategy involves continued development and, where development is successful, commercialization of select successfully developed product candidates for orphan and niche indications independently. In order to execute on this strategy, we will need to build out a regulatory, sales, manufacturing, distribution and marketing infrastructure and expand our development capabilities or contract with third parties to provide these capabilities and infrastructure for us. To achieve this, we will need to identify, hire and integrate personnel who have not worked together as a group previously. We anticipate that we may need to hire additional accounting, legal and financial staff with appropriate public company experience and technical accounting and other knowledge to address the added burdens of operating as a public company. There are likely to be infrastructure costs associated with public company compliance as well.

As our operations expand, we expect that we will need to manage additional relationships with various strategic collaborators, suppliers and other third parties.

Dr. Gary Bridger, our Executive Vice President of Research and Development, works for us on a part-time, one-day-a-week basis, pursuant to a consulting agreement. Drs. Simon Pimstone and Y. Paul Goldberg each devote a small amount of their time to clinical work outside of their duties at our company, conducting, generally, two to three outpatient clinics per month. Future growth will impose significant added responsibilities on members of

 

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management, and our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities.

If we are to effectively manage our growth, our expenses may increase more than expected, our ability to generate and grow revenue could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.

If we fail to attract and retain senior management and key personnel, we may be unable to successfully develop our product candidates, perform our obligations under our collaboration agreements, conduct our clinical trials and commercialize our product candidates.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel.

We could experience difficulties attracting and retaining qualified employees as competition for qualified personnel in the biotechnology and pharmaceutical field is intense. We are highly dependent upon our senior management, particularly Dr. Pimstone, our Chief Executive Officer and President; Mr. Ian Mortimer, our Chief Financial Officer; and Dr. Goldberg, our Vice President, Clinical Development, as well as other employees. In the near future, the loss of services of any of these individuals or one or more of our other members of senior management could materially delay or even prevent the successful development of our product candidates.

In addition, we will need to hire additional personnel as we expand our clinical development activities and develop commercial capabilities, including a sales infrastructure to support our independent commercialization efforts. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for individuals with similar skill sets. The inability to recruit or loss of the services of any executive or key employee may impede the progress of our research, development and commercialization objectives.

Our employees, collaborators and other personnel may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of fraud or other misconduct by our employees, collaborators, vendors, principal investigators, consultants and commercial partners. Misconduct by these parties could include intentional failures to comply with the regulations of the FDA, EMA and other non-U.S. regulators, provide accurate information to the FDA, EMA and other non-U.S. regulators, comply with data privacy and security and healthcare fraud and abuse laws and regulations in the U.S. and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. Additionally, laws regarding data privacy and security, including the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, as well as comparable laws in non-U.S. jurisdictions, may impose obligations with respect to safeguarding the privacy, use, security and transmission of individually identifiable health information such as genetic material.

Various laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Any misconduct could also involve the improper use of information obtained in the course of clinical studies, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of conduct applicable to all of our employees, which will be effective as of the effectiveness of the registration statement of which this prospectus forms a part, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

 

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A variety of risks associated with international operations could materially adversely affect our business.

Glybera has been approved for commercial sale in the EU by the EMA. Our collaborator for TV-45070, Teva, is based in Israel and a significant portion of the research and development activities under our collaboration with Teva are performed outside of North America. If we continue to engage in significant cross-border activities, we will be subject to risks related to international operations, including:

 

  n  

different regulatory requirements for maintaining approval of drugs and biologics in foreign countries;

 

  n  

reduced protection for intellectual property rights in certain countries;

 

  n  

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

  n  

economic weakness, including inflation, political instability or open conflict in particular foreign economies and markets;

 

  n  

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

  n  

foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

 

  n  

workforce uncertainty in countries where labor unrest is more common than in North America;

 

  n  

tighter restrictions on privacy and the collection and use of data, including genetic material, may apply in jurisdictions outside of North America, where we find some of the families with individuals that exhibit the severe phenotypes that we study; and

 

  n  

business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.

If any of these issues were to occur, our business could be materially harmed.

U.S. Holders of our shares may suffer adverse tax consequences if we are characterized as a passive foreign investment company.

Generally, for any taxable year in which 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be determined in part by the market value of our common shares, which is subject to change) are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Based on the composition of our gross income and gross assets and the nature of our business, we do not believe that we were a PFIC for the taxable year ended December 31, 2013 and we do not expect to be a PFIC following this offering and for the taxable year ending December 31, 2014.

If we are a PFIC for 2014 or any subsequent year, U.S. Holders (as defined in “United States & Canadian Income Tax Considerations—U.S. Federal Income Tax Information for U.S. Holders”) of our common shares may suffer adverse tax consequences. Gains realized by non-corporate U.S. Holders on the sale of our common shares would be taxed as ordinary income, rather than as capital gain, and the preferential tax rate applicable to dividends received on our common shares would be lost. Interest charges would also be added to taxes on gains and dividends realized by all U.S. Holders.

A U.S. Holder may avoid these adverse tax consequences by timely making a qualified electing fund election. For each year that we would meet the PFIC gross income or asset test, an electing U.S. Holder would be required to include in gross income its pro rata share of our net ordinary income and net capital gains, if any. A U.S. Holder may make a qualified electing fund election only if we commit to provide U.S. Holders with their pro rata share of our net ordinary income and net capital gains. If we are a PFIC in the current or a future tax year, we will provide our U.S. Holders with the information that is necessary in order for them to make a qualified electing fund election and to report their common shares of ordinary earnings and net capital gains for each year for which we are a PFIC.

A U.S. Holder may also mitigate the adverse tax consequences if we are a PFIC by timely making a mark-to-market election. Generally, for each year that we would meet the PFIC gross income or asset test, an electing U.S. Holder would include in gross income the increase in the value of its shares during each of its taxable years and deduct from gross income the decrease in the value of such shares during each of its taxable years. A mark-to-market election may be made and maintained only if our common shares are regularly traded on a qualified exchange, including The NASDAQ Global Market, or NASDAQ. Whether our common shares are regularly traded on a qualified

 

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exchange is an annual determination based on facts that, in part, are beyond our control. Accordingly, a U.S. Holder might not be eligible to make a mark-to-market election to mitigate the adverse tax consequences if we are characterized as a PFIC. See “United States and Canadian Income Tax Considerations—U.S. Federal Income Tax Information for U.S. Holders—Passive Foreign Investment Company Consequences.”

Acquisitions or joint ventures could disrupt our business, cause dilution to our shareholders and otherwise harm our business.

We actively evaluate various strategic transactions on an ongoing basis and may acquire other businesses, products or technologies as well as pursue strategic alliances, joint ventures or investments in complementary businesses. Any of these transactions could be material to our financial condition and operating results and expose us to many risks, including:

 

  n  

disruption in our relationships with collaborators or suppliers as a result of such a transaction;

 

  n  

unanticipated liabilities related to acquired companies;

 

  n  

difficulties integrating acquired personnel, technologies and operations into our existing business;

 

  n  

retention of key employees;

 

  n  

diversion of management time and focus from operating our business to management of strategic alliances or joint ventures or acquisition integration challenges;

 

  n  

increases in our expenses and reductions in our cash available for operations and other uses; and

 

  n  

possible write-offs or impairment charges relating to acquired businesses.

Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.

Also, the anticipated benefit of any strategic alliance, joint venture or acquisition may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results.

Risks Related to Development, Clinical Testing and Regulatory Approval of Our Product Candidates

The regulatory approval processes of the FDA, EMA and regulators in other jurisdictions are lengthy, time-consuming and inherently unpredictable. If we, or our collaborators, are unable to obtain timely regulatory approval for our product candidates, our business will be substantially harmed.

The regulatory approval process is expensive and the time required to obtain approval from the FDA, EMA or other regulatory authorities in other jurisdictions to sell any product is uncertain and may take years. Whether regulatory approval will be granted is unpredictable and depends upon numerous factors, including the substantial discretion of the regulatory authorities. Approval policies, regulations, or the type and amount of preclinical and clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. Other than for Glybera in the EU, neither we nor our collaborators have obtained regulatory approval for any of our product candidates. It is possible that none of our existing product candidates or any of our future product candidates will ever obtain regulatory approval, even if we expend substantial time and resources seeking such approval.

Our product candidates could fail to receive regulatory approval for many reasons, including the following:

 

  n  

the FDA, EMA or other regulatory authorities may disagree with the design or implementation of our or our collaborators’ clinical trials;

 

  n  

we or our collaborators may be unable to demonstrate to the satisfaction of the FDA, EMA or other regulatory authorities that a product candidate is safe and effective for its proposed indication;

 

  n  

the results of clinical trials may not meet the level of statistical significance required by the FDA, EMA or other regulatory authorities for approval;

 

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  n  

we, or our collaborators, may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

  n  

the FDA, EMA or other regulatory authorities may disagree with our or our collaborators’ interpretation of data from preclinical studies or clinical trials;

 

  n  

the data collected from clinical trials of our product candidates may not be sufficient to support the submission of a New Drug Application, or NDA, or other submission or to obtain regulatory approval in the U.S. or elsewhere;

 

  n  

the FDA, EMA or other regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we or our collaborators contract for clinical and commercial supplies; and

 

  n  

the approval policies or regulations of the FDA, EMA or other regulatory authorities outside of the U.S. may significantly change in a manner rendering our or our collaborators’ clinical data insufficient for approval.

Even if we, or our collaborators, obtain approval for a particular product, regulatory authorities may grant approval contingent on the performance of costly post-approval clinical trials, or may approve a product with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product.

Clinical drug development involves a lengthy and expensive process with uncertain timelines and uncertain outcomes. If clinical trials are prolonged or delayed, we, or our collaborators, may be unable to commercialize our product candidates on a timely basis.

Clinical testing of product candidates is expensive and, depending on the stage of development, can take a substantial period of time to complete. Clinical trial outcomes are inherently uncertain, and failure can occur at any time during the clinical development process.

Clinical trials can be halted or delayed for a variety of reasons, including those related to:

 

  n  

side effects or adverse events in study participants presenting an unacceptable safety risk;

 

  n  

inability to reach agreement with prospective contract research organizations, or CROs, and clinical trial sites, or the breach of such agreements;

 

  n  

failure of third-party contractors, such as CROs, or investigators to comply with regulatory requirements;

 

  n  

delay or failure in obtaining the necessary approvals from regulators or institutional review boards, or IRBs, in order to commence a clinical trial at a prospective trial site, or their suspension or termination of a clinical trial once commenced;

 

  n  

a requirement to undertake and complete additional preclinical studies to generate data required to support the submission of an NDA;

 

  n  

inability to enroll sufficient patients to complete a protocol, particularly in orphan diseases;

 

  n  

difficulty in having patients complete a trial or return for post-treatment follow-up;

 

  n  

clinical sites deviating from trial protocol or dropping out of a trial;

 

  n  

problems with drug product or drug substance storage and distribution;

 

  n  

adding new clinical trial sites;

 

  n  

our inability to manufacture, or obtain from third parties, adequate supply of drug substance or drug product sufficient to complete our preclinical studies and clinical trials; and

 

  n  

governmental or regulatory delays and changes in regulatory requirements, policy and guidelines.

The results of any Phase 3 or other pivotal clinical trial may not be adequate to support marketing approval. These clinical trials are lengthy and, with respect to non-orphan indications, usually involve many hundreds to thousands of patients. In addition, if the FDA, EMA or another applicable regulator disagrees with our or our collaborator’s choice of the key testing criterion, or primary endpoint, or the results for the primary endpoint are not robust or significant relative to the control group of patients not receiving the experimental therapy, such regulator may refuse to approve our product candidate in the region in which it has jurisdiction. The FDA, EMA or other applicable non-U.S. regulators also may require additional clinical trials as a condition for approving any of these product candidates.

We could also encounter delays if a clinical trial is suspended or terminated by us, by our collaborators, by the IRBs of the institutions in which such trial is being conducted, by any Data Safety Monitoring Board for such trial, or by the

 

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FDA, EMA or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA, EMA or other regulatory authorities resulting in the imposition of a clinical hold, product candidate manufacturing problems, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. In addition, delays can occur due to safety concerns arising from trials or other clinical data regarding another company’s product candidate in the same compound class as one of ours.

If we or our collaborators experience delays in the completion of, or termination of, any clinical trial of one of our product candidates, the commercial prospects of the product candidate will be harmed, could shorten the patent protection period during which we may have the exclusive right to commercialize our products and our or our collaborators’ ability to commence product sales and generate product revenue from the product will be delayed. In addition, any delays in completing our clinical trials will increase our costs and slow down our product candidate development and approval process. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

Our TV-45070 and GDC-0276 product candidates for treatment of pain target novel molecular mechanisms. Regulatory authorities may require more extensive studies of the long-term effects of such product candidates for regulatory approval, which could delay development of our product candidates or our future product candidates based on novel mechanisms.

Our clinical trials may fail to demonstrate adequately the safety and efficacy of our product candidates, which could prevent or delay regulatory approval and commercialization.

Before obtaining regulatory approvals for the commercial sale of our products, we must demonstrate through lengthy, complex and expensive preclinical testing and clinical trials that the product candidate is both safe and effective for use in each target indication. Clinical trials often fail to demonstrate safety and efficacy of the product candidate studied for the target indication. Most product candidates that commence clinical trials are never approved as products.

In the case of our product candidates, we are seeking to develop treatments for diseases for which there is relatively limited clinical experience, and, in some cases our clinical trials use novel end points and measurement methodologies, which adds a layer of complexity to our clinical trials and may delay regulatory approval. In addition, our focus on orphan and niche markets may cause us to select target indications that are in more challenging therapeutic areas. For example, clinical trials for pain, the indication for which TV-45070 is being developed, are inherently difficult to conduct. The primary measure of pain is subjective patient feedback, which can be influenced by factors outside of our control, and can vary widely from day to day for a particular patient, and from patient to patient and site to site within a clinical study. The placebo effect also tends to have a more significant impact on pain trials.

If our product candidates are not shown to be both safe and effective in clinical trials, we will not be able to obtain regulatory approval or commercialize these product candidates and products. In such case, we would need to develop other compounds and conducting associated preclinical testing and clinical trials, as well as the potential need for additional financing, would have a material adverse effect on our business, growth prospects, operating results, financial condition and results of operations.

We may find it difficult to enroll patients in our clinical studies, including for orphan or niche indications, which could delay or prevent clinical studies of our product candidates.

We may not be able to identify, recruit and enroll a sufficient number of patients, or those with required or desired characteristics to achieve diversity in a study, to complete our clinical studies in a timely manner. Patient enrollment for clinical trials for orphan and niche indications and for more prevalent conditions is affected by factors including:

 

  n  

severity of the disease under investigation;

 

  n  

design of the study protocol;

 

  n  

size of the patient population;

 

  n  

eligibility criteria for the study in question;

 

  n  

perceived risks and benefits of the product candidate under study;

 

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  n  

proximity and availability of clinical study sites for prospective patients;

 

  n  

availability of competing therapies and clinical studies;

 

  n  

efforts to facilitate timely enrollment in clinical studies; and

 

  n  

patient referral practices of physicians.

The limited patient populations in orphan and niche indications present significant recruitment challenges for clinical trials. For example, studies estimate the prevalence of LPLD to be approximately 1:1,000,000 and the prevalence of primary EM, to be approximately 43,000 patients in the U.S. Primary EM is a condition of EM that is not caused by another disease or disorder. Many of these patients may not be suitable or available for clinical trials. This means that we or our collaborators generally will have to run multi-site and potentially multi-national trials, which can be expensive and require close coordination and supervision. If we experience delays in completing our clinical trials, such delays could result in increased costs, delays in advancing our product development, delays in testing the effectiveness of our technology or termination of the clinical studies altogether.

If we fail to obtain or maintain orphan drug designation or other regulatory exclusivity for some of our product candidates, our competitive position would be harmed.

A product candidate that receives orphan drug designation can benefit from a streamlined regulatory process as well as potential commercial benefits following approval. Currently, this designation provides market exclusivity in the U.S. and the EU for seven years and ten years, respectively, if a product is the first such product approved for such orphan indication. This market exclusivity does not, however, pertain to indications other than those for which the drug was specifically designated in the approval, nor does it prevent other types of drugs from receiving orphan designations or approvals in these same indications. Further, even after an orphan drug is approved, the FDA can subsequently approve a drug with similar chemical structure for the same condition if the FDA concludes that the new drug is clinically superior to the orphan product or a market shortage occurs.

In the EU, orphan exclusivity may be reduced to six years if the drug no longer satisfies the original designation criteria or can be lost altogether if the marketing authorization holder consents to a second orphan drug application or cannot supply enough drug, or when a second applicant demonstrates its drug is “clinically superior” to the original orphan drug. TV-45070 has received both fast track and orphan drug designations for the treatment of EM by the FDA. If we seek orphan drug designations for other indications or in other jurisdictions, such as for TV-45070 in the EU, we may fail to receive such orphan drug designations and, even if we succeed, such orphan drug designations may fail to result in or maintain orphan drug exclusivity upon approval, which would harm our competitive position.

Results of earlier clinical trials may not be predictive of the results of later-stage clinical trials.

The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Interpretation of results from early, usually smaller, studies that suggest a clinically meaningful response in some patients, requires caution. Results from later stages of clinical trials enrolling more patients may fail to show the desired safety and efficacy results or otherwise fail to be consistent with the results of earlier trials of the same product candidates. Later clinical trial results may not replicate earlier clinical trials for a variety of reasons, including differences in trial design, different trial endpoints (or lack of trial endpoints in exploratory studies), patient population, number of patients, patient selection criteria, trial duration, drug dosage and formulation and lack of statistical power in the earlier studies. These uncertainties are enhanced where the diseases under study lack established clinical endpoints and validated measures of efficacy, as is often the case with orphan diseases for which no drugs have been developed previously. For example, our results for two small exploratory clinical trials for primary EM pain, one using a topical formulation and the other an oral formulation of TV-45070, used novel measures of efficacy assessment. While these studies provided promising results, further larger clinical trials will be necessary to confirm and extend these observations.

Changes in methods of product candidate manufacturing or formulation may result in additional costs or delay.

As product candidates are developed through preclinical to late stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods and formulation, are altered along the way in an effort to optimize processes and results. Such changes carry the risk that they will not achieve these intended objectives. Any of these changes could cause our product candidates to perform differently and affect the results of planned clinical trials or other future clinical trials conducted with the altered materials. This could delay completion of clinical trials, require the conduct of bridging clinical trials or the

 

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repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates and/or jeopardize our or our collaborators’ ability to commence product sales and generate revenue.

Even if we obtain and maintain approval for our product candidates from one jurisdiction, we may never obtain approval for our product candidates in other jurisdictions, which would limit our market opportunities and adversely affect our business.

Sales of our approved products are, and will be, subject to U.S. and foreign regulatory requirements governing clinical trials and marketing approval, and we plan to seek regulatory approval to commercialize our product candidates in North America, the EU and in additional foreign countries. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries and regulatory approval in one country does not ensure approval in any other country, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in others. For example, approval in the U.S. by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority, such as the EMA for Glybera, does not ensure approval by regulatory authorities in other countries, including by the FDA. Approval procedures vary among jurisdictions and can be lengthy and expensive, and involve requirements and administrative review periods different from, and greater than, those in the U.S., including additional preclinical studies or clinical trials. Even if our product candidates are approved, regulatory approval for any product may be withdrawn by the regulatory authorities in a particular jurisdiction.

Even if a product is approved, the FDA or the EMA, as the case may be, may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming clinical trials or reporting as conditions of approval. In many countries outside the U.S., a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for a product is also subject to approval.

Regulatory authorities in countries outside of the U.S. and the EMA also have their own requirements for approval of product candidates with which we must comply prior to marketing in those countries. Obtaining foreign regulatory approvals and compliance with such foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our current and any future products, in certain countries.

If we fail to receive applicable marketing approvals or comply with the regulatory requirements in international markets, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed and our business will be adversely affected.

We work with outside scientists and their institutions in executing our business strategy of developing product candidates using our Extreme Genetics discovery platform. These scientists may have other commitments or conflicts of interest, which could limit our access to their expertise and harm our ability to leverage our discovery platform.

We work with scientific advisors and collaborators at academic research institutions in connection with our Extreme Genetics discovery platform. These scientific advisors serve as our link to the various families with extreme phenotypes in that these advisors may:

 

  n  

identify families as potential candidates for study;

 

  n  

obtain their consent to participate in our research;

 

  n  

perform medical examinations and gather medical histories;

 

  n  

conduct the initial analysis of suitability of the families to participate in our research based on the foregoing; and

 

  n  

collect data and biological samples from the family members periodically in accordance with our study protocols.

These scientists and collaborators are not our employees, rather they serve as either independent contractors or the primary investigators under research collaboration agreements that we have with their sponsoring academic or research institution. Such scientists and collaborators may have other commitments that would limit their availability to us. Although our scientific advisors generally agree not to do competing work, if an actual or potential conflict of interest between their work for us and their work for another entity arises, we may lose their services. It is also

 

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possible that some of our valuable proprietary knowledge may become publicly known through these scientific advisors if they breach their confidentiality agreements with us, which would cause competitive harm to our business.

Risks Related to Commercialization

If, in the future, we are unable to establish our own sales, marketing and distribution capabilities or enter into licensing or collaboration agreements for these purposes, we may not be successful in independently commercializing any future products.

We do not have a sales or marketing infrastructure and, as a company, have no sales, marketing or distribution experience. Our strategy involves, in part, building our own commercial infrastructure to selectively commercialize future products in niche or orphan indications. Where we believe such involvement would advance our business, we seek to retain the right to participate in the future development and commercialization of such products. For example, we have a co-promotion option for TV-45070 with Teva in the U.S.

To develop internal sales, distribution and marketing capabilities, we will have to invest significant amounts of financial and management resources, some of which will need to be committed prior to any confirmation that any of our proprietary product candidates will be approved. For any future products for which we decide to perform sales, marketing and distribution functions ourselves, we could face a number of additional risks, including:

 

  n  

our inability to recruit and retain adequate numbers of effective sales and marketing personnel to or develop alternative sales channels;

 

  n  

the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any future products;

 

  n  

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

 

  n  

unforeseen costs and expenses associated with creating and maintaining an independent sales and marketing organization.

Where and when appropriate, we may elect to utilize contract sales forces or distribution partners to assist in the commercialization of our product candidates. If we enter into arrangements with third parties to perform sales, marketing and distribution services for a product, the resulting revenue or the profitability from this revenue to us is likely to be lower than if we had sold, marketed and distributed that product ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell, market and distribute our product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties, and any of these third parties may fail to devote the necessary resources and attention to sell, market and distribute our current or any future products effectively.

Even if we receive regulatory approval to commercialize any of the product candidates that we develop independently, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense.

Any regulatory approvals that we receive for our product candidates we commercialize will be subject to limitations on the approved indicated uses for which the product may be marketed or subject to certain conditions of approval, and may contain requirements for potentially costly post-approval trials, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the marketed product.

For any approved product, we will need to ensure continued compliance with extensive regulations and requirements regarding the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product. These requirements include submissions of safety and other post-approval information and reports, as well as continued compliance with current good manufacturing practices, or cGMP, and current good clinical practices, or cGCP, for any clinical trials that we or our collaborators conduct post-approval. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

 

  n  

restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market or voluntary or mandatory product recalls;

 

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  n  

fines, warning letters or holds on any post-approval clinical trials;

 

  n  

refusal by the FDA, EMA or another applicable regulatory authority to approve pending applications or supplements to approved applications filed by us or our collaborators, or suspension or revocation of product license approvals;

 

  n  

product seizure or detention, or refusal to permit the import or export of products; and

 

  n  

injunctions or the imposition of civil or criminal penalties.

Occurrence of any of the foregoing could have a material and adverse effect on our business and results of operations.

If the market opportunities for any product that we or our collaborators develop are smaller than we believe they are, our revenue may be adversely affected and our business may suffer.

We intend to focus our independent product development on treatments for rare diseases. Our projections of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based on estimates. Currently, most reported estimates of the prevalence of these diseases are based on studies of small subsets of the population in specific geographic areas, which are then extrapolated to estimate the prevalence of the diseases in the U.S. or elsewhere. For example, studies estimate the prevalence of LPLD to be approximately 1:1,000,000, the prevalence of primary EM to be approximately 43,000 patients, and the prevalence of Dravet Syndrome, or DS, to be 7,500-15,000 patients in the U.S. These estimates may prove to be incorrect. If the prevalence of such diseases is smaller than we have projected, then, even if our products are approved, we may not be able to successfully commercialize them.

Even if we or our collaborators receive approval to commercialize our products, unfavorable pricing regulations and challenging third-party coverage and reimbursement practices could harm our business.

Our or any collaborators’ ability to commercialize any products successfully will depend, in part, on the extent to which coverage and reimbursement for these products and related treatments will be available from government healthcare programs, private health insurers, managed care plans, and other organizations. Government authorities and third-party payers, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that coverage and reimbursement will be available for any product that we or any collaborator commercialize and, if reimbursement is available, the level of reimbursement. In addition, coverage and reimbursement may impact the demand for, or the price of, any product candidate for which we or a collaborator obtains marketing approval. If coverage and reimbursement are not available or reimbursement is available only to limited levels, we or our collaborators may not be able to successfully commercialize any product candidate for which marketing approval is obtained.

There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA, EMA or other regulatory authorities. Moreover, eligibility for coverage and reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution expenses. Interim reimbursement levels for new drugs, if applicable, may also be insufficient to cover our and any collaborator’s costs and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payers and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the U.S. Third-party payers often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our or any collaborator’s inability to promptly obtain coverage and profitable payment rates from both government-funded and private payers for any approved products that we or our collaborators develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

 

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Our target patient populations in orphan and niche indications, where we intend to selectively develop and commercialize products independently, are relatively small. In order for therapies that are designed to treat smaller patient populations to be commercially viable, the reimbursement for such therapies needs to be higher, on a relative basis, to account for the lack of volume. Accordingly, we will need to implement a coverage and reimbursement strategy for any approved product that accounts for the smaller potential market size. If we are unable to establish or sustain coverage and adequate reimbursement for our current and any future products from third party payers or the government, the adoption of those products and sales revenue will be adversely affected, which, in turn, could adversely affect the ability to market or sell those products.

Recently enacted and future legislation may increase the difficulty and cost for us to commercialize any products that we or our collaborators develop and affect the prices we may obtain.

The U.S. and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell any of our products profitably, once such products are approved for sale. Among policy makers and payers in the U.S. and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the U.S., the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, collectively, PPACA, was enacted, which includes measures that have significantly changed, or will significantly change, the way healthcare is financed by both governmental and private insurers. Among the provisions of PPACA of importance to the pharmaceutical industry are the following:

 

  n  

an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs, that began in 2011;

 

  n  

an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of the average manufacturer price for branded and generic drugs, respectively;

 

  n  

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts to negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;

 

  n  

extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

 

  n  

expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal Poverty Level beginning in 2014, thereby potentially increasing manufacturers’ Medicaid rebate liability;

 

  n  

expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

 

  n  

new requirements under the federal Open Payments program, created under Section 6002 of the PPACA and its implementing regulations that manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) report annually to the U.S. Department of Health and Human Services, or HHS, information related to “payments or other transfers of value” made or distributed to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals and that applicable manufacturers and applicable group purchasing organizations report annually to the HHS ownership and investment interests held by physicians (as defined above) and their immediate family members, with data collection required beginning August 1, 2013 and reporting to the Centers for Medicare & Medicaid Services, or CMS, required by March 31, 2014 and by the 90th day of each subsequent calendar year, and disclosure of such information to be made on a publicly available website by September 2014;

 

  n  

a requirement to annually report drug samples that manufacturers and distributors provide to physicians, effective April 1, 2012;

 

  n  

expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers, and enhanced penalties for noncompliance;

 

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  n  

a licensure framework for follow-on biologic products;

 

  n  

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research;

 

  n  

creation of the Independent Payment Advisory Board which, beginning in 2014, will have authority to recommend certain changes to the Medicare program that could result in reduced payments for prescription drugs and those recommendations could have the effect of law even if Congress does not act on the recommendations; and

 

  n  

establishment of a Center for Medicare Innovation at CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending that began on January 1, 2011.

In the EU, similar political, economic and regulatory developments may affect our ability to profitably commercialize our current or any future products. In addition to continuing pressure on prices and cost containment measures, legislative developments at the EU or member state level may result in significant additional requirements or obstacles that may increase our operating costs. In international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific products and therapies. Glybera and our future products, if any, might not be considered medically reasonable and necessary for a specific indication or cost-effective by third-party payors, coverage, an adequate level of reimbursement might not be available for such products and third-party payors’ reimbursement policies might adversely affect our or our collaborators’ ability to sell Glybera and any future products profitably.

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-approval testing and other requirements.

We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the U.S. or abroad. If we or our collaborators are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we or our collaborators are not able to maintain regulatory compliance, our product candidates may lose any marketing approval that may have been obtained and we may not achieve or sustain profitability, which would adversely affect our business.

Foreign governments tend to impose strict price controls, which may adversely affect our future profitability.

In most foreign countries, particularly in those in the EU, prescription drug pricing and/or reimbursement is subject to governmental control. In those countries that impose price controls, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we or our collaborators may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies.

Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we or our collaborators might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenue that are generated from the sale of the product in that country. If reimbursement of such products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, or if there is competition from lower priced cross-border sales, our profitability will be negatively affected.

 

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Risks Related to Our Dependence on Third Parties

We depend on our collaborative relationship with Teva to further develop and commercialize TV-45070, and if our relationship is not successful or is terminated, we may not be able to effectively develop and/or commercialize TV-45070, which would have a material adverse effect on our business.

We depend on Teva to collaborate with us to develop and globally commercialize TV-45070. Under the agreement, Teva controls all decision-making with respect to the clinical development and commercialization for TV-45070. As a result of our dependence on Teva, the eventual success or commercial viability of TV-45070 is largely beyond our control. The financial returns to us, if any, depend in large part on the achievement of development and commercialization milestones, plus a share of any revenue from sales. Therefore, our success, and any associated financial returns to us and our investors, will depend in large part on Teva’s performance under the agreement. We are subject to a number of additional specific risks associated with our dependence on our collaborative relationship with Teva, including:

 

  n  

adverse decisions by Teva or the Joint Development Committee regarding the development and commercialization of TV-45070;

 

  n  

possible disagreements as to the timing, nature and extent of our development plans, including clinical trials or regulatory approval strategy;

 

  n  

loss of significant rights if we fail to meet our obligations under the agreement;

 

  n  

our limited control over clinical trials of TV-45070;

 

  n  

changes in key management personnel at Teva, including in members of the Joint Development Committee; and

 

  n  

possible disagreements with Teva regarding the agreement, for example, with regard to ownership of intellectual property rights.

If either we or Teva fail to perform our respective obligations, any clinical trial, regulatory approval or development progress could be significantly delayed or halted, could result in costly or time-consuming litigation or arbitration and could have a material adverse effect on our business.

Decisions by Teva to emphasize other drug candidates currently in its portfolio ahead of our product candidates, or to add competitive agents to its portfolio could result in a decision to terminate the agreement, in which event, among other things, we may be responsible for paying any remaining costs of all ongoing or future clinical trials.

In addition, Teva’s executive offices and a substantial percentage of their manufacturing capabilities are located in Israel. Teva’s Israeli operations are dependent upon materials imported from outside Israel, and Teva also exports significant amounts of products from Israel. Accordingly, our collaboration with Teva could be materially and adversely affected by acts of terrorism or if major hostilities were to occur in the Middle East or trade between Israel and its present trading partners were curtailed, including as a result of acts of terrorism in the U.S. or elsewhere.

Any of the above discussed scenarios could adversely affect the timing and extent of our development and commercialization activities, which could cause significant delays and funding shortfalls for those activities and seriously harm our business.

Our prospects for successful development and commercialization of our partnered products and product candidates are dependent upon the research, development and marketing efforts of our collaborators.

We have no control over the resources, time and effort that our collaborators may devote to our programs and limited access to information regarding or resulting from such programs. We are dependent on uniQure, and its licensee Chiesi to successfully commercialize Glybera and on Teva, Genentech, and Merck & Co., Inc., or Merck, to fund and conduct the research and any clinical development of product candidates under our collaboration with each of them, and for the successful regulatory approval, marketing and commercialization of one or more of such products or product candidates. Such success will be subject to significant uncertainty.

Our ability to recognize revenue from successful collaborations may be impaired by multiple factors including:

 

  n  

a collaborator may shift its priorities and resources away from our programs due to a change in business strategies, or a merger, acquisition, sale or downsizing of its company or business unit;

 

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  n  

a collaborator may cease development in therapeutic areas which are the subject of our strategic alliances;

 

  n  

a collaborator may change the success criteria for a particular program or product candidate thereby delaying or ceasing development of such program or candidate;

 

  n  

a significant delay in initiation of certain development activities by a collaborator will also delay payment of milestones tied to such activities, thereby impacting our ability to fund our own activities;

 

  n  

a collaborator could develop a product that competes, either directly or indirectly, with our current or future products, if any;

 

  n  

a collaborator with commercialization obligations may not commit sufficient financial or human resources to the marketing, distribution or sale of a product;

 

  n  

a collaborator with manufacturing responsibilities may encounter regulatory, resource or quality issues and be unable to meet demand requirements;

 

  n  

a collaborator may exercise its rights under the agreement to terminate our collaboration;

 

  n  

a dispute may arise between us and a collaborator concerning the research or development of a product candidate or commercialization of a product resulting in a delay in milestones, royalty payments or termination of a program and possibly resulting in costly litigation or arbitration which may divert management attention and resources;

 

  n  

a collaborator may not adequately protect the intellectual property rights associated with a product or product candidate; and

 

  n  

a collaborator may use our proprietary information or intellectual property in such a way as to invite litigation from a third party.

If our collaborators do not perform in the manner we expect or fulfill their responsibilities in a timely manner, or at all, the clinical development, regulatory approval and commercialization efforts could be delayed, terminated or be commercially unsuccessful. Conflicts between us and our collaborators may arise. In the event of termination of one or more of our collaboration agreements, it may become necessary for us to assume the responsibility of any terminated product or product candidates at our own expense or seek new collaborators. In that event, we would likely be required to limit the size and scope of one or more of our independent programs or increase our expenditures and seek additional funding which may not be available on acceptable terms or at all, and our business would be materially and adversely affected.

We may not be successful in establishing new collaborations or maintaining our existing alliances, which could adversely affect our ability to develop future product candidates and commercialize future products.

We may seek to enter into additional product collaborations in the future, including alliances with other biotechnology or pharmaceutical companies, to enhance and accelerate the development of our future product candidates and the commercialization of any resulting products. We face significant competition in seeking appropriate collaborators and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish other collaborations or other alternative arrangements for any future product candidates because our research and development pipeline may be insufficient, our product candidates may be deemed to be at too early of a stage of development for collaboration effort and/or third parties may view our product candidates as lacking the requisite potential to demonstrate safety and efficacy. Even if we are successful in our efforts to establish collaborations, the terms that we agree upon may not be favorable to us and we may not be able to maintain such collaborations if, for example, development or approval of a product candidate is delayed or sales of an approved product are disappointing.

If any of our existing collaboration agreements is terminated, or if we determine that entering into other product collaborations is in our best interest but we either fail to enter into, delay in entering into or fail to maintain such collaborations:

 

  n  

the development of certain of our current or future product candidates may be terminated or delayed;

 

  n  

our cash expenditures related to development of our product candidates would increase significantly and we may need to seek additional financing sooner than expected;

 

  n  

we may be required to hire additional employees or otherwise develop expertise, such as clinical, regulatory, sales and marketing expertise, which we do not currently have;

 

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  n  

we will bear all of the risk related to the development of any such product candidates; and

 

  n  

the competitiveness of any product that is commercialized could be reduced.

We intend to rely on third-party manufacturers to produce our clinical product candidate supplies. Any failure by a third-party manufacturer to produce acceptable supplies for us may delay or impair our ability to initiate or complete our clinical trials or commercialize approved products.

We do not currently own or operate any manufacturing facilities nor do we have any in-house manufacturing experience or personnel. We rely on our collaborators to manufacture product candidates licensed to them or work with multiple third party contract manufacturers to produce sufficient quantities of materials required for the manufacture of our product candidates for preclinical testing and clinical trials and intend to do so for the commercial manufacture of our products. If we are unable to arrange for such third-party manufacturing sources, or fail to do so on commercially reasonable terms, we may not be able to successfully produce, sufficient supply of product candidate or we may be delayed in doing so. Such failure or substantial delay could materially harm our business.

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates ourselves, including reliance on the third party for regulatory compliance and quality control and assurance, volume production, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control (including a failure to synthesize and manufacture our product candidates in accordance with our product specifications) and the possibility of termination or nonrenewal of the agreement by the third party at a time that is costly or damaging to us. In addition, the FDA, EMA and other regulatory authorities require that our product candidates be manufactured according to cGMP and similar foreign standards. Pharmaceutical manufacturers and their subcontractors are required to register their facilities and/or products manufactured at the time of submission of the marketing application and then annually thereafter with the FDA and certain state and foreign agencies. They are also subject to periodic unannounced inspections by the FDA, state and other foreign authorities. Any subsequent discovery of problems with a product, or a manufacturing or laboratory facility used by us or our collaborators, may result in restrictions on the product or on the manufacturing or laboratory facility, including marketed product recall, suspension of manufacturing, product seizure, or a voluntary withdrawal of the drug from the market. Any failure by our third-party manufacturers to comply with cGMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates.

We rely on third parties to monitor, support, conduct and/or oversee clinical trials of the product candidates that we are developing independently and, in some cases, to maintain regulatory files for those product candidates. We may not be able to obtain regulatory approval for our product candidates or commercialize any products that may result from our development efforts, if we are not able to maintain or secure agreements with such third parties on acceptable terms, if these third parties do not perform their services as required, or if these third parties fail to timely transfer any regulatory information held by them to us.

We rely on entities outside of our control, which may include academic institutions, CROs, hospitals, clinics and other third-party collaborators, to monitor, support, conduct and/or oversee preclinical and clinical studies of our current and future product candidates. We also rely on third parties to perform clinical trials on our current and future product candidates when they reach that stage. As a result, we have less control over the timing and cost of these studies and the ability to recruit trial subjects than if we conducted these trials with our own personnel.

If we are unable to maintain or enter into agreements with these third parties on acceptable terms, or if any such engagement is terminated prematurely, we may be unable to enroll patients on a timely basis or otherwise conduct our trials in the manner we anticipate. In addition, there is no guarantee that these third parties will devote adequate time and resources to our studies or perform as required by our contract or in accordance with regulatory requirements, including maintenance of clinical trial information regarding our product candidates. If these third parties fail to meet expected deadlines, fail to transfer to us any regulatory information in a timely manner, fail to adhere to protocols or fail to act in accordance with regulatory requirements or our agreements with them, or if they otherwise perform in a substandard manner or in a way that compromises the quality or accuracy of their activities or the data they obtain, then clinical trials of our future product candidates may be extended or delayed with additional costs incurred, or our data may be rejected by the FDA, EMA or other regulatory agencies.

 

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Ultimately, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on third parties does not relieve us of our regulatory responsibilities.

We and our CROs are required to comply with cGCP regulations and guidelines enforced by the FDA, the competent authorities of the member states of the EEA and comparable foreign regulatory authorities for products in clinical development. Regulatory authorities enforce these cGCP regulations through periodic inspections of clinical trial sponsors, principal investigators and clinical trial sites. If we or any of our CROs fail to comply with applicable cGCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and our submission of marketing applications may be delayed or the FDA may require us to perform additional clinical trials before approving our marketing applications. Upon inspection, the FDA could determine that any of our clinical trials fail or have failed to comply with applicable cGCP regulations. In addition, our clinical trials must be conducted with product produced under the cGMP regulations enforced by the FDA, and our clinical trials may require a large number of test subjects. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and increase our costs. Moreover, our business may be implicated if any of our CROs violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.

If any of our clinical trial sites terminates for any reason, we may experience the loss of follow-up information on patients enrolled in our ongoing clinical trials unless we are able to transfer the care of those patients to another qualified clinical trial site. Further, if our relationship with any of our CROs is terminated, we may be unable to enter into arrangements with alternative CROs on commercially reasonable terms, or at all.

Switching or adding CROs or other suppliers can involve substantial cost and require extensive management time and focus. In addition, there is a natural transition period when a new CRO or supplier commences work. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines. If we are required to seek alternative supply arrangements, the resulting delays and potential inability to find a suitable replacement could materially and adversely impact our business.

Risks Related to Intellectual Property

We could be unsuccessful in obtaining or maintaining adequate patent protection for one or more of our products or product candidates.

Our commercial success will depend, in large part, on our ability to obtain and maintain patent and other intellectual property protection with respect to our product candidates. Patents might not be issued or granted with respect to our patent applications that are currently pending, and issued or granted patents might later be found to be invalid or unenforceable, be interpreted in a manner that does not adequately protect our current product or any future products, or fail to otherwise provide us with any competitive advantage. The patent position of biotechnology and pharmaceutical companies is generally uncertain because it involves complex legal and factual considerations. The standards applied by the U.S. Patent and Trademark Office, or USPTO, and foreign patent offices in granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology and pharmaceutical patents. Consequently, patents may not issue from our pending patent applications. As such, we do not know the degree of future protection that we will have on our proprietary products and technology, if any, and a failure to obtain adequate intellectual property protection with respect to our product candidates and proprietary technology could have a material adverse impact on our business.

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the US in several stages over the lifetime of the patents and/or applications. We employ reputable law firms and other professionals and rely on such third parties to effect payment of these fees with respect to the patents and patent applications that we own, and we rely upon our licensors or our other collaborators to effect payment of these fees with respect to the patents and patent applications that we license. The USPTO and various non-US governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us

 

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comply with respect to the patents and patent applications that we own, and we rely upon our licensors or our other collaborators to effect compliance with respect to the patents and patent applications that we license. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance would have a material adverse effect on our business.

Our intellectual property rights will not necessarily provide us with competitive advantages.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:

 

  n  

others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of the patents that we or our collaborators own or have exclusively licensed;

 

  n  

others may independently develop similar or alternative technologies without infringing our intellectual property rights;

 

  n  

issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors;

 

  n  

we may obtain patents for certain compounds many years before we obtain marketing approval for products containing such compounds, and because patents have a limited life, which may begin to run prior to the commercial sale of the related product, the commercial value of our patents may be limited;

 

  n  

our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;

 

  n  

we may fail to develop additional proprietary technologies that are patentable;

 

  n  

the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S., or we may fail to apply for or obtain adequate intellectual property protection in all the jurisdictions in which we operate; and

 

  n  

the patents of others may have an adverse effect on our business, for example by preventing us from marketing one or more of our product candidates for one or more indications.

Any of the aforementioned threats to our competitive advantage could have a material adverse effect on our business.

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the U.S. can be less extensive than those in the U.S. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the U.S. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the U.S., or from selling or importing products made using our inventions in and into the U.S. or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the U.S. These products may compete with our current or future products, if any, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we

 

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initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

Our patents covering one or more of our products or product candidates could be found invalid or unenforceable if challenged.

Any of our intellectual property rights could be challenged or invalidated despite measures we take to obtain patent and other intellectual property protection with respect to our product candidates and proprietary technology. For example, if we were to initiate legal proceedings against a third party to enforce a patent covering one of our product candidates, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the U.S. and in some other jurisdictions, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, for example, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld material information from the USPTO or the applicable foreign counterpart, or made a misleading statement, during prosecution. A litigant or the USPTO itself could challenge our patents on this basis even if we believe that we have conducted our patent prosecution in accordance with the duty of candor and in good faith. The outcome following such a challenge is unpredictable.

With respect to challenges to the validity of our patents, for example, there might be invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on a product candidate. Even if a defendant does not prevail on a legal assertion of invalidity and/or unenforceability, our patent claims may be construed in a manner that would limit our ability to enforce such claims against the defendant and others. The cost of defending such a challenge, particularly in a foreign jurisdiction, and any resulting loss of patent protection could have a material adverse impact on one or more of our product candidates and our business.

Enforcing our intellectual property rights against third parties may also cause such third parties to file other counterclaims against us, which could be costly to defend, particularly in a foreign jurisdiction, and could require us to pay substantial damages, cease the sale of certain products or enter into a license agreement and pay royalties (which may not be possible on commercially reasonable terms or at all). Any efforts to enforce our intellectual property rights are also likely to be costly and may divert the efforts of our scientific and management personnel.

Patent protection and patent prosecution for some of our product candidates is dependent on, and the ability to assert patents and defend them against claims of invalidity is maintained by, third parties.

There have been and may be times in the future when certain patents that relate to our product candidates or any approved products are controlled by our licensees or licensors. Although we may, under such arrangements, have rights to consult with our collaborators on actions taken as well as back-up rights of prosecution and enforcement, we have in the past and may in the future relinquish rights to prosecute and maintain patents and patent applications within our portfolio as well as the ability to assert such patents against infringers. Currently, some of these rights relating to the patent portfolios for Glybera, TV-45070, and some of our earlier stage product candidates are held by our collaborators.

If any current or future licensee or licensor with rights to prosecute, assert or defend patents related to our product candidates fails to appropriately prosecute and maintain patent protection for patents covering any of our product candidates, or if patents covering any of our product candidates are asserted against infringers or defended against claims of invalidity or unenforceability in a manner which adversely affects such coverage, our ability to develop and commercialize any such product candidate may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products.

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or one of our licensors is not valid or is unenforceable, or may refuse to stop the other party in such infringement proceeding from using the technology at

 

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issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly, and could put any of our patent applications at risk of not yielding an issued patent.

Interference proceedings, derivation proceedings, entitlement proceedings, ex parte reexamination, inter partes reexamination, inter partes review, post-grant review, and opposition proceedings provoked by third parties or brought by the USPTO or any foreign patent authority may be used to challenge inventorship, ownership, claim scope, or validity of our patent applications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms, if any license is offered at all. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees.

We may not be able to prevent, alone or with our licensors, misappropriation of our trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in the U.S. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common shares.

Claims that our product candidates or the sale or use of our future products infringe the patent or other intellectual property rights of third parties could result in costly litigation or could require substantial time and money to resolve, even if litigation is avoided.

Our commercial success depends upon our ability to develop product candidates and commercialize products that may be approved in the future, using our proprietary technology without infringing the intellectual property rights of others. Our product or product candidates or any uses of them may now and in the future infringe third-party patents or other intellectual property rights. Third parties might allege that we or our collaborators are infringing their patent rights or that we have misappropriated their trade secrets, or that we are otherwise violating their intellectual property rights, whether with respect to the manner in which we have conducted our research or to the composition, use or manufacture of the compounds we have developed or are developing with our collaborators. Such third parties might resort to litigation against us or other parties we have agreed to indemnify, which litigation could be based on either existing intellectual property or intellectual property that arises in the future.

It is possible that relevant patents or patent applications held by third parties will cover our product candidates at the time of launch and we may also fail to identify, relevant patents or patent applications held by third parties that cover our product candidates. For example, applications filed before November 29, 2000, and certain applications filed after that date that will not be filed outside the U.S. remain confidential until patents issue. Other patent applications in the U.S. and several other jurisdictions are published approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority date. Furthermore, publication of discoveries in the scientific or patent literature often lags behind actual discoveries. Therefore, we cannot be certain that we or our collaborators were the first to invent, or the first to file patent applications on, our product candidates or for their uses, or that our product candidates will not infringe patents that are currently issued or that are issued in the future. In the event that a third party has also filed a patent application covering one of our product candidates or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the USPTO or its foreign counterpart to determine priority of invention. Additionally, pending patent applications and patents which have been published can, subject to certain limitations, be later amended in a manner that could cover our current or future products, if any, or their use.

Defending against claims of patent infringement, misappropriation of trade secrets or other violations of intellectual property rights could be costly and time consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such litigation could burden us with substantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time and attention of our management team, distracting them from the pursuit of other company business. Claims that our product candidates or the sale or use of our future products infringe, misappropriate or otherwise violate third-party intellectual property rights could therefore have a material adverse impact on our business.

 

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Most of our competitors are larger than we are and have substantially greater financial resources. They are, therefore, likely to be able to sustain the costs of complex intellectual property litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to conduct our clinical trials, continue our internal research programs, in-license needed technology, or enter into strategic collaborations that would help us bring our product candidates to market.

In addition, any future intellectual property litigation, interference or other administrative proceedings will result in additional expense and distraction of our personnel. An adverse outcome in such litigation or proceedings may expose us or any future strategic collaborators to loss of our proprietary position, expose us to significant liabilities, or require us to seek licenses that may not be available on commercially acceptable terms, if at all, each of which could have a material adverse effect on our business.

Unfavorable outcomes in intellectual property litigation could limit our research and development activities and/or our ability to commercialize certain products.

If third parties successfully assert their intellectual property rights against us, we might be barred from using certain aspects of our technology, or barred from developing and commercializing certain products. Prohibitions against using certain technologies, or prohibitions against commercializing certain products, could be imposed by a court or by a settlement agreement between us and a plaintiff. In addition, if we are unsuccessful in defending against allegations that we have infringed, misappropriated or otherwise violated patent or other intellectual property rights of others, we may be forced to pay substantial damage awards to the plaintiff. There is inevitable uncertainty in intellectual property litigation and we could lose, even if the case against us is weak or flawed. If litigation leads to an outcome unfavorable to us, we may be required to obtain a license from the intellectual property owner in order to continue our research and development programs or to market any resulting product. It is possible that the necessary license will not be available to us on commercially acceptable terms, or at all. Alternatively, we may be required to modify or redesign our current or future products, if any, in order to avoid infringing or otherwise violating third-party intellectual property rights. This may not be technically or commercially feasible, may render those products less competitive, or may delay or prevent the entry of those products to the market. Any of the foregoing could limit our research and development activities, our ability to commercialize one or more product candidates, or both.

In order to avoid or settle potential claims with respect to any patent or other intellectual property rights of third parties, we may choose or be required to seek a license from a third party and be required to pay license fees or royalties or both, which could be substantial. These licenses may not be available on acceptable terms, or at all. Even if we or any future collaborators were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced, by court order or otherwise, to cease some or all aspects of our business operations, if, as a result of actual or threatened patent or other intellectual property claims, we are unable to enter into licenses on acceptable terms. Further, we could be found liable for significant monetary damages as a result of claims of intellectual property infringement. For example, we have received, and may in the future receive, offers to license and demands to license from third parties claiming that we are infringing their intellectual property or owe license fees and, even if such claims are without merit, we could fail to successfully avoid or settle such claims.

If Teva, uniQure, Genentech or Merck license or otherwise acquire rights to intellectual property controlled by a third party in various circumstances, for example, where a product could not be legally developed or commercialized in a country without the third-party intellectual property right or, where it is decided that it would be useful to acquire such third-party right to develop or commercialize the product, they are eligible under our collaboration agreements to decrease payments payable to us on a product-by-product basis and, in certain cases, on a country-by-country basis. Any of the foregoing events could harm our business significantly.

If we breach any of the agreements under which we license the use, development and commercialization rights to our product candidates or technology from third parties, we could lose license rights that are important to our business.

The patent portfolio for Glybera is in-licensed from UBC. Under our existing license agreements, we are subject to various obligations, including diligence obligations such as development and commercialization obligations, as well as potential royalty payments and other obligations. If we fail to comply with any of these obligations or otherwise breach our license agreements, our licensing partners may have the right to terminate the applicable license in whole or in part. Generally, the loss of any one of our current licenses, or any other license we may acquire in the future, could materially harm our business, prospects, financial condition and results of operations.

 

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Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and other proprietary information, which would harm our competitive position.

In addition to patents, we rely on trade secrets, technical know-how and proprietary information concerning our Extreme Genetics discovery platform, business strategy and product candidates in order to protect our competitive position, which are difficult to protect. In the course of our research and development activities and our business activities, we often rely on confidentiality agreements to protect our proprietary information. Such confidentiality agreements are used, for example, when we talk to vendors of laboratory or clinical development services or potential strategic collaborators. In addition, each of our employees and consultants is required to sign a confidentiality agreement and invention assignment agreement upon joining our company. Our employees, consultants, contractors, business partners or outside scientific collaborators might intentionally or inadvertently disclose our trade secret information in breach of these confidentiality agreements or our trade secrets may otherwise be misappropriated. Our collaborators might also have rights to publish data and we might fail to apply for patent protection prior to such publication. It is possible that a competitor will make use of such information, and that our competitive position will be compromised. In addition, to the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the U.S. sometimes are less willing than U.S. courts to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. If we cannot maintain the confidentiality of our proprietary technology and other confidential information, then our ability to obtain patent protection or to protect our trade secret information would be jeopardized, which would adversely affect our competitive position.

Patent reform legislation and recent court decisions could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.

On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The USPTO has and continues to develop and implement regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act. The full effect of these changes are currently unclear as the USPTO has not yet adopted all pertinent final rules and regulations, the courts have yet to address these provisions and the applicability of the Leahy-Smith Act and new regulations on specific patents, including our patents discussed herein, have not been determined and would need to be reviewed. Accordingly, it is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. As a result, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents, all of which could have a material adverse effect on our business and financial condition. On June 13, 2013, the U.S. Supreme Court decision in Association for Molecular Pathology v. Myriad Genetics, Inc., held that isolated DNA sequences are not patentable. As a consequence of the Myriad decision, if any of our future product candidates utilize isolated human DNA as a result of our Extreme Genetics discovery platform that allows us to identify DNA sequences associated with human disease, we will not be able to obtain patents in the U.S. claiming such novel gene targets that we discover, which could limit our ability to prevent third parties from developing drugs directed against such targets.

If we do not obtain protection under the Hatch-Waxman Act and similar legislation outside of the U.S. by extending the patent terms for our product candidates, our business may be materially harmed.

Depending upon the timing, duration and specifics of FDA marketing approval of our product candidates, if any, one or more U.S. patents may be eligible for limited patent term restoration under the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term lost during clinical testing of the product and the subsequent FDA regulatory review process. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request.

If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, the period during which we will have the right to exclusively market our product will be shortened and our

 

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competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced, possibly materially.

We have not registered our corporate name as a trademark in all of our potential markets, and failure to secure those registrations could adversely affect our business.

Our corporate name, Xenon, has not been trademarked in each market where we operate and plan to operate. Our trademark applications for our corporate name or the name of our products may not be allowed for registration, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections, which we may be unable to overcome in our responses. Third parties may also attempt to register trademarks utilizing the Xenon name on their products, and we may not be successful in preventing such usage. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would.

Intellectual property litigation may lead to unfavorable publicity that harms our reputation and causes the market price of our common shares to decline.

During the course of any intellectual property litigation, there could be public announcements of the initiation of the litigation as well as results of hearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our existing products, programs or intellectual property could be diminished. Accordingly, the market price of our common shares may decline. Such announcements could also harm our reputation or the market for our future products, which could have a material adverse effect on our business.

Risks Related to Our Industry

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our current and any future products.

We face an inherent risk of product liability as a result of the clinical testing of our product candidates, and we will face an even greater risk if we commercialize any product candidates. For example, we may be sued if any of our product candidates, including any that are developed in combination therapies, allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. There is also risk that third parties we have agreed to indemnify could incur liability. Regardless of the merits or eventual outcome, liability claims may result in:

 

  n  

decreased demand for our product candidates or any resulting products;

 

  n  

injury to our reputation;

 

  n  

withdrawal of clinical trial participants;

 

  n  

costs to defend the related litigation;

 

  n  

a diversion of management’s time and our resources;

 

  n  

substantial monetary awards to trial participants or patients;

 

  n  

product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

  n  

loss of revenue;

 

  n  

the inability to commercialize our product candidates; and

 

  n  

a decline in our share price.

We currently carry product liability insurance of $5,000,000 per occurrence and $5,000,000 aggregate limit. We believe our product liability insurance coverage is appropriate in light of our current clinical programs; however, we may

 

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not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when we obtain marketing approval for product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may then be unable to obtain product liability insurance on commercially reasonable terms or in adequate amounts. On occasion, large judgments have been awarded in class action lawsuits based on drugs or medical treatments that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our common share price to decline and, if judgments exceed our insurance coverage, could adversely affect our future results of operations and business.

Patients with the diseases targeted by our product candidates are often already in severe and advanced stages of disease and have both known and unknown significant pre-existing and potentially life-threatening conditions. During the course of treatment, patients may suffer adverse events, including death, for reasons that may be related to our product candidates. Such events could subject us to costly litigation, require us to pay substantial amounts of money to injured patients, delay, negatively impact or end our opportunity to receive or maintain regulatory approval to market those product candidates, or require us to suspend or abandon our commercialization efforts. Even in a circumstance in which we do not believe that an adverse event is related to our products, the investigation into the circumstance may be time-consuming or inconclusive. These investigations may interrupt our sales efforts, delay our regulatory approval process in other countries, or impact and limit the type of regulatory approvals our product candidates receive or maintain. As a result of these factors, a product liability claim, even if successfully defended, could have a material adverse effect on our business, financial condition or results of operations.

Our current and future relationships with customers and third-party payers in the U.S. and elsewhere will be subject, directly or indirectly, to applicable federal and state anti-kickback, fraud and abuse, false claims, transparency, health information privacy and security, and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, administrative burdens, and diminished profits and future earnings.

Healthcare providers, physicians and third-party payors in the U.S. and elsewhere play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act, that may constrain the business or financial arrangements and relationships through which we market, sell and distribute any products for which we obtain marketing approval. In addition, we may be subject to transparency laws and patient privacy regulation by the federal government and by the U.S. states and foreign jurisdictions in which we conduct our business. The applicable federal, state and foreign healthcare laws and regulations that may affect our ability to operate include the following:

 

  n  

the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal and state healthcare programs such as Medicare and Medicaid;

 

  n  

federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which impose criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, or other third party payers claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

  n  

HIPAA, which imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;

 

  n  

HIPAA, as amended by HITECH, and their respective implementing regulations, which impose obligations on covered healthcare providers, health plans, and healthcare clearinghouses, as well as their business associates that create, receive, maintain, or transmit individually identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

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  n  

the federal Open Payments program, created under Section 6002 of PPACA and its implementing regulations requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to HHS information related to “payments or other transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and applicable manufacturers and applicable group purchasing organizations to report annually to HHS ownership and investment interests held by physicians (as defined above) and their immediate family members, with data collection required beginning August 1, 2013, reporting to the Centers for Medicare & Medicaid Services, or CMS, required by March 31, 2014 (and by the 90th day of each subsequent calendar year), and disclosure of such information to be made on a publicly available website by September 2014; and

 

  n  

analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payers, including private insurers; state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the collection, export, privacy, use and security of biological materials and health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations, which could have a material adverse effect on our business. If any of the physicians or other providers or entities with whom we expect to do business, including our collaborators, is found not to be in compliance with applicable laws, it may be subject to criminal, civil or administrative sanctions, including exclusions from participation in government healthcare programs, which could also materially affect our business.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

Our research and development activities involve the controlled use of potentially harmful biological materials as well as hazardous materials, chemicals, and various radioactive compounds typically employed in molecular and cellular biology. For example, we routinely use cells in culture and we employ small amounts of radioisotopes. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling, or disposal of these materials through our maintenance of up-to-date licensing and training programs. In the event of contamination or injury, we could be held liable for damages that result, and any liability could exceed our resources. We currently carry insurance covering certain claims arising from our use of these materials. However, if we are unable to maintain our insurance coverage at a reasonable cost and with adequate coverage, our insurance may not cover any liability that may arise. We are subject to U.S. and Canadian federal, provincial, and local laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products. Complying with regulations regarding the use of these materials could be costly, and if we fail to comply with these regulations, it could have a material adverse effect on our operations and profitability.

We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from serious disaster.

Our headquarters are located in Burnaby, British Columbia, Canada. We are vulnerable to natural disasters such as earthquakes that could disrupt our operations. If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as the manufacturing facilities of our third-party contract manufacturers, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. We do

 

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not carry insurance for earthquakes or other natural disasters and although our business interruption insurance applies in the event of an earthquake, we may not carry sufficient business interruption insurance to compensate us for all losses that may occur. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business. In addition, we may lose samples or other valuable data. The occurrence of any of the forgoing could have a material adverse effect on our business.

Risks Related to Our Common Shares and this Offering

Future sales of our common shares in the public market could cause our share price to fall.

Our share price could decline as a result of sales of a large number of our common shares after this offering or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Holders of approximately 30,786,296 common shares, or     % of our common shares, will have rights to require us to file registration statements covering the sale of their common shares or to include their common shares in registration statements that we may file for ourselves or other shareholders described in the section of the prospectus captioned “Description of Share Capital—Registration Rights.” We also intend to register the offer and sale of all common shares that we may issue under our equity compensation plans. Once we register the offer and sale of common shares for the holders of registration rights and option holders, they can be freely sold in the public market upon issuance, subject to the market stand-off and lock-up agreements described in the sections of this prospectus captioned “Shares Eligible for Future Sale—Lock-Up and Market Standoff Agreements” and “Underwriting.”

In addition, in the future, we may issue additional common shares or other equity or debt securities convertible into common shares in connection with a financing, acquisition, litigation settlement, employee arrangements or otherwise. Any such issuance could result in substantial dilution to our existing shareholders and could cause our common share price to decline.

We expect that our trading price will fluctuate significantly and investors may not be able to resell their shares at or above the initial public offering price.

The trading price of our common shares following this offering may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. As a result of this volatility, you may not be able to sell your common shares at or above the initial public offering price, if at all. The market price for our common shares may be influenced by many factors, including:

 

  n  

actions by any of our collaborators regarding our product candidates they are developing, including announcements regarding clinical or regulatory decisions or developments or our collaboration;

 

  n  

announcements by us or our competitors of new products, product candidates or new uses for existing products, significant contracts, commercial relationships or capital commitments and the timing of these introductions or announcements;

 

  n  

unanticipated serious safety concerns related to Glybera or to the use of any of our products and product candidates;

 

  n  

results from or delays of clinical trials of our product candidates;

 

  n  

failure to obtain or delays in obtaining product approvals or clearances from regulatory authorities;

 

  n  

adverse regulatory or reimbursement announcements;

 

  n  

announcements by us or our competitors of significant acquisitions, strategic collaborations, joint ventures or capital commitments;

 

  n  

the results of our efforts to discover or develop additional product candidates;

 

  n  

our dependence on third parties, including our collaborators, CROs, clinical trial sponsors and clinical investigators;

 

  n  

regulatory or legal developments in Canada, the U.S. or other countries;

 

  n  

developments or disputes concerning patent applications, issued patents or other proprietary rights;

 

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  n  

the recruitment or departure of key scientific or management personnel;

 

  n  

our ability to successfully commercialize our future product candidates we develop independently, if approved;

 

  n  

the level of expenses related to any of our product candidates or clinical development programs;

 

  n  

actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

  n  

actual or anticipated quarterly variations in our financial results or those of our competitors;

 

  n  

any change to the composition of the board of directors or key personnel;

 

  n  

expiration of contractual lock-up agreements with our executive officers, directors and security holders;

 

  n  

sales of common shares by us or our shareholders in the future, as well as the overall trading volume of our common shares;

 

  n  

changes in the structure of healthcare payment systems;

 

  n  

commencement of, or our involvement in, litigation;

 

  n  

general economic, industry and market conditions in the pharmaceutical and biotechnology sectors and other factors that may be unrelated to our operating performance or the operating performance of our competitors, including changes in market valuations of similar companies; and

 

  n  

the other factors described in this “Risk Factors” section.

In addition, the stock market in general and NASDAQ and the biopharmaceutical industry in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affect the market price of our common shares, regardless of our operating performance. In several recent situations where the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our shareholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results.

After this offering, our executive officers, directors and principal shareholders will be able to exert significant influence over matters submitted to shareholders for approval.

Upon the closing of this offering, our executive officers and directors and shareholders who owned more than 5% of our outstanding common shares before this offering will, in the aggregate, own or control shares representing approximately     % of our outstanding common shares. As a result, if these shareholders were to choose to act together, they would be able to exert significant influence over matters submitted to our shareholders for approval, as well as our management and affairs. The interests of this group of shareholders may not always coincide with our corporate interests or the interests of other shareholders, and they may act in a way in which you may not agree with or in a way that may not be in the best interests of other shareholders. This concentration of voting power could delay or prevent an acquisition of our company on terms that other shareholders may desire or otherwise discourage a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on our share price.

Provisions in our corporate charter documents and Canadian law could make an acquisition of us, which may be beneficial to our shareholders, more difficult and may prevent attempts by our shareholders to replace or remove our current management and/or limit the market price of our common shares.

Provisions in our articles and our by-laws that will become effective immediately prior to consummation of this offering, as well as certain provisions under the Canada Business Corporations Act, or CBCA, and applicable Canadian securities laws, may discourage, delay or prevent a merger, acquisition or other change in control of us that shareholders may consider favorable, including transactions in which they might otherwise receive a premium for their common shares. These provisions could also limit the price that investors might be willing to pay in the future for our common shares, thereby depressing the market price of our common shares. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors. Among other things, these provisions include the following:

 

  n  

shareholders cannot amend our articles unless such amendment is approved by shareholders holding at least two-thirds of the shares entitled to vote on such approval;

 

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  n  

our board of directors may, without shareholder approval, issue preferred shares having any terms, conditions, rights, preferences and privileges as the board of directors may determine; and

 

  n  

shareholders must give advance notice to nominate directors or to submit proposals for consideration at shareholders’ meetings.

Any provision in our articles, by-laws, under the CBCA or under any applicable Canadian securities law that has the effect of delaying or deterring a change in control could limit the opportunity for our shareholders to receive a premium for their common shares, and could also affect the price that some investors are willing to pay for our common shares.

U.S. civil liabilities may not be enforceable against us, our directors, our officers or certain experts named in this prospectus.

We are governed by the CBCA and our principal place of business is in Canada. Many of our directors and officers, as well as certain experts named herein, reside outside of the U.S., and all or a substantial portion of their assets as well as all or a substantial portion of our assets are located outside the U.S. As a result, it may be difficult for investors to effect service of process within the U.S. upon us and such directors, officers and experts or to enforce judgments obtained against us or such persons, in U.S. courts, in any action, including actions predicated upon the civil liability provisions of U.S. federal securities laws or any other laws of the U.S. Additionally, rights predicated solely upon civil liability provisions of U.S. federal securities laws or any other laws of the U.S. may not be enforceable in original actions, or actions to enforce judgments obtained in U.S. courts, brought in Canadian courts, including courts in the Province of British Columbia.

We are governed by the corporate laws of Canada which in some cases have a different effect on shareholders than the corporate laws of Delaware, U.S.

We are governed by the CBCA and other relevant laws, which may affect the rights of shareholders differently than those of a company governed by the laws of a U.S. jurisdiction, and may, together with our charter documents, have the effect of delaying, deferring or discouraging another party from acquiring control of our company by means of a tender offer, a proxy contest or otherwise, or may affect the price an acquiring party would be willing to offer in such an instance. The material differences between the CBCA and Delaware General Corporation Law, or DGCL, that may have the greatest such effect include, but are not limited to, the following: (i) for material corporate transactions (such as mergers and amalgamations, other extraordinary corporate transactions or amendments to our articles) the CBCA generally requires a two-thirds majority vote by shareholders, whereas DGCL generally only requires a majority vote; and (ii) under the CBCA a holder of 5% or more of our common shares can requisition a special meeting of shareholders, whereas such right does not exist under the DGCL. Refer to the heading titled “Material Differences between the Canada Business Corporations Act and Delaware General Corporation Law” for more information.

We do not know whether an active and liquid trading market will develop for our common shares or what the market price of our common shares will be and as a result it may be difficult for you to sell your common shares.

Prior to this offering, there has been no public market for our common shares. An active trading market for our shares may never develop or be sustained following this offering, on NASDAQ, on which we intend to apply to have our common shares listed, or otherwise. If an active market for our common shares does not develop, it may be difficult for you to sell common shares you purchase in this offering without depressing the market price for the common shares or you may not be able to sell your shares at all. The initial public offering price for our common shares will be determined through negotiations with the underwriters and the negotiated price may not be indicative of the market price for our common shares after this offering. The initial public offering price may vary from the market price of our common shares after the offering. As a result of these and other factors, you may not be able to sell your common shares at or above the initial public offering price or at all. Further, an inactive market may also impair our ability to raise capital by selling additional common shares and may impair our ability to enter into strategic collaborations or acquire companies or products by using our common shares as consideration.

 

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Complying with the laws and regulations affecting public companies will increase our costs and the demands on management and could harm our operating results and our ability to accurately report our financial condition, results of operations or cash flows, which may adversely affect investor confidence in us and, as a result, the value of our common shares.

As a public company, and particularly after we cease to be an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the related rules and regulations subsequently implemented by the Securities and Exchange Commission, or SEC, the applicable Canadian securities regulators and NASDAQ impose numerous requirements on public companies, including requiring changes in corporate governance practices. Also, the Securities Exchange Act of 1934, as amended, or the Exchange Act, requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. In addition, we have recently hired Ian Mortimer as our full-time chief financial officer. We anticipate that we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to address the added burdens of operating as a public company. Our management and other personnel will need to devote a substantial amount of time to compliance with these laws and regulations. These requirements have increased and will continue to increase our legal, accounting, and financial compliance costs and have made and will continue to make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or to incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.

The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In particular, commencing with our second annual report on Form 10-K, Section 404 of the Sarbanes-Oxley Act, or Section 404, will require us to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm potentially to attest to, the effectiveness of our internal control over financial reporting. As an “emerging growth company” we expect to avail ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404. However, we may no longer avail ourselves of this exemption when we cease to be an “emerging growth company.” When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Our compliance with applicable provisions of Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues as we implement additional corporate governance practices and comply with reporting requirements. Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our common shares could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

Furthermore, investor perceptions of our company may suffer if deficiencies are found, and this could cause a decline in the market price of our common shares. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our stated operating results and harm our reputation. If we are unable to implement these requirements effectively or efficiently, it could harm our operations, financial reporting, or financial results and could result in an adverse opinion on our internal controls from our independent registered public accounting firm.

We are an “emerging growth company,” and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common shares less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an “emerging growth company,” we may choose to take advantage of

 

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exemptions from various reporting requirements applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” for up to five years following the completion of this offering, although, if we have more than $1.0 billion in annual revenue, if the market value of our common shares held by non-affiliates exceeds $700 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before the end of that five-year period, we would cease to be an “emerging growth company” as of the following December 31. Investors could find our common shares less attractive if we choose to rely on these exemptions. If some investors find our common shares less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common shares and our share price may be more volatile.

As an “emerging growth company,” the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common shares.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common shares.

We will be required to disclose changes made in our internal controls and procedures on a quarterly basis and our management will be required to assess the effectiveness of these controls annually. However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404. We could be an “emerging growth company” for up to five years. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. In addition, our management and independent registered public accounting firm did not perform an evaluation of our internal control over financial reporting as of December 31, 2013, December 31, 2012 or December 31, 2011, in accordance with the provisions of the Sarbanes-Oxley Act. Had we and our independent registered public accounting firm performed such an evaluation, control deficiencies may have been identified by management or our independent registered public accounting firm, and those control deficiencies could have also represented one or more material weaknesses. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.

If you purchase our common shares in this offering, you will incur immediate and substantial dilution in the book value of your shares and future sales and issuances of our common shares or rights to purchase common shares, including pursuant to our equity incentive plans, could cause you to incur additional dilution and could cause our share price to fall.

Investors purchasing common shares in this offering will pay a price per common share that substantially exceeds the net tangible book value per common share as of June 30, 2014. Net tangible book value is our tangible assets after subtracting our liabilities. As a result, investors purchasing common shares in this offering will incur immediate

 

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dilution of $         per common share, based on the initial public offering price of $         per common share. Further, investors purchasing common shares in this offering will contribute approximately     % of the total amount invested by shareholders since our inception, but will own only approximately     % of the common shares outstanding after giving effect to this offering.

This dilution is due to our investors who purchased shares prior to this offering having paid substantially less than the price offered to the public in this offering when they purchased their shares. In addition, as of June 30, 2014, options to purchase 7,013,578 of our common shares with a weighted-average exercise price of $0.90 per common share were outstanding. The exercise of any of these options would result in additional dilution. As a result of the dilution to investors purchasing common shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation. Further, because we will need to raise additional capital to fund our clinical development programs, we may in the future sell substantial amounts of common shares or securities convertible into or exchangeable for common shares. Pursuant to our equity incentive plan(s), our compensation committee (or a subset thereof) is authorized to grant equity-based incentive awards to our employees, directors and consultants. Future option grants and issuances of common shares under our share-based compensation plans may have an adverse effect on the market price of our common shares.

These future issuances of common shares or common share-related securities, together with the exercise of outstanding options and any additional common shares issued in connection with acquisitions, if any, may result in further dilution to our existing shareholders, and new investors could gain rights, preferences and privileges senior to those of holders of our common shares, including common shares sold in this offering.

For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

Our management team will have broad discretion to use the net proceeds from this offering and its investment of these proceeds may not yield a favorable return. They may invest the proceeds of this offering in ways with which investors disagree.

Our management team will have broad discretion in the application of the net proceeds from this offering and could spend or invest the proceeds in ways with which our shareholders disagree. Accordingly, investors will need to rely on our management team’s judgment with respect to the use of these proceeds. We intend to use the proceeds from this offering to: (1) fund preclinical and early clinical development of our DS and XEN801 programs; (2) genetic research and drug discovery activities using our Extreme Genetics discovery platform; and (3) for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire, license and invest in complementary products, technologies or businesses; however, we currently have no agreements or commitments to complete any such transaction. These uses may not yield a favorable return to our shareholders.

We cannot specify with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering. In addition, the amount, allocation and timing of our actual expenditures will depend upon numerous factors, including milestone payments received from our collaborations and royalties received on sale of our approved product and any future approved product. Accordingly, we will have broad discretion in using these proceeds. Until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.

We are at risk of securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

We do not anticipate paying any cash dividends on our common shares in the foreseeable future.

We do not currently intend to pay any cash dividends on our common shares in the foreseeable future. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common shares may be investors’ sole source of gain for the foreseeable future.

NASDAQ may delist our securities from its exchange, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.

We intend to apply to list our common shares on NASDAQ. In order to make a final determination of compliance with their listing criteria, NASDAQ may look to the first trading day’s activity and, particularly, the last bid price on such

 

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day. In the event the trading price for our common shares drops below NASDAQ’s $1.00 minimum bid requirement, NASDAQ could rescind our initial listing approval. If that were to happen, the liquidity for our common shares would decrease. If we failed to list the common shares on NASDAQ, the liquidity for our common shares would be significantly impaired, which may substantially decrease the trading price of our common shares.

In addition, in the future, our securities may fail to meet the continued listing requirements to be listed on NASDAQ. If NASDAQ delists our common shares from trading on its exchange, we could face significant material adverse consequences, including:

 

  n  

a limited availability of market quotations for our securities;

 

  n  

a determination that our common shares is a “penny stock” which will require brokers trading in our common shares to adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our common shares;

 

  n  

a limited amount of news and analyst coverage for our company; and

 

  n  

a decreased ability to issue additional securities or obtain additional financing in the future.

If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, our share price and trading volume could decline.

The trading market for our common shares will be influenced by the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no or too few securities or industry analysts commence coverage of our company, the trading price for our common shares would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our common shares or publish inaccurate or unfavorable research about our business, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common shares could decrease, which might cause our price and trading volume to decline.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to management. Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere in this prospectus contain forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.

These statements involve risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

  n  

our ability to identify additional products or product candidates using our Extreme Genetics discovery platform;

 

 

  n  

the initiation, timing, cost, progress and success of our research and development programs, preclinical studies and clinical trials;

 

  n  

our ability to advance product candidates into, and successfully complete, clinical trials;

 

  n  

our ability to recruit sufficient numbers of patients for our future clinical trials for orphan or more common indications;

 

 

  n  

our ability to achieve profitability;

 

  n  

our ability to obtain funding for our operations, including research funding;

 

  n  

our ability to receive milestones, royalties and sublicensing fees under our collaborations, and the timing of such payments;

 

  n  

the implementation of our business model and strategic plans;

 

  n  

our ability to develop and commercialize product candidates for orphan and niche indications independently;

 

  n  

our commercialization, marketing and manufacturing capabilities and strategy;

 

  n  

our ability to find families to support our Extreme Genetics discovery platform;

 

  n  

our ability to discover genes and drug targets;

 

  n  

our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

 

  n  

our expectations regarding federal, state and foreign regulatory requirements;

 

  n  

the therapeutic benefits, effectiveness and safety of our product candidates;

 

  n  

the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products and product candidates;

 

  n  

the rate and degree of market acceptance and clinical utility of Glybera and future products, if any;

 

  n  

the timing of and our and our collaborators’ ability to obtain and maintain regulatory approvals for our product candidates;

 

  n  

the likelihood of our exercise of our option to co-promote TV-45070 in the U.S. under our Teva collaboration and co-fund and co-develop under our Merck collaboration;

 

  n  

our ability to maintain and establish collaborations;

 

  n  

our use of proceeds from this offering;

 

  n  

our expectations regarding market risk, including interest rate changes and foreign currency fluctuations;

 

  n  

our belief in the sufficiency of our cash flows to meet our needs for at least the next 12 to 24 months;

 

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  n  

our expectations regarding the timing during which we will be an emerging growth company under the JOBS Act;

 

  n  

our ability to engage and retain the employees required to grow our business;

 

  n  

our future financial performance and projected expenditures;

 

  n  

developments relating to our competitors and our industry, including the success of competing therapies that are or become available; and

 

  n  

estimates of our expenses, future revenue, capital requirements and our needs for additional financing.

In addition, you should refer to the “Risk Factors” section of this prospectus for a discussion of other important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, do not protect any forward-looking statements that we make in connection with this offering.

 

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MARKET, INDUSTRY AND OTHER DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our market position, market opportunity and market size, is based on information from various sources such as industry publications, on assumptions that we have made based on such data and other similar sources and on our knowledge of the markets for our products. These data involve a number of assumptions and limitations. We have not independently verified any third-party information.

In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section entitled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the common shares in this offering will be approximately $         million, or approximately $         million if the underwriters exercise in full their option to purchase additional common shares, at an assumed initial public offering price of $         per common share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $         per common share would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming the number of common shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of common shares we are offering. Each increase (decrease) of one million common shares in the number of common shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the initial public offering price or the number of common shares by these amounts would have a material effect on our use of the proceeds from this offering, although it may accelerate the time at which we will need to seek additional capital.

We currently expect to use the net proceeds from this offering as follows:

 

  n  

approximately $         million for preclinical and early clinical development of our Dravet Syndrome and XEN801 programs;

 

  n  

approximately $         million to fund genetic research and drug discovery activities using our Extreme Genetics discovery platform; and

 

  n  

the remainder for working capital and general corporate purposes.

We may also use a portion of the net proceeds in connection with any exercise of co-development or co-promotion rights under our collaborations; however, no such rights are currently exercisable. In addition, we may also use a portion of the net proceeds to acquire, license and invest in complementary products, technologies or businesses; however, we currently have no agreements or commitments to complete any such transaction.

This expected use of the net proceeds of this offering represents our intentions based on our current plans and business conditions, which could change in the future as our plans and business conditions evolve. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering or the amounts that we will actually spend on the uses set forth above. The amounts, allocation and timing of our actual expenditures will depend upon numerous factors, including:

 

  n  

the focus and results of our research, drug discovery and preclinical development activities;

 

  n  

the type, number, costs and results of any clinical trials for our product candidates;

 

  n  

regulatory actions relating to our product candidates;

 

  n  

our ability to achieve milestones and obtain royalty payments from our collaborators;

 

  n  

whether any co-funding or co-promotion rights under our strategic alliances are exercised;

 

  n  

competitive and technological developments; and

 

  n  

the rate of growth, if any, of our business.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our common shares or any other securities. We currently anticipate that we will retain all available funds and any future earnings, if any, in the foreseeable future for use in the operation of our business and do not currently anticipate paying cash dividends in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of the board of directors, subject to applicable law and will depend on various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the board of directors deems relevant.

 

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CAPITALIZATION

The following table summarizes our capitalization as of June 30, 2014:

 

  n  

on an actual basis;

 

  n  

on a pro forma basis to reflect (1) the conversion of all outstanding preferred shares into an aggregate of 37,549,041 common shares upon the closing of this offering including the conversion of all of our outstanding Series A preferred shares and Series B preferred shares into 10,431,507 common shares and the conversion of all of our outstanding Series E preferred shares into 27,117,534 common shares, based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) and the adjustment provisions relating to our Series E preferred shares described in the section titled “Description of Share Capital”; (2) the automatic conversion of all subscription rights outstanding upon the closing of this offering into an aggregate of 51,810 common shares; and (3) a          for          reverse share split of our common and preferred shares to be effected prior to the closing of this offering; and

 

  n  

on a pro forma as adjusted basis, to further reflect the sale and issuance by us of              common shares in this offering at an assumed initial price to public of $         per common share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Investors should read the information in this table together with the financial statements and related notes to those statements, as well as the sections of this prospectus captioned “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

     AS OF JUNE 30, 2014  
     ACTUAL     PRO FORMA      PRO FORMA
AS ADJUSTED (1)
 
    

(unaudited)

 
    

(in thousands, except per share amounts)

 

Redeemable convertible preferred shares, without par value; issuable in series, 32,116,669 authorized, 31,437,274 preferred shares issued and outstanding, actual; no preferred shares authorized, issued or outstanding, pro forma; no preferred shares authorized, issued or outstanding, pro forma as adjusted

   $ 102,488      $       $   

Shareholders’ deficit:

       

Preferred shares, without par value, no shares authorized, issued or outstanding, actual; unlimited shares authorized, no shares issued or outstanding, pro forma; unlimited shares authorized, no shares issued or outstanding, pro forma as adjusted

                      

Common shares, without par value, unlimited common shares authorized, 6,552,128 common shares issued and outstanding, actual; unlimited common shares authorized,                      common shares issued and outstanding, pro forma; unlimited common shares authorized,                      common shares issued and outstanding, pro forma as adjusted

     6,182        108,782      

Additional paid-in capital

     30,064        29,952      

Accumulated deficit

       (114,149     (114,149)      

Accumulated comprehensive income

     2,521        2,521      
  

 

 

   

 

 

    

 

 

 

Total shareholders’ (deficit) equity

     (75,382     27,106      
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 27,106      $ 27,106       $                      
  

 

 

   

 

 

    

 

 

 

 

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(1)  

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per common share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of additional paid-in capital, total shareholders’ deficit and total capitalization by approximately $         million, assuming that the number of common shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of common shares we are offering. Each increase (decrease) of one million common shares in the number of common shares offered by us would increase (decrease) each of additional paid-in capital, total shareholders’ deficit and total capitalization by approximately $         million, assuming that the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

The outstanding share information in the table above excludes, as of June 30, 2014:

 

  n  

7,013,578 common shares issuable upon exercise of options outstanding as of June 30, 2014, with a weighted-average exercise price of CAD$0.96 per common share, or $0.90 per common share, as converted; and

 

  n  

2,000,000 common shares reserved for future issuance under our 2014 Equity Incentive Plan, as amended, which will become effective on the business day immediately prior to the date of effectiveness of the registration statement of which this prospectus forms a part, and any future automatic increase in common shares reserved for issuance under such plan.

 

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DILUTION

Investors purchasing our common shares in this offering will experience immediate and substantial dilution in the pro forma net tangible book value of their common shares. Dilution in pro forma net tangible book value represents the difference between the price to public per common share and the pro forma net tangible book value per share immediately after the offering.

The historical net tangible book value of our common shares as of June 30, 2014 was $27.1 million, or $4.14 per common share. Historical net tangible book value (deficit) per common share represents our total tangible assets (total assets less intangible assets) less total liabilities divided by the number of outstanding common shares.

After giving effect to (1) the automatic conversion of the outstanding preferred shares into an aggregate of 37,549,041 common shares upon the closing of this offering assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus); (2) the automatic conversion into an aggregate of 51,810 common shares of all subscription rights outstanding upon the closing of this offering; (3) the issuance of              common shares in this offering; and (4) receipt of the net proceeds from the sale of              common shares in this offering at an assumed initial public offering price of $         per common share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, the pro forma as adjusted net tangible book value as of June 30, 2014 would have been approximately $         million, or $         per common share. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per common share to existing shareholders and an immediate dilution of $         per common share to new investors purchasing common shares in this offering.

The following table illustrates this dilution on a per common share basis to new investors:

 

 

 

Assumed initial price to public per common share

      $                

Historical net tangible book value per common share as of June 30, 2014

   $ 4.14      

Decrease per common share attributable to conversion of redeemable convertible preferred shares

     

Decrease per common share attributable to the conversion of subscription rights

     

Pro forma net tangible book deficit per common share before this offering

     

Increase in net tangible book value per common share attributable to investors participating in this offering

     
  

 

 

    
Pro forma as adjusted net tangible book value per common share, as adjusted to give effect to this offering      
     

 

 

 

Pro forma dilution per common share to investors participating in this offering

      $     
     

 

 

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per common share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) the pro forma as adjusted net tangible book value by approximately $         million, or approximately $         per common share, and increase (decrease) the pro forma dilution per share to investors in this offering by approximately $         per common share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of common shares we are offering. An increase of one million common shares in the number of shares offered by us would increase the pro forma as adjusted net tangible book value by approximately $        , or $         per common share, and the pro forma dilution per common share to investors in this offering would be $         per common share, assuming that the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a decrease of one million common shares in the number of common shares offered by us would decrease the pro forma as adjusted net tangible book value by approximately $         million, or $         per common share, and the pro forma dilution per common share to investors in this offering would be $        

 

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per common share, assuming that the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

If the underwriters exercise their option in full to purchase              additional common shares in this offering, the pro forma as adjusted net tangible book value per common share after the offering would be $         per common share, the increase in the pro forma net tangible book value per common share to existing shareholders would be $         per common share and the pro forma dilution to new investors purchasing common shares in this offering would be $         per common share.

The following table summarizes, on a pro forma basis as of June 30, 2014, the differences between the number of common shares purchased from us, the total consideration and the weighted-average price per share paid by existing shareholders and by investors participating in this offering at an assumed initial public offering price of $         per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

 

     COMMON SHARES PURCHASED     TOTAL CONSIDERATION     WEIGHTED-
AVERAGE PRICE
PER COMMON SHARE
 
     NUMBER    PERCENT     AMOUNT      PERCENT    

Existing shareholders before this offering

                   $                                 $                                     

Investors participating in this offering

            
  

 

  

 

 

   

 

 

    

 

 

   

Total

                   $                     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per common share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) total consideration paid by new investors by approximately $         million, assuming that the number of common shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of one million common shares in the number of common shares offered by us would increase (decrease) total consideration paid by new investors by $         million, assuming that the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The number of common shares to be outstanding following this offering is based on 44,152,979 common shares outstanding as of June 30, 2014, after giving effect to (i) the conversion of all outstanding convertible preferred shares into an aggregate of 37,549,041 common shares upon the closing of this offering, assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), (ii) the conversion of all outstanding subscription rights into an aggregate of 51,810 common shares upon the closing of this offering, and (iii) a              for              reverse share split. The outstanding share information in the table above excludes, as of June 30, 2014:

 

  n  

7,013,578 common shares issuable upon exercise of options outstanding as of June 30, 2014, with a weighted-average exercise price of CAD$0.96 per common share, or $0.90 per common share, as converted; and

 

  n  

2,000,000 common shares reserved for future issuance under our 2014 Equity Incentive Plan, as amended, which will become effective on the business day immediately prior to the effective date of the registration statement of which this prospectus forms a part, and any future automatic increase in common shares reserved for issuance under such plan.

Share reserves for our share-based compensation plans will also be subject to automatic annual increase in accordance with the terms of the plans. To the extent that new options are issued under our share-based compensation plans or we issue additional common shares in the future, there will be further dilution to investors participating in this offering.

 

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SELECTED FINANCIAL DATA

We derived the selected statement of operations data for the fiscal years ended December 31, 2011, 2012 and 2013 and the balance sheet data as of December 31, 2012 and 2013 from our audited financial statements included elsewhere in this prospectus. The selected statement of operations data for the six months ended June 30, 2013 and 2014 and the balance sheet data as of June 30, 2014 have been derived from unaudited interim financial statements included elsewhere in this prospectus and have been prepared on the same basis as the audited financial statements. In the opinion of management, the unaudited data reflects all adjustments, which include only normal and recurring adjustments, necessary for a fair presentation of the results as of and for the periods. The balance sheet data as of December 31, 2011 have been derived from audited financial statements which are not included in this prospectus. Our historical results are not necessarily indicative of results to be expected in any future period and results for the six months ended June 30, 2014 are not necessarily indicative of results to be expected for the full year ending December 31, 2014. You should read the following selected financial data below in conjunction with our financial statements and related notes included elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus. Our audited annual financial statements have been prepared in U.S. dollars and in accordance with U.S. Generally Accepted Accounting Principles.

 

 

 

    YEAR ENDED DECEMBER 31,     SIX MONTHS ENDED JUNE 30,  
          2011                 2012               2013             2013             2014      
          (unaudited)  
    (in thousands, except per share data)  

Statement of Operations Data:

         

Revenue:

         

Collaboration revenue

  $ 6,915      $ 14,300      $ 27,352      $ 10,985      $ 10,297   

Royalties

    3        8        4               2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    6,918        14,308        27,356        10,985        10,299   

Operating expenses:

         

Research and development

    12,302        10,455        12,303        6,983        5,099   

General and administrative

    6,730        7,006        5,341        2,828        2,790   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    19,032        17,461        17,644        9,811        7,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (12,114     (3,153     9,712        1,174        2,410   

Other income (expense):

         

Interest income

    153        144        338        76        278   

Interest expense

    (91     (93     (64     (41       

Foreign exchange gain (loss)

    60        (169     2,035        1,920        (85

Gain (loss) on write-off and disposal of assets

           (1,030     11        11          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (11,992     (4,301     12,032        3,140        2,603   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to participating securities

                  8,199        3,140        2,603   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common shareholders

  $ (11,992   $ (4,301   $ 3,833      $      $   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share—basic (1)

  $ (1.86   $ (0.67   $ 0.59      $ 0.00      $ 0.00   

Net income (loss) per share—diluted (1)

  $ (1.86   $ (0.67   $ 0.39      $ 0.00      $ 0.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding used in computing basic net income (loss) per share (1)

    6,433        6,452        6,501        6,478        6,548   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding used in computing diluted net income (loss) per share (1)

    6,433        6,452        9,765        6,478        6,548   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share—basic (unaudited) (2)

      $ 0.27        $ 0.06   

Pro forma net income (loss) per share—diluted (unaudited) (2)

      $ 0.25        $ 0.05   
     

 

 

     

 

 

 

Weighted-average common shares outstanding used in computing the proforma net income (loss) per share—basic (unaudited) (2)

        44,110          44,155   
     

 

 

     

 

 

 

Weighted-average common shares outstanding used in computing the proforma net income (loss) per share—diluted (unaudited) (2)

        47,314          47,765   
     

 

 

     

 

 

 

 

 

 

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     AS OF DECEMBER 31,     AS OF JUNE 30  
     2011     2012     2013     2014  
           (unaudited)  
     (in thousands)  

Balance Sheet Data:

        

Cash, cash equivalents and marketable securities

   $ 14,924      $ 60,162      $ 49,276      $ 44,710   

Working capital

     20,536        41,507        31,666        27,977   

Total assets

     30,465        63,305        54,487        50,712   

Note payable

     1,586        1,665                 

Redeemable convertible preferred shares

     102,488        102,488        102,488        102,488   

Total shareholders’ deficit

     (86,316     (89,865     (78,372     (75,382

 

 

(1)   

See Note 2 to our financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net income (loss) per common share and the weighted-average number of common shares used in computation of the per common share amounts.

(2)   

Pro forma net income (loss) per share represents net income (loss) divided by the pro forma weighted-average shares outstanding, and reflects (i) the conversion of all outstanding preferred shares into an aggregate of 37,549,041 common shares, including the conversion of all of our outstanding Series A preferred shares and Series B preferred shares into 10,431,507 common shares and the conversion of all of our Series E preferred shares into 27,117,534 common shares, based upon an assumed initial public offering price of $             per share (the midpoint of the price range set forth on the cover page of this prospectus) and the adjustment provisions relating to our outstanding Series E preferred shares described in “Description of Share Capital,” upon the closing of this offering, and (ii) the conversion of the weighted-average number of outstanding subscription rights for the period into an aggregate of 58,103 common shares.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this prospectus. Some of the information contained in this discussion and analysis or set forth in other parts of this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage biopharmaceutical company discovering and developing a pipeline of differentiated therapeutics for orphan indications that we intend to commercialize on our own, and for larger market indications that we intend to partner with global pharmaceutical companies. We have built a core enabling discovery platform for the discovery of validated drug targets by studying rare human diseases with extreme traits, including diseases caused by mutations in ion channels, known as channelopathies. We have an integrated platform that includes in-house capabilities for human genetics, small molecule drug discovery, and preclinical and clinical development.

Our business was founded on our proprietary discovery platform, which we refer to as Extreme Genetics. Extreme Genetics involves the study of families where individuals exhibit inherited severe traits, or phenotypes. By identifying and characterizing single-gene defects responsible for these phenotypes, we gain insights into human disease biology to better select targets for therapeutic intervention. Our Extreme Genetics discovery platform has yielded the first approved gene therapy product in the European Union, or the EU, a broad development pipeline and multiple pharmaceutical partnerships.

Our pharmaceutical partners include Teva Pharmaceutical Industries, Ltd., or Teva (through its subsidiary, Ivax International GmbH), Genentech, Inc., or Genentech, and Merck & Co., Inc., or Merck (through its affiliate, Essex Chemie AG). Our pharmaceutical collaborations have generated in aggregate over $140.0 million in non-equity funding to date with the potential to provide us with over $1.0 billion in future milestone payments, as well as royalties and co-promotion income on product sales.

To date, our Extreme Genetics discovery platform has yielded:

 

  n  

Glybera, developed by our licensee uniQure Biopharma B.V., or uniQure, the first, and currently the only, gene therapy approved in the EU for the treatment of the orphan disorder lipoprotein lipase deficiency, or LPLD;

 

  n  

TV-45070 (formerly XEN402), a product candidate with four Phase 2 proof-of-concept clinical trials completed. Our partner Teva is conducting a 300-patient, randomized Phase 2b clinical trial in osteoarthritis, or OA, of the knee and is planning clinical development in neuropathic pain indications, including postherpetic neuralgia, or PHN;

 

  n  

GDC-0276, a product candidate being developed in collaboration with Genentech for the treatment of pain. In August 2014, Genentech received approval from Health Canada to initiate a Phase 1 clinical trial for GDC-0276; and

 

  n  

preclinical programs, including a sodium channel inhibitor for the orphan disorder Dravet Syndrome, or DS, and XEN801, a stearoyl Co-A desaturase, or SCD1, inhibitor for the treatment of acne. We anticipate filing an investigational new drug application, or IND, for XEN801 in the first half of 2015 and an IND for our DS program in 2016.

We believe that our Extreme Genetics discovery platform enhances the likelihood of discovering a drug target that has a major effect in humans. From these discoveries, we can gain an improved understanding of how a drug that modulates the target might act when given to a human.

We have funded our operations primarily through payments received from our pharmaceutical collaborators and government funding as well as through the sale of convertible preferred shares in various financing transactions. Through June 30, 2014, we have received an aggregate of approximately $265.2 million to fund our operations, of

 

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which approximately $145.7 million was non-equity funding pursuant to collaboration and license agreements, approximately $17.0 million was pursuant to government funding, and approximately $102.5 million was pursuant to the sale of our preferred shares. For 2011, 2012, 2013 and the six months ended June 30, 2014, we recognized revenue for an aggregate of approximately $6.9 million, $14.3 million, $27.4 million and $10.3 million, respectively, consisting primarily of funding from our collaborators.

Though our revenue from our collaboration and license agreements has resulted in net income of $2.6 million for the six months ended June 30, 2014 and net income of $12.0 million for the year ended December 31, 2013, we have incurred net losses on an annual basis since inception and do not expect to have sustained profitability for the foreseeable future. We had net losses of $12.0 million and $4.3 million for the years ended December 31, 2011 and 2012, respectively, and had an accumulated deficit of $114.1 million as of June 30, 2014, from expenses incurred in connection with our research programs and from general and administrative costs associated with our operations.

We have not generated any royalty revenue or other revenue from product sales, and 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.

We expect to continue to incur significant expenses and operating losses for at least the next 12 to 24 months. We anticipate that our expenses will increase substantially as we:

 

  n  

continue our research and preclinical and clinical development of our product candidates;

 

  n  

seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical trials;

 

  n  

make milestone and other payments under our in-license agreements;

 

  n  

maintain, protect and expand our intellectual property portfolio;

 

  n  

attract, hire and retain skilled personnel; and

 

  n  

create additional infrastructure to support our operations as a public company and otherwise.

Financial Operations Overview

Revenue

To date, our revenue has been primarily derived from collaboration and licensing agreements as well as, to a lesser extent, government funding. In addition, we have received nominal royalties from a diagnostic license. To date, we have not generated any royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales other than from sales of Glybera under our license to uniQure for the foreseeable future, if ever. We have entered into several collaboration agreements, the most significant of which, with respect to revenue, are described below.

uniQure. Effective August 2000, we entered into a sublicense and research agreement with uniQure (formerly Amsterdam Molecular Therapeutics), pursuant to which we granted to uniQure an exclusive, worldwide sublicense under certain intellectual property controlled by us to develop and commercialize technology and compounds related to the variant of lipoprotein lipase, or LPL, called LPLS447X. Together with collaborators from the University of British Columbia, or UBC, we demonstrated that the LPLS447X variant resulted in increased LPL enzyme activity leading to reduced triglyceride levels in humans. Under our sublicense and research agreement with uniQure, we collaborated with uniQure and UBC on preclinical activities, and thereafter uniQure developed an LPL gene therapy product, Glybera, which contains the LPLS447X variant. Glybera was approved in the EU in October 2012 to treat LPLD in patients with severe or multiple pancreatitis attacks, despite dietary fat restrictions. uniQure conducted the clinical trials and is responsible for the commercialization of Glybera.

 

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Under the terms of the agreement, we are eligible to receive mid single-digit royalties on net sales of the licensed products, for sales made by uniQure and its affiliates. The royalty rates for sales made by uniQure and its affiliates are reduced to a low single-digit when the licensed patents expire. In July 2013, uniQure announced that it had entered into a partnership with Chiesi Farmaceutici, S.p.A., or Chiesi, for the commercialization of Glybera in the EU and more than a dozen other countries, including Brazil, China, Mexico and Russia. We believe that Chiesi plans to launch Glybera in the fourth quarter of 2014 or the first quarter of 2015 in Europe, and that uniQure is pursuing a U.S. product approval strategy with plans to file a Biologics License Application, or BLA, with the U.S. Food and Drug Administration, or the FDA, in 2017. With respect to uniQure’s sublicense to Chiesi, we are eligible to receive a percentage in the low twenties of all non-royalty compensation relating to the licensed technology or products that uniQure receives from Chiesi (including, for example, upfront payments and milestone payments), a percentage in the low twenties of any royalties that uniQure receives from Chiesi based on sales of technology or products covered by the licensed patents, plus a mid single-digit percentage of certain further royalties that uniQure receives from Chiesi based on sales of our licensed technology or products after the expiration of all licensed patents covering the product. If uniQure grants a sublicense to a third party other than to Chiesi, then we are eligible to receive a percentage in the low twenties of all non-royalty compensation relating to the licensed technology or products that uniQure receives from such sublicensee (for example, upfront payments and milestone payments), plus a percentage in the low twenties of any royalties that uniQure receives from such sublicensee based on sales of technology or products covered by the licensed patents.

Teva. In December 2012, we entered into a collaborative development and license agreement with Teva, through its subsidiary, Ivax International GmbH, pursuant to which we granted Teva an exclusive worldwide license to develop and commercialize certain products, including TV-45070. Under the terms of the agreement, Teva paid us an upfront fee of $41.0 million. We are collaborating with Teva to further develop TV-45070, and Teva is funding all development costs with respect to the licensed products. Teva is providing funding to us for certain of our full-time equivalents, or FTEs, performing the research collaboration plan. In addition, we are eligible to receive potential milestone payments totaling up to $335.0 million, comprised of a $20.0 million clinical milestone payment, up to $285.0 million in regulatory milestone payments, and a $30.0 million sales-based milestone payment. If TV-45070 is approved, we are also eligible to receive royalties in the low teens to low twenties on net sales of the licensed products for the timeframe that such products are covered by the licensed patents and in certain other instances.

We have an option to a 20% to 30% co-promotion interest for products incorporating TV-45070 in the U.S. Our exercise of this option is subject to meeting objective financial conditions, staffing requirements and compliance standards to be determined in Teva’s reasonable discretion in accordance with standard industry practice. Our co-promotion option is exercisable upon the filing of the first new drug application, or NDA, for a TV-45070 product with the FDA and we will be obligated to pay an opt-in fee to Teva, which is calculated by multiplying our co-promotion interest (as a percentage) by the amount of certain milestones paid or payable by Teva, to which is added certain past and future development costs incurred by Teva with respect to the product for the U.S. Our co-promotion interest is in the 20% to 30% range, and equals our percentage share of detailing activities and co-promotion expenses. Such opt-in fee is payable as a reduction to the milestone payments, our share of operating profits, or a combination of the two that Teva would otherwise owe to us. If we exercise this option, upon paying an opt-in fee to Teva we will be eligible to receive, in lieu of royalties with respect to such product sales in the U.S., a percentage share (equal to our co-promotion interest) of operating profits from such product sales in the U.S.

Genentech. In December 2011, we entered into a collaborative research and license agreement with Genentech and its affiliate, F. Hoffman-La Roche Ltd, or Roche, to discover and develop small and large molecules that selectively inhibit the Nav1.7 sodium channel as well as companion diagnostics for the potential treatment of pain. Pursuant to this agreement, we granted Genentech a worldwide exclusive license to develop and commercialize compounds directed to Nav1.7 and products incorporating such compounds for all uses. We also granted Genentech a worldwide non-exclusive license to diagnostic products for the purpose of developing or commercializing such compounds.

Under the terms of the agreement, Genentech paid us an upfront fee of $10.0 million, a $5.0 million milestone payment for the selection of GDC-0276 for development and an $8.0 million milestone payment upon the approval by Health Canada of the Clinical Trial Application for GDC-0276. Genentech is providing funding to us for certain of our FTEs performing the research collaboration plan. In addition, we are eligible to receive pre-commercial and commercial milestone payments with respect to the licensed products totaling up to an additional $613.0 million,

 

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comprised of up to $45.5 million in preclinical and clinical milestone payments, up to $387.5 million in regulatory milestone payments, and up to $180.0 million in sales-based milestone payments for multiple products and indications. In addition, we are eligible to receive royalties based on net sales of the licensed products, which range from a mid single-digit percentage to ten percent for small-molecule inhibitors for the timeframe that such products are covered by the licensed patents and a low single-digit percentage thereafter, plus a single-digit percentage for large-molecule inhibitors of Nav1.7.

In March 2014, we entered into a new agreement with Genentech for pain genetics, where we intend to use our Extreme Genetics discovery platform to focus on identifying genetic targets associated with rare phenotypes where individuals have an inability to perceive pain or where individuals have non-precipitated spontaneous severe pain. Pursuant to the terms of this agreement, any intellectual property arising out of the collaboration will be jointly owned by us and Genentech. We have also granted Genentech a time-limited, exclusive right of first negotiation on a target-by-target basis to form joint drug discovery collaborations. Under the terms of this agreement, Genentech paid us an upfront payment of $1.5 million. In addition, we are eligible for an additional $2.0 million in milestone payments, and, at our option, a Genentech affiliate will invest up to $5.0 million in a private placement concurrent with this public offering.

Merck. In June 2009, we entered into an exclusive collaborative research and option agreement with Merck, pursuant to which we conducted a research program to discover and develop novel small-molecule candidates for the potential treatment of cardiovascular disease. Merck provided payments to us for our FTEs who performed our activities pursuant to the research program conducted under the Merck agreement. The Merck collaborative research program ended in December 2012.

Under the terms of the agreement, Merck had the option to obtain an exclusive license under certain intellectual property controlled by us to develop and commercialize compounds and products directed to targets in the research program, which has now expired. In June 2012, Merck exercised its option and paid us $2.0 million to obtain such a worldwide exclusive license to develop and commercialize compound inhibitors of a target that was identified using our Extreme Genetics discovery platform.

Through June 30, 2014, we have received milestone payments and an option fee totaling $9.0 million, and we are eligible for further research, development and regulatory milestone payments of up to $64.0 million, comprised of $21.0 million in preclinical and clinical milestone payments and up to $43.0 million in regulatory milestone payments for products directed to the licensed target as well as royalties from the mid to high single-digit range.

We have an option to co-fund the Phase 1 and first Phase 2 clinical trials of product candidates licensed by Merck by paying Merck 50% of such development costs. Such co-funding option is available at the IND-filing stage for the applicable product candidate. If we exercise our co-funding option then the maximum eligible milestone amounts due to us increase to $86.5 million and the royalties increase to the high single-digit to the sub-teen double-digit range.

Genome BC. We entered into a research funding agreement with Genome BC in January 2009. Under the agreement with Genome BC, we carried out certain research activities with partial funding from Genome BC provided on a quarterly basis in arrears over the term of the research program. This agreement expired at the end of its term in September 2013.

 

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The following table is a summary of revenue recognized from our current collaboration and licensing agreements for each of the years ended December 31, 2011, 2012 and 2013 and the six months ended June 30, 2013 and 2014 (in thousands):

 

 

 

     YEAR ENDED DECEMBER 31,      SIX MONTHS ENDED JUNE 30,  
           2011                  2012            2013              2013                      2014          
                          (unaudited)  

uniQure:

              

Milestone payment

   $       $ 198       $ 531       $       $   

Teva:

              

Recognition of upfront payment

             927         13,143         6,607         6,120   

Research funding

                     630         294         167   

Genentech:

              

Recognition of upfront payment

     94         3,431         3,300         1,659         1,755   

Research funding

     93         3,517         4,514         2,257         2,255   

Milestone payment

                     5,062                   

Merck:

              

Recognition of initial milestone payment

     2,145         1,060                           

Option fee

             2,060                           

Research funding

     3,206         2,442                           

Milestone payment

     1,038                                   

Genome BC:

              

Research funding

     339         665         172         168           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collaboration revenue

   $ 6,915       $ 14,300       $ 27,352       $ 10,985       $ 10,297   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Through June 30, 2014, we had recognized upfront fees and milestone payments totaling CAD$1.1 million, pursuant to our agreement with uniQure. We are eligible to receive certain additional milestone payments of less than CAD$1.0 million for Glybera and for each subsequent product, if any, developed pursuant to the agreement.

Pursuant to the terms of our agreement with Teva, we received an upfront payment of $41.0 million. We determined that the various deliverables under this agreement should be considered as a single unit of accounting. As such, the $41.0 million upfront payment is being recognized as revenue ratably over the expected period of research performance of pre-commercial activities, which is the three-year period from December 2012 through December 2015.

Pursuant to the terms of our December 2011 agreement with Genentech, we received an upfront payment of $10.0 million. We determined that the various deliverables under this agreement should be considered as a single unit of accounting. As such, the $10.0 million upfront payment is being recognized as revenue ratably over the expected period of research performance, which is the three-year period from December 2011 through December 2014. In September 2013, we received a $5.0 million milestone payment for the selection of a compound for good laboratory practices, or GLP, toxicology studies. We recognized the milestone payment upon achievement in August 2013.

Pursuant to the terms of our March 2014 agreement with Genentech, we received an upfront payment of $1.5 million. We determined that the various deliverables under this agreement should be considered as a single unit of accounting. As such, the $1.5 million upfront payment is being recognized as revenue ratably over the expected period of research performance, which is the two-year period from March 2014 to March 2016.

Pursuant to the terms of our agreement with Merck, we received an initial milestone payment of $5.0 million in February 2010. We determined that this initial milestone payment was not substantive and should not be considered a separate element. As such, we recognized the initial milestone payment of $5.0 million as revenue ratably over the expected period of research performance of pre-commercial activities, which was the period from February 2010 through June 2012. Since the beginning of 2011, we have received both an option fee and two milestone payments

 

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from Merck. Each of these payments was determined to be substantive and at risk at the inception of the agreement and as such have been recognized as revenue in the period received.

As our other internal and partnered products are in various stages of clinical and preclinical development, we do not expect to generate any revenue from product sales other than from our share of revenue related to our agreement with uniQure for at least the next several years. We expect that revenue for the next several years will be derived from our agreement with uniQure and our eligibility to receive a share of the compensation received by uniQure relating to the technology or products licensed by us, and FTEs and milestone payments 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 our deferred revenue for our collaboration and licensing agreements as of December 31, 2011, 2012 and 2013 and June 30, 2014 (in thousands):

 

 

 

     DECEMBER 31,      JUNE 30,
2014
 
           2011                  2012                  2013           
                          (unaudited)  

Teva

   $       $ 39,907       $ 24,691       $ 18,326   

Genentech

     9,949         6,745         3,115         2,883   

Merck

     1,155                           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total deferred revenue

   $ 11,104       $ 46,652       $ 27,806       $ 21,209   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

We expect such deferred revenue remaining as of June 30, 2014 to be recognized as revenue in the applicable fiscal years ending December 31, 2014, 2015 and 2016 based on our accounting policy for revenue recognition indicated for each collaboration agreement.

Operating Expenses

The following table summarizes our operating expenses for the years ended December 31, 2011, 2012 and 2013 and for the six months ended June 30, 2013 and 2014 (in thousands):

 

 

 

     YEAR ENDED DECEMBER 31,      SIX MONTHS ENDED JUNE 30  
             2011                      2012                      2013                      2013                      2014          
                          (unaudited)  

Research and development

   $ 12,302       $ 10,455       $ 12,303       $ 6,983       $ 5,099   

General and administrative

     6,730         7,006         5,341         2,828         2,790   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 19,032       $ 17,461       $ 17,644       $ 9,811       $ 7,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Research and Development Expenses

Research and development expenses represent costs incurred to conduct research on our product candidates in collaboration with Teva, Genentech and Merck, as well as further research and development of our other proprietary product candidates.

Research and development expenses consist of costs incurred in performing research and development activities, including salary, related benefits and share-based compensation for employees engaged in scientific research and development, third-party contract costs relating to research, formulation, manufacturing, preclinical studies and clinical trial activities, third-party license and collaboration fees, laboratory consumables and allocated facility-related costs.

 

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Project-specific expenses reflect costs directly attributable to our clinical development candidates and our preclinical candidates once nominated and selected for further development. All remaining research and development expenses are reflected in early-stage discovery programs. 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 into clinical development, conduct our development activities under our agreements with Teva and Genentech, advance our internal drug discovery programs into preclinical development and continue our early-stage research. The increase in expense will likely include added personnel and third-party contracts related to research, formulation, manufacturing, preclinical studies and clinical trial activities as well as third-party license and collaboration fees and laboratory consumables.

Clinical development timelines, likelihood of regulatory approval and commercialization and associated costs are uncertain and 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 preclinical 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 expense for at least the next 12 to 24 months.

General and Administrative Expenses

General and administrative expenses consist primarily of salary, related benefits and share-based compensation of our executive, finance, business development and administrative functions, travel expenses, allocated facility-related costs not otherwise included in research and development expenses, 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 build our commercial infrastructure for the potential option for co-promotion of TV-45070 in the U.S., if and when regulatory approval is received.

We also anticipate incurring additional general and administrative expenses as a public company, including costs of additional personnel, additional professional fees for audit, accounting and legal services, director fees, enhanced business and accounting systems, costs related to investor relations and increased premiums for directors’ and officers’ liability insurance.

Other Income (Expense)

Interest Income. Interest income consists of income earned on our cash and investment balances. Our interest income has not been significant due to the levels of cash and investment balances and low interest earned on such balances. We anticipate that our interest income will continue to fluctuate depending on timing of payments from collaborative partners, our cash and investment balances, and interest rates.

Interest Expense. Interest expense consists of interest incurred on the note payable held by Isis Pharmaceuticals, Inc., or Isis, related to our collaboration agreement for XEN701. As we fully repaid the note payable to Isis in June 2013 and now have no other debts outstanding, we expect to have little or no interest expense in the future. In the fourth quarter of 2013, we discontinued development of XEN701 as the preclinical data did not support its continued advancement. In the first quarter of 2014, we provided formal notice of termination of the agreement to Isis.

Foreign Exchange Gain (Loss). Our functional currency is the Canadian dollar. For presentation purposes, our assets and liabilities are translated to U.S. dollars at exchange rates at the reporting date. Any resulting exchange gains and losses resulting from the translation of U.S. denominated transactions are recorded in current operations.

Gain (Loss) on Write-off and Disposal of Assets. During the year ended December 31, 2012, we wrote-off leasehold improvements at our leased facility which had a net book value of $1.0 million in connection with a lease extension and modification agreement made effective April 1, 2012.

 

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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 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 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.

While our significant accounting policies are more fully described in the notes to our financial statements appearing in this prospectus, we believe that the following accounting policies are the most critical to understanding and evaluating our reported financial results.

Revenue Recognition

We have generated revenue primarily through collaboration and license agreements.

Under these collaboration agreements, we may receive non-refundable upfront payments, funding for research and development services, milestone payments, other contingent payments and royalties based on achieving pre-determined milestones. Research funding is recorded as revenue over the period of the research commitment. Milestone and other contingent payments are recorded as revenue when the underlying milestone is achieved if there is substantive uncertainty at the date the collaboration arrangement is entered into that the event will be achieved. In assessing the appropriate revenue recognition related to a collaboration agreement, we first determine whether an arrangement includes multiple elements, such as the delivery of intellectual property rights and research and development services. Upfront payments are recorded as deferred revenue in the balance sheet and are recognized as collaboration revenue over the estimated period of research performance that is consistent with the terms of the research and development obligations contained in the collaboration agreement. We periodically review the estimated period of performance based on the progress made under each arrangement.

In January 2011, the Financial Accounting Standards Board, or FASB, adopted new authoritative guidance on revenue recognition for multiple element arrangements, Accounting Standards Update, or ASU, No. 2009-13, Multiple-Deliverable Revenue Arrangements, or ASU 2009-13. This guidance, which applies to multiple element arrangements entered into or materially modified on or after January 1, 2011, amends the criteria for separating and allocating consideration in a multiple element arrangement by modifying the fair value requirements for revenue recognition and eliminating the use of the residual method. The selling prices of deliverables under an arrangement may be derived using third-party evidence, or TPE, or a best estimate of selling price, or BESP, if vendor-specific objective evidence of fair value, or VSOE, is not available.

Deliverables under the arrangement will be separate units of accounting provided that a delivered item has value to the customer on a stand-alone basis and if the arrangement does not include a general right of return relative to the delivered item and delivery or performance of the undelivered items is considered probably and substantially in the control of the vendor. The update also provided new guidance regarding how to apply the standard to arrangements that are materially modified following adoption of the update. The potential future impact of the adoption of this update will depend on the nature of any new agreements entered into or material modifications to existing arrangements.

Under a collaboration agreement, a steering committee is sometimes responsible for overseeing the general working relationships, determining the protocols to be followed in the research and development performed, and evaluating the results from the continued development of the product. We intend to evaluate whether our participation in any joint steering committees is a substantive obligation or whether the services are considered inconsequential or perfunctory.

The factors we would consider in determining if our participation in a joint steering committee is a substantive obligation include: (i) which party negotiated or requested the steering committee, (ii) how frequently the steering committee meets, (iii) whether or not there are any penalties or other recourse if we do not attend the steering

 

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committee meetings, (iv) which party has decision making authority on the steering committee and (v) whether or not the collaborator has the requisite experience and expertise associated with the research and development of the licensed intellectual property.

Incentive milestone payments may be triggered either by the results of our research efforts or by events external to us, such as regulatory approval to market a product. We recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved, but only if the consideration earned from the achievement of a milestone meets all the criteria for the milestone to be considered substantive at the inception of the arrangement. For a milestone to be considered substantive, the consideration earned by achieving the milestone must be commensurate with either our performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from our performance to achieve the milestone, relate solely to our past performance and be reasonable relative to all deliverables and payment terms in the collaboration agreement.

We generally recognize revenue from upfront payments ratably over the term of our estimated period of performance of research under our collaboration agreements in the event that such arrangements represent a single unit of accounting.

In January 2012, we also adopted the guidance (ASU No. 2010-17, Milestones Method of Revenue Recognition, or ASU 2010-17) that permits the recognition of revenue contingent upon our achievement of a milestone in its entirety, in the period the milestone is achieved, only if the milestone meets certain criteria and is considered to be substantive.

We made judgments which affect the periods over which we recognized revenue, including modifying such periods based on any amendments to our collaboration agreements.

Accrued Expenses

As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. Examples of estimated accrued expenses include:

 

  n  

fees paid to contract research organizations in connection with preclinical and toxicology studies and clinical trials;

 

  n  

fees paid to investigative sites in connection with clinical trials;

 

  n  

fees paid to contract manufacturers in connection with the production of clinical trial materials; and

 

  n  

fees paid for professional services.

There have been no material adjustments to our estimates of accrued expenses for any of the periods presented herein, and we do not anticipate that our payment of actual expenses will differ materially from our estimates at June 30, 2014.

Share-Based Compensation

Compensation expense related to share-based awards to employees, directors and other service providers is measured and recognized in our financial statements based on the fair value method with a corresponding increase in additional paid-in capital. Any consideration we receive from the exercise of stock options is credited to share capital.

We measure the fair value of each option awarded to employees on the grant date using the Black-Scholes option-pricing model and a single option award approach for options issued. The fair value of the award determined at grant is amortized over the vesting period.

 

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We measure the fair value of each option awarded to non-employees on the date of grant and periodically re-measure during the grant period as the options are earned.

We expense the value of the options, net of forfeitures, over the vesting periods of the awards, which is typically three to four years. Prior to the completion of this offering, we used the methodology described below to determine fair value. Following completion of this offering, the fair value of our common shares will be determined based on the quoted market price.

Our use of the Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common shares, risk-free interest rates, the expected term of the option, the expected volatility of the price of our common shares and the expected dividend yield of our common shares. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our share-based compensation expense could be materially different in the future.

Our assumptions and estimates are as follows:

 

  n  

Fair Value of Common Shares. Because our common shares are not yet publicly traded, we must estimate their fair value, as discussed in “Valuation of Common Shares” below.

 

  n  

Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes option-pricing model on the implied yield available on the long-term U.S. Treasury note rate.

 

  n  

Expected Term. The expected term is our estimate of when share-based awards are expected to be exercised. We use the simplified method to determine the expected term of options. Under this method the expected term represents the average of the vesting period and the contractual term.

 

  n  

Expected Volatility. We determine the price volatility factor based on the historical volatilities of our publicly-traded peer group as we do not have a trading history for our common shares. Industry peers consist of several public companies in the life sciences industry that are similar to us in size, stage of life cycle, and financial leverage. We did not rely on implied volatilities of traded options in our industry peers’ common shares because the volume of activity was relatively low. Following completion of the offering, we intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common shares price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

 

  n  

Expected Dividend Yield. We have never declared or paid cash dividends and based on our current expectation we do not expect to pay dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

The assumptions we used to determine the fair value of stock options granted during the periods presented are as follows, presented on a weighted-average basis:

 

 

 

     YEAR ENDED DECEMBER 31,     SIX MONTHS ENDED JUNE 30  
     2011     2012     2013     2013     2014  
                       (unaudited)  

Risk-free interest rate

     2.36     1.14     1.03     1.03     1.97

Expected term (in years)

     6.2        6.2        6.2        6.2        6.2   

Expected volatility

     70     70     70     70     74

Expected dividend yield

                                   

 

 

In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the share-based compensation expense for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors, such as historical experience with option

 

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exercises. Quarterly changes in the estimated forfeiture rate can have a significant impact on our share-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the share-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the share-based compensation expense recognized in the financial statements.

We will continue to use judgment in evaluating the assumptions related to our share-based compensation on a prospective basis. As we continue to accumulate additional data related to our common shares, we may have refinements to our estimates, which could impact our future share-based compensation expense.

Valuation of Common Shares

We are required to estimate the fair value of the common shares underlying our share-based awards when performing the fair value calculations with the Black-Scholes option-pricing model. The fair value of our common shares was determined by our board of directors, with input from management, and takes into account our most recently available valuation of common shares and our assessment of additional objective and subjective factors we believed were relevant and which may have changed between the date of the most recent valuation and the date of the grant. We believe that our audit committee, or the Committee, and our board of directors have the relevant experience and expertise to determine the fair value of our common shares.

Because there has been no public market for our common shares, the Committee and our board of directors considers numerous objective and subjective factors to determine its best estimate of the fair value of our common shares as of each grant date, including, among other thing, the following:

 

  n  

the lack of marketability of our common shares;

 

  n  

the rights of the preferred shares and the common shares in a liquidation scenario;

 

  n  

current market conditions applicable at the time of the assessment;

 

  n  

our financial condition;

 

  n  

our business performance;

 

  n  

the latest sales and issuances of our preferred shares to third parties;

 

  n  

prevailing industry trends;

 

  n  

the stage of development of our product candidates; and

 

  n  

with respect to grants made on or following January 1, 2013, valuation reports prepared by an independent third-party valuation firm.

 

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Option Grants

The following table summarizes by grant date the number of shares subject to options granted between January 1, 2013 and the date of this prospectus, the per share exercise price of the options and the fair value of common shares underlying the options on the date of grant:

 

 

 

GRANT DATE

   NUMBER OF
COMMON SHARES
UNDERLYING
OPTIONS GRANTED
     OPTION EXERCISE
PRICE (CAD$)
     OPTION EXERCISE
PRICE (U.S. $)
     FAIR VALUE PER
SHARE (U.S. $)
 

January 1, 2013

     823,400         0.55         0.55         1.07   

January 2, 2013

     1,500         0.55         0.55         1.08   

January 7, 2013

     500         0.55         0.56         1.08   

January 14, 2013

     200,000         0.55         0.56         1.08   

January 28, 2013

     3,000         0.55         0.55         1.05   

February 10, 2013

     3,000         0.55         0.55         1.06   

February 11, 2013

     5,000         0.55         0.55         1.05   

March 10, 2013

     150,000         0.55         0.54         1.03   

April 1, 2013

     750         0.55         0.54         1.98   

April 25, 2013

     20,000         0.55         0.54         1.98   

April 28, 2013

     5,000         0.55         0.54         1.98   

June 16, 2013

     2,000         0.55         0.54         1.98   

August 1, 2013

     207,000         2.01         1.94         1.94   

January 14, 2014

     764,000         2.22         2.03         2.03   

February 2, 2014

     2,000         2.22         2.00         2.00   

July 28, 2014

     18,000         2.31         2.14         2.14   

August 5, 2014

     12,500         2.31         2.11         2.11   

 

 

The exercise prices of our options are denominated in Canadian dollars. Except as indicated above, the exercise prices in the chart above have been translated to U.S. dollars at the exchange rate in effect on the applicable grant date.

The fair value determinations as of January 1, 2013 and June 30, 2013 were determined retrospectively by the Committee and our board of directors having considered and with reference to a report prepared by an independent third-party valuation firm utilizing the option pricing method, or OPM. In connection with the assessment, we performed a probability-weighted analysis of the different valuations expected for the common shares in the event that we complete an IPO as well as in the alternative. Such an analysis may be considered to be part of the Probability-Weighted Expected Return Method, or PWERM, methodology.

OPM analyzes the value of each class of security by treating it as a call option on a portion of the future value of a business. Under this method, the common shares have value only if the funds available for distribution to shareholders exceed the value of the liquidation preference at the time of a liquidity event (for example, in a merger or sale), assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the shareholders. OPM values each equity class by creating a series of call options on our equity value, with exercise prices based on the liquidation preferences, participation rights, and strike prices of derivatives. This method is generally preferred when future outcomes are difficult to predict and dissolution or liquidation is not imminent.

With respect to our determination of fair value as of January 1, 2013, our board of directors determined the fair value with reference to the valuation report, which was prepared based on a blend of the income and market approach with a two-thirds weighting for the income approach and a one-third weighting for the market approach. We considered this weighting appropriate given our stage of development as it considers our projected growth rate and financial projections while considering the enterprise value for similar public companies. In the report, the equity value was allocated using a time to sale event of three years and time to IPO of one year, using a discount rate of 33.8%, determined, in part, with reference to a company-specific risk premium accounting for the fact that we had not,

 

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among other things: (i) completed clinical trials for our product candidates, (ii) received needed regulatory approvals for commercial sale in important markets and (iii) demonstrated large-scale commercial viability of our products. The report assumed volatility of 70% based on historical trading volatility for our peer group of companies. A discount for lack of marketability, to account for the illiquidity of the common shares, was applied to the indicated common share value to determine the fair value of the shares. The discount was 35% for the sale scenario and 10% for the IPO scenario. The discount for lack of marketability was determined based on qualitative factors such as our expectation of the timing of the liquidity event under both the sale and IPO scenarios, our ability to access additional capital and the resulting dilution, and the degree of risk in the biotechnology industry. Based on these factors, our board of directors concluded that our common shares had a fair value of $1.07 (CAD$1.06) per share on January 1, 2013.

For our June 30, 2013 determination of fair value, we and our valuation firm considered a number of factors including:

 

  n  

the improving market receptivity for early-stage biotechnology companies, which caused us to consider an IPO;

 

  n  

the grant by the FDA of orphan drug designation to TV-45070;

 

  n  

our decision to exercise our license option on XEN701 and commence IND-enabling studies for this product candidate; and

 

  n  

progress towards our IPO, including engagement of investment bankers, lawyers and accountants and our initial organizational meeting.

For our June 30, 2013 valuation, we estimated enterprise value using a blend of the income and market approaches with a two-thirds weighting for the income approach and a one-third weighting for the market approach, as in our January 1, 2013 valuation. We adjusted our valuation model to increase the probability of an IPO from 30% to 50% to account for an increased probability of an IPO scenario, in light of continued favorable market conditions and the progress we achieved towards a potential initial public offering of our common shares. Additionally, we discounted the common shares using a discount rate of 24.3% and reduced the discount for lack of marketability for the IPO scenario from 10% to 5% given that we believed that we were moving close to a potential exit event through an IPO. We believe that the reduction in discount rate for lack of marketability from the valuation as at January 1, 2013 was consistent with the reduction of the risk and other qualitative factors. We reduced the expected time to IPO from 12 months to 6 months for this valuation while maintaining the expected time to sale scenario at three years. We assumed volatility remained at 70% as in the prior valuation.

Based on the revised assumptions underlying the valuation model and the changes in our business and in the market values of early-stage biotechnology companies, as well as the impact of an increasing enterprise value on the relative value of our common shares as compared to our convertible preferred shares, the Committee and our board of directors, together with management input, determined that the fair value of our common shares had increased to $1.91 (CAD$2.01) per share as of June 30, 2013. For financial reporting purposes, given the lack of company milestones in the second quarter of 2013 that would be expected to materially influence common share value, and given the fact that the concentration of IPO preparation activities and market receptivity improvement occurred in the second quarter of 2013, we conservatively applied this $1.91 (CAD$2.01) value for computation of stock-based compensation expense to our option grants between April 1, 2013 and June 30, 2013. In connection with the stock option grant on August 1, 2013, our board of directors determined that there had been no material change to the fair value of our common shares as of such date.

There were no option grants from August 2, 2013 to December 31, 2013.

For our December 31, 2013 determination of fair value, we and our valuation firm considered a number of factors including:

 

  n  

the general market receptivity for early-stage biotechnology companies;

 

  n  

Teva filing an IND with the FDA for the commencement of Phase 2b study for OA;

 

  n  

Genentech advancing GDC-0276 into IND-enabling studies;

 

  n  

a decision to discontinue the development of XEN701; and

 

  n  

progress towards our IPO.

 

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For our December 31, 2013 valuation, we estimated enterprise value using a blend of the income and market approaches. The probability of an IPO increased from 50% to 60% from the June 30, 2013 valuation. We discounted the common shares using a discount rate of 25.7% and increased the discount for lack of marketability for the IPO scenario from 5% to 10%, given that we had increased the expected time to IPO from six months to nine months from the valuation date and feedback from our advisors that IPO market conditions were not as strong as earlier in the year. We assumed volatility remained at 70% as in the prior valuation. The expected time to sale scenario remained at three years.

Based on the revised assumptions underlying the valuation model and the changes in our business and in the market values of early-stage biotechnology companies, the Committee and our board of directors, together with management input, determined that the fair value of our common shares was equal to $2.09 (CAD$2.22) per share as of December 31, 2013. We applied this $2.09 (CAD$2.22) value for computation of stock-based compensation expense to our option grants between December 31, 2013 and February 2, 2014, as our board of directors determined that there had been no material change to the fair value of our common shares between December 31, 2013 and the dates of the option grants.

There were no option grants from February 3, 2014 to June 30, 2014.

For our June 30, 2014 determination of fair value, we and our valuation firm considered a number of factors including:

 

  n  

the general market receptivity for early-stage biotechnology companies and the IPO market in general;

 

  n  

Teva commencing the Phase 2b study for OA;

 

  n  

Genentech advancing GDC-0276 towards an IND filing; and

 

  n  

progress towards our IPO.

For our June 30, 2014 valuation, we estimated enterprise value using a blend of the income and market approaches. The probability of an IPO remained unchanged from the December 30, 2013 valuation at 60%. We discounted the common shares using a discount rate of 19.4% and decreased the discount for lack of marketability for the IPO scenario from 10% to 5%, given that we had decreased the expected time to IPO from nine months to five months from the valuation date. We assumed volatility remained at 70% as in the prior valuation. The expected time to sale scenario remained at three years.

Based on the revised assumptions underlying the valuation model and the changes in our business and in the market values of early-stage biotechnology companies, the Committee and our board of directors, together with management input, determined that the fair value of our common shares was equal to $2.17 (CAD$2.31) per share as of June 30, 2014.

Based on the assumed initial public offering price of $         per common share (the midpoint of the price range set forth on the cover page of this prospectus), the aggregate intrinsic value of stock options outstanding as of June 30, 2014 was $         million, of which $         million relate to vested options and $         million to unvested options.

The following table summarizes the share-based compensation expense recorded for the periods shown (in thousands):

 

 

 

     YEAR ENDED DECEMBER 31,      SIX MONTHS ENDED JUNE 30  
         2011              2012              2013              2013              2014      
                          (unaudited)  

Research and development

   $ 145       $ 112       $ 147       $ 70       $ 96   

General and administrative

     290         294         428         203         277   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 435       $ 406       $ 575       $ 273       $ 373   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

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Results of Operations

Comparison of Six Months Ended June 30, 2013 and 2014

The following table summarizes the results of our operations for the six months ended June 30, 2013 and 2014, together with changes in those items (in thousands):

 

 

 

     SIX MONTHS ENDED JUNE 30,     CHANGE
2013 VS. 2014
INCREASE/(DECREASE)
 
             2013                     2014            
     (unaudited)        

Collaboration revenue

   $ 10,985      $ 10,297      $ (688

Royalties

            2        2   

Research and development expenses

     6,983        5,099        (1,884

General and administrative expenses

     2,828        2,790        (38

Other:

      

Interest income

     76        278        202   

Interest (expense)

     (41            41   

Foreign exchange gain (loss)

     1,920        (85     (2,005

Gain (loss) on write-off and disposal of assets

     11               (11
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 3,140      $ 2,603      $ (537
  

 

 

   

 

 

   

 

 

 

 

 

Revenue

We recognized revenue of $10.3 million for the six months ended June 30, 2014 compared to $11.0 million for the six months ended June 30, 2013, a decrease of $0.7 million. The decrease was primarily attributable to a $0.6 million decrease resulting from the change in the foreign exchange rate between the U.S. and Canadian dollar, a $0.2 million decrease in research funding from Genome BC as the agreement with Genome BC expired in late 2013 and a $0.1 million decrease in FTE funding from Teva. This was partially offset by the recognition of $0.2 million of the upfront payment received from Genentech for the pain genetics collaboration entered into in March 2014.

Research and Development Expenses

The following table summarizes our research and development expenses for the six months ended June 30, 2013 and 2014, together with changes in those items (in thousands):

 

 

 

     SIX MONTHS ENDED JUNE 30,      CHANGE
2013 VS. 2014
INCREASE/(DECREASE)
 
             2013                      2014             
     (unaudited)         

Teva collaboration (TV-45070) expenses

   $ 482       $ 534       $ 52   

Genentech collaboration (GDC-0276 and Genetics) expenses

     2,358         2,571         213   

Other collaboration expenses

     89                 (89

Preclinical and discovery program expenses

     4,054         1,994         (2,060
  

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 6,983       $ 5,099       $ (1,884
  

 

 

    

 

 

    

 

 

 

 

 

Research and development expenses were $5.1 million for the six months ended June 30, 2014 as compared to $7.0 million for the six months ended June 30, 2013. The decrease of $1.9 million was primarily attributable to a $2.1 million decrease in preclinical and discovery program expenses consisting of a decrease of $3.0 million for XEN701 which was discontinued in late 2013, partially offset by an increase in spending of $0.9 million for our other early stage research programs. This decrease was partially offset by Genentech collaboration expenses which increased by $0.2 million primarily resulting from costs incurred for the pain genetics collaboration entered into in March 2014.

 

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General and Administrative Expenses

The following table summarizes our general and administrative expenses for the six months ended June 30, 2013 and 2014, together with changes in those items (in thousands):

 

 

 

     SIX MONTHS ENDED JUNE 30,      CHANGE
2013 VS. 2014
INCREASE/(DECREASE)
 
             2013                      2014             
     (unaudited)         

General and administrative expenses

   $ 2,828       $ 2,790       $ (38

 

 

General and administrative expenses were $2.8 million for both the six months ended June 30, 2014 and the six months ended June 30, 2013.

Other Income (Expense)

The following table summarizes our other income (expense) for the six months ended June 30, 2013 and 2014, together with changes in those items (in thousands):

 

 

 

     SIX MONTHS ENDED JUNE 30,      CHANGE
2013 VS. 2014
INCREASE/(DECREASE)
 
         2013              2014         
     (unaudited)         

Other income (expense):

   $ 1,966       $ 193       $ (1,773

 

 

Interest income was $0.3 million for the six months ended June 30, 2014 as compared to $0.1 million for the six months ended June 30, 2013, an increase of $0.2 million. This increase was primarily attributable to an increase in interest rates and balances of savings accounts.

We recognized a foreign exchange loss of $0.1 million for the six months ended June 30, 2014 as compared to a foreign exchange gain of $1.9 million for the six months ended June 30, 2013. The foreign exchange gain in 2013 was due to the increased Canadian dollar to U.S. dollar exchange rate.

Comparison of Years Ended December 31, 2012 and 2013

The following table summarizes the results of our operations for the years ended December 31, 2012 and 2013 together with changes in those items (in thousands):

 

 

 

     YEAR ENDED DECEMBER 31,     CHANGE
2012 VS. 2013
INCREASE/(DECREASE)
 
         2012             2013        

Collaboration revenue

   $ 14,300      $ 27,352      $ 13,052   

Royalties

     8        4        (4

Research and development expenses

     10,455        12,302        1,848   

General and administrative expenses

     7,006        5,341        1,665   

Other:

      

Interest income

     144        338        194   

Interest (expense)

     (93     (64     29   

Foreign exchange gain (loss)

     (169     2,035        2,204   

Gain (loss) on write-off and disposal of assets

     (1,030     11        1,041   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (4,301   $ 12,032      $ 16,333   
  

 

 

   

 

 

   

 

 

 

 

 

 

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Revenue

We recognized revenue of $27.4 million for the year ended December 31, 2013 compared to $14.3 million for the year ended December 31, 2012, an increase of $13.1 million. The increase was primarily attributable to the recognition of $12.8 million of the upfront payment and research funding from Teva, a $5.1 million milestone payment received from Genentech, $1.0 million in additional FTE funding we received from Genentech, and $0.3 million in non-royalty compensation (related to a payment) from uniQure. This was offset by a $0.5 million decrease in research funding from Genome BC and $5.6 million decrease in revenue from Merck for an option fee, recognition of an upfront payment, and FTE funding related to the research agreement that ended in December 2012.

Research and Development Expenses

The following table summarizes research and development expenses for the years ended December 31, 2012 and 2013 together with changes in those items (in thousands):

 

 

 

     YEAR ENDED DECEMBER 31,      CHANGE
2012 VS. 2013
INCREASE/(DECREASE)
 
         2012              2013         

Teva collaboration (TV-45070) expenses

   $ 1,951       $ 1,005       $ (946

Genentech collaboration (GDC-0276) expenses

     3,652         5,072         1,420   

Other collaboration expenses

     1,717         133         (1,584

Preclinical and discovery program expenses

     3,135         6,093         2,958   
  

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 10,455       $ 12,303       $ 1,848   
  

 

 

    

 

 

    

 

 

 

 

 

Research and development expenses were $12.3 million for the year ended December 31, 2013 as compared to $10.5 million for the year ended December 31, 2012. The increase of $1.8 million was primarily attributable to a $3.0 million increase in preclinical and discovery program expenses consisting of a $1.5 million increase in spending for XEN701 and a $1.5 million increase in spending for our other early stage research programs. There was also a $1.4 million increase in Genentech collaboration expenses due to an increase in the number of FTEs dedicated to this collaboration. The increases were offset in part by a $1.6 million decrease in other collaboration expenses primarily due to the Merck collaborative research program ending in December 2012 and a $0.9 million decrease in spending for TV-45070 related to Teva’s assumption of the development costs of that product candidate as of January 1, 2013.

General and Administrative Expenses

The following table summarizes general and administrative expenses for the years ended December 31, 2012 and 2013 together with changes in those items (in thousands):

 

 

 

     YEAR ENDED DECEMBER 31,      CHANGE
2012 VS. 2013
INCREASE/(DECREASE)
 
         2012              2013         

General and administrative expenses

   $ 7,006       $ 5,341       $ (1,665

 

 

General and administrative expenses were $5.3 million for the year ended December 31, 2013 compared to $7.0 million for the year ended December 31, 2012. This decrease was primarily due to a reduction in intellectual property expenses, the majority of which have been assumed by our collaborators.

 

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Other Income (Expense)

The following table summarizes our other income (expense) for the years ended December 31, 2012 and 2013 together with changes in those items (in thousands):

 

 

 

     YEAR ENDED DECEMBER 31,      CHANGE
2012 VS. 2013
INCREASE/(DECREASE)
 
         2012             2013         

Other income (expense):

   $ (1,148   $ 2,320       $ 3,468   

 

 

Interest income was $0.3 million for the year ended December 31, 2013 as compared to $0.1 million for the year ended December 31, 2012, an increase of $0.2 million. The increase was primarily attributable to our increased cash and investment balances from our receipt of $41.0 million in December 2012 from Teva.

We recognized a foreign exchange gain of $2.0 million for the year ended December 31, 2013 as compared to a foreign exchange loss of $0.2 million for the year ended December 31, 2012. The foreign exchange gain in 2013 was due to the increased Canadian dollar to U.S. dollar exchange rate.

We wrote-off leasehold improvements with a net book value of $1.0 million for the year ended December 31, 2012 in connection with a lease extension and modification agreement made effective April 1, 2012. No such item was recorded in the year ended December 31, 2013.

Comparison of Years Ended December 31, 2011 and 2012

The following table summarizes the results of our operations for the years ended December 31, 2011 and 2012 together with changes in those items (in thousands):

 

 

 

     YEAR ENDED DECEMBER 31,     CHANGE
2011 VS. 2012
INCREASE/(DECREASE)
 
             2011                     2012            

Collaboration revenue

   $ 6,915      $ 14,300      $ 7,385   

Royalties

     3        8        5   

Research and development expenses

     12,302        10,455        (1,847

General and administrative expenses

     6,730        7,006        276   

Other:

      

Interest income

     153        144        (9

Interest (expense)

     (91     (93     (2

Foreign exchange gain (loss)

     60        (169     (229

Gain (loss) on write-off and disposal of assets

            (1,030     (1,030
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (11,992   $ (4,301   $ 7,691   
  

 

 

   

 

 

   

 

 

 

 

 

Revenue

We recognized revenue of $14.3 million for the year ended December 31, 2012 as compared to $6.9 million for the year ended December 31, 2011, an increase of $7.4 million. The increase during 2012 was primarily due to an upfront payment and research funding pursuant to our collaboration agreement with Genentech.

 

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Research and Development Expenses

The following table summarizes research and development expenses for the years ended December 31, 2011 and 2012 together with changes in those items (in thousands):

 

 

 

     YEAR ENDED DECEMBER 31,      CHANGE
2011 VS. 2012
INCREASE/(DECREASE)
 
             2011                      2012             

Teva collaboration (TV-45070) expenses

   $ 2,455       $ 1,951       $ (504

Genentech collaboration (GDC-0276) expenses

     3,794         3,652         (142

Other collaboration expenses

     3,301         1,717         (1,584

Preclinical and discovery program expenses

     2,752         3,135         383   
  

 

 

    

 

 

    

 

 

 

Total research and development expenses

   $ 12,302       $ 10,455       $ (1,847
  

 

 

    

 

 

    

 

 

 

 

 

Research and development expenses were $10.5 million for the year ended December 31, 2012 compared to $12.3 million for the year ended December 31, 2011. The decrease was primarily due to a $1.6 million decrease in other collaboration expenses related to the Genome BC and Merck collaborations which ended in December 2011 and 2012, respectively. There was also a $0.5 million decrease for TV-45070 related to Teva’s assumption of the development costs of that product candidate as of January 1, 2013.

General and Administrative Expenses

The following table summarizes general and administrative expenses for the years ended December 31, 2011 and 2012 together with changes in those items (in thousands):

 

 

 

     YEAR ENDED DECEMBER 31,      CHANGE
2011 VS. 2012
INCREASE/(DECREASE)
 
         2011              2012         

General and administrative expenses

   $ 6,730       $ 7,006       $ 276   

 

 

General and administrative expenses were $7.0 million for the year ended December 31, 2012 compared to $6.7 million for the year ended December 31, 2011, an increase of $0.3 million. The increase was primarily due to an increase in intellectual property expenses associated with our discovery and development programs.

Other Income (Expense)

The following table summarizes our other income (expense) for the years ended December 31, 2011 and 2012 together with changes in those items (in thousands):

 

 

 

     YEAR ENDED
DECEMBER 31,
    CHANGE
2011 VS. 2012
INCREASE/(DECREASE)
 
         2011              2012        

Other income (expense):

   $ 122       $ (1,148   $ (1,270

 

 

Interest income for the year ended December 31, 2012 was comparable to interest income for the year ended December 31, 2011 due to similar levels of cash and investment balances for both years.

Interest expense for the year ended December 31, 2012 was comparable to interest expense for the year ended December 31, 2011 due to the similar amount of principal of the note payable to our collaborator, Isis, pursuant to our agreement with them.

We recognized a foreign exchange loss of $0.2 million for the year ended December 31, 2012 compared to a foreign exchange gain of $0.1 million for the year ended December 31, 2011 due to unfavorable exchange rate fluctuation.

 

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We wrote-off leasehold improvements with a net book value of $1.0 million during the year ended December 31, 2012 in connection with a lease extension and modification agreement made effective April 1, 2012. No such item was recorded in the year ended December 31, 2011.

Liquidity and Capital Resources

To date, we have financed our operations primarily through funding received from collaboration and license agreements and private placements of our common and preferred shares, as well as through the receipt of government funding. Through June 30, 2014, we have received an aggregate of approximately $265.2 million to fund our operations, of which approximately $145.7 million was non-equity funding pursuant to collaboration and license agreements, approximately $17.0 million was pursuant to government funding, and approximately $102.5 million was pursuant to the sale of our preferred shares. As of June 30, 2014, we had cash, cash equivalents and marketable securities of $44.7 million.

We have incurred significant operating losses since inception. Our net loss was $12.0 million and $4.3 million for the years ended December 31, 2011 and 2012, respectively. Although we had $12.0 million in net income for the year ended December 31, 2013, and $2.6 million in net income for the six months ended June 30, 2014, we had an accumulated deficit of $114.1 million from inception through June 30, 2014. 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 continue to incur significant expenses and operating losses for the foreseeable future as we continue our research and preclinical and clinical development of our product candidates; expand the scope of our current clinical studies for our product candidates; initiate additional preclinical, clinical or other studies for our product candidates, including under our collaboration agreements; change or add additional manufacturers or suppliers; 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 agreements including, without limitation, our agreements with UBC and the Memorial University of Newfoundland, or MUN; maintain, protect and expand our intellectual property portfolio; attract and retain skilled personnel; establish a sales, marketing and distribution infrastructure to commercialize any products for which we or one of our collaborators may obtain marketing approval, and maintain commercial rights; create additional infrastructure to support our operations as a public company and our product development and planned future commercialization efforts; and experience any delays or encounter issues with any of the above.

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. Except for any obligations of our collaborators to reimburse us for research and development expenses or to make milestone payments under our agreements with them, upon completion of this offering, we will not have any committed external sources of capital. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common shareholders. If we raise additional funds through collaboration agreements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

 

  n  

whether our existing collaborations continue to generate research funding, milestone payments and royalties to us;

 

  n  

the number and stage of development of future product candidates that we choose to pursue;

 

  n  

the scope, progress, results and costs of research and development of our future product candidates independently, and conducting preclinical research and clinical studies;

 

  n  

the timing and costs involved in obtaining regulatory approvals for any future product candidates we develop independently;

 

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  n  

the cost associated with exercising our co-promotion option for TV-45070 in the U.S., should the opportunity arise and we choose to do so;

 

  n  

the cost of commercialization activities, if any, of any future product candidates we develop independently that are approved for sale, including marketing, sales and distribution costs;

 

  n  

the cost of manufacturing our future product candidates and any products we successfully commercialize independently;

 

  n  

our ability to maintain existing collaborations and to establish new collaborations, licensing or other arrangements and the financial terms of such arrangements;

 

  n  

the costs of preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome of such litigation; and

 

  n  

the timing, receipt and amount of sales, or royalties on Glybera, TV-45070, GDC-0276 and our future product candidates, if any.

 

Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that the net proceeds from this offering, together with our existing cash, cash equivalents and marketable securities as of the date of this prospectus and research funding that we expect to receive under our existing collaborations, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 to 24 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.

Cash Flows

The following table shows a summary of our cash flows for the years ended December 31, 2011, 2012 and 2013 and for the six months ended June 30, 2013 and 2014 (in thousands):

 

 

 

    YEAR ENDED DECEMBER 31,     SIX MONTHS ENDED JUNE 30,  
          2011                 2012                 2013                 2013                 2014        
                      (unaudited)  

Net cash provided by (used in) operating activities

  $ (13,689   $ 45,573      $ (3,322   $ (5,614   $ (3,067

Net cash provided by (used in) investing activities

    13,889        491        (11,472     (68     1,125   

Net cash provided by (used in) financing activities

    2               (4,391     (1,697     (726