Xenon Pharmaceuticals Inc. (XENE)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis together with our consolidated financial statements and notes included elsewhere in this Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption Part I, Item 1A — “Risk Factors.” Throughout this discussion, unless the context specifies or implies otherwise, the terms “Xenon,” “we,” “us,” and “our” refer to Xenon Pharmaceuticals Inc. and its subsidiary.

Overview

We are a neuroscience-focused biopharmaceutical company dedicated to discovering, developing, and delivering life-changing therapeutics. We are advancing an ion channel product portfolio to address areas of high unmet medical need, including epilepsy and depression.

Azetukalner Clinical Development

Azetukalner, a novel, highly potent, selective Kv7 potassium channel opener, represents the most advanced, clinically validated potassium channel modulator in late-stage clinical development for the treatment of multiple indications that include epilepsy, including focal onset seizures, or FOS, and primary generalized tonic-clonic seizures, or PGTCS, as well as neuropsychiatric disorders including major depressive disorder, or MDD and bipolar depression, or BPD.

Epilepsy Programs

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Phase 3 X-TOLE2/3 azetukalner clinical studies in FOS continue to advance, with the first topline data readout anticipated in the second half of 2025.

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Phase 3 X-ACKT clinical study continues to enroll patients and is intended to support potential regulatory submissions in an additional epilepsy indication of PGTCS.

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Building upon more than 700+ patient-years of data to date from the ongoing X-TOLE open-label extension, or OLE, study, we continue to generate long-term scientific evidence supporting azetukalner’s compelling efficacy and safety profile, with approximately one in three patients on drug for at least 36 months achieving seizure freedom for a period of one year or longer.

Neuropsychiatric Program

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X-NOVA2, the first of three planned Phase 3 clinical trials evaluating azetukalner in patients with MDD is currently enrolling patients, and X-NOVA3 is expected to initiate mid-year.

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We recently announced plans for a Phase 3 BPD program with initiation of the first of two azetukalner clinical studies in bipolar I and bipolar II depression expected by mid-year. Initiation of this program is based on a strong scientific rationale – supported by promising clinical data with azetukalner and the Kv7 mechanism in MDD and preclinical research examining the genetic links between BPD and Kv7 and evidence of Kv7 downregulation in BPD – as well as a large unmet medical need.

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Patient enrollment in the investigator-sponsored Phase 2 proof-of-concept study of azetukalner in MDD led by Icahn School of Medicine at Mount Sinai is complete, and topline results are anticipated in the first half of 2025.

Early-Stage Pipeline: Next Generation Ion Channel Modulators

We continue to expand our portfolio by leveraging our extensive expertise to discover and develop potassium and sodium channel therapeutics, with the goal of filing multiple INDs, or equivalent, in 2025.

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IND-enabling work is underway with multiple Kv7 development candidates. Kv7 may have utility in a broad range of therapeutic indications including seizures, pain, and neuropsychiatric disorders, such as MDD and BPD.

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IND-enabling work is underway with a lead Nav1.7 development candidate. Nav1.7 is an important pain-related target, based on strong human genetic validation, that may represent a new class of medicines without the limitations of opioids.

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We expect a lead candidate within our Nav1.1 program will enter IND-enabling studies in 2025. Pre-clinical data suggests that targeting Nav1.1 could potentially address the underlying cause and symptoms of Dravet Syndrome

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Partnered Program

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As part of our ongoing collaboration with Neurocrine Biosciences to develop treatments for epilepsy, NBI-921355, a Nav1.2 and Nav1.6 sodium channel inhibitor in development for the potential treatment for certain types of epilepsy, has progressed into a Phase 1 clinical study in healthy adult participants, triggering an anticipated $7.5 million milestone payment to Xenon.

We have funded our operations primarily through the sale of equity securities, funding received from our licensees and collaborators, and debt financing. We did not recognize any revenue in the years ended December 31, 2024 and 2023, as compared to revenue from collaboration agreements of $9.4 million for the year ended December 31, 2022. To date, we have not had any products approved for sale and have not generated any revenue from product sales. We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for a product candidate, which we expect will take a number of years, if ever, and the outcome of which is subject to significant uncertainty.

We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We have incurred net losses in each year since inception and expect to continue to incur net losses for the foreseeable future. Our net losses were $234.3 million, $182.4 million, and $125.4 million for the years ended December 31, 2024, 2023, and 2022, respectively. As of December 31, 2024, we had an accumulated deficit of $899.5 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We anticipate that our operating expenses will increase substantially, particularly as we:

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prepare for the potential commercial launch of azetukalner;

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invest significantly to further develop azetukalner for our current and future indications;

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advance additional product candidates into pre-clinical and clinical development;

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

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require the manufacture of larger quantities of our product candidates for clinical development and potential commercialization;

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hire additional commercial, clinical, scientific, management and administrative personnel;

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acquire or in-license other assets and technologies;

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maintain, protect and expand our intellectual property portfolio; and

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create additional infrastructure to support our operations and any future commercialization efforts.

Financial Operations Overview

Revenue

To date, our revenue has been primarily derived from collaboration and licensing agreements and we have not generated any revenue from product sales. If our development efforts for our product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.

We may also generate revenue in the future from payments as a result of license or collaboration agreements for any of our product candidates or intellectual property, such as our license and collaboration agreement with Neurocrine Biosciences, or the Neurocrine Collaboration, described in “Business — Collaborations, Commercial and License Agreements” and “Note 10” of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We cannot provide assurance as to the timing of future milestone or royalty payments under the Neurocrine Collaboration, or that we will receive any of these payments at all.

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The following table is a summary of revenue recognized for the years ended December 31, 2024, 2023 and 2022 (in thousands):

Pursuant to the terms of the Neurocrine Collaboration, we received an upfront cash payment of $30.0 million and a $20.0 million equity investment in our common shares in December 2019. The overall transaction price of the arrangement was measured and allocated to certain performance obligations and revenue was recognized as those performance obligations were completed. In January 2022, based on the U.S. Food and Drug Administration’s (“FDA”) approval to expand the SCN8A-DEE study population to include subjects aged between 2 and 11 years, we received an aggregate milestone payment of $15.0 million in the form of $6.75 million cash and $8.25 million equity investment in our common shares. The equity investment was measured at fair value on the date of issuance and the resulting premium with the cash payment, was recognized as revenue. Research and development services were recognized as revenue at fair market value as the services were rendered. The research collaboration was completed in June 2022.

Operating Expenses

The following table summarizes our operating expenses for the years ended December 31, 2024, 2023 and 2022 (in thousands):

Research and Development Expenses

Research and development expenses represent costs incurred to conduct development of our proprietary product candidates and our drug discovery efforts, including any acquired or in-licensed product candidates or technology, and costs to support any partnered product candidates.

Research and development expenses consist of costs incurred in performing research and development activities, including:

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personnel-related expenses, consisting of salaries, benefits and stock-based compensation for employees engaged in scientific research and development;

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third-party expenses incurred in connection with the pre-clinical and clinical development of our product candidates, including under agreements with CROs;

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third-party expenses relating to formulation, process development and manufacture of drug substance and drug product for use in our pre-clinical testing, clinical trials and potential commercial supply;

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third-party acquisition, license and collaboration fees;

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laboratory consumables; and

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certain indirect costs incurred in support of overall research and development activities, including facilities, depreciation and information technology costs.

Project-specific expenses reflect costs directly attributable to our clinical development candidates for which we have incurred significant expenses. All remaining research and development expenses are reflected in pre-clinical, discovery and other program expenses. At any given time, we have several active early-stage research and drug discovery programs. Our personnel and infrastructure are typically deployed over multiple projects and are not directly linked to any individual internal early-stage research or drug discovery program. Therefore, we do not maintain financial information for our internal early-stage research and internal drug discovery programs on a project-specific basis.

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We expense all research and development costs as incurred. Payments we make for research and development services prior to the services being rendered are recorded as prepaid assets in our consolidated balance sheets and are expensed as the services are provided. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and third-party service providers.

We expect that our research and development expenses will increase substantially in the future as we continue to invest in research and development activities related to developing our product candidates, including investments in manufacturing, as our programs advance into later stages of development and we continue to conduct clinical trials, advance our internal drug discovery programs into pre-clinical development and continue our early-stage research. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size, scope and duration of later-stage clinical trials.

Clinical development timelines, likelihood of regulatory approval, and commercialization and associated costs are uncertain, difficult to estimate, and can vary significantly. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we cannot accurately estimate or know the nature, timing and costs that will be necessary to complete the pre-clinical and clinical development for any of our product candidates or when and to what extent we may generate revenue from the commercialization and sale of any of our product candidates or achieve profitability.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related expenses, consisting of salaries, benefits and stock-based compensation for our employees engaged in executive, finance, legal, business development, commercial and administrative functions, insurance costs, professional fees for auditing, tax and legal services, costs related to maintenance and filing of intellectual property, costs incurred as we prepare for commercialization, and allocated facility-related and information technology costs not otherwise included in research and development expenses.

We expect that general and administrative expenses will increase in the future as we expand our operating activities to support our continued research activities and development of our product candidates, and as we prepare for commercialization. We will also continue to incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.

Other Income (Expense)

Interest income. Interest income consists of income earned on our cash and investment balances. We anticipate that our interest income will continue to fluctuate depending on our cash and investment balances and interest rates.

Unrealized fair value gain (loss) on trading securities. Trading securities are recorded at fair value. Unrealized fair value gain (loss) on trading securities is related to changes in market pricing on the investments classified as trading securities during the period.

Foreign exchange gain (loss). Net foreign exchange gain (loss) consists of gains and losses from the impact of foreign exchange fluctuations on our monetary assets and liabilities that are denominated in currencies other than the U.S. dollar (principally the Canadian dollar). We will continue to incur substantial expenses in Canadian dollars and will remain subject to risks associated with foreign currency fluctuations.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the United States, or GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the revenue and expenses incurred during the reported periods. We base estimates on our historical experience, known trends and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The items in our financial statements requiring significant estimates and judgments are as follows:

Revenue recognition:

Revenue recognition is a critical accounting estimate due to the magnitude and nature of the revenues we receive.

Our primary sources of revenue are derived from non-refundable upfront payments, funding for research and development services, milestone payments, and royalties under license and collaboration agreements.

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In contracts where we have more than one performance obligation to provide our customer with goods or services, each performance obligation is evaluated to determine whether it is distinct. The consideration under the contract is then allocated between the distinct performance obligations based on their respective relative standalone selling prices. The estimated standalone selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold on a standalone basis and is determined by reference to market rates for the good or service when sold to others or by using an adjusted market assessment approach if selling price on a standalone basis is not available.

The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred to our customer for the related goods or services. We generally recognize revenue from non-refundable upfront payments over the estimated term of the performance obligation or period in which the underlying benefit is transferred to our customer. If non-refundable license fees have value to the customer on a standalone basis, separate from the undelivered performance obligations, they are recognized upon delivery. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. Consideration in exchange for research and development services performed by us on behalf of the licensee is recognized upon performance of such activities at rates consistent with prevailing market rates. Consideration associated with at-risk substantive performance milestones, including sales-based milestones, is recognized as revenue using the most likely amount method when it is probable that a significant reversal of the cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such milestones, and if necessary, adjust the estimate of the overall transaction price. Sales-based royalties received in connection with licenses of intellectual property are subject to a specific exception in the revenue standards, whereby the consideration is not included in the transaction price and recognized in revenue until the customer’s subsequent sales or usages occur.

Research and development costs:

Research and development costs is a critical accounting policy due to the magnitude of the costs and the requirement to estimate the proportionate performance of vendors to calculate third-party accrued and prepaid research and development expenses.

We accrue for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of pre-clinical studies and clinical trials, and manufacturing activities. Third-party service providers generally provide estimates of proportionate performance to allow us to determine an appropriate accrual. When determining the adequacy of an accrual, we analyze progress based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered. Our historical prepaid and accrual estimates have not been materially different from the actual costs.

Stock-based compensation:

Stock-based compensation is a critical accounting estimate due to the magnitude of and the many assumptions that are required to calculate stock-based compensation expense.

We grant stock options to employees, consultants, directors and officers pursuant to our equity incentive plans. Compensation expense is recorded using the fair value method. We calculate the fair value of stock options using the Black-Scholes option-pricing model which requires that certain assumptions, including the expected life of the option and expected volatility of the stock, be estimated at the time that the options are granted. The expected volatility is based on the historical volatility of our common shares calculated based on a period of time commensurate with the expected term assumption. The expected term of our stock options has been determined utilizing our available historical data and we recognize forfeitures as they occur. We amortize the fair value of stock options using the straight-line method over the vesting period of the options.

We also grant performance share unit awards (“PSUs”) to certain employees and officers pursuant to our equity incentive plans. The grant date fair value of PSUs is determined based on the closing market price of our common shares. Compensation expense is recognized if the performance condition is considered probable of achievement using our best estimates and is amortized on a straight-line basis over the requisite service period of each separately vesting tranche of the award. Forfeitures are accounted for in the period they occur.

Changes in any of these assumptions may materially affect the fair value of awards granted and the amount of stock-based compensation expense recognized.

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Results of Operations

Comparison of Years Ended December 31, 2024, 2023 and 2022

The following table summarizes the results of our operations for the years ended December 31, 2024, 2023 and 2022 together with changes in those items (in thousands):

Revenue

We did not recognize any revenue in the years ended December 31, 2024 and 2023, as compared to revenue of $9.4 million for 2022. Revenue recognized in 2022 was related to the Neurocrine Collaboration, including $0.4 million of the overall transaction price, $1.9 million in research and development services, and a $7.1 million milestone.

Research and Development Expenses

The following table summarizes research and development expenses for the years ended December 31, 2024, 2023 and 2022 together with changes in those items (in thousands):

Research and development expenses increased by $42.9 million for the year ended December 31, 2024 as compared to 2023. Direct external costs related to azetukalner increased by $17.5 million primarily due to our ongoing Phase 3 epilepsy clinical trials and the initiation of our first Phase 3 MDD clinical trial, manufacturing activities to support current and future clinical trials as well as our potential NDA submission, partially offset by a decrease in costs for our Phase 2 MDD clinical trial which completed in late 2023. The decrease in direct external costs related to XEN496 of $5.2 million is due to our decision in May 2023 to no longer pursue the clinical development of XEN496. Pre-clinical and discovery program costs increased by $6.0 million due to the advancement of multiple potential drug candidates targeting Kv7, Nav1.7 and Nav1.1. Personnel-related costs increased by $22.9 million driven by an increase in headcount to support late-stage development and an increase in stock-based compensation expense due to an increase in the number of options granted at a higher fair value.

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Research and development expenses increased by $61.7 million for the year ended December 31, 2023 as compared to 2022. Direct external costs related to azetukalner increased by $51.9 million primarily due to ongoing site initiation and patient enrollment in our Phase 3 epilepsy clinical trials, increase in manufacturing activities to support current and future clinical trials and a potential NDA submission, as well as the completion of our Phase 2 MDD clinical trial. The decrease in direct external costs related to XEN496 of $9.6 million is due to our decision in May 2023 to no longer pursue the clinical development of XEN496. Personnel-related costs increased by $14.3 million driven by an increase in headcount to support late-stage development and an increase in stock-based compensation expense due to an increase in the number of options granted at a higher fair value.

General and Administrative Expenses

The following table summarizes general and administrative expenses for the years ended December 31, 2024, 2023 and 2022 together with changes in those items (in thousands):

General and administrative expenses increased by $22.4 million for the year ended December 31, 2024 as compared to 2023. Personnel-related costs increased by $16.1 million primarily due to higher headcount to support our expanding research and development activities and future potential commercialization as well as an increase in stock-based compensation expense due to an increase in the number of options granted at a higher fair value. Professional and consulting fees increased by $5.4 million primarily associated with legal services in support of our ongoing business operations and pre-commercial activities.

General and administrative expenses increased by $13.7 million for the year ended December 31, 2023 as compared to 2022. Personnel-related costs increased by $9.4 million primarily due to higher headcount to support our expanding research and development activities as well as an increase in stock-based compensation expense due to an increase in the number of options granted at a higher fair value. Professional and consulting fees increased by $3.6 million primarily associated with legal services in support of our ongoing business operations and market research activities.

Other Income

The following table summarizes our other income for the years ended December 31, 2024, 2023 and 2022 together with changes in those items (in thousands):

Other income increased by $9.5 million for the year ended December 31, 2024 as compared to 2023. Interest income increased by $14.3 million driven by a higher average balance of marketable securities and higher average market yields on investments. The unrealized fair value gain on trading securities decreased by $3.6 million due to the fact that we did not hold any marketable securities classified as trading in 2024.

Other income increased by $27.5 million for the year ended December 31, 2023 as compared to 2022. Interest income increased by $18.9 million driven by a higher balance of marketable securities and an increase in market yields on investments. The unrealized fair value gain on trading securities increased by $6.5 million due to changes in market yields on trading securities, partially offset by a lower balance of trading securities.

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Liquidity and Capital Resources

Sources of Liquidity

To date, we have financed our operations primarily through the sale of equity securities, funding received from collaboration and license agreements, and debt financing. Since our initial public offering through December 31, 2024, we have raised aggregate net cash proceeds of more than $1.4 billion primarily from the issuance of equity securities. As of December 31, 2024, we had cash and cash equivalents and marketable securities of $754.4 million.

Except for any obligations of our collaborators to make milestone payments under our agreements with them, we do not have any committed external sources of capital. Until such time as we can generate substantial product revenue, if ever, we expect to finance our cash needs through a combination of collaboration agreements and equity or debt financings.

We entered into an “at-the-market” equity offering sales agreement in August 2020, amended as of March 2022, with Jefferies LLC and Stifel, Nicolaus & Company, Incorporated, or the ATM Program, and a new prospectus supplement was filed with the SEC on August 9, 2024, pursuant to which we refreshed the ATM Program and may sell common shares having gross proceeds of up to $350.0 million, from time to time. As of December 31, 2024, an aggregate of 310,000 common shares have been sold for proceeds of $12.1 million, net of commissions and transaction expenses.

Funding Requirements

We have incurred significant operating losses since inception. As of December 31, 2024, we had an accumulated deficit of $899.5 million. We expect to continue to incur significant expenses in excess of our revenue and expect to incur operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect to incur significant expenses and increasing operating losses for the foreseeable future as we prepare for the potential commercial launch of azetukalner; invest significantly to further develop azetukalner for our current and future indications; advance additional product candidates into pre-clinical and clinical development; seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical studies; manufacture larger quantities of our product candidates of clinical development and potential commercialization; hire additional commercial, clinical, scientific, management and administrative personnel; acquire or in-license other product candidates and technologies; make milestone or other payments under our in-license or other agreements, including, without limitation, payments to 1st Order Pharmaceuticals, Inc and other third parties; maintain, protect and expand our intellectual property portfolio; establish a sales, marketing, distribution and other commercial infrastructure to commercialize any products for which we may obtain marketing approval; create additional infrastructure and incur additional costs to support our operations and our product development and planned future commercialization efforts; and experience any delays or encounter issues with any of the above.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

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the scope, progress, results and costs of researching and developing our current product candidates, as well as other additional product candidates we may develop and pursue in the future;

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the timing of, and the costs involved in, obtaining marketing approvals for our product candidates and any other additional product candidates we may develop and pursue in the future;

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the number of future product candidates that we may pursue and their development requirements;

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if approved, the costs of commercialization activities for any product candidate that receives regulatory approval to the extent such costs are not the responsibility of an existing or future collaborator, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

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subject to the receipt of regulatory approval, revenue, if any, received from commercial sales of our product candidates and any other additional product candidates we may develop and pursue in the future;

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

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

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our headcount growth and associated costs as we expand our research and development and initiate pre-commercial and commercial activities;

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

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the ongoing costs of operating as a public company.

Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cash and cash equivalents and marketable securities as of the date of this report will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. However, our estimates and assumptions may prove to be wrong, and we cannot guarantee that our existing capital resources will be sufficient to conduct and complete all of our anticipated research and development efforts and future commercialization efforts. Additionally, the process of testing drug candidates in clinical trials is costly, and the timing of progress in these trials remains uncertain. Further, inflation may affect our use of capital resources by increasing our cost of labor and research and development expenses. Our long-term funding requirements will consist of operational, capital, and manufacturing expenditures, including those contractual commitments described below. Because of the inherent risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of capital outflows and operating expenditures associated with our long-term anticipated pre-clinical studies and clinical trials.

Contractual Commitments

In April 2017, we acquired azetukalner from 1st Order Pharmaceuticals, Inc., or 1st Order, pursuant to an asset purchase agreement. In August 2020, we and 1st Order amended the asset purchase agreement to amend certain definitions in the agreement and to modify the payment schedule for certain milestones. Through December 31, 2024, we have paid $2.0 million based on progress against these milestones. Future potential payments to 1st Order include up to $6.0 million in regulatory milestones. There are no royalty obligations to 1st Order.

We have operating leases for research laboratories and office space in Burnaby, British Columbia and office space in Needham, Massachusetts. The terms of the leases expire in June 2032 and November 2027, respectively. Amounts related to future lease payments for operating lease obligations as of December 31, 2024 totaled $10.2 million, with $1.7 million expected to be paid within the next 12 months.

Cash Flows

The following table shows a summary of our cash flows for the years ended December 31, 2024, 2023 and 2022 (in thousands):

(1) Amounts have been reclassified as described in Note 2 of our consolidated financial statements.

Operating Activities

For the year ended December 31, 2024, net cash used in operating activities totaled $181.4 million, compared to $151.1 million in 2023. The increase was primarily related to higher research and development and general and administrative expenses, as well as changes in operating assets and liabilities, partially offset by higher interest income.

For the year ended December 31, 2023, net cash used in operating activities totaled $151.1 million, compared to $101.0 million in 2022. The increase was primarily related to higher research and development and general and administrative expenses, and a decrease in revenue recognized, partially offset by higher interest income and changes in operating assets and liabilities.

Investing Activities

For the year ended December 31, 2024, net cash provided by investing activities totaled $165.0 million, compared to net cash used of $111.4 million in 2023. The change was driven primarily by an increase in the redemption of marketable securities, net of purchases. In addition, there was a decrease in the purchases of property, plant and equipment.

For the year ended December 31, 2023, net cash used in investing activities totaled $111.4 million, compared to $293.4 million in 2022. The change was driven primarily by an increase in the redemption of marketable securities, net of purchases. This was partially offset by an increase in the purchases of property, plant and equipment.

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Financing Activities

For the year ended December 31, 2024, net cash provided by financing activities totaled $12.1 million, compared to $353.5 million in 2023. The decrease was primarily related to net proceeds from the issuance of common shares of $12.1 million in 2024 as compared to net proceeds of $353.5 million in 2023 from the issuance of common shares and pre-funded warrants.

For the year ended December 31, 2023, net cash provided by financing activities totaled $353.5 million, compared to $278.5 million in 2022. The increase was primarily related to net proceeds of $353.5 million in 2023 as compared to net proceeds of $277.8 million in 2022 from the issuance of common shares and pre-funded warrants.

Related Party Transactions

For a description of our related party transactions, see “Certain Relationships and Related Transactions, and Director Independence.”

Outstanding Share Data

As of February 24, 2025, we had 76,542,811 common shares issued and outstanding, outstanding pre-funded warrants to purchase an additional 2,173,081 common shares, outstanding stock options to purchase an additional 10,364,025 common shares, outstanding performance share units convertible into 194,000 common shares and an outstanding warrant to purchase an additional 40,000 common shares.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis together with our consolidated financial statements and notes included elsewhere in this Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption Part I, Item 1A — “Risk Factors.” Throughout this discussion, unless the context specifies or implies otherwise, the terms “Xenon,” “we,” “us,” and “our” refer to Xenon Pharmaceuticals Inc. and its subsidiary.

Overview

We are a neuroscience-focused biopharmaceutical company committed to discovering, developing, and commercializing innovative therapeutics to improve the lives of people living with neurological and psychiatric disorders. We are advancing a novel product pipeline to address areas of high unmet medical need, including epilepsy and depression.

XEN1101

XEN1101 is a novel, potent Kv7 potassium channel opener being developed for the treatment of epilepsy, major depressive disorder, or MDD, and potentially other neurological disorders.

XEN1101 for Epilepsy (Focal Onset Seizures)

Our XEN1101 Phase 3 epilepsy program includes two identical Phase 3 clinical trials, called X-TOLE2 and X-TOLE3, which are designed closely after the Phase 2b X-TOLE clinical trial. These multicenter, randomized, double-blind, placebo-controlled trials are evaluating the clinical efficacy, safety, and tolerability of 15 mg or 25 mg of XEN1101 administered once-daily with food as adjunctive treatment in approximately 360 patients per study with focal onset seizures, or FOS. The primary efficacy endpoint is the median percent change, or MPC, in monthly seizure frequency from baseline through the double-blind period, or DBP, of XEN1101 compared to placebo. We anticipate patient enrollment in X-TOLE2 will be completed in late 2024 to early 2025.

XEN1101 for Epilepsy (Primary Generalized Tonic-Clonic Seizures)

Our Phase 3 X-ACKT clinical trial is intended to support potential regulatory submissions in an additional epilepsy indication of primary generalized tonic-clonic seizures, or PGTCS. This multicenter, randomized, double-blind, placebo-controlled study is evaluating the clinical efficacy, safety, and tolerability of 25 mg of XEN1101 administered once-daily with food as adjunctive treatment in approximately 160 patients with PGTCS. The primary efficacy endpoint is the MPC in monthly PGTCS frequency from baseline through the DBP of XEN1101 compared to placebo.

XEN1101 for Epilepsy (Open-Label Extension)

Upon completion of the DBP in X-TOLE2, X-TOLE3, or X-ACKT, eligible patients may enter an open-label extension, or OLE, study for up to three years. In addition, the ongoing X-TOLE Phase 2b OLE has been extended from five to seven years and continues to generate important long-term data for XEN1101.

XEN1101 for Major Depressive Disorder

In November 2023, we reported promising topline results from the Phase 2 proof-of-concept X-NOVA clinical trial, which evaluated the clinical efficacy, safety, and tolerability of 10 mg and 20 mg of XEN1101 administered once-daily with food in 168 patients with moderate to severe MDD. The primary endpoint of the study was a change in the Montgomery-Åsberg Depression Rating Scale, or MADRS, at week 6. A clear dose response and a clinically meaningful, but not statistically significant, 3.04 difference between placebo and the XEN1101 20 mg group (p=0.135) was observed. Statistical significance was achieved on other secondary efficacy endpoints, including the Hamilton Depression Rating Scale, or HAM-D17; the Snaith-Hamilton Pleasure Scale, or SHAPS, measuring anhedonia; and MADRS at week 1, demonstrating early onset of efficacy. XEN1101 was generally well tolerated with similar rates of overall adverse events, as well as similar rates of discontinuation, reported across all treatment arms. No serious adverse events were reported in the two XEN1101 treatment groups, XEN1101 was not associated with notable weight gain and participants did not report any notable sexual dysfunction. We are actively planning for late-stage clinical development of XEN1101 in MDD and expect to initiate the Phase 3 clinical program in 2024. We are also evaluating other potential indications for the future development of XEN1101.

In addition, we are collaborating with the Icahn School of Medicine at Mount Sinai to support an ongoing investigator-sponsored Phase 2 proof-of-concept, randomized, parallel-arm, placebo-controlled multi-site study of XEN1101 for the treatment of MDD in approximately 60 subjects. See “Recent Developments” for additional information about topline X-NOVA results.

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Other Pipeline Opportunities

We continue to leverage our extensive ion channel expertise and drug discovery capabilities to identify validated drug targets and develop new product candidates. The near-term focus is on internal development candidates targeting Kv7, Nav1.1 and Nav1.7.

Partnered Program: NBI-921352

We have an ongoing collaboration with Neurocrine Biosciences to develop treatments for epilepsy. Neurocrine Biosciences has an exclusive license to XEN901, now known as NBI-921352, a selective Nav1.6 sodium channel inhibitor. In November 2023, Neurocrine Biosciences reported that the Phase 2 clinical trial evaluating NBI-921352 in adult patients with FOS failed to demonstrate meaningful reduction in seizure frequency. Neurocrine Biosciences guided that no further development with NBI-921352 in FOS is planned at this time. A Phase 2 clinical trial is currently underway evaluating NBI-921352 in patients aged between 2 and 21 years with SCN8A developmental and epileptic encephalopathy.

We have funded our operations primarily through the sale of equity securities, including receiving net proceeds of approximately $324.0 million from the sale of common shares and pre-funded warrants in a public offering in November 2023, funding received from our licensees and collaborators, and debt financing. We did not recognize any revenue in the year ended December 31, 2023, as compared to revenue from collaboration agreements of $9.4 million and $18.4 million for the years ended December 31, 2022 and 2021, respectively. To date, we have not had any products approved for sale and have not generated any revenue from product sales. We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for a product candidate, which we expect will take a number of years, if ever, and the outcome of which is subject to significant uncertainty.

We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We have incurred net losses in each year since inception and expect to continue to incur net losses for the foreseeable future. Our net losses were $182.4 million, $125.4 million, and $78.9 million for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, we had an accumulated deficit of $665.1 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We anticipate that our operating expenses will increase substantially, particularly as we:

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continue our research and pre-clinical and clinical development of our product candidates;

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

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require the manufacture of larger quantities of our product candidates for clinical development and potential commercialization;

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attract, hire and retain skilled personnel;

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acquire or in-license other assets and technologies;

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maintain, protect and expand our intellectual property portfolio; and

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create additional infrastructure to support our operations and any future commercialization efforts.

Financial Operations Overview

Revenue

To date, our revenue has been primarily derived from collaboration and licensing agreements and we have not generated any revenue from product sales. If our development efforts for our product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.

We may also generate revenue in the future from payments as a result of license or collaboration agreements for any of our product candidates or intellectual property, such as our license and collaboration agreement with Neurocrine Biosciences, or the Neurocrine Collaboration, described in “Business — Collaborations, Commercial and License Agreements” and “Note 11” of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We cannot provide assurance as to the timing of future milestone or royalty payments under the Neurocrine Collaboration, or that we will receive any of these payments at all.

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The following table is a summary of revenue recognized for the years ended December 31, 2023, 2022 and 2021 (in thousands):

Pursuant to the terms of the Neurocrine Collaboration, we received an upfront cash payment of $30.0 million and a $20.0 million equity investment in our common shares in December 2019. The overall transaction price of the arrangement was measured and allocated to certain performance obligations and revenue was recognized as those performance obligations were completed. In September 2021, based on the regulatory approval of a clinical trial application in Europe for NBI-921352 for focal-onset seizures in adults, we received an aggregate milestone payment of $10.0 million in the form of $4.5 million cash and a $5.5 million equity investment in our common shares. Further, in January 2022, based on the U.S. Food and Drug Administration’s (“FDA”) approval to expand the SCN8A-DEE study population to include subjects aged between 2 and 11 years, we received an aggregate milestone payment of $15.0 million in the form of $6.75 million cash and $8.25 million equity investment in our common shares. In each instance, the equity investment was measured at fair value on the date of issuance and the resulting premium with the cash payment, was recognized as revenue. Research and development services were recognized as revenue at fair market value as the services were rendered. The research collaboration was completed in June 2022.

In the year ended December 31, 2021, we recognized revenue of $3.0 million in connection with our agreement with Pacira BioSciences, Inc., or the Pacira Agreement, for the global rights to develop and commercialize PCRX301 which included a $1.0 million milestone for the clearance of an investigational new drug application by the FDA and a $2.0 million milestone for the initiation of a Phase 1b clinical trial. No revenue was recognized in the years ended December 31, 2023 and December 31, 2022 in connection with the Pacira Agreement. In November 2022, Pacira BioSciences made the strategic decision to no longer pursue the clinical development of PCRX-301.

Operating Expenses

The following table summarizes our operating expenses for the years ended December 31, 2023, 2022 and 2021 (in thousands):

Research and Development Expenses

Research and development expenses represent costs incurred to conduct development of our proprietary product candidates and our drug discovery efforts, including any acquired or in-licensed product candidates or technology, and costs to support our partnered product candidates.

Research and development expenses consist of costs incurred in performing research and development activities, including:

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personnel-related expenses, consisting of salaries, benefits and stock-based compensation for employees engaged in scientific research and development;

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third-party expenses incurred in connection with the pre-clinical and clinical development of our product candidates, including under agreements with CROs;

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third-party expenses relating to formulation, process development and manufacture of drug substance and drug product for use in our pre-clinical testing and clinical trials;

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third-party acquisition, license and collaboration fees;

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laboratory consumables; and

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certain indirect costs incurred in support of overall research and development activities, including facilities, depreciation and information technology costs.

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Project-specific expenses reflect costs directly attributable to our clinical development candidates for which we have incurred significant expenses. All remaining research and development expenses are reflected in pre-clinical, discovery and other program expenses. At any given time, we have several active early-stage research and drug discovery programs. Our personnel and infrastructure are typically deployed over multiple projects and are not directly linked to any individual internal early-stage research or drug discovery program. Therefore, we do not maintain financial information for our internal early-stage research and internal drug discovery programs on a project-specific basis.

We expense all research and development costs as incurred. Payments we make for research and development services prior to the services being rendered are recorded as prepaid assets in our consolidated balance sheets and are expensed as the services are provided. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and third-party service providers.

We expect that our research and development expenses will increase substantially in the future as we continue to invest in research and development activities related to developing our product candidates, including investments in manufacturing, as our programs advance into later stages of development and we continue to conduct clinical trials, advance our internal drug discovery programs into pre-clinical development and continue our early-stage research. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size, scope and duration of later-stage clinical trials.

Clinical development timelines, likelihood of regulatory approval, and commercialization and associated costs are uncertain, difficult to estimate, and can vary significantly. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we cannot accurately estimate or know the nature, timing and costs that will be necessary to complete the pre-clinical and clinical development for any of our product candidates or when and to what extent we may generate revenue from the commercialization and sale of any of our product candidates or achieve profitability.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related expenses, consisting of salaries, benefits and stock-based compensation for our employees engaged in executive, finance, legal, business development, commercial and administrative functions, insurance costs, professional fees for auditing, tax and legal services, costs related to maintenance and filing of intellectual property, costs incurred as we prepare for commercialization, and allocated facility-related and information technology costs not otherwise included in research and development expenses.

We expect that general and administrative expenses will increase in the future as we expand our operating activities to support our continued research activities and development of our product candidates, and as we prepare for commercialization. We will also continue to incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.

Other Income (Expense)

Interest income. Interest income consists of income earned on our cash and investment balances. We anticipate that our interest income will continue to fluctuate depending on our cash and investment balances and interest rates.

Unrealized fair value gain (loss) on trading securities. Trading securities are recorded at fair value. Unrealized fair value gain (loss) on trading securities is related to changes in market pricing on the investments during the period. We anticipate that unrealized fair value gain (loss) on trading securities will continue to fluctuate depending on our investment balance and market yields.

Foreign exchange gain (loss). Net foreign exchange gains and losses consisted of gains and losses from the impact of foreign exchange fluctuations on our monetary assets and liabilities that are denominated in currencies other than the U.S. dollar (principally the Canadian dollar). We will continue to incur substantial expenses in Canadian dollars and will remain subject to risks associated with foreign currency fluctuations.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the U.S., or U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the revenue and expenses incurred during the reported periods. We base estimates on our historical experience, known trends and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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The significant accounting policies that we believe to be most critical in fully understanding and evaluating our historical and future performance are revenue recognition, research and development costs and stock-based compensation. For additional information, see “Note 3” of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Revenue recognition:

Revenue recognition is a critical accounting estimate due to the magnitude and nature of the revenues we receive.

Our primary sources of revenue are derived from non-refundable upfront payments, funding for research and development services, milestone payments, and royalties under license and collaboration agreements.

In contracts where we have more than one performance obligation to provide our customer with goods or services, each performance obligation is evaluated to determine whether it is distinct. The consideration under the contract is then allocated between the distinct performance obligations based on their respective relative standalone selling prices. The estimated standalone selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold on a standalone basis and is determined by reference to market rates for the good or service when sold to others or by using an adjusted market assessment approach if selling price on a standalone basis is not available. We generally recognize revenue from non-refundable upfront payments over the estimated term of the performance obligation or period in which the underlying benefit is transferred to the customer. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred to our customer for the related goods or services. Consideration in exchange for research and development services performed by us on behalf of the licensee is recognized upon performance of such activities at rates consistent with prevailing market rates. Consideration associated with at-risk substantive performance milestones, including sales-based milestones, is recognized as revenue when we determine it is probable that a significant reversal of the cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such milestones, and if necessary, adjust our estimate of the overall transaction price. Sales-based royalties received in connection with licenses of intellectual property are subject to a specific exception in the revenue standards, whereby the consideration is not included in the transaction price and recognized in revenue until the customer’s subsequent sales or usages occur.

Research and development costs:

Research and development costs is a critical accounting policy due to the magnitude of the costs and the requirement to estimate the proportionate performance of vendors to calculate third-party accrued and prepaid research and development expenses.

We accrue for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of pre-clinical studies and clinical trials, and manufacturing activities. Third-party service providers generally provide estimates of proportionate performance to allow us to determine an appropriate accrual. When determining the adequacy of an accrual, we analyze progress based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered. Our historical prepaid and accrual estimates have not been materially different from the actual costs.

Stock-based compensation:

Stock-based compensation is a critical accounting estimate due to the magnitude of and the many assumptions that are required to calculate stock-based compensation expense.

We grant stock options to employees, consultants, directors and officers pursuant to our stock option plans. Compensation expense is recorded using the fair value method. We calculate the fair value of stock options using the Black-Scholes option-pricing model which requires that certain assumptions, including the expected life of the option and expected volatility of the stock, be estimated at the time that the options are granted. The expected volatility is based on the historical volatility of our common shares calculated based on a period of time commensurate with the expected term assumption. The expected term of our stock options has been determined utilizing our available historical data and we recognize forfeitures as they occur. We amortize the fair value of stock options using the straight-line method over the vesting period of the options.

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Results of Operations

Comparison of Years Ended December 31, 2023, 2022 and 2021

The following table summarizes the results of our operations for the years ended December 31, 2023, 2022 and 2021 together with changes in those items (in thousands):

Revenue

Revenue decreased by $9.4 million in the year ended December 31, 2023 as compared to the same period in 2022. The decrease was primarily due to the Neurocrine Collaboration; all performance obligations associated with the upfront payment were completed in March 2022, resulting in a decrease in revenue of $0.4 million and the research component of our collaboration was completed in June 2022, resulting in a decrease in research and development services revenue of $1.9 million. In addition, we recognized a $7.1 million milestone under the Neurocrine Collaboration in 2022, whereas no milestones were recognized under this collaboration in 2023.

Revenue decreased by $9.0 million in the year ended December 31, 2022 as compared to the same period in 2021. The decrease was primarily due to the Neurocrine Collaboration; all performance obligations associated with the upfront payment were completed in March 2022, resulting in a decrease in revenue of $3.3 million and the research component of our collaboration was completed in June 2022, resulting in a decrease in research and development services revenue of $4.5 million. In addition, we recognized a $3.0 million milestone under our Pacira Agreement in 2021, whereas no milestones were recognized under this agreement in 2022.

Research and Development Expenses

The following table summarizes research and development expenses for the years ended December 31, 2023, 2022 and 2021 together with changes in those items (in thousands):

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Research and development expenses increased by $61.7 million in the year ended December 31, 2023 as compared to the same period in 2022. The increase was primarily attributable to our XEN1101 program as well as personnel-related costs due to increased headcount to support late-stage development and stock-based compensation expense due to an increase in the number of options granted at a higher fair value, partially offset by a decrease in spend on XEN496. The increase for XEN1101 is driven by ongoing site initiation and patient enrollment in our Phase 3 epilepsy clinical trials, increase in manufacturing activities to support current and future clinical trials and a potential NDA submission, as well as the completion of our X-NOVA Phase 2 MDD clinical trial. The decrease in XEN496 was attributed to decreased external costs to support the EPIK clinical trial and open label extension as a result of our decision to no longer pursue the clinical development of XEN496.

Research and development expenses increased by $30.3 million in the year ended December 31, 2022 as compared to the same period in 2021. The increase was primarily attributable to our XEN1101 program and personnel-related costs due to increased headcount to support late-stage development and stock-based compensation expense due to an increase in the number of options granted at a higher fair value. The increase for XEN1101 includes expenses related to the initiation of our Phase 3 epilepsy clinical trials, ongoing costs to support the X-TOLE open label extension, and our X-NOVA Phase 2 MDD clinical trial.

General and Administrative Expenses

The following table summarizes general and administrative expenses for the years ended December 31, 2023, 2022 and 2021 together with changes in those items (in thousands):

General and administrative expenses increased by $13.7 million in the year ended December 31, 2023 as compared to the same period in 2022. The increase was primarily attributable to personnel-related costs due to increased headcount to support our expanding research and development activities and stock-based compensation expense due to an increase in the number of options granted at a higher fair value as well as higher professional and consulting fees.

General and administrative expenses increased by $10.8 million in the year ended December 31, 2022 as compared to the same period in 2021. The increase was primarily attributable to personnel-related costs due to increased headcount to support our expanding research and development activities and stock-based compensation expense due to an increase in the number of options granted at a higher fair value as well as higher recruitment fees, insurance premiums, and higher professional and consulting fees.

Other Income

The following table summarizes our other income for the years ended December 31, 2023, 2022 and 2021 together with changes in those items (in thousands):

Other income increased by $27.5 million in the year ended December 31, 2023 as compared to the same period in 2022. The increase was primarily attributable to an $18.9 million increase in interest income driven by a higher balance of marketable securities and an increase in market yields on investments. In addition, there was a $6.5 million increase in the unrealized fair value gain on trading securities due to changes in market yields on trading securities, partially offset by a lower balance of trading securities. There was also a $2.1 million change in the foreign exchange gain (loss) due to fluctuations in the value of the Canadian dollar and a lower balance of cash and cash equivalents denominated in Canadian dollars.

Other income increased by $3.8 million in the year ended December 31, 2022 as compared to the same period in 2021. The increase was primarily attributable to an $8.2 million increase in interest income driven by a higher balance of marketable securities

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and an increase in market yields on investments. The increase was partially offset by a $2.2 million increase in foreign exchange loss due to a higher balance of cash and cash equivalents denominated in Canadian dollars and a decline in the value of the Canadian dollar, and a $2.2 million increase in the unrealized loss on the fair value of trading securities due to a higher balance of trading securities and increase in market yields on investments.

Liquidity and Capital Resources

Sources of Liquidity

To date, we have financed our operations primarily through the sale of equity securities, funding received from collaboration and license agreements, and debt financing. Since our initial public offering through December 31, 2023, we have raised aggregate net cash proceeds of more than $1.3 billion primarily from the issuance of equity securities, including net proceeds of approximately $324.0 million from the sale of common shares and pre-funded warrants in a public offering in November 2023. As of December 31, 2023, we had cash and cash equivalents and marketable securities of $930.9 million.

Except for any obligations of our collaborators to make milestone payments under our agreements with them, we do not have any committed external sources of capital. Until such time as we can generate substantial product revenue, if ever, we expect to finance our cash needs through a combination of collaboration agreements and equity or debt financings.

We entered into an “at-the-market” equity offering sales agreement in August 2020, amended as of March 2022, with Jefferies LLC, or Jefferies, and Stifel, Nicolaus & Company, Incorporated, or Stifel, pursuant to which we may sell our common shares from time to time. In January 2021, we sold an aggregate of 733,000 common shares for proceeds of $10.7 million, net of commissions and transaction expenses pursuant to a prospectus supplement filed with the SEC on August 6, 2020, or the August 2020 ATM. We may sell common shares having gross proceeds of up to $250.0 million, from time to time, pursuant to a new prospectus supplement filed with the SEC on March 1, 2022, or the March 2022 ATM, replacing the August 2020 ATM. As of December 31, 2023, an aggregate of 855,685 common shares have been sold for proceeds of $29.5 million, net of commissions and transaction expenses, under the March 2022 ATM.

Funding Requirements

We have incurred significant operating losses since inception. As of December 31, 2023, we had an accumulated deficit of $665.1 million. We expect to continue to incur significant expenses in excess of our revenue and expect to incur operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect to incur significant expenses and increasing operating losses for the foreseeable future as we continue our research and pre-clinical and clinical development of our product candidates; expand the scope of our studies for our current and prospective product candidates; initiate additional pre-clinical, clinical or other studies for our product candidates; manufacture drug supply and drug product for clinical trials and commercialization; seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical studies; hire and retain additional personnel; seek to identify, and validate additional product candidates; acquire or in-license other product candidates and technologies; make milestone or other payments under our in-license or other agreements, including, without limitation, payments to 1st Order Pharmaceuticals, Inc and other third parties; maintain, protect and expand our intellectual property portfolio; establish a sales, marketing, distribution and other commercial infrastructure to commercialize any products for which we may obtain marketing approval; create additional infrastructure and incur additional costs to support our operations and our product development and planned future commercialization efforts; and experience any delays or encounter issues with any of the above.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

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the scope, progress, results and costs of researching and developing our current product candidates, as well as other additional product candidates we may develop and pursue in the future;

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the timing of, and the costs involved in, obtaining marketing approvals for our product candidates and any other additional product candidates we may develop and pursue in the future;

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the number of future product candidates that we may pursue and their development requirements;

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if approved, the costs of commercialization activities for any product candidate that receives regulatory approval to the extent such costs are not the responsibility of an existing or future collaborator, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

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subject to the receipt of regulatory approval, revenue, if any, received from commercial sales of our product candidates and any other additional product candidates we may develop and pursue in the future;

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

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

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our headcount growth and associated costs as we expand our research and development and initiate pre-commercial and commercial activities;

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

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the ongoing costs of operating as a public company.

Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cash and cash equivalents and marketable securities as of the date of this report will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. However, our estimates and assumptions may prove to be wrong, and we cannot guarantee that our existing capital resources will be sufficient to conduct and complete all of our anticipated research and development efforts and future commercialization efforts. Additionally, the process of testing drug candidates in clinical trials is costly, and the timing of progress in these trials remains uncertain. Further, inflation may affect our use of capital resources by increasing our cost of labor and research and development expenses. Our long-term funding requirements will consist of operational, capital, and manufacturing expenditures, including those contractual commitments described below. Because of the inherent risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of capital outflows and operating expenditures associated with our long-term anticipated pre-clinical studies and clinical trials.

Contractual Commitments

In April 2017, we acquired XEN1101 (previously known as 1OP2198) from 1st Order Pharmaceuticals, Inc., or 1st Order, pursuant to an asset purchase agreement. In August 2020, we and 1st Order amended the asset purchase agreement to amend certain definitions in the agreement and to modify the payment schedule for certain milestones. Through December 31, 2023, we have paid $2.0 million based on progress against these milestones. Future potential payments to 1st Order include up to $6.0 million in regulatory milestones. There are no royalty obligations to 1st Order.

We have operating leases for research laboratories and office space in Burnaby, British Columbia and office space in Needham, Massachusetts. The terms of the leases expire in June 2032 and November 2027, respectively. Amounts related to future lease payments for operating lease obligations as of December 31, 2023 totaled $12.5 million, with $1.7 million expected to be paid within the next 12 months.

Cash Flows

The following table shows a summary of our cash flows for the years ended December 31, 2023, 2022 and 2021 (in thousands):

Operating Activities

For the year ended December 31, 2023, net cash used in operating activities totaled $145.3 million, compared to $98.4 million for the same period in 2022. The increase was primarily related to higher research and development and general and administrative expenses, and no revenue recognized in 2023. This was partially offset by higher interest income and changes in operating assets and liabilities.

For the year ended December 31, 2022, net cash used in operating activities totaled $98.4 million, compared to $69.5 million for the same period in 2021. The increase was primarily related to higher research and development and general and administrative expenses, and lower revenue recognized in connection with the Neurocrine Collaboration and the Pacira Agreement. This was partially offset by higher interest income and changes in operating assets and liabilities.

Investing Activities

For the year ended December 31, 2023, net cash used in investing activities totaled $117.2 million, compared to $296.0 million for the same period in 2022. The change was driven primarily by an increase in the redemption of marketable securities, net of purchases. This was partially offset by an increase in the purchases of property, plant and equipment.

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For the year ended December 31, 2022, net cash used in investing activities totaled $296.0 million, compared to $246.8 million for the same period in 2021. The change was driven primarily by an increase in purchases of marketable securities, net of redemptions.

Financing Activities

For the year ended December 31, 2023, net cash provided by financing activities totaled $353.5 million, compared to $278.5 million for the same period in 2022. The increase was primarily related to net proceeds of $353.5 million in 2023 as compared to net proceeds of $277.8 million in 2022 from the issuance of common shares and pre-funded warrants.

For the year ended December 31, 2022, net cash provided by financing activities totaled $278.5 million, compared to $447.5 million for the same period in 2021. The decrease was primarily related to net proceeds of $277.8 million in 2022 as compared to net proceeds of $447.3 million in 2021 from the issuance of common shares and pre-funded warrants.

Related Party Transactions

For a description of our related party transactions, see “Certain Relationships and Related Transactions, and Director Independence.”

Outstanding Share Data

As of February 26, 2024, we had 75,432,482 common shares issued and outstanding, outstanding pre-funded warrants to purchase an additional 2,173,081 common shares, outstanding stock options to purchase an additional 8,860,105 common shares and an outstanding warrant to purchase an additional 40,000 common shares.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis together with our consolidated financial statements and notes included elsewhere in this Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption Part I, Item 1A — “Risk Factors.” Throughout this discussion, unless the context specifies or implies otherwise, the terms “Xenon,” “we,” “us,” and “our” refer to Xenon Pharmaceuticals Inc. and its subsidiary.

Overview

We are a clinical stage biopharmaceutical company committed to developing innovative therapeutics to improve the lives of patients with neurological disorders. We are advancing a novel product pipeline of neurology-focused therapies to address areas of high unmet medical need, with a focus on epilepsy.

XEN1101

XEN1101 is a differentiated Kv7 potassium channel opener being developed for the treatment of epilepsy and other neurological disorders, including major depressive disorder, or MDD.

XEN1101 for Epilepsy (Focal Onset Seizures)

We have initiated our XEN1101 Phase 3 development program, which includes two identical Phase 3 clinical trials to be run in parallel, called X-TOLE2 and X-TOLE3, that are designed closely after the Phase 2b X-TOLE clinical trial. These multicenter, randomized, double-blind, placebo-controlled trials will evaluate the clinical efficacy, safety, and tolerability of XEN1101 administered as adjunctive treatment in approximately 360 patients per study with focal onset seizures, or FOS. The primary efficacy endpoint is the median percent change, or MPC, in monthly seizure frequency from baseline through the double-blind period, or DBP, of XEN1101 compared to placebo.

XEN1101 for Epilepsy (Primary Generalized Tonic Clonic Seizures)

We have initiated a Phase 3 clinical trial, called X-ACKT, to support potential regulatory submissions in an additional epilepsy indication of primary generalized tonic clonic seizures, or PGTCS. This multicenter, randomized, double-blind, placebo-controlled study will evaluate the clinical efficacy, safety, and tolerability of XEN1101 administered as adjunctive treatment in approximately 160 patients with PGTCS. The primary efficacy endpoint is the MPC in monthly PGTCS frequency from baseline through the DBP of XEN1101 compared to placebo.

Upon completion of the DBP in X-TOLE2, X-TOLE3, or X-ACKT, eligible patients may enter an open-label extension, or OLE, study for up to three years. In addition, the ongoing X-TOLE Phase 2b OLE continues to generate important long-term data for XEN1101.

XEN1101 for Major Depressive Disorder

Based on promising pre-clinical data with XEN1101 and published clinical data generated using ezogabine, we are evaluating the clinical efficacy, safety and tolerability of XEN1101 administered as monotherapy in approximately 150 patients with MDD in a Phase 2 clinical trial called X-NOVA. Designed as a randomized, double-blind, placebo-controlled, multicenter clinical study, the primary objective is to assess the efficacy of XEN1101 compared to placebo on improvement of depressive symptoms in subjects diagnosed with moderate to severe MDD, using the Montgomery-Åsberg Depression Rating Scale, or MADRS, score change through week six. Topline results from the X-NOVA study are anticipated in the third quarter of this year.

In addition, we are collaborating with the Icahn School of Medicine at Mount Sinai to support an ongoing investigator-sponsored Phase 2 proof-of-concept, randomized, parallel-arm, placebo-controlled multi-site study of XEN1101 for the treatment of MDD in approximately 60 subjects. The primary objective of the study is to investigate the effect of XEN1101 on the brain reward circuit as measured by the change in bilateral ventral striatum activity as assessed by functional MRI, or fMRI. The secondary objectives are to test the effect of XEN1101 compared to placebo on clinical measures of depression and anhedonia using the MADRS and Snaith-Hamilton Pleasure Scale, or SHAPS, respectively.

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Additional Proprietary and Partnered Programs

XEN496

XEN496, a Kv7 potassium channel opener, is a proprietary pediatric formulation of the active ingredient ezogabine being developed for the treatment of KCNQ2 developmental and epileptic encephalopathy, or KCNQ2-DEE. A Phase 3 randomized, double-blind, placebo-controlled, parallel group, multicenter clinical trial, called EPIK, is ongoing to evaluate the efficacy, safety, and tolerability of XEN496 administered as adjunctive treatment in approximately 40 pediatric patients aged one month to less than six years with KCNQ2-DEE. We anticipate that the EPIK study will be completed in 2024.

NBI-921352

We have an ongoing collaboration with Neurocrine Biosciences to develop treatments for epilepsy. Neurocrine Biosciences has an exclusive license to XEN901, now known as NBI-921352, a selective Nav1.6 sodium channel inhibitor. Neurocrine Biosciences is conducting a Phase 2 clinical trial evaluating NBI-921352 in adult patients with focal onset seizures, with data expected in the second half of this year. In addition, a Phase 2 clinical trial is underway evaluating NBI-921352 in patients aged between 2 and 21 years with SCN8A developmental and epileptic encephalopathy, or SCN8A-DEE. Pursuant to the terms of the agreement, we have the potential to receive certain clinical, regulatory, and commercial milestone payments, as well as future sales royalties.

We have funded our operations primarily through the sale of equity securities, funding received from our licensees and collaborators, and debt financing. We recognized revenue of $9.4 million, $18.4 million and $32.2 million for the years ended December 31, 2022, 2021 and 2020, respectively, in connection with our collaboration and licensing agreements. To date, we have not had any products approved for sale and have not generated any revenue from product sales. We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for a product candidate, which we expect will take a number of years, if ever, and the outcome of which is subject to significant uncertainty.

We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We have incurred net losses in each year since inception and expect to continue to incur net losses for the foreseeable future. Our net losses were $125.4 million, $78.9 million, and $28.8 million for the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022, we had an accumulated deficit of $482.7 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We anticipate that our operating expenses will increase substantially, particularly as we:

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continue our research and pre-clinical and clinical development of our product candidates;

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

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require the manufacture of larger quantities of our product candidates for clinical development and potential commercialization;

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attract, hire and retain skilled personnel;

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acquire or in-license other assets and technologies;

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maintain, protect and expand our intellectual property portfolio; and

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create additional infrastructure to support our operations, our product development and planned future commercialization efforts.

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Financial Operations Overview

Revenue

To date, our revenue has been primarily derived from collaboration and licensing agreements and we have not generated any revenue from product sales. If our development efforts for our product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.

We may also generate revenue in the future from payments as a result of license or collaboration agreements for any of our product candidates or intellectual property, such as our license and collaboration agreement with Neurocrine Biosciences, or the Neurocrine Collaboration, described in “Business — Collaborations, Commercial and License Agreements” and “Note 13” of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We cannot provide assurance as to the timing of future milestone or royalty payments under the Neurocrine Collaboration, or that we will receive any of these payments at all.

The following table is a summary of revenue recognized for the years ended December 31, 2022, 2021 and 2020 (in thousands):

Pursuant to the terms of the Neurocrine Collaboration, we received an upfront cash payment of $30.0 million and a $20.0 million equity investment in our common shares in December 2019. The overall transaction price of the arrangement was measured and allocated to the performance obligations and revenue was recognized as the performance obligations were completed. In September 2021, based on the regulatory approval of a clinical trial application in Europe for NBI-921352 for focal-onset seizures in adults, we received an aggregate milestone payment of $10.0 million in the form of $4.5 million cash and a $5.5 million equity investment in our common shares. Further, in January 2022, based on the U.S. Food and Drug Administration’s (“FDA”) approval to expand the SCN8A-DEE study population to include subjects aged between 2 and 11 years, we received an aggregate milestone payment of $15.0 million in the form of $6.75 million cash and $8.25 million equity investment in our common shares. In each instance, the equity investment was measured at fair value on the date of issuance and the resulting premium with the cash payment, was recognized as revenue in the respective period. Research and development services were recognized into revenue at fair market value as the services were rendered. The research collaboration was completed in June 2022.

In the year ended December 31 2021, we recognized revenue of $3.0 million in connection with our agreement with Pacira BioSciences, or the Pacira Agreement, for the global rights to develop and commercialize PCRX301 which included a $1.0 million milestone for the clearance of an investigational new drug application by the FDA and a $2.0 million milestone for the initiation of a Phase 1b clinical trial. No revenue was recognized in the years ended December 31, 2022 and December 31, 2020 in connection with the Pacira Agreement. In November 2022, Pacira BioSciences made the strategic decision to no longer pursue the clinical development of PCRX-301.

Operating Expenses

The following table summarizes our operating expenses for the years ended December 31, 2022, 2021 and 2020 (in thousands):

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Research and Development Expenses

Research and development expenses represent costs incurred to conduct development of our proprietary product candidates and our drug discovery efforts, including any acquired or in-licensed product candidates or technology, and costs to support our partnered product candidates.

Research and development expenses consist of costs incurred in performing research and development activities, including:

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personnel-related expenses, consisting of salaries, benefits and stock-based compensation for employees engaged in scientific research and development;

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third-party expenses incurred in connection with the pre-clinical and clinical development of our product candidates, including under agreements with CROs;

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third-party expenses relating to formulation, process development and manufacture of drug substance and drug product for use in our pre-clinical testing and clinical trials;

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third-party acquisition, license and collaboration fees;

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laboratory consumables; and

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certain indirect costs incurred in support of overall research and development activities, including facilities, depreciation and information technology costs.

Project-specific expenses reflect costs directly attributable to our clinical development candidates for which we have incurred significant expenses. All remaining research and development expenses are reflected in pre-clinical, discovery and other internal program expenses. At any given time, we have several active early-stage research and drug discovery programs. Our personnel and infrastructure are typically deployed over multiple projects and are not directly linked to any individual internal early-stage research or drug discovery program. Therefore, we do not maintain financial information for our internal early-stage research and internal drug discovery programs on a project-specific basis.

We expense all research and development costs as incurred. Payments we make for research and development services prior to the services being rendered are recorded as prepaid assets in our consolidated balance sheets and are expensed as the services are provided. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and third-party service providers.

We expect that our research and development expenses will increase substantially in the future as we continue to invest in research and development activities related to developing our product candidates, including investments in manufacturing, as our programs advance into later stages of development and we continue to conduct clinical trials, advance our internal drug discovery programs into pre-clinical development and continue our early-stage research. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size, scope and duration of later-stage clinical trials.

Clinical development timelines, likelihood of regulatory approval, and commercialization and associated costs are uncertain, difficult to estimate, and can vary significantly. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we cannot accurately estimate or know the nature, timing and costs that will be necessary to complete the pre-clinical and clinical development for any of our product candidates or when and to what extent we may generate revenue from the commercialization and sale of any of our product candidates or achieve profitability.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related expenses, consisting of salaries, benefits and stock-based compensation for our employees engaged in executive, finance, legal, business development, commercial and administrative functions, insurance costs, professional fees for auditing, tax and legal services, costs related to maintenance and filing of intellectual property, costs incurred as we prepare for commercialization, and allocated facility-related and information technology costs not otherwise included in research and development expenses.

We expect that general and administrative expenses will increase in the future as we expand our operating activities to support our continued research activities and development of our product candidates, and as we prepare for commercialization. We will also continue to incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.

Other Income (Expense)

Interest income. Interest income consists of income earned on our cash and investment balances. We anticipate that our interest income will continue to fluctuate depending on our cash and investment balances and interest rates.

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Unrealized fair value (loss) gain on trading securities. Trading securities are recorded at fair value. Unrealized fair value (loss) gain on trading securities is related to changes in market pricing on the investments during the period. We anticipate that unrealized fair value (loss) gain on trading securities will continue to fluctuate depending on our investment balance and market yields.

Interest expense. Interest expense consists of accrual of the final payment fee, amortization of debt discounts, and interest charged on our borrowings with Silicon Valley Bank. In May 2020, we repaid the total outstanding term loan balance ahead of the maturity date.

Foreign exchange (loss) gain. Net foreign exchange gains and losses consisted of gains and losses from the impact of foreign exchange fluctuations on our monetary assets and liabilities that are denominated in currencies other than the U.S. dollar (principally the Canadian dollar). We will continue to incur substantial expenses in Canadian dollars and will remain subject to risks associated with foreign currency fluctuations.

Loss on repayment of term loan. In May 2020, we repaid the total outstanding balance of our term loan with Silicon Valley Bank ahead of the maturity date. We recorded a one-time loss of $1.0 million on the repayment of the term loan, inclusive of repayment fees.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the U.S., or U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the revenue and expenses incurred during the reported periods. We base estimates on our historical experience, known trends and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The significant accounting policies that we believe to be most critical in fully understanding and evaluating our historical and future performance are revenue recognition, research and development costs and stock-based compensation. For additional information, see “Note 3” of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Revenue recognition:

Revenue recognition is a critical accounting estimate due to the magnitude and nature of the revenues we receive.

Our primary sources of revenue are derived from non-refundable upfront payments, funding for research and development services, milestone payments, and royalties under license and collaboration agreements.

In contracts where we have more than one performance obligation to provide our customer with goods or services, each performance obligation is evaluated to determine whether it is distinct. The consideration under the contract is then allocated between the distinct performance obligations based on their respective relative standalone selling prices. The estimated standalone selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold on a standalone basis and is determined by reference to market rates for the good or service when sold to others or by using an adjusted market assessment approach if selling price on a standalone basis is not available. We generally recognize revenue from non-refundable upfront payments over the estimated term of the performance obligation or period in which the underlying benefit is transferred to the customer. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred to our customer for the related goods or services. Consideration in exchange for research and development services performed by us on behalf of the licensee is recognized upon performance of such activities at rates consistent with prevailing market rates. Consideration associated with at-risk substantive performance milestones, including sales-based milestones, is recognized as revenue when we determine it is probable that a significant reversal of the cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such milestones, and if necessary, adjust our estimate of the overall transaction price. Sales-based royalties received in connection with licenses of intellectual property are subject to a specific exception in the revenue standards, whereby the consideration is not included in the transaction price and recognized in revenue until the customer’s subsequent sales or usages occur.

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Research and development costs:

Research and development costs is a critical accounting policy due to the magnitude of the costs and the requirement to estimate the proportionate performance of vendors to calculate third-party accrued and prepaid research and development expenses.

We accrue for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of pre-clinical studies and clinical trials, and manufacturing activities. Third-party service providers generally provide estimates of proportionate performance to allow us to determine an appropriate accrual. When determining the adequacy of an accrual, we analyze progress based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered. Our historical prepaid and accrual estimates have not been materially different from the actual costs.

Stock-based compensation:

Stock-based compensation is a critical accounting estimate due to the magnitude of and the many assumptions that are required to calculate stock-based compensation expense.

We grant stock options to employees, consultants, directors and officers pursuant to our stock option plans. Compensation expense is recorded using the fair value method. We calculate the fair value of stock options using the Black-Scholes option-pricing model which requires that certain assumptions, including the expected life of the option and expected volatility of the stock, be estimated at the time that the options are granted. The expected volatility is based on the historical volatility of our common shares calculated based on a period of time commensurate with the expected term assumption. The expected term of our stock options has been determined utilizing our available historical data and we recognize forfeitures as they occur. We amortize the fair value of stock options using the straight-line method over the vesting period of the options.

Results of Operations

Comparison of Years Ended December 31, 2022, 2021 and 2020

The following table summarizes the results of our operations for the years ended December 31, 2022, 2021 and 2020 together with changes in those items (in thousands):

Revenue

Revenue decreased by $9.0 million in the year ended December 31, 2022 as compared to the same period in 2021. The decrease was primarily due to the Neurocrine Collaboration; all performance obligations associated with an upfront payment were completed in March 2022, resulting in a decrease in revenue of $3.3 million and the research component of our collaboration was completed in June 2022, resulting in a decrease in research and development services revenue of $4.5 million. In addition, we recognized a $3.0 million milestone under our Pacira Agreement in 2021, whereas no milestones were recognized under this agreement in 2022.

Revenue decreased by $13.7 million in the year ended December 31, 2021 as compared to the same period in 2020. The decrease was primarily due to the completion of performance obligations under the Neurocrine Collaboration, resulting in a decrease in revenue of $23.1 million. The decrease was partially offset by the recognition of a $5.3 million of milestone revenue under our Neurocrine Collaboration, as well as a $3.0 million milestone under our Pacira Agreement in 2021, whereas no milestones were recognized under these agreements in 2020.

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Research and Development Expenses

The following table summarizes research and development expenses for the years ended December 31, 2022, 2021 and 2020 together with changes in those items (in thousands):

Research and development expenses increased by $30.3 million in the year ended December 31, 2022 as compared to the same period in 2021. The increase was primarily attributable to our XEN1101 program and personnel-related costs due to increased headcount to support late-stage development and stock-based compensation expense due to an increase in the number of options granted at a higher fair value. The increase for XEN1101 includes expenses related to the initiation of our Phase 3 epilepsy clinical trials, ongoing costs to support the X-TOLE open label extension, and our ongoing Phase 2 X-NOVA clinical trial.

Research and development expenses increased by $24.9 million in the year ended December 31, 2021 as compared to the same period in 2020. The increase was primarily attributable to our pre-clinical, discovery and other internal programs related to an increase in efforts for future product candidates, personnel-related costs due to increased headcount and stock-based compensation expense, and ongoing costs to support the XEN496 EPIK clinical trial and EPIK open label extension as well as the XEN1101 X-TOLE clinical trial and X-TOLE open label extension.

General and Administrative Expenses

The following table summarizes general and administrative expenses for the years ended December 31, 2022, 2021 and 2020 together with changes in those items (in thousands):

General and administrative expenses increased by $10.8 million in the year ended December 31, 2022 as compared to the same period in 2021. The increase was primarily attributable to personnel-related costs due to increased headcount to support our expanding research and development activities and stock-based compensation expense due to an increase in the number of options granted at a higher fair value, recruitment fees, insurance premiums, expenses supporting intellectual property protection and professional fees.

General and administrative expenses increased by $9.0 million for the year ended December 31, 2021 as compared to the same period in 2020. The increase was primarily attributable to personnel-related costs due to increased headcount to support our expanding research and development activities and stock-based compensation expense due to an increase in the number of options granted at a higher fair value, market research costs and expenses supporting intellectual property protection.

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Other Income

The following table summarizes our other income for the years ended December 31, 2022, 2021 and 2020 together with changes in those items (in thousands):

Other income increased by $3.8 million in the year ended December 31, 2022 as compared to the same period in 2021. The increase was primarily attributable to an $8.2 million increase in interest income driven by a higher balance of marketable securities and an increase in market yields on investments. The increase was partially offset by a $2.2 million increase in foreign exchange loss due to a higher balance of cash and cash equivalents and marketable securities denominated in Canadian dollars and a decline in the value of the Canadian dollar, and a $2.2 million increase in the unrealized loss on the fair value of trading securities due to a higher balance of trading securities and increase in market yields on investments.

Other income decreased by $2.1 million in the year ended December 31, 2021 as compared to the same period in 2020. The decrease was primarily driven by a $1.8 million decrease in interest income due to a decline in market yields on investments and an unrealized loss on the fair value of trading securities of $0.7 million in 2021 due to changes in market yields on investments. The decrease was also attributable to a decrease of $1.0 million in foreign exchange gain, largely due to an increase in the value of the Canadian dollar. These were partially offset by a decrease in interest expense and a one-time loss of $1.0 million due to the repayment of our term loan in May 2020.

Liquidity and Capital Resources

Sources of Liquidity

To date, we have financed our operations primarily through the sale of equity securities, funding received from collaboration and license agreements, and debt financing. Since our initial public offering through December 31, 2022, we have raised aggregate net cash proceeds of more than $1.0 billion primarily from the issuance of equity securities. As of December 31, 2022, we had cash and cash equivalents and marketable securities of $720.8 million.

Except for any obligations of our collaborators to make milestone payments under our agreements with them, we do not have any committed external sources of capital. Until such time as we can generate substantial product revenue, if ever, we expect to finance our cash needs through a combination of collaboration agreements and equity or debt financings.

We entered into an “at-the-market” equity offering sales agreement in August 2020, amended as of March 2022, with Jefferies LLC, or Jefferies, and Stifel, Nicolaus & Company, Incorporated, or Stifel, pursuant to which we may sell our common shares from time to time. In January 2021, we sold an aggregate of 733,000 common shares for proceeds of $10.7 million, net of commissions and transaction expenses pursuant to a prospectus supplement filed with the SEC on August 6, 2020, or the August 2020 ATM. We may sell common shares having gross proceeds of up to $250.0 million, from time to time, pursuant to a new prospectus supplement filed with the SEC on March 1, 2022, or the March 2022 ATM, replacing the August 2020 ATM. As of December 31, 2022, no common shares have been sold under the March 2022 ATM.

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Funding Requirements

We have incurred significant operating losses since inception. As of December 31, 2022, we had an accumulated deficit of $482.7 million. We expect to continue to incur significant expenses in excess of our revenue and expect to incur operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect to incur significant expenses and increasing operating losses for the foreseeable future as we continue our research and pre-clinical and clinical development of our product candidates; expand the scope of our studies for our current and prospective product candidates; initiate additional pre-clinical, clinical or other studies for our product candidates; manufacture drug supply and drug product for clinical trials and commercialization; seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical studies; hire and retain additional personnel; seek to identify, and validate additional product candidates; acquire or in-license other product candidates and technologies; make milestone or other payments under our in-license or other agreements, including, without limitation, payments to 1st Order Pharmaceuticals, Inc and other third parties; maintain, protect and expand our intellectual property portfolio; establish a sales, marketing, distribution and other commercial infrastructure to commercialize any products for which we may obtain marketing approval; create additional infrastructure and incur additional costs to support our operations and our product development and planned future commercialization efforts; and experience any delays or encounter issues with any of the above.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

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the scope, progress, results and costs of researching and developing our current product candidates, as well as other additional product candidates we may develop and pursue in the future;

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the timing of, and the costs involved in, obtaining marketing approvals for our product candidates and any other additional product candidates we may develop and pursue in the future;

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the number of future product candidates that we may pursue and their development requirements;

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if approved, the costs of commercialization activities for any product candidate that receives regulatory approval to the extent such costs are not the responsibility of an existing or future collaborator, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

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subject to the receipt of regulatory approval, revenue, if any, received from commercial sales of our product candidates and any other additional product candidates we may develop and pursue in the future;

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

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

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our headcount growth and associated costs as we expand our research and development and initiate pre-commercial and commercial activities;

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

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the ongoing costs of operating as a public company.

Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cash and cash equivalents and marketable securities as of the date of this report will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. However, our estimates and assumptions may prove to be wrong, and we cannot guarantee that our existing capital resources will be sufficient to conduct and complete all of our anticipated research and development efforts and future commercialization efforts. Additionally, the process of testing drug candidates in clinical trials is costly, and the timing of progress in these trials remains uncertain. Further, inflation may affect our use of capital resources by increasing our cost of labor and research and development expenses. Our long-term funding requirements will consist of operational, capital, and manufacturing expenditures, including those contractual commitments described below. Because of the inherent risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of capital outflows and operating expenditures associated with our long-term anticipated pre-clinical studies and clinical trials.

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Contractual Commitments

In April 2017, we acquired XEN1101 (previously known as 1OP2198) from 1st Order Pharmaceuticals, Inc., or 1st Order, pursuant to an asset purchase agreement. In August 2020, we and 1st Order amended the asset purchase agreement to amend certain definitions in the agreement and to modify the payment schedule for certain milestones. Through December 31, 2022, we have paid $0.6 million based on progress against these milestones. Also in February 2023, an additional $1.4 million was paid for the achievement of clinical and other milestones. Future potential payments to 1st Order include up to $6.0 million in regulatory milestones. There are no royalty obligations to 1st Order.

We have operating leases for research laboratories and office space in Burnaby, British Columbia and office space in Needham, Massachusetts. The terms of the leases expire in June 2032 and November 2027, respectively. Amounts related to future lease payments for operating lease obligations as of December 31, 2022 totaled $13.9 million, with $1.6 million expected to be paid within the next 12 months.

Cash Flows

The following table shows a summary of our cash flows for the years ended December 31, 2022, 2021 and 2020 (in thousands):

Operating Activities

For the year ended December 31, 2022, net cash used in operating activities totaled $98.4 million, compared to $69.5 million in the same period in 2021. The increase was primarily related to higher research and development and general and administrative expenses, and lower revenue recognized in connection with the Neurocrine Collaboration and Pacira Agreement. This was partially offset by higher interest income and changes in operating assets and liabilities.

For the year ended December 31, 2021, net cash used in operating activities totaled $69.5 million, compared to $48.1 million in the same period in 2020. The increase was primarily related to higher research and development and general and administrative expenses and lower interest income, partially offset by milestone revenue recognized in connection with our Neurocrine Collaboration and Pacira Agreement in 2021.

Investing Activities

For the year ended December 31, 2022, net cash used in investing activities totaled $296.0 million, compared to $246.8 million in the same period in 2021. The change was driven primarily by an increase in purchases of marketable securities, net of redemptions.

For the year ended December 31, 2021, net cash used in investing activities totaled $246.8 million, compared to $16.8 million in the same period in 2020. The change was driven primarily by an increase in purchases of marketable securities, net of redemptions.

Financing Activities

For the year ended December 31, 2022, net cash provided by financing activities totaled $278.5 million, compared to $447.5 million in the same period in 2021. The decrease was primarily related to net proceeds of $277.8 million in 2022 as compared to net proceeds of $447.3 million in 2021 from the issuance of common shares and pre-funded warrants.

For the year ended December 31, 2021, net cash provided by financing activities totaled $447.5 million, compared to $85.8 million in the same period in 2020. The increase was primarily related to net proceeds of $447.3 million from the issuance of common shares and pre-funded warrants in 2021 as compared to net proceeds of $102.5 million from the issuance of common shares, partially offset by repayment of our term loan, in 2020.

Related Party Transactions

For a description of our related party transactions, see “Certain Relationships and Related Transactions, and Director Independence.”

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Outstanding Share Data

As of February 24, 2023, we had 63,037,991 common shares issued and outstanding, outstanding pre-funded warrants to purchase an additional 2,678,861 common shares, outstanding stock options to purchase an additional 7,046,669 common shares and an outstanding warrant to purchase an additional 40,000 common shares.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis together with our consolidated financial statements and notes included elsewhere in this Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption Part I, Item 1A — “Risk Factors.” Throughout this discussion, unless the context specifies or implies otherwise, the terms “Xenon,” “we,” “us,” and “our” refer to Xenon Pharmaceuticals Inc. and its subsidiary.

Overview

We are a clinical stage biopharmaceutical company committed to developing innovative therapeutics to improve the lives of patients with neurological disorders. We are advancing a novel product pipeline of neurology-focused therapies to address areas of high unmet medical need, with a focus on epilepsy.

Proprietary Programs

XEN1101

XEN1101 is a differentiated Kv7 potassium channel opener being developed for the treatment of epilepsy and major depressive disorder, or MDD. In October 2021, we announced positive results from our Phase 2b X-TOLE clinical trial, which evaluated the clinical efficacy, safety and tolerability of XEN1101 administered as an adjunctive treatment for adult patients with focal epilepsy. The topline data showed all primary and secondary seizure reduction endpoints were statistically significant across all dose groups, including the primary endpoint of median reduction from baseline in monthly seizure frequency and in the key secondary endpoint of patients with at least a 50% reduction in monthly focal seizure frequency from baseline, with p-values of 0.001 for both the 20 mg and 25 mg dose groups.

We anticipate participating in an “end-of-Phase 2” meeting with the U.S. Food and Drug Administration, or FDA, in the second quarter of this year to support the initiation of our Phase 3 XEN1101 clinical program in adult patients with focal epilepsy, estimated in the second half of the year. The X-TOLE open-label extension, which has been extended to three years, is expected to continue to generate important long-term data for XEN1101. We are also evaluating other potential epilepsy indications for the future development of XEN1101.

In addition, we are collaborating with the Icahn School of Medicine at Mount Sinai to conduct an investigator-sponsored Phase 2 proof-of-concept, multi-site, randomized, parallel-arm, placebo-controlled clinical trial of XEN1101 for the treatment of MDD, with patient enrollment underway. In addition, an investigational new drug, or IND, application has been submitted to the FDA to support our plans for a larger company-sponsored clinical study in MDD with XEN1101, which is expected to be initiated in the first half of 2022, pending acceptance of our regulatory filings.

XEN496

XEN496, a Kv7 potassium channel opener, is a proprietary pediatric formulation of the active ingredient ezogabine being developed for the treatment of KCNQ2 developmental and epileptic encephalopathy, or KCNQ2-DEE. A Phase 3 randomized, double-blind, placebo-controlled, parallel group, multicenter clinical trial, called the “EPIK” study, is underway to evaluate the efficacy, safety, and tolerability of XEN496 administered as adjunctive treatment in approximately 40 pediatric patients aged one month to less than six years with KCNQ2-DEE. We anticipate that the EPIK study will be completed in the first half of 2023.

Partnered Programs

NBI-921352

We have an ongoing collaboration with Neurocrine Biosciences to develop treatments for epilepsy. Neurocrine Biosciences has an exclusive license to XEN901, now known as NBI-921352, a selective Nav1.6 sodium channel inhibitor. Neurocrine Biosciences is conducting a Phase 2 clinical trial evaluating NBI-921352 in adult patients with focal onset seizures, with data expected in 2023. In addition, a Phase 2 clinical trial is underway evaluating NBI-921352 in patients aged between 2 and 21 years with SCN8A developmental and epileptic encephalopathy, or SCN8A-DEE. Pursuant to the terms of the agreement, we have the potential to receive certain clinical, regulatory, and commercial milestone payments, as well as future sales royalties.

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PCRX301 (formerly FX301)

In November 2021, Pacira BioSciences, Inc. completed its acquisition of Flexion Therapeutics, Inc., or Flexion, which included Flexion’s global rights to develop and commercialize XEN402, a Nav1.7 inhibitor also known as funapide. XEN402 has been formulated for extended release from a thermosensitive hydrogel and is now known as PCRX301 (previously FX301). A Phase 1b proof-of-concept trial is underway evaluating the safety and tolerability of PCRX301 administered as a single-dose, popliteal fossa block in patients undergoing bunionectomy, with data now anticipated in the second quarter of this year. Pursuant to the terms of the agreement, we have the potential to receive certain clinical, regulatory, and commercial milestone payments, as well as future sales royalties.

We have funded our operations primarily through the sale of equity securities, funding received from our licensees and collaborators, and debt financing. For the year ended December 31, 2021, we recognized revenue of $18.4 million compared to $32.2 million for the year ended December 31, 2020, in connection with our agreements with Neurocrine Biosciences and Pacira BioSciences. We had a net loss of $78.9 million for the year ended December 31, 2021 and an accumulated deficit of $357.4 million as of December 31, 2021, from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations.

We do not generate any royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales for the foreseeable future, if ever. We expect that our revenue in the near term will be substantially dependent on our collaboration agreements. Given the uncertain nature of clinical development of our current and future product candidates and the commercialization of current and future products, we cannot predict when or whether we will receive further milestone payments under our current or future collaboration agreements or whether we will be able to report either revenue or net income in future years.

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 as we:

Recent Developments

Subsequent to year-end, in January 2022, we announced that our collaboration to develop treatments for epilepsy with Neurocrine Biosciences achieved a regulatory milestone. The FDA accepted Neurocrine’s protocol amendment that expands the study population to include subjects aged between 2 and 11 years in the ongoing Phase 2 randomized, double-blind, placebo-controlled study to evaluate the efficacy, safety, tolerability, and pharmacokinetics of NBI-921352 in pediatric patients with SCN8A-DEE. Pursuant to the collaboration agreement, we received an aggregate of $15.0 million from Neurocrine Biosciences in the form of a $6.75 million payment in cash and a $8.25 million equity investment at a per share price of $31.855, calculated as a 15% premium to our 30-day trailing volume weighted average price. For additional information, please see the section of this report titled “Business — Collaborations, Commercial and License Agreements — License and Collaboration Agreement with Neurocrine Biosciences, Inc.”

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Financial Operations Overview

Revenue

To date, our revenue has been primarily derived from collaboration and licensing agreements. We do not generate any royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales for the foreseeable future, if ever. Over our history, we have entered into several collaboration agreements and our current collaboration and licensing agreements are described in “Business — Collaborations, Commercial and License Agreements” and “Note 12” of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

The following table is a summary of revenue recognized from our current collaboration and licensing agreements for the years ended December 31, 2021 and 2020 (in thousands):

Pursuant to the terms of our license and collaboration agreement with Neurocrine Biosciences, we received an upfront cash payment of $30.0 million and a $20.0 million equity investment in our common shares at the inception of the agreement in December 2019. The equity investment was measured at fair value on the date of issuance and the resulting premium, together with the upfront cash payment and variable consideration which is probable that a significant reversal of the cumulative revenue recognized will not occur, is the transaction price of the arrangement at the inception of the agreement for allocation to the performance obligations. The allocation was based on the relative estimated standalone selling prices of each obligation under the agreement including: (i) an exclusive license to NBI-921352 with associated technology and know-how transfer, (ii) an exclusive license to pre-clinical compounds for development, XEN393, XPC’535 and XPC’391, collectively referred to as the development track candidates, or the DTCs, with associated know-how transfer, and (iii) development services under the initial development program for the DTCs. In September 2021, based on the regulatory approval of a clinical trial application in Europe for NBI-921352 for focal-onset seizures in adults, we received an aggregate milestone payment of $10.0 million in the form of $4.5 million cash and a $5.5 million equity investment in our common shares. The equity investment was measured at fair value of $4.7 million on the date of issuance and the resulting premium of $0.8 million, with the cash payment of $4.5 million, was recognized as revenue in the period. In the year ended December 31, 2021, we also recognized $3.7 million of the transaction price allocated to performance obligations (i), (ii) and (iii), compared to $26.8 million for the year ended December 31, 2020. Performance obligations (i) and (ii) were completed as of December 31, 2020. Performance obligation (iii) is expected to be completed by Q1 2022. Research and development services are recognized into revenue at fair market value as the services are rendered.

In the year ended December 31 2021, we recognized revenue of $3.0 million in connection with our agreement with Pacira BioSciences for the global rights to develop and commercialize PCRX301 which included a $1.0 million milestone for the clearance of an investigational new drug application by the FDA and a $2.0 million milestone for the initiation of a Phase 1b clinical trial. No revenue was recognized for the year ended December 31, 2020 in connection with our agreement with Pacira BioSciences.

As our other internal and partnered products are in various stages of clinical and pre-clinical development, we do not expect to generate any revenue from product sales for at least the next several years. We expect that any revenue for the next several years will be derived from milestone payments and research and development funding under our current collaboration agreements and any additional collaboration agreements that we may enter into in the future. We cannot provide any assurance as to the extent or timing of future milestone payments or royalty payments or that we will receive any future payments at all.

We expect that any revenue we generate will fluctuate quarter to quarter as a function of the timing and amount of milestones and other payments from our existing collaborations and any future collaborations.

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Operating Expenses

The following table summarizes our operating expenses for the years ended December 31, 2021 and 2020 (in thousands):

Research and Development Expenses

Research and development expenses represent costs incurred to conduct research and development of our proprietary product candidates, including any acquired or in-licensed product candidates or technology, and costs to support our partnered product candidates.

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

Project-specific expenses reflect costs directly attributable to our clinical development candidates for which we have incurred significant expenses. All remaining research and development expenses are reflected in pre-clinical, discovery and other internal program expenses. At any given time, we have several active early-stage research and drug discovery programs. Our personnel and infrastructure are typically deployed over multiple projects and are not directly linked to any individual internal early-stage research or drug discovery program. Therefore, we do not maintain financial information for our internal early-stage research and internal drug discovery programs on a project-specific basis.

We expense all research and development costs as incurred. We expect that our research and development expenses will increase in the future as we advance our proprietary product candidates through clinical development, advance our internal drug discovery programs into pre-clinical development and continue our early-stage research. The increase in expense will likely include added personnel and third-party contracts related to research, formulation, process development and manufacturing, pre-clinical studies and clinical trial activities as well as third-party acquisition, license and collaboration fees and laboratory consumables.

Clinical development timelines, likelihood of regulatory approval, and commercialization and associated costs are uncertain, difficult to estimate, and can vary significantly. We anticipate determining which research and development projects to pursue as well as the level of funding available for each project based on the scientific research and pre-clinical and clinical results of each product candidate and related regulatory action. We expect our research and development expenses to continue to represent our largest category of operating expenses for at least the next 12 to 24 months.

General and Administrative Expenses

General and administrative expenses consist primarily of salary, related benefits and stock-based compensation of our executive, finance, legal, business development, commercial and administrative functions, travel expenses, allocated facility-related and information technology costs not otherwise included in research and development expenses, director compensation, director’s and officer’s insurance premiums, investor relations costs, recruitment costs and professional fees for auditing, tax and legal services, including legal expenses for intellectual property protection.

We expect that general and administrative expenses will increase in the future as we expand our operating activities to support increased research and development activities and the potential commercialization of our product candidates.

Other Income (Expense)

Interest Income. Interest income consists of income earned on our cash and investment balances. We anticipate that our interest income will continue to fluctuate depending on our cash and investment balances and interest rates.

Unrealized fair value gain (loss) on marketable securities. Marketable securities are recorded at quoted prices in active markets, which approximate the fair value. Unrealized fair value gain (loss) on marketable securities is related to changes in market pricing on the investments during the period. We anticipate that unrealized fair value gain (loss) on marketable securities will continue to fluctuate depending on our investment balance and interest rates.

Interest Expense. Interest expense consists of accrual of the final payment fee, amortization of debt discounts, and interest charged on our borrowings with Silicon Valley Bank. In May 2020, we repaid the total outstanding term loan balance ahead of the maturity date.

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Foreign Exchange Gain (Loss). Net foreign exchange gains and losses consisted of gains and losses from the impact of foreign exchange fluctuations on our monetary assets and liabilities that are denominated in currencies other than the U.S. dollar (principally the Canadian dollar). We will continue to incur substantial expenses in Canadian dollars and will remain subject to risks associated with foreign currency fluctuations.

Loss on repayment of term loan. In May 2020, we repaid the total outstanding balance of our term loan with Silicon Valley Bank ahead of the maturity date. We recorded a one-time loss of $1.0 million on the repayment of the term loan, inclusive of repayment fees.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the U.S., or U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the revenue and expenses incurred during the reported periods. We base estimates on our historical experience, known trends and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The significant accounting policies that we believe to be most critical in fully understanding and evaluating our financial results are revenue recognition, research and development costs and stock-based compensation. For additional information, see “Note 3” of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Revenue recognition:

Revenue recognition is a critical accounting estimate due to the magnitude and nature of the revenues we receive.

Our primary sources of revenue are derived from non-refundable upfront payments, funding for research and development services, milestone payments, and royalties under various collaboration agreements.

In contracts where we have more than one performance obligation to provide our customer with goods or services, each performance obligation is evaluated to determine whether it is distinct. The consideration under the contract is then allocated between the distinct performance obligations based on their respective relative standalone selling prices. The estimated standalone selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold on a standalone basis and is determined by reference to market rates for the good or service when sold to others or by using an adjusted market assessment approach if selling price on a standalone basis is not available. We generally recognize revenue from non-refundable upfront payments over the estimated term of the performance obligation or period in which the underlying benefit is transferred to the customer. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred to our customer for the related goods or services. Consideration in exchange for research and development services performed by us on behalf of the licensee is recognized upon performance of such activities at rates consistent with prevailing market rates. Consideration associated with at-risk substantive performance milestones, including sales-based milestones, is recognized as revenue when we determine it is probable that a significant reversal of the cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such milestones, and if necessary, adjust our estimate of the overall transaction price. Sales-based royalties received in connection with licenses of intellectual property are subject to a specific exception in the revenue standards, whereby the consideration is not included in the transaction price and recognized in revenue until the customer’s subsequent sales or usages occur.

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Research and development costs:

Research and development costs is a critical accounting policy due to the magnitude of the costs and the requirement to determine the proportionate performance of vendors to calculate third-party accrued and prepaid research and development expenses.

We incur development activity costs, such as pre-clinical costs, manufacturing costs and clinical trial costs paid to contract research organizations, contract development and manufacturing organizations, investigators and other vendors who conduct certain product development activities on our behalf. The amount of expenses recognized in a period related to service agreements is based on the work performed using the accrual basis of accounting. Clinical trial expenses represent a significant component of research and development expenses and we outsource a significant portion of these activities to third party contract research organizations. Third-party clinical trial expenses include investigator fees, site costs, clinical research organization costs and other trial-related vendor costs. Vendors, including contract research organizations, generally provide estimates of proportionate performance to allow us to determine an appropriate accrual. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

Stock-based compensation:

Stock-based compensation is a critical accounting estimate due to the magnitude of and the many assumptions that are required to calculate stock-based compensation expense.

We grant stock options to employees, consultants, directors and officers pursuant to our stock option plans. Compensation expense is recorded using the fair value method. We calculate the fair value of stock options using the Black-Scholes option-pricing model which requires that certain assumptions, including the expected life of the option and expected volatility of the stock, be estimated at the time that the options are granted. The expected volatility is based on the historical volatility of our common shares calculated based on a period of time commensurate with the expected term assumption. The expected term of our stock options has been determined utilizing our available historical data and we recognize forfeitures as they occur. We amortize the fair value of stock options using the straight-line method over the vesting period of the options.

Results of Operations

Comparison of Years Ended December 31, 2021 and 2020

The following table summarizes the results of our operations for the years ended December 31, 2021 and 2020 together with changes in those items (in thousands):

Revenue

Revenue decreased by $13.7 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. Revenue for the year ended December 31, 2021 related to recognition of $5.3 million of milestone revenue, $3.7 million of deferred revenue as well as $6.5 million for research and development services under our license and collaboration agreement with Neurocrine Biosciences, as compared to recognition of $26.8 million of deferred revenue and $5.4 million for research and development services under this agreement for the year ended December 31, 2020. Revenue for the year ended December 31, 2021 also included $3.0 million in milestone revenue recognized in connection with our agreement with Pacira BioSciences, whereas no revenue was recognized in connection with this agreement for the year ended December 31, 2020.

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Research and Development Expenses

The following table summarizes research and development expenses for the years ended December 31, 2021 and 2020 together with changes in those items (in thousands):

Research and development expenses increased by $24.9 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increases were primarily attributable to increased spending on our clinical development product candidates XEN1101 and XEN496 as well as increased spending on our pre-clinical, discovery and other internal programs.

General and Administrative Expenses

The following table summarizes general and administrative expenses for the years ended December 31, 2021 and 2020 together with changes in those items (in thousands):

General and administrative expenses increased by $9.0 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase was primarily attributable to higher salaries and benefits due to increased headcount to support our expanding research and development activities, increased stock-based compensation expense due to an increase in the number of options granted at a higher fair value, increased market research costs and increased legal fees for intellectual property protection.

Other Income

The following table summarizes our other income (expense) for the years ended December 31, 2021 and 2020 together with changes in those items (in thousands):

Other income decreased by $2.1 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The decrease was primarily driven by a decrease in interest income due to a decline in realized market yields on investments and an  unrealized loss on the fair value of marketable securities of $0.7 million for the year ended December 31, 2021 due to changes in market yields on investments. The decrease in other income was also attributable to a decrease in the foreign exchange gain for the year ended December 31, 2021 as compared to the year ended December 31, 2020, largely due to a 0.7% increase as compared to a 2% increase in the value of the Canadian dollar, respectively. These were partially offset by a decrease in interest expense and a one-time loss of $1.0 million due to the repayment of our term loan in May 2020.

Liquidity and Capital Resources

Sources of Liquidity

To date, we have financed our operations primarily through funding received from collaboration and license agreements, private placements of our common and preferred shares, public offerings of our common shares and pre-funded warrants, and debt financing. As of December 31, 2021, we had cash and cash equivalents and marketable securities of $551.8 million.

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Except for any obligations of our collaborators to make milestone payments and research and development funding under our agreements with them, we do not have any committed external sources of capital. Until such time as we can generate substantial product revenue, if ever, we expect to finance our cash needs through a combination of collaboration agreements and equity or debt financings. For example, we have previously entered into an “at-the-market” equity offering sales agreement in August 2020, amended as of March 2022, with Jefferies LLC, or Jefferies, and Stifel, Nicolaus & Company, Incorporated, or Stifel, pursuant to which we may sell our common shares from time to time. As of December 31, 2021, we had sold an aggregate of 733,000 common shares for proceeds of $10.7 million, net of commissions paid and transaction expenses, pursuant to the sales agreement. In January 2022, pursuant to the terms of our license and collaboration agreement with Neurocrine Biosciences, we received a cash payment of $6.75 million and we issued 258,986 common shares to Neurocrine Biosciences for an aggregate purchase price of $8.25 million. In addition, in October 2021, we completed an underwritten public offering of 10,000,000 common shares, including 1,525,423 common shares sold upon the full exercise of the underwriters’ over-allotment option, at a public offering price of $29.50 per common share, and pre-funded warrants to purchase 1,694,915 common shares at $29.4999 per pre-funded warrant, with each pre-funded warrant having an exercise price of $0.0001. The public offering was completed on October 8, 2021, and we received proceeds of $323.9 million, net of underwriting discounts and commissions and offering expenses. In September 2021, pursuant to the terms of our license and collaboration agreement with Neurocrine Biosciences, we received a cash payment of $4.5 million and we issued 275,337 common shares to Neurocrine Biosciences for an aggregate purchase price of $5.5 million. In March 2021, we entered into an underwriting agreement with Jefferies and Stifel relating to an underwritten public offering of 5,135,135 common shares, including 810,810 shares sold upon the full exercise of the underwriters’ option to purchase additional shares, and pre-funded warrants to purchase 1,081,081 common shares. The common shares were offered at a public offering price of $18.50 per common share and the pre-funded warrants were offered at a price of $18.4999 per pre-funded warrant, for proceeds of $107.9 million, net of underwriting discounts, commissions and offering expenses.

Funding Requirements

We have incurred significant operating losses since inception. We had a $78.9 million net loss for the year ended December 31, 2021 and an accumulated deficit of $357.4 million from inception through December 31, 2021. We expect to continue to incur significant expenses in excess of our revenue and expect to incur operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect to incur significant expenses and increasing operating losses for the foreseeable future as we continue our research and pre-clinical and clinical development of our product candidates; expand the scope of our studies for our current and prospective product candidates; initiate additional pre-clinical, clinical or other studies for our product candidates; change or add additional manufacturers or suppliers and manufacture drug supply and drug product for clinical trials and commercialization; seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical studies; seek to identify, and validate additional product candidates; acquire or in-license other product candidates and technologies; make milestone or other payments under our in-license or other agreements, including, without limitation, payments to 1st Order Pharmaceuticals, Inc and other third parties; maintain, protect and expand our intellectual property portfolio; establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval, create additional infrastructure and incur additional costs to support our operations and our product development and planned future commercialization efforts; and experience any delays or encounter issues with any of the above.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

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Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cash and cash equivalents and marketable securities as of the date of this report will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Additionally, the process of testing drug candidates in clinical trials is costly, and the timing of progress in these trials remains uncertain. Further, inflation may affect our use of capital resources by increasing our cost of labor and clinical trial expenses. Our long-term funding requirements will consist of operational, capital, and manufacturing expenditures, including those contractual commitments described below. Because of the inherent risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of capital outflows and operating expenditures associated with our long-term anticipated preclinical studies and clinical trials.

Contractual Commitments

In August 2015, we entered into a priority access agreement with Medpace Inc., or Medpace, for the provision of certain clinical development services, under which we committed to using Medpace non-exclusively for clinical development services over the five year term of the agreement which ended in August 2020. We committed to $7.0 million of services over the term of the agreement of which $3.8 million of services have been received and $3.2 million remains committed as of December 31, 2021. As we did not meet the commitment to retain Medpace for $7.0 million of services prior to August 2020, we are required to provide Medpace the exclusive right to perform all subsequent outsourced clinical development work until such $7.0 million commitment has been satisfied, subject to the availability of appropriate Medpace resources and reasonable service rates. If we decide not to retain Medpace for the provision of clinical development services, we may satisfy our obligations under the priority access agreement by paying Medpace an amount equal to half of the unsatisfied portion. We intend to continue to utilize Medpace for clinical development work where appropriate in order to fulfill the remaining commitment; therefore, no liability has been recognized as of December 31, 2021 with respect to the unsatisfied portion under the priority access agreement.

In April 2017, we acquired XEN1101 (previously known as 1OP2198) from 1st Order Pharmaceuticals, Inc., or 1st Order, pursuant to an asset purchase agreement. In August 2020, we and 1st Order amended the asset purchase agreement to amend certain definitions in the agreement and to modify the payment schedule for certain milestones. Future potential payments to 1st Order include up to $0.9 million in clinical development milestones, up to $6.0 million in regulatory milestones, and $0.5 million in other milestones. To date, we have paid $0.6 million based on progress against these milestones. There are no royalty obligations to 1st Order.

We have one operating lease for research laboratories and office space in Burnaby, British Columbia. The term of the lease expires in June 2032. Amounts related to future lease payments for operating lease obligations as of December 31, 2021 totaled $11.7 million, with $0.9 million expected to be paid within the next 12 months.

Cash Flows

The following table shows a summary of our cash flows for the years ended December 31, 2021 and 2020 (in thousands):

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Operating Activities

For the year ended December 31, 2021, net cash used in operating activities totaled $69.5 million, compared to $48.1 million in 2020. The increase in cash used in operating activities was primarily related to higher expenditures for the clinical development of our proprietary product candidates and pre-clinical, discovery and other internal programs, higher general and administrative expenses and lower interest income for the year ended December 31, 2021 as compared to the same period in 2020, partially offset by $8.3 million in milestone revenue recognized in connection with our agreements with Neurocrine Biosciences and Pacira BioSciences in the year ended December 31, 2021.

Investing Activities

For the year ended December 31, 2021, net cash used in investing activities totaled $246.8 million, compared to $16.8 million in 2020. The change in cash used in investing activities was driven primarily by an increase in purchases of marketable securities, net of redemptions.

Financing Activities

For the year ended December 31, 2021, net cash provided by financing activities totaled $447.5 million, compared to $85.8 million in 2020. The increase in cash provided by financing activities was primarily related to net proceeds of $447.3 million from the issuance of common shares and pre-funded warrants during the year ended December 31, 2021 as compared to $102.5 million from the issuance of common shares, partially offset by repayment of our term loan, for the same period in 2020.

Related Party Transactions

For a description of our related party transactions, see “Certain Relationships and Related Transactions, and Director Independence.”

Outstanding Share Data

As of February 25, 2022, we had 51,921,446 common shares issued and outstanding, outstanding pre-funded warrants to purchase an additional 2,775,996 common shares, outstanding stock options to purchase an additional 5,666,091 common shares and an outstanding warrant to purchase an additional 40,000 common shares. In addition, as of February 25, 2022, we had 1,016,000 Series 1 Preferred Shares issued and outstanding. The Series 1 Preferred Shares are convertible into common shares on a one-for-one basis subject to the holder, together with its affiliates, beneficially owning no more than 9.99% of the total number of common shares issued and outstanding immediately after giving effect to such conversion, or the Beneficial Ownership Limitation. The holder may reset the Beneficial Ownership Limitation to a higher or lower number, not to exceed 19.99% of the total number of common shares issued and outstanding immediately after giving effect to such conversion, upon providing written notice to us which will be effective 61 days after delivery of such notice. The holders of the Series 1 Preferred Shares are entitled to vote together with the common shares on an as-converted basis and as a single class, subject in the case of each holder of the Series 1 Preferred Shares to the Beneficial Ownership Limitation. The Series 1 Preferred Shares may be “restricted securities” as such term is defined under applicable Canadian securities laws, as any Series 1 Preferred Shares that are ineligible to be converted into common shares due to the Beneficial Ownership Limitation, measured as of a given record date that applies for a shareholder meeting or ability to act by written consent, shall be deemed to be non-voting securities. For additional information regarding our Series 1 Preferred Shares, see “Note 10d” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.