Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
XBiotech Inc. (“XBiotech” or the “Company) is
a pre-market biopharmaceutical company engaged in discovering and developing True Human™ monoclonal antibodies for treating
a variety of diseases. True Human™ monoclonal antibodies are those which occur naturally in human beings—as opposed
to being derived from animal immunization or otherwise engineered. We believe that naturally occurring monoclonal antibodies have
the potential to be safer and more effective than their non-naturally occurring counterparts. XBiotech is focused on developing
its True Human™ pipeline and manufacturing system.
We have never been profitable and, as of September 30, 2017, we had an accumulated deficit of $209.3 million.
We had net losses of $6.2 million and $25.9 million for the three months and nine months ended September 30, 2017, respectively,
compared to $12.5 million and $36.4 million for the three months and nine months ended September 30, 2016, respectively. We expect
to incur significant operating losses for the foreseeable future as we advance our drug candidates from discovery through preclinical
testing and clinical trials and seek regulatory approval and eventual commercialization. In addition to these increasing research
and development expenses, we expect general and administrative costs to increase as we continue to operate as a public company.
We will need to generate significant revenues to achieve profitability, and we may never do so. As of September 30, 2017, we had
56 employees compared to 106 as of September 30, 2016. This decrease was due to a re-organization of the Company that occurred
following the recent material events surrounding the Phase 3 oncology studies.
Recent Events:
The Company’s Phase III symptomatic colorectal cancer study has been completed and XBiotech proceeded
with the submission of a Marketing Authorization Application (MAA) to the European Medicines Agency (EMA) in March 2016. In May
2017, the Company announced that it received a negative opinion from the EMA’s Committee for Medicinal Products for Human
Use (“CHMP”) for the MAA in Europe. XBiotech subsequently pursued the EMA’s re-examination procedure in which
new Rapporteurs were assigned to reevaluate the initial opinion after receiving the Company’s grounds for re-examination.
On September 14
th
, the CHMP issued its opinion on the re-examination of the Company’s MAA and maintained its initial
negative opinion issued in May 2017.
Based on the positive, top-line results announced earlier this year
in two Phase II studies, one which evaluated MABp1 for the treatment of Hidradenitis Suppurativa and one using the Company’s
proprietary 514G3 True Human antibody for the treatment of
Staphylococcus aureus
bloodstream infections, plans for
advanced studies in these indications are on-going. We are currently seeking guidance from the FDA to help with clinical protocol
development for both studies to enable better agreement on what will be sufficient data to seek product registration.
The Company continues to be subject to a number of risks common to
companies in similar stages of development. Principal among these risks are the uncertainties of technological innovations, dependence
on key individuals, development of the same or similar technological innovations by the Company’s competitors and protection
of proprietary technology. The Company’s ability to fund its planned clinical operations, including completion of its planned
clinical trials, is expected to depend on the amount and timing of cash receipts from future collaboration or product sales and/or
financing transactions. The Company believes that its cash and cash equivalents of $39.0 million at September 30, 2017 will enable
the Company to achieve some key inflection points, including advanced clinical studies in certain indication(s), as well as on-going
R&D efforts for the Company’s pre-clinical pipeline. Based on our research and development plans and our timing expectations
related to the progress of our programs, we expect that our cash and cash equivalents as of September 30, 2017 will enable us to
fund our operating expenses and capital expenditure requirements through 2018. We have based this estimate on assumptions that
may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.
Revenues
To date, we have not generated any revenue. Our ability to generate
revenue and become profitable depends on our ability to successfully commercialize our lead product candidate, Xilonix™,
or any other product candidate we may advance in the future.
Research and Development Expenses
Research and development expense consists of expenses incurred in
connection with identifying and developing our drug candidates. These expenses consist primarily of salaries and related expenses,
stock-based compensation, the purchase of equipment, laboratory and manufacturing supplies, facility costs, costs for preclinical
and clinical research, development of quality control systems, quality assurance programs and manufacturing processes. We charge
all research and development expenses to operations as incurred.
Clinical development timelines, likelihood of success and total
costs vary widely. We do not currently track our internal research and development costs or our personnel and related costs on
an individual drug candidate basis. We use our research and development resources, including employees and our drug discovery technology,
across multiple drug development programs. As a result, we cannot state precisely the costs incurred for each of our research and
development programs or our clinical and preclinical drug candidates. From inception through September 30, 2017, we have recorded
total research and development expenses, including share-based compensation, of $164.1 million. Our total research and development
expenses for the three months and nine months ended September 30, 2017 were $4.9 million and $20.5 million, respectively, compared
to $9.8 million and $28.8 million for the three months and nine months ended September 30, 2016, respectively. Share-based compensation
was $0.2 million for the three months and nine months ended September 30, 2017, respectively, compared to $0.6 million and $1.7
million for the three months and nine months ended September 30, 2016, respectively.
Research and development expenses, as a
percentage of total operating expenses for the three months and nine months ended September 30, 2017 were 75% and 77%, respectively,
compared to 78% and 79% for the three months and nine months ended September 30, 2016, respectively. The percentages,
excluding
stock-based compensation, for the three months and nine months ended September 30, 2017 were 77% and 83%, respectively, compared
to 81% and 84% for the three months and nine months ended September 30, 2016, respectively.
The clinical research and development costs may decrease going forward
with the completion of all clinical studies to date. Although, expenses could increase due to the potential of pursuing advanced
clinical studies in various indications.
Based on the results of our preclinical studies, we anticipate that
we will select drug candidates and research projects for further development on an ongoing basis in response to their preclinical
and clinical success and commercial potential. For research and development candidates in early stages of development, it is premature
to estimate when material net cash inflows from these projects might occur.
General and Administrative Expenses
General and administrative expense consists primarily of salaries
and related expenses for personnel in administrative, finance, business development and human resource functions, as well as the
legal costs of pursuing patent protection of our intellectual property and patent filing and maintenance expenses, stock–based
compensation, and professional fees for legal services. Our total general and administration expenses for the three months and
nine months ended September 30, 2017 were $1.7 million and $6.0 million, respectively, compared to $2.7 million and $7.5 million
for the three months and nine months ended September 30, 2016, respectively. Share-based compensation accounted for $0.2 million
and $1.8 million for the three months and nine months ended September 30, 2017, respectively, compared to $0.6 million and $2.3
million for the three months and nine months ended September 30, 2016, respectively.
General and administrative expenses, as a percentage of total operating
expenses for the three months and nine months ended September 30, 2017 were 25% and 23%, respectively, compared to 22% and 21%
for the three months and nine months ended September 30, 2016, respectively. The percentages,
excluding
stock-based compensation,
for the three months and nine months ended September 30, 2017 were 23% and 17%, respectively, compared to 19% and 16% for the three
months and nine months ended September 30, 2016, respectively.
Critical Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make judgments, estimates and assumptions in the preparation of our consolidated
financial statements and accompanying notes. Actual results could differ from those estimates. We believe there have been no significant
changes in our critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2016.
Results of Operations
Revenue
We did not record any revenue during the three months and nine months
ended September 30, 2017 and 2016.
Expenses
Research and Development
Research and Development costs are summarized as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
Increase
|
|
% Increase
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
(Decrease)
|
Salaries and related expenses
|
|
$
|
1,267
|
|
|
$
|
1,993
|
|
|
$
|
(726
|
)
|
|
|
(36
|
%)
|
Laboratory and manufacturing supplies
|
|
|
301
|
|
|
|
2,217
|
|
|
|
(1,916
|
)
|
|
|
(86
|
%)
|
Clinical trials and sponsored research
|
|
|
1,772
|
|
|
|
3,598
|
|
|
|
(1,826
|
)
|
|
|
(51
|
%)
|
Stock-based compensation
|
|
|
217
|
|
|
|
565
|
|
|
|
(348
|
)
|
|
|
(62
|
%)
|
Other
|
|
|
1,373
|
|
|
|
1,401
|
|
|
|
(28
|
)
|
|
|
(2
|
%)
|
Total
|
|
$
|
4,930
|
|
|
$
|
9,774
|
|
|
$
|
(4,844
|
)
|
|
|
(50
|
%)
|
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
% Increase
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
(Decrease)
|
Salaries and related expenses
|
|
$
|
5,250
|
|
|
$
|
5,829
|
|
|
$
|
(579
|
)
|
|
|
(16
|
%)
|
Laboratory and manufacturing supplies
|
|
|
2,313
|
|
|
|
5,755
|
|
|
|
(3,442
|
)
|
|
|
(60
|
%)
|
Clinical trials and sponsored research
|
|
|
8,713
|
|
|
|
11,911
|
|
|
|
(3,198
|
)
|
|
|
(27
|
%)
|
Stock-based compensation
|
|
|
237
|
|
|
|
1,749
|
|
|
|
(1,512
|
)
|
|
|
(86
|
%)
|
Other
|
|
|
4,005
|
|
|
|
3,557
|
|
|
|
448
|
|
|
|
13
|
%
|
Total
|
|
$
|
20,518
|
|
|
$
|
28,801
|
|
|
$
|
(8,283
|
)
|
|
|
(29
|
%)
|
We do not currently track our internal research and development
costs or our personnel and related costs on an individual drug candidate basis. We use our research and development resources,
including employees and our drug discovery technology, across multiple drug development programs. As a result, we cannot state
precisely the costs incurred for each of our research and development programs or our clinical and preclinical drug candidates.
Research and development expenses decreased by 50% to $4.9 million for the three months ended September 30, 2017
compared to $9.8 million for the three months ended September 30, 2016. Research and development expenses decreased by 29% to $20.5
million for the nine months ended September 30, 2017 compared to $28.8 million for the nine months ended September 30, 2016.
The three month decrease in research and development expenses was
mainly due to a $1.9 million decrease in laboratory and manufacturing supplies expense, due to a reduction in clinical trial drug
manufacturing. In addition, there was a decrease in clinical trials and sponsored research expense due to the completion of a global
trial. Salary and related expenses also decreased due to the reduction of our research and development workforce from 95 to 49.
Compared to the nine months ended September 30, 2016, the research
and development expense decrease in the nine months ended September 30, 2017 was primarily caused by the decrease in laboratory
and manufacturing supplies expense. The clinical trials and sponsored research expense decrease was principally due to the reduced
expense accrual and as a result of the the completion of a global trial. Stock-based compensation expenses also decreased due to
the forfeiture of terminated employees’ stock options.
General and Administrative
General and administrative costs are summarized as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
Increase
|
|
% Increase
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
(Decrease)
|
Salaries and related expenses
|
|
$
|
407
|
|
|
$
|
445
|
|
|
$
|
(38
|
)
|
|
|
(9
|
%)
|
Patent filing expense
|
|
|
160
|
|
|
|
135
|
|
|
|
25
|
|
|
|
19
|
%
|
Stock-based compensation
|
|
|
228
|
|
|
|
561
|
|
|
|
(333
|
)
|
|
|
(59
|
%)
|
Professional fees
|
|
|
440
|
|
|
|
1,063
|
|
|
|
(623
|
)
|
|
|
(59
|
%)
|
Other
|
|
|
428
|
|
|
|
481
|
|
|
|
(53
|
)
|
|
|
(11
|
%)
|
Total
|
|
$
|
1,663
|
|
|
$
|
2,685
|
|
|
$
|
(1,022
|
)
|
|
|
(38
|
%)
|
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
% Increase
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
(Decrease)
|
Salaries and related expenses
|
|
$
|
1,172
|
|
|
$
|
1,358
|
|
|
$
|
(186
|
)
|
|
|
(14
|
%)
|
Patent filing expense
|
|
|
517
|
|
|
|
488
|
|
|
|
29
|
|
|
|
6
|
%
|
Stock-based compensation
|
|
|
1,828
|
|
|
|
2,291
|
|
|
|
(463
|
)
|
|
|
(20
|
%)
|
Professional fees
|
|
|
1,168
|
|
|
|
1,923
|
|
|
|
(755
|
)
|
|
|
(39
|
%)
|
Other
|
|
|
1,350
|
|
|
|
1,461
|
|
|
|
(109
|
)
|
|
|
(8
|
%)
|
Total
|
|
$
|
6,035
|
|
|
$
|
7,521
|
|
|
$
|
(1,486
|
)
|
|
|
(20
|
%)
|
General and administrative expenses decreased by 38% to $1.7 million
for the three months ended September 30, 2017 compared to $2.7 million for the three months ended September 30, 2016. General and
administrative expenses decreased by 20% to $6.0 million for the nine months ended September 30, 2017 compared to $7.5 million
for the nine months ended September 30, 2016.
The three months decrease was primarily related to a $0.6 million
decrease in public relations fees and legal fees. Stock-based compensation also decreased due to the forfeiture of terminated employees’
stock options.
The nine months decrease was principally due to the reduction
in public relations fees, the decrease of stock-based compensation expense and labor expense. The decrease in stock-based
compensation is due to the grant of stock options to board members in the first quarter of 2016 that were immediately vested.
Labor costs also decreased due to the reduction of our general and administrative workforce from 10 to 7.
Other income (loss)
The following table summarizes other income (loss) (in thousands):
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest income
|
|
|
123
|
|
|
|
-
|
|
|
|
287
|
|
|
|
-
|
|
Foreign exchange gain (loss)
|
|
|
265
|
|
|
|
(25
|
)
|
|
|
365
|
|
|
|
(41
|
)
|
Total
|
|
$
|
388
|
|
|
$
|
(25
|
)
|
|
$
|
652
|
|
|
$
|
(41
|
)
|
The interest income for the three months and nine months ended September
30, 2017 is mainly from the interest generated from our Canadian bank account. Foreign exchange gain was mainly due to the fluctuation
of the exchange rate between Euro and US dollar.
Liquidity and Capital Resources
Our cash requirements could change materially as a result of the
progress of our research and development and clinical programs, licensing activities, acquisitions, divestitures or other corporate
developments.
Since our inception on March 22, 2005 through September 30,
2017, we have funded our operations principally through public offerings and private placements of equity securities, which have
provided aggregate cash proceeds of approximately $257.2 million. The following table summarizes our sources and uses of cash (in
thousands):
|
|
Nine Months Ended
September 30,
|
Net cash (used in) provided by:
|
|
2017
|
|
2016
|
Operating activities
|
|
$
|
(26,842
|
)
|
|
$
|
(33,214
|
)
|
Investing activities
|
|
|
(1,151
|
)
|
|
|
(11,946
|
)
|
Financing activities
|
|
|
33,319
|
|
|
|
866
|
|
Effect of foreign exchange rate on cash and cash equivalents
|
|
|
(673
|
)
|
|
|
36
|
|
Net change in cash and cash equivalents
|
|
$
|
4,653
|
|
|
$
|
(44,258
|
)
|
During the nine months ended September 30, 2017 and 2016, our operating
activities used net cash of $26.8 million and $33.2 million, respectively. The use of net cash in each of these periods primarily
resulted from our net losses. The net loss from operations for the nine months ended September 30, 2017 as compared to the nine
months ended September 30, 2016 decreased, but the prepayment for clinical trial and payment for bills related to previous period
expenses increased the cash used.
During the nine months ended September 30, 2017 and 2016, our investing activities used net cash of $1.2 million
and $11.9 million, respectively. The use of cash during the nine months ended September 30, 2017 was for research and development,
and the purchase of new manufacturing equipment. We spent approximately $7.7 million on the construction of new facilities during
the nine months ended September 30, 2016.
During the nine months ended September 30, 2017 and 2016, our financing
activities provided net cash proceeds of $33.3 million and $0.9 million, respectively. During the nine months ended September 30,
2017, we entered into subscription agreements with accredited investors, and sold 2.4 million common shares at $13 per share for
approximately $31.6 million in net proceeds. Also, we sold 87 thousand shares under a Common Stock Sales Agreement with H.C. Wainwright
& Co. LLC for net proceeds of approximately $1.0 million. Employees exercised stock options to purchase a total of 289 thousand
shares of common stock for a total of approximately $0.8 million in net proceeds. During the nine months ended September 30, 2016,
employees exercised stock options to purchase a total of 165 thousand shares of common stock for a total of approximately $0.9
million in net proceeds.
We expect to continue to incur substantial operating losses in the
future. We will not receive any product revenue until a drug candidate has been approved by the Food and Drug Administration or
similar regulatory agencies in other countries and successfully commercialized. As of September 30, 2017, our principal sources
of liquidity were our cash and cash equivalents, which totaled approximately $39.0 million.
Contractual Obligations and Commitments
On January 12, 2008, we entered a lease
agreement to lease our office space in Austin, Texas. On September 15, 2010, we entered into a second lease agreement to lease
additional space in Austin, Texas. On March 20, 2014, we extended the lease for an additional 21 months on the same terms and rental
rates as the current lease. On February 28, 2016, we extended the lease for another 4 years. The future minimum lease payments
are as follows as of September 30, 2017 (in thousands):
Contractual Obligations
|
|
Total
|
|
Less than
1 Year
|
|
1 - 3 Years
|
|
More than
3 years
|
Office space leases
|
|
$
|
665
|
|
|
$
|
468
|
|
|
$
|
197
|
|
|
$
|
—
|
|
Total contractual obligations
|
|
$
|
665
|
|
|
$
|
468
|
|
|
$
|
197
|
|
|
$
|
—
|
|
Rent expense was $186 thousand and $180 thousand for the three months
ended September 30, 2017 and 2016, respectively.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet activities,
including the use of structured finance, special purpose entities or variable interest entities.