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
June 30, 2017, we had an accumulated deficit of $203.1 million. We had net losses of $9.1 million and $19.7 million for the three
months and six months ended June 30, 2017, respectively, compared to $13.6 million and $23.9 million for the three months and six
months ended June 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 June 30, 2017, we had 60 employees compared to 103 as of March 31, 2017. This decrease was due to a re-orgainization of the Company that occurred following the recent material
events surrounding the Phase 3 oncology studies.
Recent Events:
Clinical Regulatory Developments
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 is proceeding with the EMA’s re-examination
procedure in which new Rapporteurs will be assigned to reevaluate the initial opinion. The Company has retained European counsel
and regulatory specialists in Europe to manage the re-examination process, who is following the standard protocol and timetable
set by the EMA.
In June 2017 XBiotech reported discontinuation of its second Phase
III study, a double-blind placebo controlled study for improving survival in metastatic colorectal cancer, following the Independent
Data Monitoring Committee’s (IDMC) second prospectively planned, unblinded interim analysis at 75% of events in the study.
The IDMC had no safety concerns from the unblinded analysis. However, the committee recommended the early termination of the study
since the findings were not sufficient to meet efficacy or the threshold for continuation, which involved a prospectively defined
acceptance boundary for the interim analysis. XBiotech is currently conducting full data analyses, as stratification of the data
may identify subpopulations that benefited from therapy.
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 is on-going. We are seeking end of Phase 2 meetings with the FDA to help guide the
development of special protocol asssessments (SPA), which are submitted to the FDA 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 $45.9 million at June 30, 2017
will enable the Company to achieve several major inflection points, including potential marketing authorization in Europe depending
on the outcome of the re-examination procedure, 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 June 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 June
30, 2017, we have recorded total research and development expenses, including share-based compensation, of $159.2 million. Our
total research and development expenses for the three months and six months ended June 30, 2017 were $7.4 million and $15.6 million,
respectively, compared to $11.2 million and $19.0 million for the three months and six months ended June 30, 2016, respectively.
Share-based compensation accounted for ($0.3) million and $21 thousand for the three months and six months ended June 30, 2017,
respectively, compared to $0.6 million and $1.2 million for the three months and six months ended June 30, 2016, respectively.
Research and development expenses, as a percentage of total operating expenses for the three months and
six months ended June 30, 2017 were 76% and 78%, respectively, compared to 82% and 80% for the three months and six months ended
June 30, 2016, respectively. The percentages,
excluding
stock-based compensation, for the three months and six months ended
June 30, 2017 were 87% and 85%, respectively, compared to 88% and 87% for the three months and six months ended June 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 potential marketing approval of our
lead product candidate in Europe based on the outcome of the re-examination procedure and related commercialization costs, as well
as, 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
six months ended June 30, 2017 were $2.3 million and $4.4 million, respectively, compared to $2.4 million and $4.8 million for
the three months and six months ended June 30, 2016, respectively. Share-based compensation accounted for $1.2 million and $1.6
million for the three months and six months ended June 30, 2017, respectively, compared to $0.5 million and $1.7 million for the
three months and six months ended June 30, 2016, respectively.
General and administrative expenses, as a percentage of total operating
expenses for the three months and six months ended June 30, 2017 were 24% and 22%, respectively, compared to 18% and 20% for the
three months and six months ended June 30, 2016, respectively. The percentages,
excluding
stock-based compensation, for
the three months and six months ended June 30, 2017 were 13% and 15%, respectively, compared to 15% and 15% for the three months
and six months ended June 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 six months
ended June 30, 2017 and 2016.
Expenses
Research and Development
Research and Development costs are summarized as follows (in thousands):
|
|
Three Months Ended June 30,
|
|
Increase
|
|
% Increase
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
(Decrease)
|
Salaries and related expenses
|
|
$
|
1,770
|
|
|
$
|
1,980
|
|
|
$
|
(211
|
)
|
|
|
(11
|
%)
|
Laboratory and manufacturing supplies
|
|
|
780
|
|
|
|
2,762
|
|
|
|
(1,982
|
)
|
|
|
(72
|
%)
|
Clinical trials and sponsored research
|
|
|
3,785
|
|
|
|
4,657
|
|
|
|
(872
|
)
|
|
|
(19
|
%)
|
Stock-based compensation
|
|
|
(273
|
)
|
|
|
587
|
|
|
|
(860
|
)
|
|
|
(147
|
%)
|
Other
|
|
|
1,337
|
|
|
|
1,230
|
|
|
|
108
|
|
|
|
9
|
%
|
Total
|
|
$
|
7,399
|
|
|
$
|
11,216
|
|
|
$
|
(3,817
|
)
|
|
|
(34
|
%)
|
|
|
Six Months Ended June 30,
|
|
Increase
|
|
% Increase
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
(Decrease)
|
Salaries and related expenses
|
|
$
|
3,983
|
|
|
$
|
3,837
|
|
|
$
|
146
|
|
|
|
4
|
%
|
Laboratory and manufacturing supplies
|
|
|
2,012
|
|
|
|
3,538
|
|
|
|
(1,526
|
)
|
|
|
(43
|
%)
|
Clinical trials and sponsored research
|
|
|
6,941
|
|
|
|
8,313
|
|
|
|
(1,372
|
)
|
|
|
(17
|
%)
|
Stock-based compensation
|
|
|
21
|
|
|
|
1,184
|
|
|
|
(1,163
|
)
|
|
|
(98
|
%)
|
Other
|
|
|
2,630
|
|
|
|
2,156
|
|
|
|
474
|
|
|
|
22
|
%
|
Total
|
|
$
|
15,587
|
|
|
$
|
19,028
|
|
|
$
|
(3,441
|
)
|
|
|
(18
|
%)
|
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 34% to $7.4 million
for the three months ended June 30, 2017 compared to $11.2 million for the three months ended June 30, 2016. Research and development
expenses decreased by 18% to $15.6 million for the six months ended June 30, 2017 compared to $19.0 million for the six months
ended June 30, 2016.
The three month decrease in research and
development expenses was mainly due to a $2.0 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 slow down of a global trial. Stock-based compensation expenses also decreased due to the forfeiture of terminated employees’
stock option.
Compared to the six months ended June 30, 2016, the research and
development expense decrease in the six months ended June 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 slow down of a global trial.
General and Administrative
General and administrative costs are summarized as follows (in thousands):
|
|
Three Months Ended June 30,
|
|
Increase
|
|
% Increase
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
(Decrease)
|
Salaries and related expenses
|
|
$
|
297
|
|
|
$
|
386
|
|
|
$
|
(89
|
)
|
|
|
(23
|
%)
|
Patent filing expense
|
|
|
171
|
|
|
|
207
|
|
|
|
(36
|
)
|
|
|
(17
|
%)
|
Stock-based compensation
|
|
|
1,171
|
|
|
|
511
|
|
|
|
660
|
|
|
|
129
|
%
|
Professional fees
|
|
|
312
|
|
|
|
768
|
|
|
|
(456
|
)
|
|
|
(59
|
%)
|
Other
|
|
|
338
|
|
|
|
527
|
|
|
|
(189
|
)
|
|
|
(36
|
%)
|
Total
|
|
$
|
2,289
|
|
|
$
|
2,399
|
|
|
$
|
(110
|
)
|
|
|
(5
|
%)
|
|
|
Six Months Ended June 30,
|
|
Increase
|
|
% Increase
|
|
|
2017
|
|
2016
|
|
(Decrease)
|
|
(Decrease)
|
Salaries and related expenses
|
|
$
|
765
|
|
|
$
|
913
|
|
|
$
|
(148
|
)
|
|
|
(16
|
%)
|
Patent filing expense
|
|
|
357
|
|
|
|
353
|
|
|
|
4
|
|
|
|
1
|
%
|
Stock-based compensation
|
|
|
1,601
|
|
|
|
1,730
|
|
|
|
(129
|
)
|
|
|
(7
|
%)
|
Professional fees
|
|
|
728
|
|
|
|
860
|
|
|
|
(132
|
)
|
|
|
(15
|
%)
|
Other
|
|
|
921
|
|
|
|
979
|
|
|
|
(58
|
)
|
|
|
(6
|
%)
|
Total
|
|
$
|
4,372
|
|
|
$
|
4,835
|
|
|
$
|
(463
|
)
|
|
|
(10
|
%)
|
General and administrative expenses decreased by 5% to $2.3 million
for the three months ended June 30, 2017 compared to $2.4 million for the three months ended June 30, 2016. General and administrative
expenses decreased by 10% to $4.4 million for the six months ended June 30, 2017 compared to $4.8 million for the six months ended
June 30, 2016.
The three months decrease was primarily
related to a $0.5 million decrease in public relations fees and legal fees. Other expenses also decreased including travel and
recruiting activities. Stock-based compensation increased $0.7 million due to the repurchase of stock options from a certain individual.
The six months decrease was principally
due to the decrease in stock-based compensation, the reduction of our workforce and the public relations fees. The decrease in
stock-based compensation is due to the grant of stock options to board members in 2016 Q1 that were immediately vested. Labor costs
also decreased due to the reduction of our general and administrative workforce from 11 to 5.
Other income (loss)
The following table summarizes other income (loss) (in thousands):
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest income
|
|
|
114
|
|
|
|
-
|
|
|
|
164
|
|
|
|
-
|
|
Foreign exchange gain (loss)
|
|
|
441
|
|
|
|
(7
|
)
|
|
|
99
|
|
|
|
(16
|
)
|
Total
|
|
$
|
555
|
|
|
$
|
(7
|
)
|
|
$
|
263
|
|
|
$
|
(16
|
)
|
The interest income for the three months and six months ended June
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 June 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 $289.9 million. The following table summarizes our sources and uses
of cash (in thousands):
|
|
Six Months Ended June 30,
|
Net cash (used in) provided by:
|
|
2017
|
|
2016
|
Operating activities
|
|
$
|
(20,376
|
)
|
|
$
|
(18,198
|
)
|
Investing activities
|
|
|
(890
|
)
|
|
|
(8,774
|
)
|
Financing activities
|
|
|
33,274
|
|
|
|
707
|
|
Effect of foreign exchange rate on cash and cash equivalents
|
|
|
(383
|
)
|
|
|
12
|
|
Net change in cash and cash equivalents
|
|
$
|
11,625
|
|
|
$
|
(26,253
|
)
|
During the six months ended June 30, 2017 and 2016, our operating
activities used net cash of $20.4 million and $18.2 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 six months ended June 30, 2017 as compared to the six months
ended June 30, 2016 decreased, but the prepayment for clinical trial and payment for bills related to previous period expense increased
the cash used.
During the six months ended June 30, 2017
and 2016, our investing activities used net cash of $0.9 million and $8.7 million, respectively. The use of cash during the six
months ended June 30, 2017 was for the purchase of new research and development equipment. We spent approximately $8.8 million
on the construction of new facilities during the six months ended June 30, 2016.
During the six months ended June 30, 2017 and 2016, our financing
activities provided net cash proceeds of $33.3 million and $0.7 million, respectively. During the six months ended June 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 271 thousand shares
of common stock for a total of approximately $0.8 million in net proceeds. During the six months ended June 30, 2016, employees
exercised stock options to purchase a total of 150 thousand shares of common stock for a total of approximately $0.7 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 June 30, 2017, our principal sources of liquidity
were our cash and cash equivalents, which totaled approximately $45.9 million.
Contractual Obligations and Commitments
On January 12, 2008, we entered a lease agreement to lease our facility
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 June 30, 2017 (in thousands):
Contractual Obligations
|
|
Total
|
|
Less than
1 Year
|
|
1 - 3 Years
|
|
More than 3 years
|
Operating facility leases
|
|
$
|
780
|
|
|
$
|
465
|
|
|
$
|
315
|
|
|
$
|
—
|
|
Total contractual obligations
|
|
$
|
780
|
|
|
$
|
465
|
|
|
$
|
315
|
|
|
$
|
—
|
|
Rent expense was $186 thousand and $180 thousand for the three months
ended June 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.