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, 2019, we had an accumulated deficit of $255.6 million. We had net losses of $6.2 million and $17.9 million for the
three months and nine months ended September 30, 2019, respectively, compared to $5.1 million and $15.0 million for the three months
and nine months ended September 30, 2018, respectively. We expect to incur significant and increasing 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 add personnel and 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, 2019, we had 58 employees.
Recent Events:
The Company launched a randomized,
double blind, placebo-controlled, multi-center phase 2 studies evaluating bermekimab subcutaneous formulation in adults with moderate
to severe Hidradenitis Suppurativa (HS). The study, chaired by reknown dermatologist Dr. Alice Gottlieb, will involve150 patients
into three arms: two bermekimab dosing regimens versus a placebo arm over sixteen (16) weeks of therapy. The study’s
primary endpoint is the percentage of subjects achieving Hidradenitis Suppurativa Clinical Response (HiSCR) at week 12. Multiple
secondary efficacy endpoints will be assessed after 12 and 16 weeks of therapy (for more information on this study please visit
www.clinicaltrials.gov). This will be the third study undertaken by the Company in this indication. Results from an earlier, smaller
randomized study are published in the Journal of Investigative Dermatology. This study met its primary endpoint, demonstrating
significant improvement of HiSCR in patients treated with bermekimab compared to control after 12 weeks of therapy (response rate
of 60% vs 10%, respectively (p=0.035)).
The Company also launched a randomized,
double blind, placebo-controlled, multi-center phase 2 studies evaluating bermekimab subcutaneous formulation in adults with moderate
to severe and Atopic Dermatitis (AD). The study, chaired by Dr. Seth Forman, is expected to have its first patient enrolled around
the time of release of this filing and will involve 90 patients into three arms: two bermekimab dosing regimens versus a placebo
arm over sixteen (16) weeks of therapy. In October, the Company presented results of an ealier open-label study with bermekimab
in atopic dermatitis at the European Academy of Dermatology and Venereology (EADV) Congress, a leading annual dermatology
conference. A highlight of the presented data was the observation that after only 8 weeks of bermekimab therapy, three-fourths
of patients achieved 75% improvement in their Eczema Area and Severity Index (EASI 75) scores, which is a key assessment of response
to therapy in AD. The current standard of care and the only approved biological therapy for AD involves a 16 week treatment regimen,
and their clinical trials have shown to result in 44-51% of patients achieving 75% improvement in EASI score. In addition, Dr.
Gottlieb presented signficant reduction in itch, with 75% of patients achieving clinically significant improvement in 8 weeks.
The Company also announced enrollment
of the first patient in a phase 2, randomized double-blind, placebo-controlled clinical study evaluating bermekimab therapy in
adults with systemic sclerosis (SSc), otherwise known as scleroderma. The primary endpoint of the study will be measured at 12
weeks, and will assess SSc disease severity using a combination of rheumatological, clinical, and physiological measures. This
is the first study for bermekimab in rheumatology, which the Company believes has the potential to be a very important area of
medicine for bermekimab therapy. The ongoing study will randomize patients 1:1 to receive either weekly subcutaneous injections
of bermekimab or placebo. The study will also include an open label weekly bermekimab treatment regimen during weeks 13-24, where
patients will continue to be evaluated using the same endpoints.
The Company reported that it
strengthened its already considerable IP position during the quarter, including granting of important broad Canadian patents for
bermkimab in the treatment of dermatological pathologies. In September the Company announced the Canadian Patent Office granted XBiotech Patent
Number 56003542-6CA, covering the use of bermekimab in the treatment of inflammatory skin diseases. The patent describes studies
showing that antibodies which specifically neutralize the activity of interleukin-1alpha (IL-1α), such as bermekimab, reduce
skin inflammation and treat inflammatory skin diseases.
XBiotech plans to continue the
development of its clinical pipeline along with research and development efforts to enable selection of drug candidates and research
projects for further development in response to their preclinical and clinical success and commercial potential.
Risks
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 $40.3 million at September
30, 2019 will enable the Company to achieve some key inflection points, including 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,
2019 will enable us to fund our operating expenses and capital expenditure requirements through September 30, 2020. We have based
this estimate on assumptions that may prove to be inaccurate, 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,
bermekimab, 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, share-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, 2019, we have recorded total research and development expenses, including share-based compensation, of $199.4 million.
Our total research and development expenses for the three months and nine months ended September 30, 2019 were $4.5 million and
$13.8 million, respectively, compared to $3.9 million and $10.9 million for the three months and nine months ended September 30,
2018, respectively. Share-based compensation accounted for $0.4 million and $1.0 million for the three months and nine months ended
September 30, 2019, respectively, compared to $0.2 million and $0.5 million for the three months and nine months ended September
30, 2018, respectively.
Research and development expenses, as a
percentage of total operating expenses for the three months and nine months ended September 30, 2019 were 74% and 77% compared
to 77% and 73% for the three months and nine months ended September 30, 2018, respectively. The percentages, excluding share-based
compensation, for the three months and nine months ended September 30, 2019 were 78% and 79%, compared to 79% and 76% for the three
months and nine months ended September 30, 2018, respectively.
The clinical development costs may further
increase going forward with potentially more advanced studies in the future as we evaluate our clinical data and pipeline.
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, 2019 were $1.6 million and $4.2 million, respectively, compared to $1.2 million
and $4.0 million for the three months and nine months ended September 30, 2018, respectively. Share-based compensation accounted
for $0.4 million and $0.9 million for the three months and nine months ended September 30, 2019, respectively, compared to $0.2
million and $0.7 million for the three months and nine months ended September 30, 2018, respectively.
General and administrative expenses, as
a percentage of total operating expenses for the three months and nine months ended September 30, 2019 were 26% and 23%, compared
to 23% and 27% for the three months and nine months ended September 30, 2018, respectively. The percentages, excluding share-based
compensation, for the three months and nine months ended September 30, 2019 were 22% and 20%, compared to 21% and 24% for the three
months and nine months ended September 30, 2018, 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, 2018.
Results of Operations
Revenue
We did not record any revenue during the
three months and nine months ended September 30, 2019 and 2018.
Expenses
Research and Development
Research and Development costs are summarized
as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
Increase
|
|
% Increase
|
|
|
2019
|
|
2018
|
|
(Decrease)
|
|
(Decrease)
|
Salaries and related expenses
|
|
$
|
1,291
|
|
|
$
|
1,017
|
|
|
$
|
274
|
|
|
|
27
|
%
|
Laboratory and manufacturing supplies
|
|
|
1,048
|
|
|
|
528
|
|
|
|
520
|
|
|
|
98
|
%
|
Clinical trials and sponsored research
|
|
|
355
|
|
|
|
447
|
|
|
|
(92
|
)
|
|
|
-21
|
%
|
Share-based compensation
|
|
|
386
|
|
|
|
224
|
|
|
|
162
|
|
|
|
72
|
%
|
Other
|
|
|
1,453
|
|
|
|
1,724
|
|
|
|
(272
|
)
|
|
|
-16
|
%
|
Total
|
|
$
|
4,533
|
|
|
$
|
3,940
|
|
|
$
|
592
|
|
|
|
15
|
%
|
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
% Increase
|
|
|
2019
|
|
2018
|
|
(Decrease)
|
|
(Decrease)
|
Salaries and related expenses
|
|
$
|
3,640
|
|
|
$
|
3,088
|
|
|
$
|
552
|
|
|
|
18
|
%
|
Laboratory and manufacturing supplies
|
|
|
3,634
|
|
|
|
1,165
|
|
|
|
2,469
|
|
|
|
212
|
%
|
Clinical trials and sponsored research
|
|
|
852
|
|
|
|
1,041
|
|
|
|
(189
|
)
|
|
|
-18
|
%
|
Share-based compensation
|
|
|
972
|
|
|
|
474
|
|
|
|
498
|
|
|
|
105
|
%
|
Other
|
|
|
4,655
|
|
|
|
5,114
|
|
|
|
(459
|
)
|
|
|
-9
|
%
|
Total
|
|
$
|
13,753
|
|
|
$
|
10,882
|
|
|
$
|
2,871
|
|
|
|
26
|
%
|
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 increased
15% to $4.5 million for the three months ended September 30, 2019 compared to $3.9 million for the three months ended September
30, 2018. Research and development expenses increased 26% to $13.8 million for the nine months ended September 30, 2019 compared
to $10.9 million for the nine months ended September 30, 2018.
The three month increase in research and
development expenses was mainly due to a $0.5 million increase of laboratory and manufacturing supplies, related to the clinical
drug manufacturing for the clinical trial opened in the third quarter of the year. Clinical trials and sponsored research expense
decreased due to the completion of two clinical trials started in 2018 and the newly opened clinical trial hasn’t fully executed.
In addition, there was an increase in salary and related expenses and share-based compensation due to the increase of our research
and development workforce from 44 to 53. Also, the increase was offset by the $0.3 million decrease in facility expense in other
fees, because of the full termination of the lease associated with the office building on Riverside in Austin Texas.
Compared to the nine months ended September
30, 2018, the research and development expense increase in the nine months ended September 30, 2019 was primarily caused by the
increase of laboratory and manufacturing supplies for the clinical trial opened in the third quarter of the year. Labor costs and
share-based compensation also increased due to the growing size of the research and development workforce.
General and Administrative
General and administrative costs are summarized
as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
Increase
|
|
% Increase
|
|
|
2019
|
|
2018
|
|
(Decrease)
|
|
(Decrease)
|
Salaries and related expenses
|
|
$
|
397
|
|
|
$
|
191
|
|
|
$
|
206
|
|
|
|
108
|
%
|
Patent filing expense
|
|
|
173
|
|
|
|
208
|
|
|
|
(35
|
)
|
|
|
-17
|
%
|
Share-based compensation
|
|
|
411
|
|
|
|
215
|
|
|
|
196
|
|
|
|
91
|
%
|
Professional fees
|
|
|
221
|
|
|
|
210
|
|
|
|
11
|
|
|
|
5
|
%
|
Other
|
|
|
376
|
|
|
|
351
|
|
|
|
25
|
|
|
|
7
|
%
|
Total
|
|
$
|
1,578
|
|
|
$
|
1,175
|
|
|
$
|
403
|
|
|
|
34
|
%
|
|
|
Nine Months Ended
September 30,
|
|
Increase
|
|
% Increase
|
|
|
2019
|
|
2018
|
|
(Decrease)
|
|
(Decrease)
|
Salaries and related expenses
|
|
$
|
862
|
|
|
$
|
899
|
|
|
$
|
(37
|
)
|
|
|
-4
|
%
|
Patent filing expense
|
|
|
542
|
|
|
|
609
|
|
|
|
(67
|
)
|
|
|
-11
|
%
|
Share-based compensation
|
|
|
881
|
|
|
|
712
|
|
|
|
169
|
|
|
|
24
|
%
|
Professional fees
|
|
|
761
|
|
|
|
553
|
|
|
|
208
|
|
|
|
38
|
%
|
Other
|
|
|
1,123
|
|
|
|
1,231
|
|
|
|
(108
|
)
|
|
|
-9
|
%
|
Total
|
|
$
|
4,169
|
|
|
$
|
4,004
|
|
|
$
|
165
|
|
|
|
4
|
%
|
General and administrative expenses increased
34% to $1.6 million for the three months ended September 30, 2019 compared to $1.2 million for the three months ended September
30, 2018. General and administrative expenses increased 4% to $4.2 million for the nine months ended September 30, 2019 compared
to $4.0 million for the nine months ended September 30, 2018.
The three months increase was primarily
related to a $0.2 million increased in salaries and related expense due to the $228 thousand bonus paid to the Chief Executive
Officer in July 2019. Share-based compensation increased due to the 300 thousand stock options granted to the Chief Executive Officer
in 2019 compared to 200 thousand in 2018.
Compared to the nine months ended September
30, 2018, , the general and administrative expense slightly increased in the nine months ended September 30, 2019 was primarily
caused by the increase in professional fees due to services for underwriter agreement in Q2. Share-based compensation increased
due to the stock options granted to the Chief Executive Officer and employees.
Other income (loss)
The following table summarizes other income
(loss) (in thousands):
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Interest income
|
|
|
250
|
|
|
|
100
|
|
|
|
379
|
|
|
|
270
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
Foreign exchange (loss)
|
|
|
(289
|
)
|
|
|
(36
|
)
|
|
|
(333
|
)
|
|
|
(411
|
)
|
Total
|
|
$
|
(39
|
)
|
|
$
|
64
|
|
|
$
|
56
|
|
|
$
|
(141
|
)
|
The interest income for the three months
and nine months ended September 30, 2019 and 2018 was mainly from the interest generated from the Company’s Canadian bank
account. Foreign exchange loss was mainly due to the fluctuation between US dollar and Euro in the three months and nine months
ended September 30, 2019 compared to the three months and nine months ended September 30, 2018.
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, 2019, we have funded our operations principally through public offerings and the private placement of equity
securities, which have provided aggregate cash proceeds of approximately $296.3 million. The following table summarizes our
sources and uses of cash (in thousands):
|
|
Nine Months Ended
September 30,
|
Net cash (used in) provided by:
|
|
2019
|
|
2018
|
Operating activities
|
|
$
|
(14,524
|
)
|
|
$
|
(11,421
|
)
|
Investing activities
|
|
|
(198
|
)
|
|
|
(114
|
)
|
Financing activities
|
|
|
38,924
|
|
|
|
201
|
|
Effect of foreign exchange rate on cash and cash equivalents
|
|
|
313
|
|
|
|
415
|
|
Net change in cash and cash equivalents
|
|
$
|
24,515
|
|
|
$
|
(10,919
|
)
|
During the nine months ended September 30,
2019 and 2018, our operating activities used net cash of $14.5 million and $11.4 million, respectively. The use of net cash in
each of these periods primarily resulted from our net losses. The increase in net loss from operations for the nine months ended
September 30, 2019 as compared to the nine months ended September 30, 2018 was mainly due to the increase in laboratory and manufacturing
supplies.
During the nine months ended September 30,
2019 and 2018, our investing activities used net cash of $198 thousand and $114 thousand, respectively. The use of cash was for
the purchase of new research and development equipment.
During the nine months ended September 30,
2019 and 2018, our financing activities provided net cash proceeds of $38.9 million and $0.2 million, respectively. During the
nine months ended September 30, 2019, the Company sold 4.8 million shares under the Common Shares Purchase Agreement with Piper
Jaffray & Co for net proceeds of approximately $37.5 million. Employees exercised stock options to purchase a total of 318
thousand shares of our common stock for approximately $1.2 million in net proceeds. In this period, the Company also collected
$0.3 million of its subscription receivable balance. During the nine months ended September 30, 2018, employees exercised stock
options to purchase a total of 81 thousand shares of our common stock for approximately $0.2 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 FDA, EMA
or similar regulatory agencies in other countries and successfully commercialized, or other potential business development transaction..
As of September 30, 2019, our principal sources of liquidity were our cash and cash equivalents, which totaled approximately $40.3
million.
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.