X4 PHARMACEUTICALS, INC DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND MANAGEMENT RESULTS (Form 10-Q)
The following information should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K, which was filed with the
Securities and Exchange Commission("SEC"), on March 17, 2022, the ("Annual Report"). This discussion and analysis contains forward-looking statements that involve significant risks and uncertainties. Our actual results, performance or experience could differ materially from what is indicated by any forward-looking statement due to various important factors, risks and uncertainties, including, but not limited to, those set forth under "Risk Factors" included elsewhere in this Quarterly Report on Form 10- Q. Suchfactors may be amplified by the ongoing COVID-19 pandemic and its potential impact on our business and the overall global economy.
We are a late-stage clinical biopharmaceutical company discovering and developing novel therapies for the treatment of diseases of the immune system, with a focus on rare diseases and those with limited treatment options. Our lead clinical candidate, mavorixafor, is a first-in-class, small molecule antagonist of chemokine receptor CXCR4 being developed as a once-daily oral therapy. We believe that inhibition of the CXCR4 pathway creates the potential to provide therapeutic benefit across a wide variety of immune-system related diseases, including chronic neutropenic disorders and certain types of cancer. We are currently evaluating the safety and efficacy of mavorixafor in a 52-week, global Phase 3 clinical trial ("4WHIM trial") for the treatment of patients with WHIM (Warts, Hypogammaglobulinemia, Infections, and Myelokathexis) syndrome, a rare, inherited, primary immunodeficiency disease typically caused by genetic mutations in the CXCR4 receptor gene. We are also studying mavorixafor in two Phase 1b clinical trials - one in patients with chronic neutropenic disorders, including congenital, idiopathic, and cyclic neutropenia, and one in combination with the Bruton tyrosine kinase inhibitor ("BTKi") ibrutinib in patients with a rare B-cell lymphoma called Waldenström's macroglobulinemia and confirmed mutations to both the CXCR4 and MYD88 genes. We completed enrollment of the 4WHIM trial in the third quarter of 2021, with 31 patients aged 12 and older enrolled, and continue to expect to report results from the trial in the fourth quarter of 2022. We have begun building our commercial team in anticipation of a possible New Drug Application ("NDA") submission to the
U.S. Food and Drug Administration("FDA") early in the second half of 2023, with the goal of obtaining approval for mavorixafor for the treatment of people in the U.S.aged 12 and older with WHIM syndrome, should the final Phase 3 data support the NDA filing. We reported positive results from the Phase 1b chronic neutropenia trial in September 2022and we are currently amending the clinical trial protocol to extend and expand the study. Additional clinical data are expected from this expanded trial in the first half of 2023, which we expect will inform the likely regulatory path forward for mavorixafor in the treatment of chronic neutropenia. We reported positive interim results from the Waldenström's trial in August 2022; we expect this study to conclude in December 2022. In July 2022, we announced a strategic re-prioritization of our resources towards advancing mavorixafor solely in chronic neutropenic disorder indications, including WHIM syndrome, while pausing our pre-clinical immunodeficiency program and only progressing our oncology programs upon completion of strategic partnership(s). As a result, any further development of mavorixafor for any oncology indication, including Waldenström's macroglobulinemia, will be subject to completion of a strategic partnership. Similarly, we are currently completing pre-clinical toxicology studies on our candidate X4P-002, a novel, small-molecule CXCR4 antagonist that has demonstrated potential in a number of oncology indications; any regulatory filings to begin clinical development of XP4-002 will now be subject to completing a strategic partnership. In addition, we have paused pre-clinical development of X4P-003, a novel, small-molecule CXCR4 antagonist on which patent applications have been filed; further advancement of X4P-003 for any immunodeficiency indication will be dependent on the potential first approval of mavorixafor and our lifecycle management strategy for the company's product portfolio. Mavorixafor has received multiple special designations from global regulatory authorities: in WHIM syndrome, mavorixafor has been granted Breakthrough Therapy Designation, Fast Track Designation, and Rare Pediatric Designation in the U.S., and Orphan Drug Status in both the U.S.and European Union; mavorixafor has also been granted Orphan Drug Designation in the U.S.in Waldenström's macroglobulinemia, regardless of CXCR4 mutation status. In addition, X4 is eligible to receive a Priority Review Voucher ("PRV") as a result of mavorixafor's Rare Pediatric Designation in WHIM syndrome in the U.S.To date, we have not generated revenue from product sales and do not expect to generate significant revenue from the sale of our products in the foreseeable future. If our development efforts for our product candidates are successful and result in 27 -------------------------------------------------------------------------------- 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.
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COVID-19 Business Update In light of the ongoing COVID-19 pandemic, we have implemented business continuity measures designed to address and mitigate the impact of the COVID-19 pandemic on our employees, our business, including our clinical trials, supply chains and third-party providers. We continue to closely monitor the COVID-19 pandemic as we evolve our business continuity plans and response strategy. Following easing of governmental restrictions, in the fourth quarter of 2020, we opened our new corporate headquarters in
Boston, Massachusettsunder a return-to-work plan with a limited phased approach that is principles-based and local in design, with a focus on employee safety and optimal work environment. While we are currently operating under a "hybrid" model where full-time in-person attendance in the office is optional, all employees who have been fully vaccinated have returned to the office. While we are experiencing limited financial impacts at this time, given the global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the COVID-19 pandemic and continued uncertainty, our business, financial condition, results of operations and growth prospects could be materially adversely affected. Clinical Development With respect to clinical development, we continue to implement risk-based approaches in accordance with FDA and European Medicines Agency("EMA") COVID-19 guidance, which includes virtual and remote patient visits and monitoring where possible, while prioritizing patient safety, maintaining trial continuity and preserving data integrity. We have experienced, and expect to continue to experience, a disruption or delay in our ability to initiate trial sites and/or enroll and assess patients in several of our clinical programs as a result of the ongoing COVID-19 pandemic, notwithstanding substantial vaccination efforts. While not currently impacted, there could be an impact on our ability to supply study drug, report trial results, or interact with regulators, ethics committees or other important agencies due to limitations in regulatory authority employee resources or otherwise. In addition, we rely on contract research organizations ("CROs") or other third parties to assist us with clinical trials, and we cannot guarantee that they will continue to perform their contractual duties in a timely and satisfactory manner as a result of the ongoing COVID-19 pandemic. If the COVID-19 pandemic continues and persists for an extended period of time, we could experience further disruptions to our clinical development timelines, which would adversely affect our business, financial condition, results of operations and growth prospects. 28 -------------------------------------------------------------------------------- Supply Chain We continue to work closely with our third-party manufacturers, distributors and other partners to manage our supply chain activities and mitigate potential disruptions to our clinical supply as a result of the ongoing COVID-19 pandemic. We have business continuity plans in place and have manufacturing plans that will meet our global supply demands going forward. To best support our patients, we continue to work with our vendors to provide the option for direct-to-patient drug shipments from clinical sites. If the ongoing COVID-19 pandemic impacts essential distribution systems we could experience disruptions to our supply chain and operations, which could adversely impact our ability to carry out our clinical trials. Regulatory Activities We expect that we could experience delays in the timing of review and/or our interactions with the FDA or the European Commission("EC") due to, for example, inability to conduct planned physical inspections related to regulatory approval, or the diversion of efforts of the FDA or EC and attention to approval of other therapeutics or other activities related to COVID-19, which could delay approval decisions with respect to the preparation and submission to the FDA of a new drug application ("NDA"), or the preparation and submission to the EC of a Marketing Authorization Application ("MAA"), and otherwise delay or limit our ability to make planned regulatory submissions or obtain new product approvals. Financial Impact The ongoing COVID-19 pandemic continues to evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our operations.
Comparison of the ended three and nine months
The following table summarizes the results of our operations for the past three and nine months
Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 Change 2022 2021 Change (in thousands) Operating expenses: Research and development
$ 14,110 $ 13,188 $ 922 $ 42,044 $ 38,485 $ 3,559Selling, general and administrative 6,044 5,931 113 20,457 17,567 2,890 Gain of sale of non-financial asset - - - (509) - (509) Total operating expenses 20,154 19,119 1,035 61,992 56,052 5,940 Loss from operations (20,154) (19,119) (1,035) (61,992) (56,052) (5,940) Total other expense, net (1,445) (1,054) (391) (2,757) (2,423) (334) Loss before provision for income taxes (21,599) (20,173) (1,426) (64,749) (58,475) (6,274) Provision for income taxes (13) 2 (15) 14 14 - Net loss $ (21,586) $ (20,175) $ (1,411) $ (64,763) $ (58,489) $ (6,274)Research and Development Expenses Research and development expenses consist primarily of costs incurred in connection with the discovery and development of our product candidates, including employee salaries and related expenses, preclinical and clinical development expenses for our product candidates; internal and third-party costs of manufacturing our drug products for use in our preclinical studies and clinical trials; facility, depreciation and other expenses; costs related to compliance with regulatory requirements; and payments made under third-party licensing agreements. We expense research and development costs as incurred. 29 --------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 Change 2022 2021 Change (in thousands Direct research and development expenses by product candidate: Mavorixafor
$ 7,217 $ 6,704 $ 513 $ 17,894 $ 19,966 $ (2,072)X4P-002 341 284 57 2,285 730 1,555 X4P-003 3 173 (170) 199 923 (724) Unallocated expense 6,549 6,027 522 21,666 16,866 4,800 Total research and development expenses $ 14,110 $ 13,188 $ 922 $ 42,044 $ 38,485 $ 3,559Research and development expenses were relatively consistent for the three months ended September 30, 2022as compared to the same period in the prior year and increased $3.6 millionin the nine months ended September 30, 2022as compared to the same period in the prior year. Expenses related to our Phase 3 clinical trials of mavorixafor were lower in both the three and nine month periods as compared to the prior year as we incurred more start-up costs in the prior year to ramp up these clinical trials. These decreases in the current year were partial offset by higher unallocated research and development expenses, which increased $4.8 millionin the nine months ended September 30, 2022as compared to the same periods in the prior year primarily due to an increase compensation costs as a result of higher head count within our research and development departments, an increase in external regulatory compliance costs, and higher information technology costs. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in sale and marketing, executive, finance and administrative functions. Selling, general and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, patent, consulting, investor and public relations, accounting, and audit services. Selling, general and administrative expenses were higher as compared to the prior year primarily due to an increase in compensation, including stock-based compensation costs, primarily resulting from severance payments incurred during the third quarter of 2022 and increases in salaries. We expect selling, general and administrative expenses will grow in the future as we continue to build out our selling, general and administrative functions. Gain on Sale of Non-Financial Asset During the nine months ended September 30, 2022, a third party, who had previously acquired rights to certain intellectual property from us, terminated the arrangement and transferred these rights back us and we transferred these rights to another third party in return for $0.5 million. We have no continuing involvement in any ongoing research and development activities associated with the intellectual property. We concluded that these third parties are "non-customers" as the underlying intellectual property transferred to and from these third parties supports potential drug candidates that are not aligned with our strategic focus and, therefore, are not an output of our ordinary activities. Accordingly, we classified this transaction as a "gain on sale of non-financial asset" for the nine month period ended September 30, 2022. There was no such transaction in the same period of the prior year.
Other expenses, net
Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 Change 2022 2021 Change (in thousands) Interest income $ 14
$ 2 $ 12$ 21 $ 7 $ 14Interest expense (1,018) (920) (98) (2,849) (2,717) (132) Change in fair value of derivative liability - (62) 62 511 (36) 547 Other income (expense) (441) (74) (367) (440) 323 (763) Total other expense, net $ (1,445) $ (1,054) $ (391) $ (2,757) $ (2,423) $ (334)
Other expenses, net, for the past three and nine months
Provision for Income Taxes We did not record a
U.S.federal or state income tax benefit for our losses for the three and nine months ended September 30, 2022and 2021, respectively, due to our conclusion that a full valuation allowance is required against our U.S.federal and state 30 --------------------------------------------------------------------------------
deferred tax assets. For the three and nine months ended
liquidity and capital resources
To date, we have primarily funded our operations with proceeds from sales of common stock, warrants and pre-funded warrants for the purchase of our preferred stock and common stock, sales of preferred stock, proceeds from the issuance of convertible debt and borrowings under loan and security agreements, such as our existing loan and security agreement with Hercules Capital, Inc. (the "Hercules Loan Agreement") as more fully described in the notes to our condensed consolidated financial statements included herein. In
August 2020, we entered into a Controlled Equity OfferingSM Sales Agreement, (the "ATM Sales Agreement"), with B. Riley Securities, Inc., Cantor Fitzgerald & Co.and Stifel, Nicolaus & Company, Incorporated, (collectively, the "Sales Agents"), pursuant to which we may offer and sell, at our sole discretion through one or more of the Sales Agents, shares of our common stock having an aggregate offering price of up to $50.0 million. In March 2021, we entered into a securities purchase agreement with several institutional and accredited investors pursuant to which we sold shares of common stock and, in lieu of common stock, pre-funded warrants to purchase shares of common stock for gross proceeds of $53.0 million, before deducting offering expenses payable by us. In November 2021, we raised approximately $10.0 millionthrough the sale of pre-funded warrants to an investor. In January 2022, we entered into a common stock purchase agreement with Lincoln Park Capital Fund LLC("Lincoln Park") pursuant to which Lincoln Park has committed to purchase, at our request from time to time over a 36-month period, shares of our common stock having an aggregate offering price of up to $50.0 million, subject to certain limitations. In March 2022, we raised $3.0 millionfor the sale of shares of our common stock and pre-funded warrants for the purchase of shares of common stock in a private placement.
September 30, 2022, we have borrowed $32.5 millionthrough our Hercules Loan Agreement. Under our Hercules facility, we may borrow up to an additional $17.5 millionin term loans through December 2022, at Hercules's sole discretion. Principal payments under the Hercules Loan Agreement commence in February 2023and the Hercules Loan Agreement matures in July 2024. Going Concern Since our inception, we have incurred significant operating losses and negative cash flows from our operations. We have not yet commercialized any products and we do not expect to generate revenue from sales of any products for several years, if at all. As of September 30, 2022, our cash and cash equivalents were $79.9 million, and our restricted cash balance was $1.3 million. We expect that our research and development and selling, general and administrative expenses will continue to increase as we focus on completing the necessary development, obtaining regulatory approval and preparing for potential commercialization of our product candidates. Based on our current operating plan, we believe that our existing cash and cash equivalents will be sufficient to fund our operating expenses and capital expenditure requirements into the third quarter of 2023. As further discussed in Note 7 to our condensed consolidated financial statements, our Hercules Loan Agreement has a covenant that requires us to maintain a minimum level of cash. Based on our current financial projections and assuming we do not achieve certain financial and operational milestones that would reduce this minimum cash requirement, we believe we would be in violation of this covenant in the second quarter of 2023. If we are in violation of this covenant, Hercules could require the repayment of all outstanding debt under the Hercules Loan Agreement. As a result, we believe that, in aggregate, these conditions raise substantial doubt about our ability to continue as a going concern for the one-year period following the issuance of these condensed consolidated financial statements for the quarterly period ended September 30, 2022. Unless and until we reach profitability in the future, we will require additional capital to fund our operations. We intend to raise further capital through a combination of equity offerings, debt financings, other third party funding, marketing and distribution arrangements and collaborations and strategic alliances; however, no assurances can be made as to when and if we will obtain such funding. If we are unable to obtain funding, we could be forced to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or pre-commercialization efforts, which would adversely affect our business prospects, or we may be unable to continue or be required to scale down operations. 31 --------------------------------------------------------------------------------
The following table summarizes our cash flow activities for each of the periods presented: Nine Months Ended
September 30, 20222021 (in thousands) Net loss $
Adjustments to reconcile net loss with net cash used from operations
6,493 6,809 Changes in operating assets and liabilities 261 (172) Net cash used in operating activities (58,009) (51,852) Net cash used in investing activities (69) (602) Net cash provided by financing activities 56,586 49,675
Effects of changes in exchange rates on cash, cash equivalents and restricted cash
(468) (203) Net decrease in cash, cash equivalents and restricted cash (1,960) (2,982)
Cash, cash equivalents and restricted cash, start of period
Cash, cash equivalents and restricted cash, period end $81,148
Operating Activities During the nine months ended
September 30, 2022, net cash used in operating activities was $58.0 million, primarily resulting from our net loss of $64.8 million, adjusted for noncash expenses of $6.5 millionand changes in our operating assets and liabilities of $0.3 million. Non-cash expenses primarily includes stock-based compensation expense, non-cash lease expense and non-cash interest expense. Net cash used in operating activities for the nine months ended September 30, 2021was $51.9 million, primarily resulting from our net losses of $58.5 million, adjusted for noncash expenses of $6.8 millionand changes in our operating assets and liabilities of $0.2 million. Investing Activities During the nine months ended September 30, 2022and 2021, cash used in investing activities of less than $0.1 millionand $0.6 million, respectively, related primarily to purchases of furniture and laboratory equipment purchases related to our leased facility in Vienna, Austria. Financing Activities During the nine months ended September 30, 2022, net cash provided by financing activities was $56.6 million, consisting primarily of $60.6 millionof net proceeds from two private placement equity offerings that closed during the nine month period and the sale of shares of our common stock to Lincoln Park and through our employee stock purchase plan, partially offset by $1.2 millionof end-of-term payments made pursuant to our Hercules LoanAgreement and fees related to amendments to the agreement during the period. During the nine months ended September 30, 2021, net cash provided by financing activities was $49.7 million, consisting primarily of $51.5 millionin proceeds from a private placement equity offing that closed during the period, partially offset by $2.0 millionof cash paid to repurchase redeemable common stock. Funding Requirements As noted above, the Hercules Loan Agreement contains a minimum cash covenant that is effective on September 1, 2022. Based on our current financial projections, assuming we do not achieve certain operational and financial milestone contained within the Hercules Loan Agreement that would reduce this minimum cash requirement, we would be in violation of this covenant in the second quarter of 2023. If we are in violation of this covenant, Hercules could require the repayment of all outstanding debt under the Hercules loan facility. To fund our operations, we will be required to raise additional capital, which may be through a combination of equity offerings, such as through our ATM Sales Agreement or through our common stock purchase agreement with Lincoln Capital, debt financings, including refinancing of our Hercules Loan Agreement or entering into new debt arrangements with other third-parties, marketing and distribution arrangements and collaborations and strategic alliances. However, our ability to raise such funding, the timing of such funding and the amount of funding cannot be assured. During 2022 and beyond, we expect our expenses to continue to increase in connection with our ongoing activities, particularly as we advance the current and anticipated clinical trials of our product candidates in development. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical product candidates, we are unable to estimate the exact amount of our funding requirements. Our short-term and long-term funding requirements will depend on and could increase significantly as a result of many factors, including: •the scope, number, initiation, progress, timing, costs, design, duration, any potential delays, and results of clinical trials and nonclinical studies for our current or future product candidates, particularly our ongoing Phase 3 pivotal clinical trial of mavorixafor for the treatment of patients with WHIM syndrome, our 32 --------------------------------------------------------------------------------
ongoing phase 1b clinical trial of mavorixafor in chronic neutropenic disease and completion of our phase 1b clinical trial of mavorixafor in Waldenstrom;
•the ongoing global impact of the ongoing COVID-19 pandemic and its impact on our ongoing clinical trials, supply chain and financial markets generally;
•the outcome, timing and cost of regulatory reviews, approvals or other actions to meet regulatory requirements established by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to require that we perform more studies for our product candidates than those that we currently expect;
•our ability to obtain marketing approval for our product candidates;
•the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights covering our product candidates, including any such patent claims and intellectual property rights that we have licensed from
Genzymepursuant to the terms of our license agreement with Genzyme;
•our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the costs of defending intellectual property disputes, including patent infringement claims by third parties against us or our product candidates;
• the cost and timing of completing commercial-scale outsourced manufacturing activities related to our product candidates;
• our ability to establish and maintain licensing, collaboration or similar agreements on favorable terms, and whether and to what extent we retain development or commercialization responsibilities under any new licensing, collaboration or similar agreement;
•the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval in regions where we choose to commercialize our products on our own;
• the success of other businesses, products or technologies that we acquire or invest in;
•the costs of acquiring, licensing or investing in companies, product candidates and technologies;
•our need and ability to hire additional management, scientific and medical personnel;
•the costs to continue to operate as a public company, including the need to implement additional financial and reporting systems and other internal systems and infrastructure for our business;
•market acceptance of our product candidates to the extent they are approved for commercial sale; and
•the impact of competing technology and market developments.
If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, reduce or eliminate our product development efforts or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Hercules Credit Agreement For a full description of our Hercules Credit Agreement see Note 7 to our Condensed Consolidated Financial Statements.
Critical Accounting Policies and Significant Judgments and Estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in
the United States. The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events 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 values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. 33 -------------------------------------------------------------------------------- During the three and nine months ended September 30, 2022, there were no material changes to our critical accounting policies as reported for the year ended December 31, 2021as part of our Annual Report. In addition, see Note 2 of these condensed consolidated financial statements under the heading "Recently Adopted Accounting Pronouncements" for new accounting pronouncements or changes to the accounting pronouncements during the three and nine months ended September 30, 2022.
Emerging growth company and smaller reporting company status
We are an emerging growth company ("EGC"), as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). The JOBS Act permits an EGC to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not EGCs. We will cease to be an EGC on
December 31, 2022, which is the last day of our fiscal year following the fifth anniversary of the completion of our initial public offering. In addition, we are also a smaller reporting company ("SRC"), as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and in Item 10(f)(1) of Regulation S-K, allowing us to take advantage of certain of the scaled disclosures available to smaller reporting companies. We will continue to be an SRC even after we are no longer an EGC for so long as (i) our voting and non-voting common stock held by non-affiliates is less than $250.0 millionmeasured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100.0 millionduring the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 millionmeasured on the last business day of our second fiscal quarter.
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