You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed financial statements and notes thereto included elsewhere in this report and with the audited financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . This discussion and analysis and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled "Risk Factors." These forward-looking statements speak only as of the date hereof. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason. Unless the context requires otherwise, the terms "Ardelyx", "Company", "we", "us", and "our" refer toArdelyx, Inc.
Overview
We are a biopharmaceutical company founded with a mission to discover, develop
and commercialize innovative first-in-class medicines that meet significant
unmet medical needs.
Since commencing operations inOctober 2007 , substantially all our efforts have been dedicated to our research and development ("R&D") activities, including developing tenapanor and developing our proprietary drug discovery and design platform. We realized our first product sales of IBSRELA® (tenapanor) inMarch 2022 . As ofJune 30, 2022 , we had an accumulated deficit of$767.9 million . 24 -------------------------------------------------------------------------------- Table of Contents We expect to continue to incur substantial operating losses for the foreseeable future as we commercialize IBSRELA, seek to gain approval for XPHOZAH® (tenapanor) for the control of serum phosphorus in adult patients with CKD on dialysis; prepare for the potential commercialization of XPHOZAH, if approved; and incur manufacturing and development cost for, tenapanor. To date, we have funded our operations from the sale and issuance of common stock and convertible preferred stock, funds from our collaboration partnerships, which includes license fees, milestones and product supply revenue, as well as funds from our loan agreements with our lenders.
Our Commercial Product
IBSRELA for IBS-C
Our unique discovery platform and deep understanding of the primary mechanism of sodium transport in the intestine resulted in our discovery and development of IBSRELA, a first-in-class,U.S. Food and Drug Administration ("FDA") approved, sodium hydrogen exchanger 3 ("NHE3") inhibitor for the treatment of irritable bowel syndrome with constipation ("IBS-C") in adults. IBSRELA acts locally in the gut and is minimally absorbed. IBS-C is a gastrointestinal disorder characterized by both abdominal pain and altered bowel movements, estimated to affect 11 million people in theU.S. IBS-C is associated with significantly impaired quality of life, reduced productivity, and substantial economic burden. For our commercial launch of IBSRELA, we built a commercial organization highly experienced in launching novel therapies into specialty areas. We recognized our first sales of IBSRELA in theU.S. inMarch 2022 . The established nature of the market, limited number of players, concentration of prescribers, recognized unmet need, and favorable response to the novel mechanism IBSRELA product profile enable a targeted promotional effort centered on the 9,000 health care providers that account for 50% of IBS-C prescriptions. Central to the go to market strategy for IBSRELA is a highly experienced specialty sales force, many with existing relationships across their GI target base, full company engagement, and innovative peer-to-peer and digital initiatives leveraging the rapidly evolving market dynamics in how HCPs receive information and interact with industry. Our Product Pipeline
Development Candidate XPHOZAH for The Control of Serum Phosphorus in Adult
Patients with CKD on Dialysis
XPHOZAH is a first-in-class medicine being developed for the control of serum phosphorus in adult patients with CKD on dialysis. XPHOZAH has a unique mechanism of action and acts locally in the gut to inhibit NHE3. This results in the tightening of the epithelial cell junctions, thereby significantly reducing paracellular uptake of phosphate, the primary pathway of phosphate absorption. If approved, XPHOZAH would be the first therapy for phosphate management that blocks phosphorus absorption at the primary site of uptake. It is not a phosphate binder. InJune 2020 , we submitted a new drug application ("NDA") to the FDA for XPHOZAH for the control of serum phosphorus in adult patients with CKD on dialysis. The NDA was supported by three Phase 3 trials involving over 1,000 adult patients that evaluated the use of tenapanor for the control of serum phosphorus in adult patients with CKD on dialysis, with two trials evaluating tenapanor as monotherapy and one trial evaluating tenapanor as part of a dual mechanism approach with phosphate binders. All three Phase 3 trials met their primary and key secondary endpoints. OnJuly 28, 2021 , we received a Complete Response Letter ("CRL") from the FDA regarding our NDA for tenapanor for the control of serum phosphorus in adult patients with CKD on dialysis. According to the CRL, while the FDA agrees "that the submitted data provide substantial evidence that tenapanor is effective in reducing serum phosphorus in adult patients with CKD on dialysis," the FDA characterizes the magnitude of the treatment effect as "small and of unclear clinical significance." InDecember 2021 , we submitted a Formal Dispute Resolution Request ("FDRR"). The FDRR was focused on demonstrating that the data submitted in the NDA supported the clinical significance of the treatment effect of tenapanor. OnFebruary 4, 2022 , we received an Appeal Denied Letter ("ADL") from theFDA's Office of Cardiology, Hematology, Endocrinology and Nephrology ("OCHEN"). OnFebruary 18, 2022 , we submitted an appeal of the ADL to theFDA's Center for Drug Evaluation and Research ,Office of New Drugs ("OND"). 25 -------------------------------------------------------------------------------- Table of Contents OnApril 25, 2022 , we announced that OND had provided an interim response to our second level of appeal of the CRL. The OND noted that additional input from theCardiovascular and Renal Drug Advisory Committee ("Advisory Committee") in general, and specifically, from experts, including expert clinicians, would be valuable in further considering the clinical meaningfulness of the phosphate lowering effect observed in our phase 3 clinical program for XPHOZAH. Accordingly, the OND directed theDivision of Cardiology and Nephrology to convene the Advisory Committee, and indicated that a response to our appeal could be expected within thirty calendar days after the conclusion of the Advisory Committee meeting. OnJune 21, 2022 we announced that the FDA has informed us that a meeting of the Advisory Committee is tentatively scheduled forNovember 16, 2022 . There can be no assurances that the response from the Advisory Committee will be positive, or if the outcome of the Advisory Committee is positive, that approval of our NDA will ultimately be granted by the FDA.
RDX013 Program: Small Molecule for Treating Hyperkalemia
Our small molecule potassium secretagogue program, RDX013, is focused on the
development of a potential treatment for hyperkalemia. Hyperkalemia is a common
problem in patients with heart and kidney disease, particularly in patients
taking customary blood pressure medications known as
renin-angiotensin-aldosterone system ("RAAS") inhibitors. RDX013 is a novel
mechanism agent designed to target the underlying biological mechanisms of
potassium secretion to lower elevated potassium.
On April 25, 2022 , we reported that we have completed our data analyses of the
Phase 2 dose ranging clinical trial for RDX013 evaluating the safety and
efficacy of our potassium secretagogue for the treatment of hyperkalemia, or
elevated potassium, in chronic kidney disease patients who are not on dialysis.
While the results of the study demonstrated an acceptable safety and
tolerability profile for RDX013 and supported proof of concept in its ability to
lower serum potassium levels, with statistically significant reductions compared
to placebo after eight days of treatment, the study did not meet its primary
endpoint of significantly reducing serum potassium levels compared to placebo
after four weeks of treatment. We currently expect that the next steps for the
program will be to evaluate a new formulation that potentially enhances subject
compliance and the efficacy of RDX013 in an additional Phase 2 clinical study at
such time as we have determined our available resources support conducting such
an additional clinical study after prioritization of the commercialization of
IBSRELA and preparations for the Advisory Committee meeting for XPHOZAH.
RDX020 Program: Small molecule for Treating Metabolic Acidosis
We have an ongoing discovery program targeting the inhibition of bicarbonate exchange for the treatment of metabolic acidosis, a highly prevalent comorbidity in CKD patients that is strongly correlated with disease progression and adverse outcomes. We have identified lead compounds that are potent, selective and proprietary inhibitors of bicarbonate secretion. Our research organization was eliminated as part of ourOctober 2021 restructuring, and therefore, we currently expect to continue to advance this discovery program utilizing third-party resources managed by internal non-clinical expertise.
We have exclusive rights to tenapanor in the
agreements with Kyowa Kirin Co., Ltd. (“KKC”) in
Pharmaceutical Industrial Development Co. Ltd.
Knight Therapeutics, Inc. (“Knight”) in
commercialization of tenapanor for certain indications in their respective
territories.
Knight has exclusive rights for the development, commercialization and distribution of tenapanor inCanada for hyperphosphatemia and IBS-C. InMarch 2021 , Knight announced the commercial availability of IBSRELA inCanada , following its approval byHealth Canada inApril 2020 . Under the terms of the Knight Agreement, Knight paid us a$2.3 million upfront payment. We may also be eligible to receive approximatelyCAD22.2 million for development and commercialization milestones, or approximately$17.2 million at the currency exchange rate onJune 30, 2022 , of which$0.7 million has been received and recognized as revenue as ofJune 30, 2022 . We are also eligible to receive royalties throughout the term of the agreement, and a transfer price for manufacturing services. The variable consideration related to the remaining development milestone payments has not been included in the transaction price as they were fully constrained atJune 30, 2022 . 26 -------------------------------------------------------------------------------- Table of Contents KKC has exclusive rights for the development, commercialization and distribution of tenapanor inJapan for cardiorenal indications. Under the terms of the agreement with KKC, we received a$30.0 million upfront payment from KKC, and we may be entitled to receive up to$55.0 million in total development and regulatory milestones, of which$10.0 million has been received and recognized as revenue as ofJune 30, 2022 . We may also be eligible to receive approximately ¥8.5 billion for commercialization milestones, or approximately$62.3 million at the currency exchange rate onJune 30, 2022 , as well as reimbursement of costs plus a reasonable overhead for the supply of product and royalties on net sales throughout the term of the agreement. As discussed in Note 7. Deferred Royalty Obligation, the future royalties and commercial milestone payments we may receive under the 2017 KKC Agreement will be remitted toHealthCare Royalty Partners IV, L.P. pursuant to a Royalty and Sales Milestone Interest Acquisition Agreement. OnApril 11, 2022 , we entered into a second amendment (the "Amendment") to the 2017 KKC Agreement. Under the terms of the Amendment, we and KKC have agreed to a reduction in the royalty rate payable to us by KKC upon net sales of tenapanor inJapan . The royalty rate will be reduced from the high teens to low double digits for a two-year period of time following the first commercial sale inJapan , and then to mid-single digits for the remainder of the royalty term. As discussed in Note 7. Deferred Royalty Obligation, the future royalties we may receive under the 2017 KKC Agreement will be remitted toHealthCare Royalty Partners IV, L.P. pursuant to a Royalty and Sales Milestone Interest Acquisition Agreement. As consideration for the reduction in the royalty rate, KKC has agreed to pay us up to an additional$40.0 million payable in two tranches, with the first payment due following KKC's filing with theJapanese Ministry of Health, Labour and Welfare of its application for marketing approval for tenapanor and the second payment due following KKC's receipt of regulatory approval to market tenapanor for hyperphosphatemia inJapan . Fosun Pharma has exclusive rights for the development and commercialization of tenapanor inChina for both hyperphosphatemia and IBS-C. Under the terms of the Fosun Agreement, Fosun paid us a$12.0 million upfront license fee. We may be entitled to receive development and commercialization milestones of up to$113.0 million , of which$3.0 million has been received and recognized as revenue as ofJune 30, 2022 , as well as reimbursement of cost plus a reasonable overhead for the supply of product and tiered royalties on net sales ranging from the mid-teens to 20%.
Impact of COVID-19
The global COVID-19 pandemic has impacted the operational decisions of companies worldwide. It also has created and may continue to create significant uncertainty in the global economy. We have undertaken measures to protect our employees, partners, collaborators, and vendors, some of which impact our normal operations. To date, we have been able to continue our operations with our workforce, most of whom are working remotely, and our pre-existing infrastructure that supports secure access to our internal systems. If, however, the COVID-19 pandemic has a substantial impact on the productivity of our employees, the results of our operations and overall financial performance may be adversely impacted. The extent of the impact from the COVID-19 pandemic on our business will depend largely on future developments that are highly uncertain and cannot be predicted. For a discussion of risks of COVID-19 relating to our business, see "Part II: Other Information-Item 1A.- Risk Factors- Risks Related to Our Business- The ongoing effects of the COVID-19 pandemic, or any other outbreak of epidemic diseases, or the perception of their effects, could have a material adverse effect on our business, financial condition, results of operations or cash flows." As of the date of issuance of this financial report, we are not aware of any specific event or circumstance that would require updates to our estimates and judgments or revisions to the carrying value of our assets or liabilities. These estimates may change as new events occur and additional information is obtained.
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of financial condition and results of operations is
based on our condensed financial statements, which have been prepared in
accordance with accounting principles generally accepted in
Critical accounting policies are those that require significant judgment and/or estimates by management at the time that financial statements are prepared such that materially different results might have been reported if other assumptions had been made. These estimates form the basis for making judgments about the carrying values of assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates. The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our condensed financial statements presented in this report are described in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K filed with theSEC onFebruary 28, 2022 . 27
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During the six months ended
accounting policies and significant judgements and estimates:
Product Sales, Net
We account for our commercial product sales, net in accordance with Topic 606 - Revenue from Contracts with Customers. We received approval from the FDA inSeptember 2019 to market IBSRELA, the first and only NHE3 inhibitor for the treatment of IBS-C in adults, inthe United States (the "U.S."). We began selling IBSRELA in theU.S. inMarch 2022 . We distribute our products principally through a limited number of distributors and specialty pharmacy providers (collectively, our "Customers"). Our Customers subsequently sell our products to pharmacies and patients. Separately, we enter into arrangements with third parties that provide for government-mandated and privately-negotiated rebates, chargebacks and discounts. Revenue from product sales is recognized when our performance obligations are satisfied, which is when Customers obtain control of our product and occurs upon delivery.
Reserves for Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction
price), which includes estimates of variable consideration, including rebates,
discounts, patient copay assistance programs, and estimated product returns.
These estimates are based on the amounts earned or to be claimed for related
sales and are classified as reductions of gross accounts receivable if the
amount is payable to our Customers or a current liability if the amount is
payable to a party other than a Customer. Where appropriate, these estimates are
based on factors such as industry data and forecasted customer buying and
payment patterns, our historical experience, current contractual and statutory
requirements, specific known market events and trends. Overall, these reductions
to gross sales reflect our best estimates of the amount of consideration to
which we are entitled based on the terms of the contract. Variable consideration
is included in the transaction price only to the extent that it is probable that
a significant reversal in the amount of cumulative revenue recognized will not
occur when the uncertainty associated with the variable consideration is
subsequently resolved. Actual amounts of consideration ultimately received may
differ from our estimates. If actual results in the future vary from our
estimates, we adjust these estimates, which would affect product revenue and
earnings in the period such variances become known. As we gain more historical
experience, estimates will be more heavily based on the expected utilization
from historical data we have accumulated since the IBSRELA product launch.
Rebates are generally invoiced and paid quarterly in arrears.
Rebates: Rebates include mandated discounts under the Medicaid Drug Rebate
Program ("Medicaid") and the Medicare Coverage Gap Program ("Medicare"). Rebates
are amounts owed after the final dispensing of products to a benefit plan
participant and are based upon contractual agreements or legal requirements with
the public-sector benefit providers. These estimates for rebates are recorded in
the same period the related gross revenue is recognized, resulting in a
reduction of product revenue and the establishment of a current liability which
is included in accrued expenses on the condensed balance sheets. We estimate our
Medicaid and Medicare rebates based upon the estimated payor mix, and statutory
discount rates. Our estimates for payor mix are guided by payor information
received from specialty pharmacies, expected utilization for wholesaler sales to
pharmacies, and available industry payor information.
Chargebacks: Chargebacks are discounts that occur when certain contracted
purchasers purchase directly from our wholesalers at a discounted price. The
wholesaler, in turn, charges back the difference between the price initially
paid to us by the wholesaler and the discounted price paid to the wholesaler by
the contracted purchaser. Amounts for estimated chargebacks are established in
the same period that the related gross revenue is recognized, resulting in a
reduction of product revenue and accounts receivable. The accrual for wholesaler
chargebacks is estimated based on known chargeback rates, known sales to
wholesalers, and estimated utilization by types of contracted purchasers.
Discounts and Fees: Our payment terms are generally 30 to 60 days. Wholesalers
and specialty pharmacies are offered various forms of consideration, including
service fees. Wholesalers may also receive prompt pay discounts for payment
within a specified period. We expect prompt pay discounts to be earned when
offered and therefore, we deduct the full amount of these discounts and service
fees from product sales when revenue is recognized, resulting in a reduction of
product revenue and accounts receivable.
Other Reserves: Patients who have commercial insurance may receive co-pay
assistance when product is dispensed by pharmacies to patients. We estimate the
amount of co-pay assistance provided to eligible patients based on the terms of
the program and redemption information provided by third-party claims processing
organizations and are recorded in accounts payable and accrued expenses and
other current liabilities on the condensed balance sheets.
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Non-cash Interest Expense on Deferred Royalty Obligation
The net proceeds we receive from the sale of certain future royalties are amortized to non-cash interest expense over the estimated life of the associated agreement using the effective interest method. As we earn royalties and remit those royalties pursuant to the agreement, the balance of the deferred royalty obligation will be effectively repaid over the life of agreement. To determine the amortization of our deferred royalty obligation, we are required to estimate the total amount of future royalty payments we expect to earn. There are a number of factors that could materially affect the amount and timing of royalty payments, most of which are not within our control. We periodically assess the amount of royalty payments we expect to receive which are subject to the agreement and, to the extent that the amount or timing of such payments is materially different than our original estimates, we prospectively adjust the imputed interest rate and the related amortization of the deferred royalty obligation.
Recent Accounting Pronouncements
A summary of recent accounting pronouncements that we have adopted or may expect to adopt is included in Note 1 - Organization and Basis of Presentation to our condensed financial statements (see Part I, Item 1 Notes to Condensed Financial Statements, of this Quarterly Report on Form 10-Q).
Financial Operations Overview
Revenue
Our revenue to date has been generated primarily through license, research and development collaborative agreements with various collaboration partners. We realized our first commercial product sales of IBSRELA inMarch 2022 . In the future, we may generate revenue from a combination of our own product sales and payments in connection with our current or future collaborative partnerships, including license fees, other upfront payments, milestone payments, royalties and payments for drug product and/or drug substance. We expect that any revenue we generate will fluctuate in future periods as a result of, among other factors: whether and the extent to which we are successful in our commercialization of IBSRELA, whether we are able to gain approval from the FDA for our NDA for XPHOZAH; the timing and progress of goods and services provided pursuant to our current or future collaborative partnerships; our or our collaborators' achievement of clinical, regulatory or commercialization milestones, to the extent achieved; the timing and amount of any payments to us relating to the aforementioned milestones; and the extent to which tenapanor is approved and successfully commercialized by a collaboration partner. If our current collaboration partners or any future collaboration partners fail to obtain regulatory approval for tenapanor, our ability to generate future revenue from our collaborative arrangements, and our results of operations and financial position, would be materially and adversely affected. Our past revenue performance is not necessarily indicative of results to be expected in future periods. Cost of Revenue Cost of revenue consists of the cost of commercial goods sold to Customers, collaboration partners under product supply agreements, and royalty expense based on sales of tenapanor. We capitalize inventory costs associated with the production of our products after regulatory approval or when, based on management's judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. Otherwise, such costs are expensed as research and development. A portion of the costs of IBSRELA units recognized as revenue during the three and six months endedJune 30, 2022 were expensed prior to the fourth quarter of 2021, when our intent to commercialize IBSRELA was established and we commenced preparation for the commercial launch of IBSRELA. We believe our cost of goods sold for the three and six months endedJune 30, 2022 would have been$140 thousand and$149 thousand higher, respectively, if we had not previously expensed certain material and production costs with respect to the units sold. As ofJune 30, 2022 , we had approximately$31.2 million of inventory on hand that was previously expensed as research and development expense and will not be reported as cost of goods sold in future periods when sales of IBSRELA are recognized as revenue. Cost of revenue includes payments due to AstraZeneca, which under the terms of a termination agreement entered into in 2015 (the "AZ Termination Agreement") is entitled to (i) future royalties at a rate of 10% of net sales of tenapanor or other NHE3 products by us or our licensees, and (ii) 20% of non-royalty revenue received from our collaboration partners in connection with the development and commercialization of tenapanor or certain other NHE3 inhibitors. We have agreed to pay AstraZeneca up to a maximum of$75.0 million in the aggregate for (i) and (ii). We recognize these expenses as cost of revenue when we recognize the corresponding revenue that gives rise to payments due to AstraZeneca. To date, we have recognized an aggregate of$11.9 million as cost of revenue under the AZ Termination Agreement. 29
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Research and Development
Pursuant to theOctober 2021 restructuring plan, we eliminated our internal research organization and expect to continue our discovery efforts with respect to RDX020 through the use of third-parties managed internally by non-clinical expertise. We recognize all research and development expenses as they are incurred to support the discovery, research, development and manufacturing of our product candidates. Research and development expenses include, but are not limited to, the following:
•external research and development expenses incurred under agreements with
consultants, third-party contract research organizations (“CROs”) and
investigative sites where a substantial portion of our clinical studies are
conducted, and with contract manufacturing organizations where our clinical
supplies are produced;
•expenses associated with supplies and materials consumed in connection with our
research operations;
•expenses associated with producing tenapanor for the control of serum
phosphorus in adult patients with CKD on dialysis prior to FDA approval;
•other costs associated with research, clinical development and regulatory
activities;
•employee-related expenses, which include salaries, bonuses, benefits, travel
and stock-based compensation; and
•facilities and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation and amortization expense, information technology expense and other supplies.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, for certain of our executives, our board members, and our finance, legal, business development, market development, commercial and support staff. Other selling, general and administrative expenses include facility related costs and professional fees for legal, accounting and audit, investor relations, other consulting services and allocated facility related costs not otherwise included in research and development expenses.
Interest Expense
Interest expense represents the interest paid on our loan payable.
Other Income, net
Other income, net consists of interest income earned on our cash and cash
equivalents and available-for-sale investments, the periodic revaluation of the
exit fee related to our loan, gains on sales of property and equipment, and
currency exchange gains and losses.
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RESULTS OF OPERATIONS
The results of operations are not necessarily indicative of the results to be expected for the year endingDecember 31, 2022 , for any other interim period, or for any other future year.
Comparison of the three and six months ended
Revenue
Below is a summary of our total revenue (dollars in thousands):
Change Change
Three Months Ended June 30, 2022 vs. 2021 Six Months Ended June 30, 2022 vs. 2021
2022 2021 $ % 2022 2021 $ %
Product sales, net $ 1,564 $ - $ 1,564 (a) $ 2,014 $ - $ 2,014 (a)
Product supply revenue 952 - 952 (a) 966 126
840 666.7 % Licensing revenue 10 3 7 233.3 % 14 5,005 (4,991) (99.7) % Collaborative development revenue - 1,310 (1,310) (100.0) % - 2,764 (2,764) (100.0) % Total revenues$ 2,526 $ 1,313 $ 1,213 92.4 %$ 2,994 $ 7,895 $ (4,901) (62.1) % (a) Percent change is not meaningful. The increase to total revenues during the three months endedJune 30, 2022 is primarily attributable to$1.6 million of net product sales for IBSRELA to our Customers in connection with the commercial launch of IBSRELA, as well as$1.0 million product supply revenue for which there was no comparable revenue during the three months endedJune 30, 2021 . Partially offsetting these increases was the full recognition of upfront payments associated with the 2019 KKC Agreement through the end of 2021. The decrease to total revenues during the six months endedJune 30, 2022 is primarily attributable to a$5.0 million development milestone that was earned during the prior year that did not recur during the current year, as well as the full recognition of upfront payments associated with the 2019 KKC Agreement through the end of 2021, for which there was no comparable revenue during the six months endedJune 30, 2022 . Partially offsetting these decreases is recognition of$2.0 million of net product sales for sales of IBSRELA to our Customers in connection with the commercial launch of IBSRELA.
Operating Expenses
Below is a summary of our operating expenses (dollars in thousands):
Change Change
Three Months Ended June 30, 2022 vs. 2021 Six Months Ended June 30, 2022 vs. 2021
2022 2021 $ % 2022 2021 $ %
Cost of revenue $ 138 $ - $ 138 (a) $ 223 $ 1,000 $ (777) (77.7) %
Research and development 9,741 26,021 (16,280) (62.6) % 18,592 46,477 (27,885) (60.0) %
Selling, general and
administrative 18,862 20,124 (1,262) (6.3) % 38,201 37,255 946 2.5 %
Total operating expenses
(37.7) %$ 57,016 $ 84,732 $ (27,716) (32.7) %
(a) Percent change is not meaningful.
Cost of Revenue
The fluctuations in cost of revenue for the three and six months endedJune 30, 2022 are primarily attributable to payments due to AstraZeneca under the AZ Termination Agreement related to the commercial sales of IBSRELA during the three and six months endedJune 30, 2022 and a development milestone we earned during the six months endedJune 30, 2021 . In addition, during the three and six months endedJune 30, 2022 , we incurred cost of revenue from sales of IBSRELA to our Customers in connection with the commercial launch of IBSRELA. 31
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Research and Development
Below is a summary of our research and development expenses (dollars in
thousands):
Change Change
Three Months Ended June 30, 2022 vs. 2021 Six Months Ended June 30, 2022 vs. 2021
2022 2021 $ % 2022 2021 $ %
External R&D expenses $ 4,607 $ 17,499 $ (12,892) (73.7) % $ 7,547 $ 29,007 $ (21,460) (74.0) %
Employee-related expenses 3,575 6,512 (2,937) (45.1) % 7,752 13,732 (5,980) (43.5) %
Facilities, equipment and
depreciation expenses 716 1,439 (723) (50.2) % 1,830 2,723 (893) (32.8) %
Other 843 571 272 47.6 % 1,463 1,015 448 44.1 %
Total research and development
expenses $ 9,741 $ 26,021 $ (16,280) (62.6) % $ 18,592 $ 46,477 $ (27,885) (60.0) %
The decrease in our external R&D expenses for the three months ended June 30,
2022 is primarily the result of lower clinical study costs from the OPTIMIZE
study, lower tenapanor manufacturing expense as we have begun to capitalize
costs associated with the production of IBSRELA to inventory, and lower expenses
for research following the elimination of our research function in the fourth
quarter of 2021. The decrease in our employee-related expenses for the three and
six months ended June 30, 2022 is due to lower compensation and benefits
expenses for our research and development workforce following restructuring
actions in 2021.
Selling, General and Administrative
The fluctuations in general and administrative expenses for the three and six months endedJune 30, 2022 is primarily due to the timing of costs associated with building and staffing our commercial infrastructure and teams as we prepared for theU.S. launch of IBSRELA. The changes consisted of headcount and related personnel costs and external spending for disease awareness initiatives, commercial infrastructure and strategy.
Interest Expense
Below is a summary of our interest expense (dollars in thousands):
Change Change
Three Months Ended June 30, 2022 vs. 2021 Six Months Ended June 30, 2022 vs. 2021
2022 2021 $ % 2022 2021 $ %
Interest expense $ (787) $ (1,202) $ 415 (34.5) % $ (1,533) $ (2,302) $ 769 (33.4) %
The decrease in interest expense for the three and six months ended
2022
Other Income, net
Below is a summary of our other income, net (dollars in thousands):
Change Change
Three Months Ended June 30, 2022 vs. 2021 Six Months Ended June 30, 2022 vs. 2021
2022 2021 $ % 2022 2021 $ %
Other income, net $ 70 $ 847 $ (777) (91.7) % $ 554 $ 798 $ (244) (30.6) %
The decrease in other income, net for the three and months ended June 30, 2022
is primarily due to revaluation of our 2018 Exit Fee during the three months
ended June 30, 2021 following the receipt of the CRL from the FDA. Partially
offsetting this decrease are sales of certain lab equipment and supplies for a
net gain of $1.1 million .
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Liquidity and Capital Resources
Below is a summary of our cash, cash equivalents and investments (in thousands):
June 30, 2022 December 31, 2021 Change $ Change %
Cash and cash equivalents $ 53,408 $ 72,428 $ (19,020) (26.3) %
Short-term investments 27,604 44,261 (16,657) (37.6) %
Total liquid funds $ 81,012 $ 116,689 $ (35,677) (30.6) %
As of June 30, 2022 , we had cash, cash equivalents and investments totaling
$81.0 million compared to $116.7 million as of December 31, 2021 . We have
incurred operating losses since inception and our accumulated deficit as of
June 30, 2022 is $767.9 million . Our current level of cash and investments alone
is not sufficient to meet our plans for the next twelve months following the
filing of these financial statements on August 4, 2022 . These factors raise
substantial doubt regarding our ability to continue as a going concern for a
period of one year from the issuance of these financial statements. We plan to
address our operating cash flow requirements with our current cash and
investments, cash generated from the product launch of IBSRELA, our potential
receipt of anticipated milestone payments from our collaboration partners, our
potential receipt of anticipated payments from KKC under the Amendment, our
ability to access the capital markets, and execute asset monetization
strategies, as well as through the implementation of cash preservation
activities to reduce or defer discretionary spending.
There are no assurances that our efforts to meet our operating cash flow
requirements will be successful. If our current cash and investments as well as
our plans to meet our operating cash flow requirements are not sufficient to
fund necessary expenditures and meet our obligations for at least the next
twelve months following the issuance of these financial statements, our
liquidity, financial condition and business prospects will be materially
affected. These financial statements have been prepared on a going concern basis
and do not include any adjustments to the amounts and classification of assets
and liabilities that may be necessary in the event that we can no longer
continue as a going concern.
In July 2020 , we filed a Form S-3 registration statement, which became effective
in August 2020 ("Registration Statement"), containing (i) a base prospectus for
the offering, issuance and sale by us of up to a maximum aggregate offering
price of $250.0 million of our common stock, preferred stock, debt securities,
warrants and/or units, from time to time in one or more offerings; and (ii) a
prospectus supplement for the offering, issuance and sale by us of up to a
maximum aggregate offering price of $100.0 million of our common stock that may
be issued and sold, from time to time, under a sales agreement with Jefferies
LLC ("Jefferies"), deemed to be "at the market offerings" (the "2020 Open Market
Sales Agreement"). The 2020 Open Market Sales Agreement was fully utilized as of
December 31, 2021 . During the six months ended June 30, 2021 we sold 9.0 million
shares and received gross proceeds of $63.8 million at a weighted average sales
price of approximately $7.10 per share under the 2021 Open Market Sales
Agreement.
In August 2021 , we filed an additional prospectus supplement under the
Registration Statement for the offering, issuance and sale by us of up to a
maximum aggregate offering price of $150.0 million of our common stock that may
be issued and sold, from time to time, under an additional sales agreement we
entered into with Jefferies (the "2021 Open Market Sales Agreement"), pursuant
to which we may, from time to time, sell up to $150.0 million in shares of our
common stock through Jefferies. We are not required to sell shares under the
2021 Open Market Sales Agreement. Pursuant to the 2021 Open Market Sales
Agreement, Jefferies, as our sales agent, receives a commission of up to 3% of
the gross sales price for shares of common stock sold under the 2021 Open Market
Sales Agreement. During the six months ended June 30, 2022 we sold 20.5 million
shares and received gross proceeds of $18.9 million at a weighted average sales
price of approximately $0.92 per share under the 2021 Open Market Sales
Agreement.
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InFebruary 2022 , we entered into a loan and security agreement (the "2022 Loan Agreement") with SLR Investment Corp. The 2022 Loan Agreement provides for a senior secured term loan facility, with$27.5 million funded at closing and an additional$22.5 million that we may borrow on or prior toJuly 25, 2023 ; provided that (i) we have received approval by the FDA for our NDA for tenapanor for the control of serum phosphorus in chronic kidney disease patients on dialysis byDecember 31, 2022 , and (ii) we have achieved certain product revenue milestone targets described in the 2022 Loan Agreement. The initial funding of$27.5 million is being used to repay the 2018 Loan and to fund our ongoing operations. OnAugust 1, 2022 , we entered into an amendment to the 2022 Loan Agreement with SLR Investment Corp. that extends the date by which we must receive approval by the FDA for our NDA for the control of serum phosphorus in chronic kidney disease patients on dialysis in order to borrow the additional$22.5 million fromDecember 31, 2022 toMarch 31, 2023 . We had$25.0 million principal from the 2018 Loan outstanding as of the closing date. In connection with entering into the 2022 Loan Agreement, we entered into an agreement, whereby we agreed to pay an exit fee in the amount of 2% of the 2022 Loan funded (the "2022 Exit Fee") upon (i) any change of control transaction or (ii) our achievement of net revenue from the sale of any products equal to or greater than$100.0 million , measured on a six (6) months basis (the "Revenue Milestone"), tested monthly at the end of each month. Notwithstanding the prepayment or termination of the 2022 Loan, the 2022 Exit Fee will expire onFebruary 23, 2032 . We concluded that the 2022 Exit Fee is a freestanding derivative which should be accounted for at fair value on a recurring basis. The estimated fair value of the 2022 Exit Fee is recorded as a derivative liability and included in accrued expenses and other current liabilities on the accompanying condensed balance sheets. Our primary sources of cash have been from the sale and issuance of common stock (in both public offerings and private placements) and private placements of convertible preferred stock, funds from our collaboration partnerships and funds from our 2018 Loan Agreement and 2022 Loan Agreement. Our primary uses of cash have been to fund operating expenses, primarily research and development expenditures, pre-commercial and commercial expenses. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.
Our future funding requirements are difficult to forecast and will depend on
many factors, including:
•the extent to which we are able to generate product revenue from sales of
IBSRELA;
•whether we are successful in our efforts under the FDR process, including the Advisory Committee meeting to be convened as part of the FDR process, to secure approval for our NDA for XPHOZAH, or to reach resolution with the FDA regarding a path to address the deficiencies in the NDA noted in the CRL and ADL, and the time and cost associated with such path;
•the availability of adequate third-party reimbursement for IBSRELA and, if
approved, the sales price and the availability of adequate third-party
reimbursement for XPHOZAH;
•the manufacturing costs of IBSRELA and XPHOZAH;
•the selling and marketing costs associated with IBSRELA and, if approved,
XPHOZAH;
•our ability to maintain our existing collaboration partnerships and to
establish additional collaboration partnerships, in-license/out-license, joint
ventures or other similar arrangements and the financial terms of such
agreements;
•the timing, receipt and amount of any milestones that may be received from our
collaboration partners in connection with tenapanor, if any;
•the timing, receipt and amount of revenue, if any, that may be received from
KKC in connection with the 2022 KKC Amendment;
•the timing, receipt, and amount of sales of, or royalties on, tenapanor, if
any;
•the cash requirements of any future acquisitions or discovery of product
candidates;
•any clinical trials we are required to or decide to pursue for tenapanor or
RDX013;
•the time and cost necessary to respond to technological and market
developments;
34 -------------------------------------------------------------------------------- Table of Contents •the costs of filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights, including litigation costs and the outcome of such litigation, including costs of defending any claims of infringement brought by others in connection with the development, manufacture or commercialization of tenapanor or any of our product candidates; and
•the payment of interest and principal related to the 2022 Loan Agreement.
Please see the risk factors set forth in Part II, Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q for additional risks associated with our capital requirements. CASH FLOW ACTIVITIES
The following table summarizes our cash flows (in thousands):
Six Months Ended June 30,
2022 2021 Change $ Change %
Net cash used in operating activities
(25.0) % Net cash provided by investing activities 17,806 10,719 7,087 66.1 % Net cash provided by financing activities 22,075 63,487 (41,412) (65.2) % Net decrease in cash and cash equivalents$ (19,020) $ (4,287) $ (14,733) 343.7 %
Cash Flows from Operating Activities
Net cash used in operating activities during the six months endedJune 30, 2022 decreased by$19.6 million primarily as a result of our net loss which was$23.3 million less than during the six months endedJune 30, 2021 . Partially offsetting the net loss improvement were changes to our operating assets and liabilities related to expenditures for commercial manufacturing and inventory for the production of IBSRELA.
Cash Flows from Investing Activities
Net cash provided by investing activities increased by$7.1 million due to the timing of our investment maturities and purchases, as well as$1.3 million proceeds from sale of laboratory equipment and supplies during the six months endedJune 30, 2022 .
Cash Flows from Financing Activities
Net cash provided by financing activities decreased by$41.4 million primarily due to net proceeds from issuance of our common stock pursuant to the at the market offerings of$62.4 million during the six months endedJune 30, 2021 compared to$18.5 million during the six months endedJune 30, 2022 . In addition, during the six months endedJune 30, 2022 , we received net proceeds of$27.0 million pursuant to the 2022 Loan Agreement,$9.6 million in proceeds for the sale of certain future royalties, and repaid$33.0 million , net of settlement costs, to repay the 2018 Loan.
Off-Balance Sheet Arrangements
As of
sheet arrangements as defined in Item 303(a)(4) of Regulation S-K as promulgated
by the
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