Ardelyx Inc
Annual Report 2018

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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-K(Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 001-36485ARDELYX, INC.(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)DELAWARE26-1303944(STATE OR OTHER JURISDICTION OF(I.R.S. EMPLOYERINCORPORATION OR ORGANIZATION)IDENTIFICATION NO.) 34175 ARDENWOOD BLVD., SUITE 200, FREMONT, CALIFORNIA 94555(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)(510) 745-1700(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)Securities registered pursuant to Section 12(b) of the Act:Title of Each Class: Name of Each Exchange on Which Registered: Common Stock, par value $0.0001 per share The Nasdaq Global Market Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past90 days. Yes ☒ No ☐Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K. ☐Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerginggrowth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 ofthe Exchange Act.Large accelerated filer ☐Accelerated filer ☒Non-accelerated filer ☐ Small reporting company ☒ Emerging growth company ☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisedfinancial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant as of the last business day of the Registrant’s most recentlycompleted second fiscal quarter, June 30, 2018, based on the last reported sales price of the Registrant’s common stock of $3.70 per share was $171,401,057.The number of shares of Registrant’s Common Stock outstanding as of March 1, 2019, was 62,599,673.DOCUMENTS INCORPORATED BY REFERENCE:Portions of the Registrant’s Definitive Proxy Statement for its 2019 Annual Meeting of Stockholders, which will be filed with the Commission within 120 days ofDecember 31, 2018, the close of the Registrant’s 2018 fiscal year, are incorporated by reference into Part III of this Report. Table of ContentsARDELYX, INC.FORM 10‑K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018TABLE OF CONTENTS Page PART I Item 1. Business2Item 1A. Risk Factors24Item 1B. Unresolved Staff Comments60Item 2. Properties60Item 3. Legal Proceedings60Item 4. Mine Safety Disclosures60 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities61Item 6. Selected Financial Data62Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations63Item 7A. Quantitative and Qualitative Disclosures About Market Risk77Item 8. Financial Statements and Supplementary Data78Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure110Item 9A. Controls and Procedures110Item 9B. Other Information111 PART III Item 10. Directors, Executive Officers and Corporate Governance112Item 11. Executive Compensation112Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters112Item 13. Certain Relationships and Related Transactions, and Director Independence112Item 14. Principal Accounting Fees and Services112 PART IV Item 15. Exhibits, Financial Statement Schedules113Item 16 Form 10-K Summary113 Signatures 118 Table of ContentsNOTE REGARDING FORWARD-LOOKING STATEMENTSUnless the context requires otherwise, in this Annual Report on Form 10‑K the terms “Ardelyx”, “we,” “us,” “our”and “the Company” refer to Ardelyx, Inc.This Annual Report on Form 10‑K contains forward-looking statements that involve risks and uncertainties. Anystatements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Insome cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,”“continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,”“positioned,” “seek,” “should,” “target,” “will,” “would,” and other similar expressions that are predictions of or indicatefuture events and future trends, or the negative of these terms or other comparable terminology. These forward-lookingstatements include, but are not limited to, statements about:·our expectation regarding the timing of receipt of results from the PHREEDOM trial, our second Phase 3clinical trial evaluating tenapanor for the treatment of hyperphosphatemia in patients with end-stage renaldisease, or ESRD, on dialysis;·our expectation regarding the timing of receipt of results from the AMPLIFY trial, our Phase 3 clinical trialevaluating tenapanor in combination with phosphate binders for the treatment of hyperphosphatemia inpatients with end-stage renal disease, or ESRD, on dialysis;·our expectations regarding our plans for and our participation in the commercialization of tenapanor for thetreatment of hyperphosphatemia in ESRD patients on dialysis, including our expectations regarding ourplans to build our own sales and marketing organization to market and sell tenapanor for such indication;·our plans to seek one or more collaboration partners to commercialize tenapanor for IBS-C;·our expectations regarding the potential market size and the size of the patient populations for our productcandidates;·our plans with respect to our pre-clinical programs;·our ability to identify and validate targets and novel drug candidates using our proprietary drug discoveryand design platform including the Ardelyx Primary Enterocyte and Colonocyte Culture System, orAPECCS, or any other proprietary drug discovery and design platform we develop for the identification,screening, testing, design and development of new product candidates for the treatment of renal diseases;·the implementation of our business model and strategic plans for our business, product candidates andtechnology;·estimates of our expenses, future revenue, capital requirements, our needs for additional financing and ourability to obtain additional capital;·our financial performance; and·developments and projections relating to our competitors and our industry.Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the “ITEM 1A. RISK FACTORS” section and elsewhere in thisAnnual Report on Form 10‑K. Except as required by law, we assume no obligation to update any forward-looking statementpublicly, or to revise any forward-looking statement to reflect events or developments occurring after the date of this AnnualReport on Form 10‑K, even if new information becomes available in the future. Thus, you should not assume that our silenceover time means that actual events are bearing out as expressed or implied in any such forward-looking statement.1 Table of Contents ITEM 1. BUSINESSCompany overviewWe are a biopharmaceutical company focused on developing first-in-class medicines to improve treatment choicesfor people with cardiorenal diseases. This includes patients with end-stage renal disease, or ESRD, suffering from elevatedserum phosphorus, or hyperphosphatemia; and patients with chronic kidney disease, or CKD, and/or heart failure patientswith elevated serum potassium, or hyperkalemia.Our portfolio is led by the development of tenapanor, a first-in-class inhibitor of NHE3. In our cardiorenal pipeline,tenapanor is being evaluated in a second Phase 3 clinical trial, the PHREEDOM trial, for the treatment of hyperphosphatemiain patients with ESRD who are on dialysis, with topline results expected in the fourth quarter of 2019. This trial follows asuccessful first Phase 3 clinical trial completed in 2017, which achieved statistical significance for the primary endpoint.Tenapanor, if successfully developed and approved, would be the first therapy for phosphate management that is not aphosphate binder. Tenapanor is a novel, potent, small molecule dosed twice daily in milligram quantities. This results insignificantly reduced pill burden when compared to the multi-gram quantities of phosphate binders that patients are requiredto take. We believe tenapanor’s reduced pill burden and twice daily dosing could greatly improve patient adherence andcompliance, freeing patients from having to take pills before every meal. We are also evaluating tenapanor in combination with phosphate binders in a Phase 3 clinical trial, the AMPLIFYtrial, from which results are currently expected in the second half of 2019. If our AMPLIFY trial is successful, tenapanorwould, if approved, be the first and only phosphate lowering therapy to be indicated as adjunctive therapy for use incombination with binders. We are also advancing a small molecule potassium secretagogue program, RDX013, for the potential treatment ofhyperkalemia. Hyperkalemia is a common problem in patients with heart and kidney disease, particularly in patients takingcommon blood pressure medications known as RAAS inhibitors, which inhibit the renin-angiotensin-aldosterone system.Similar to what we are doing with tenapanor, RDX013 is designed to lower elevated potassium with a much lower pill burdenthan potassium binders and we believe may provide significant advantages as a stand-alone agent or also in combinationwith potassium binders.In addition to the development of tenapanor in our cardiorenal portfolio, we have developed tenapanor for thetreatment of patients with irritable bowel syndrome with constipation, or IBS-C. On September 12, 2018, we submitted a newdrug application, or NDA, to the U.S. Food and Drug Administration, or FDA, for the treatment of patients with IBS-C andhave been granted a target action date under the Prescription Drug User Fee Act, or PDUFA, of September 12, 2019. The NDAsubmission was supported by a clinical package encompassing more than 3,100 patients and healthy volunteers who haveparticipated in Ardelyx clinical trials and extensive clinical and preclinical data supporting the favorable safety profile. Thedata include results from the completed IBS-C registration T3MPO program, which consisted of two Phase 3 trials, T3MPO-1and T3MPO-2, and a long-term safety extension trial, T3MPO-3. Both the T3MPO-1 and T3MPO-2 trials achieved statisticalsignificance for their primary endpoint and demonstrated that tenapanor had a durable effect on reducing constipation andabdominal pain that patients with IBS-C experience. The favorable safety profile of tenapanor, which has been shown acrossall clinical trials, was further supported by the completed T3MPO-3 study.Our Commercial StrategyWe aim to build a multi-product company that commercializes its cardiorenal products in the United States. Ourstrategy is to leverage ex-U.S. collaborations with established industry leaders to efficiently bring our cardiorenal medicinesto patients outside the United States. Additionally, our goal is to bring tenapanor for IBS-C to market by leveraging domesticand ex-U.S. collaborations.In November 2017, we entered into a license agreement that provides Kyowa Hakko Kirin Co., Ltd., or KHK, withexclusive rights to develop and commercialize tenapanor for the treatment of cardiorenal diseases, includinghyperphosphatemia, in Japan. Under the terms of the license agreement, we received a $30.0 million upfront payment2 Table of Contentsand are eligible to receive up to $55.0 million in total development milestones. Additionally, under the license agreement,Ardelyx is eligible to receive up to 8.5 billion yen in total commercialization milestones, worth up to $77.5 million at thecurrency exchange rate on December 31, 2018, as well as high-teen royalties on net sales throughout the term of theagreement. In February 2019, KHK announced initiation of a Phase 2 clinical study of tenapanor for the treatment ofhyperphosphatemia in ESRD patients on dialysis. As a result of this development milestone, we received a $5.0 millionmilestone payment in February 2019.In December 2017, we entered into a license agreement with Shanghai Fosun Pharmaceutical IndustrialDevelopment Co. Ltd., or Fosun Pharma, providing Fosun Pharma with the exclusive rights to develop and commercializetenapanor in China for the treatment of patients with hyperphosphatemia related to CKD and patients with IBS-C. Under theterms of the agreement, we received an upfront payment of $12.0 million and are eligible to receive additional milestones ofup to $113.0 million, as well as tiered royalties on net sales ranging from the mid-teens to 20%.In March 2018, we entered into a license agreement with Knight Therapeutics, Inc., or Knight, that provides Knightwith exclusive rights to commercialize tenapanor in Canada. Under the terms of the agreement, Ardelyx is eligible to receiveup to CAD 25 million in total payments including an upfront payment and development and sales milestones, as well astiered royalties on net sales ranging from mid-single digits to the low twenties. Knight has made significant commercialprogress with tenapanor in Canada including the submission to Heath Canada in February of a New Drug Submission, orNDS, for the treatment of IBS-C.OUR PROPRIETARY DRUG DISCOVERY AND DESIGN PLATFORMIn line with our overall strategy and transition to focus solely on our cardiorenal pipeline, we have shifted ourresearch focus to support our preclinical and clinical stage cardiorenal candidates including tenapanor and RDX013, as wellas other potential cardiorenal opportunities. We successfully developed and continue to employ our Ardelyx PrimaryEnterocyte and Colonocyte System, or APECCS, stem cell platform to emulate, in a miniaturized format, the function andstructure of cells of specific segments of the intestine, and we are now developing a similar system with kidney cells. Weintend to continue to utilize our unique discovery and design platform to help elucidate first-in-class mechanisms of action,as with tenapanor, and to inform preclinical experiments to help advance our product candidates.OUR PRODUCT PIPELINETenapanor: A New Approach for Treating Hyperphosphatemia in ESRD Patients on DialysisThe lead product candidate in our cardiorenal portfolio is tenapanor for the treatment of hyperphosphatemia, or highlevels of blood phosphorus, in ESRD patients on dialysis. Hyperphosphatemia is an independent predictor of morbidity andmortality in patients with ESRD and is a significant problem among dialysis patients worldwide. CKD is the progressive deterioration of renal function that can occur over several months or years. The symptoms ofworsening kidney function are nonspecific, and can include having less energy, reduced appetite, dry itchy skin, swollen feetand ankles or generally just not feeling well. If the deterioration continues and is not halted by changes in lifestyle or withthe assistance of pharmacological intervention, the disease will likely cause significant cardiovascular morbidity, and canprogress to ESRD, the final stage of CKD, where kidney function will be lost entirely.Current management of ESRD includes hemodialysis and peritoneal dialysis as a means to filter toxins from theblood once kidneys have failed. Unless this intervention occurs, kidney failure results in the accumulation of waste productsthat may ultimately cause death. Hemodialysis, the most common form of dialysis, generally requires a patient to visit adialysis center at least three times per week for a minimum three-hour session, significantly reducing quality of life.Phosphorus, a vital element required for most cellular processes, is present in almost every food in the Western diet,and, in individuals with normal kidney function, any excess dietary phosphorus is efficiently removed by the kidneys andexcreted in urine. In adults with functioning kidneys, normal serum phosphorus levels are 2.5 to 4.5 mg/dL.3 Table of ContentsWith kidney failure, elevated phosphorus becomes harmful and is typically diagnosed as hyperphosphatemia when serumphosphorus levels are greater than 4.5 mg/dL, according to guidelines published by KDIGO, the global nonprofit foundationdedicated to improving the care and outcomes of kidney disease patients worldwide. Although patients with ESRD rely ondialysis to eliminate harmful agents, phosphorus is not readily removed by the procedure and other means of managingphosphorus levels must be employed. Studies have shown that 95% of ESRD patients need phosphate control.In ESRD patients, excess levels of phosphorus have been shown to lead to an increase in cardiovascular disease risk,as well as increases in serum FGF‑23, an important regulator of phosphate and vitamin D metabolism. Highly elevated levelsof FGF23 is an independent risk factor for adverse cardiac clinical outcomes as well as the development of secondaryhyperparathyroidism, or SHPT, marked by elevated parathyroid hormone. SHPT is associated with renal osteodystrophy, acondition of abnormal bone growth characterized by brittle bones.Since dialysis is unable to efficiently eliminate excess phosphorus, ESRD patients are put on restrictive, lowphosphorus diets and are currently prescribed medications called phosphate binders, the only interventions available for thetreatment of hyperphosphatemia. Phosphate binders, which commonly need to be taken with meals and snacks, act bybinding dietary phosphorus and limiting its absorption. Phosphate binders have multiple limitations, including:·systemic excess absorption of calcium, iron or lanthanum, resulting in side effects and other unintendedconsequences for ESRD patients;·significant challenges with patient compliance because of the large quantity and/or mass of the binders thatmust be taken each day; and·significant gastrointestinal, or GI, tolerability issues making frequent dosing difficult for patientsSafety and tolerability have also been significant concerns with many approved phosphate binders, with side effectsthat include long-term vascular calcification with calcium-based binders and iron-overload with iron-based binders.Common side effects of many approved phosphate binders include GI-related adverse events such as nausea, vomiting,diarrhea, constipation, and dyspepsia as well as hypercalcemia for calcium-based binders and discolored feces for iron-basedbinders.ESRD patients, who generally are severely restricted in their fluid intake, are prescribed as many as 12 or morephosphate binder pills per day, among other medications. The amount of phosphorus a binder can remove is limited by itsbinding capacity, and therefore, increasing the dose, and hence the pill burden, of the binder is the only way to increase theamount of phosphorus being bound and excreted. As a result of pill burden and mass, as well as a number of side effects, onaverage one out of two patients is not compliant with their prescribed treatment and two out of three patients at any point intime are not at target serum phosphorus levels.We are developing tenapanor for the treatment of hyperphosphatemia in ESRD patients on dialysis, as we believe ithas the potential to address certain of the key limitations of current treatments and offer a completely new mechanism ofaction. If approved, tenapanor would be the first small molecule/non-binder approach to treating hyperphosphatemia, with aunique mechanism of action that acts by inhibiting, or blocking, the NHE3 transporter in the GI tract. Our scientists, incollaboration with global academic experts, discovered that phosphate absorption in humans occurs primarily through adynamically regulated paracellular pathway. Tenapanor inhibits the NHE3 transport, and this results in a transient increase inthe intracellular proton concentration in cells lining the gastrointestinal lumen, which induces a conformational change intight junction proteins, thereby decreasing permeability to paracellular phosphate transport. This pathway of phosphate fluxthat is inhibited by tenapanor appears largely specific for phosphate, whereas the overall absorption of other ions and largemolecules appear not to be affected. Notably, in clinical trials, tenapanor has not affected the absorption of other ions(except sodium) or nutrients. A consequence of intestinal NHE3 inhibition is that systemic sodium absorption is reducedleading to an increase in stool sodium and water content, loosening stool consistency and increasing bowel movementfrequency. Tenapanor’s unique mechanism of action inhibiting paracellular phosphate absorption was published in the peer-reviewed journal Science Translational Medicine.4 Table of ContentsThis unique mechanism of action allows tenapanor to be active in many patients at a dose of 10 mg to 30 mg twicedaily as opposed to the multiple gram quantities per day required of the phosphate binders. Over the course of a week, theamount of tenapanor required would be less than 500 mg, or a total of 14 small pills, whereas the amount of phosphate binderrequired, based on package inserts, would be 10 to 30 grams, or up to 63 large pills, depending on the phosphate binder. Webelieve this significant pill burden advantage will result in better adherence and compliance which could lead to moreconsistent efficacy in ESRD patients on dialysis.Tenapanor has been specifically designed to work exclusively within the GI tract, thereby significantly reducing theamount of drug that is absorbed into the bloodstream and the potential side effects that could occur. In human studies oforally-administered tenapanor, the drug was detected in the blood in less than 1% in thousands of collected serum samples,and even in those, at very low levels (< 1.5 ng/mL). We have evaluated tenapanor across 20 clinical studies in over 3,100individuals to date.Clinical data supporting tenapanor in hyperphosphatemiaIn October 2018, we reported preclinical data from animal models in which sevelamer, a phosphate binder andtoday’s standard-of-care for the treatment of hyperphosphatemia, was administered at three dose levels, with either tenapanoror placebo, twice daily for 11 days. Two additional groups received either tenapanor or placebo alone. Results from thispreclinical study showed that the combination of tenapanor and sevelamer resulted in greater reductions in intestinalphosphate absorption than when either agent was administered alone, with a synergistic effect between the two treatments.These data support our evaluation of tenapanor in combination with phosphate binders in an ongoing Phase 3 clinical trial. In February 2017, we announced data from our first Phase 3 clinical trial evaluating tenapanor for the treatment ofhyperphosphatemia in ESRD patients on dialysis. The Phase 3 trial was an eight-week, double-blind, randomized trial, with afour-week placebo-controlled randomized withdrawal period. We enrolled a total of 219 ESRD patients withhyperphosphatemia who are on dialysis. Enrolled patients were randomized evenly into three arms, in which all groupsreceived tenapanor for eight weeks.Tenapanor was administered at fixed doses of 3 mg or 10 mg twice-daily and in a dose-titration arm starting at 30mg twice-daily with the option to down-titrate once a week during the first four weeks to 20, 15, 10 and 3 mg twice-daily,based on GI tolerability. After the end of the eight-week treatment period, patients were re-randomized 1:1 to either remainon their current tenapanor dose or switch to placebo for a four-week, placebo-controlled, randomized withdrawal period.The primary endpoint of the trial was the difference in change in serum phosphorus between the pooled tenapanor-treated patients and placebo-treated patients from the end of the eight-week treatment period to the end of the four-weekrandomized withdrawal period, in the responder population. The responder population, which was reviewed by the FDA, isdefined as patients who demonstrate a greater than or equal to 1.2 mg/dL decrease in serum phosphorus from baseline duringthe initial eight-week treatment period.The study demonstrated a statistically significant difference in serum phosphorus levels from the end of the eight-week treatment period to the end of the four-week randomized withdrawal period between the tenapanor-treated group andthe placebo-treated group in the responder patient population (mean -1.01 mg/dL, median of -1.3 mg/dL) and met its primaryendpoint (95% confidence interval, -1.44, -0.21, LSmean -0.82 mg/dL, p=0.01). The responder population (n=80 out of 164)had a mean reduction in serum phosphorus from baseline to the end of the eight-week treatment period of 2.56 mg/dL, with areduction of up to 5.7 mg/dL. Notably, in this group, 33% of patients had a reduction in serum phosphorus of greater than 3mg/dL.Tenapanor was well-tolerated in the trial. In the eight-week treatment period, the only adverse event that affectedmore than five percent of patients treated with tenapanor was diarrhea (39%), a patient-reported side effect of loosened stoolor increased frequency in bowel movements regardless of magnitude. In the four-week randomized withdrawal period, therewas a diarrhea rate of 1.2% for patients treated with tenapanor compared with 2.4% on placebo.5 Table of ContentsTreatment discontinuations due to diarrhea for patients on tenapanor was 7.8% (n=17). There were no discontinuations dueto diarrhea in the randomized withdrawal period.In order to fully assess GI tolerability, patients used an eDiary to record the frequency of daily bowel habits, as wellas stool form using the Bristol Stool Form Scale, or BSFS. During the eight-week treatment period, there was an average 0.4per day increase in bowel movement frequency from baseline, and during the four-week randomized withdrawal period, therewas an average 0.29 per day increase as compared to placebo. Average bowel movement frequency was within the normalrange in all groups. During the eight-week treatment period, there was an average 0.87 point increase in BSFS from a baselinescore of 4.2, out of a maximum of seven, where seven is liquid stool. During the four-week randomized withdrawal period,there was an average 0.7 point difference in BSFS between placebo (4.4) and tenapanor treatment (5.1).The PHREEDOM Trial, our second Phase 3 clinical trial of tenapanor for the treatment of hyperphosphatemia inESRD patients on dialysis, is currently underway. The study's design, shown in Figure 1 below, includes a 26‑week open-label treatment period, with a 12-week randomized withdrawal period followed by an additional 14‑week open-label safetyextension. Topline results from this trial are expected in the fourth quarter of 2019. We currently intend to build our ownsales and marketing organization to market and sell tenapanor for hyperphosphatemia in the United States.Figure 1. PHREEDOM Clinical Trial Design The AMPLIFY clinical trial, shown in Figure 2, is a randomized, double-blind, placebo-controlled study evaluatingtenapanor in combination with phosphate binders as adjunctive therapy for the treatment of hyperphosphatemia in patientswith ESRD on dialysis. Approximately 215 patients on a stable phosphate binder regimen with a serum phosphorus greaterthan or equal to 5.5 mg/dL and less than or equal to 10 mg/dL at screening, and after an up to 3-week run-in period will berandomized into the clinical trial 1:1 to receive tenapanor or placebo twice daily. Patients will be allowed to titrate their doseof tenapanor (or placebo) from a starting dose of 30 mg to 20 mg or 10 mg and then back up to 30 mg twice daily, based onGI tolerability and serum phosphorus levels. The primary endpoint will be the difference in change between tenapanor andplacebo of serum phosphate levels from randomization to end of the 4-week treatment period. Results from the AMPLIFYclinical trial are currently expected in the second half of 2019. If our AMPLIFY trial is successful, tenapanor would, ifapproved, be the first and only phosphate lowering therapy to be indicated as adjunctive therapy for use in combination withbinders. 6 Table of ContentsFigure 2. AMPLIFY Clinical Trial Design The hyperphosphatemia marketPhosphate binders are the only drugs marketed for the treatment of hyperphosphatemia in ESRD patients. Thevarious types of phosphate binders commercialized in the United States include the following:•Calcium carbonate (many over-the-counter brands including Tums and Caltrate)•Calcium acetate (several prescription brands including PhosLo and Phoslyra)•Lanthanum carbonate (Fosrenol)•Sevelamer hydrochloride (Renagel)•Sevelamer carbonate (Renvela)•Sucroferric oxyhydroxide (Velphoro)•Ferric citrate (Auryxia)The hydrochloride form of sevelamer, Renagel, was launched in the United States by Genzyme Corporation in 1998prior to its acquisition by Sanofi, and the carbonate form, Renvela, was launched in 2008. Sanofi reported €802 million($980 million) in worldwide sales of sevelamer during 2017 and €411 million ($470 million) in 2018. Generic sevelamercarbonate has been approved in certain jurisdictions in Europe since 2015 and in the U.S. market since June 2017.In addition to the currently marketed phosphate binders, we are aware of at least two other binders in development,including fermagate (Alpharen), an iron-based binder in Phase 3 studies being developed by Opko Health, Inc., and PT20, aniron-based binder in Phase 3 being developed by Shield Therapeutics.According to the most recent data available from the U.S. Renal Data System, in 2016 there were 457,957 patientson hemodialysis in the United States. Additionally, according to the European ERA-EDTA Registry 2016 Annual Report anda study in 2016 by the Japanese Society for Dialysis Therapy, there were approximately 327,000 patients on hemodialysis inEurope and about 329,000 in Japan. We estimate, based on phosphate binder utilization, the only approved therapies forhyperphosphatemia, that there are approximately 320,000, 260,000 and 289,000 ESRD7 Table of Contentspatients with hyperphosphatemia in the United States, countries in Europe and Japan, respectively, resulting inapproximately 869,000 ESRD patients with hyperphosphatemia in such countries.Because many ESRD patients with hyperphosphatemia are unable to lower serum phosphorus levels to below 5.5mg/dL with currently marketed phosphate binders, we believe there is a significant medical need for new agents with newmechanisms, demonstrated efficacy, a strong safety profile, and significantly lower pill burden. We believe that tenapanor, ifapproved, has the potential to have the lowest pill burden and mass among any currently marketed hyperphosphatemiaproducts, with milligram rather than gram quantities. In addition, we are evaluating whether tenapanor has the potential to beused in combination with phosphate binders for those patients who cannot achieve adequate phosphate control with a singleagent.Our intention is to build a United States-focused, highly efficient, specialized sales and marketing organizationfocused on nephrology. The nephrology market is a concentrated market strongly influenced by key opinion leaders. Therewere 10,798 nephrologists in the United States in 2017 and 7,281 dialysis facilities in the United States that offer in-centerdialysis. Based on the experience of our management team, we believe that a specialty salesforce is appropriate for thismarketplace. We believe that tenapanor for the treatment of hyperphosphatemia could represent a market opportunity ofbetween $500 million and $700 million in the United States.With its significantly reduced pill burden and well-tolerated safety profile, tenapanor, if approved, could address thesignificant pill burden challenges and intolerability that patients experience with today’s binder treatments. After we obtainresults from our PHREEDOM and AMPLIFY clinical trials, if successful, we intend to submit a New Drug Application to theFDA in 2020 for tenapanor, both as a monotherapy and, as a first in this therapeutic class, in combination with binders as anadjunctive therapy, for the treatment of hyperphosphatemia in patients with ESRD on dialysis.To bring tenapanor to patients outside the United States, we intend to establish strategic collaborations withindustry leading pharmaceutical companies with established commercial infrastructures. We currently have threecollaboration partnerships: with KHK for commercialization of tenapanor for the treatment of cardiorenal diseases, includinghyperphosphatemia, in Japan; with Fosun for the commercialization of tenapanor for the treatment of IBS-C andhyperphosphatemia in China; and with Knight for commercialization of tenapanor in Canada. License agreement with KHKIn November 2017, we entered into a license agreement, the KHK License Agreement, with KHK under which wegranted KHK an exclusive license to develop and commercialize tenapanor in Japan for the treatment of cardiorenal diseasesand conditions, excluding cancer, the KHK Field. We retained the rights to tenapanor outside of Japan, and also retained therights to tenapanor in Japan for indications other than those in the KHK Field. Pursuant to the KHK License Agreement, KHKis responsible for all of the development and commercialization costs for tenapanor in the KHK Field in Japan.Under the KHK License Agreement, we are responsible for supplying the tenapanor drug product for KHK’s use indevelopment and during commercialization until KHK has assumed such responsibility. Additionally, we are responsible forsupplying the tenapanor drug substance for KHK’s use in development and commercialization throughout the term of theKHK License Agreement, provided that KHK may exercise an option to manufacture the tenapanor drug substance undercertain conditions.Under the terms of the KHK license agreement, we have received a $30.0 million upfront payment and are eligible toreceive up to $55.0 million in total development milestones, of which $5.0 million has been recognized to date.Additionally, under the KHK License Agreement we are eligible to receive up to 8.5 billion yen in commercializationmilestones, worth up to $77.5 million at the exchange rate on December 31, 2018, and royalties based on aggregate annualnet sales of the licensed products at a high teens percentage, subject to certain single digit reductions under certaincircumstances described in the KHK License Agreement.8 Table of ContentsThe KHK License Agreement will continue until all of KHK’s applicable payment obligations under the KHKLicense Agreement have been performed or have expired, or the agreement is earlier terminated. Under the terms of the KHKLicense Agreement, we and KHK each have the right to terminate the agreement for material breach by the other party. Inaddition, KHK may terminate the agreement for convenience; for certain safety reasons or if certain primary endpoints underan applicable development plan are not met despite KHK’s commercially reasonable efforts and KHK reasonably determinesthat it cannot obtain regulatory approval. KHK may also terminate the agreement if certain pivotal clinical trials conductedby us do not meet their primary endpoints. We may terminate the KHK License Agreement if KHK challenges any patentslicensed to KHK under the agreement.License agreement with FosunIn December 2017, we entered into a license agreement, the Fosun License Agreement, with Fosun Pharma underwhich we granted Fosun Pharma an exclusive license to develop and commercialize tenapanor in China for the treatment,diagnosis or prevention of irritable bowel syndrome with constipation and chronic idiopathic constipation,hyperphosphatemia related to chronic kidney disease, and other diseases or conditions for which we obtain marketingapproval in either the US or China, collectively, the Fosun Field. The Fosun Field excludes the treatment of cancer. Weretained the rights to tenapanor outside of China, and also retained the rights to tenapanor in China for indications other thanthose in the Fosun Field. Pursuant to the terms of the Fosun License Agreement, Fosun Pharma is responsible for all of thedevelopment and commercialization costs for tenapanor in the Fosun Field in China.Under the terms of the Fosun License Agreement, we are responsible for supplying the tenapanor drug product forFosun Pharma’s use in development and during commercialization until Fosun Pharma has assumed such responsibility.Additionally, we are responsible for supplying the tenapanor drug substance for Fosun Pharma’s use in development andcommercialization throughout the term of the Fosun License Agreement.Under the terms of the Fosun License Agreement, we received an upfront payment of $12.0 million and are eligibleto receive additional milestones of up to $113.0 million in the aggregate, as well as tiered royalty payments on aggregate netsales ranging from the mid-teens percent to twenty percent, subject to certain reductions under certain circumstances, asdescribed in the Fosun License Agreement.The Fosun License Agreement will continue until all of Fosun Pharma’s applicable payment obligations under theLicense Agreement have been performed or have expired, or the agreement is earlier terminated. Under the terms of the FosunLicense Agreement, we and Fosun Pharma each have the right to terminate the agreement for material breach by the otherparty or in the event of insolvency by the other party. In addition, Fosun Pharma may terminate the agreement forconvenience and we may terminate the agreement if Fosun Pharma challenges any patents licensed to it under the agreement.License agreement with Knight TherapeuticsIn March 2018, we entered into a license agreement with Knight that provides Knight with exclusive rights tocommercialize tenapanor in Canada. Under the terms of the agreement, Ardelyx is eligible to receive up to CAD 25 million intotal payments including an upfront payment and development and sales milestones, as well as tiered royalties on net salesranging from the mid-single digits to the low twenties. Knight will have the exclusive rights to market and sell tenapanor inCanada.RDX013 Program: Small Molecule for Treating HyperkalemiaRDX013 is our novel, small molecule program for the potential treatment of hyperkalemia. Our RDX013 approachworks by leveraging the GI tract’s natural ability to secrete potassium into the lumen of the gut to reduce serum potassiumlevels. This mechanism differs significantly from the potassium binders currently on or approaching the market. For apotassium binder to work, it must be present when dietary potassium is ingested so that the agent can bind the potassium andprevent its absorption in the gut. This results in the need for large quantities of binder in order to bind the large amounts ofpotassium in the diets of most individuals. In contrast, we observed in our preclinical models that a small amount of RDX013could cause potassium to be secreted into the lumen of the gut. In this way, we believe9 Table of Contentsthat RDX013 may have the potential to lower serum potassium whether or not potassium is present in the diet and couldresult in a very low pill burden, potentially allowing better patient compliance, longer-term use and potentially betterefficacy than potassium binders. As described below, certain medications commonly administered to patients with CKDand/or heart failure can also cause hyperkalemia. With the successful development of an effective potassium secretagogue totreat hyperkalemia in a small, convenient pill format, we believe our RDX013 approach may provide nephrologists andcardiologists with an opportunity to treat hyperkalemia chronically without reducing the dose of these medications.Hyperkalemia is generally defined as the presence of blood potassium levels greater than 5.0 mEq/L. Normal levelsare 3.5 to 5.0 mEq/L. When hyperkalemia is severe, above 7.0 mEq/L, there is a significantly increased risk of death becauseof the potential for heart conductance problems.Hyperkalemia can be caused by a variety of issues. Kidney disease can result in the elevation of potassium in theblood, and certain drugs such as the common hypertension medications known as RAAS inhibitors, which inhibit the renin-angiotensin-aldosterone system, can cause hyperkalemia. As a result, the dosage of RAAS inhibitors must often besignificantly reduced in patients whose potassium levels are elevated, such as in those with CKD and heart failure. Becauseof the risk of hyperkalemia, several published guidelines have suggested that physicians should reduce and possiblydiscontinue RAAS inhibitors in order to manage the risk of hyperkalemia in CKD and heart failure patients. The alternativemedications used to control hypertension, including diuretics and calcium channel blockers, are less effective than RAASinhibitors, particularly in patients with failing kidneys and severe hypertension. According to the 2015 publication MarketDynamix: Hyperkalemia, released by Spherix Global Insights, U.S. cardiologists reported that of the patients who wouldbenefit from RAAS inhibition, up to 38% of patients with heart failure and up to 55% of patients with both heart failure andCKD are being administered a sub-optimal dose or none at all. Nephrologists reported that at least one-third of patients whowould benefit from RAAS inhibition receive a sub-optimal dose or none at all. We believe there is clearly a strong medicalneed for new medications that control hyperkalemia in order to allow for optimal use of RAAS inhibitors to controlhypertension in these patient populations.The hyperkalemia marketOf the people with CKD and/or heart failure in the United States, we estimate that there are approximately 2.1million people who also have occurrences of hyperkalemia. According to a retrospective study conducted in 2005 of anational cohort of 246,000 patients cared for in the Veterans Health Administration, about 21% and 42% of patients withCKD Stage 3b and Stage 4, respectively, had a hyperkalemic event during a 12-month period, suggesting that hyperkalemiaaffects about 900,000 individuals with CKD Stage 3b or Stage 4 in the United States. According to the United States RenalData System 2014 Atlas of CKD & ESRD, over 50% of CKD Stage 3b and Stage 4 patients are prescribed RAAS inhibitors tocontrol hypertension and to slow the course of CKD.Additionally, the number of adults in the U.S. living with heart failure is about 6.5 million, based on data collectedin the National Health and Nutrition Examination Survey, which is taken in stages over multiple years. Our proprietaryresearch suggests that up to 16%, or approximately 1.0 million, of these patients had hyperkalemia during a 12-monthperiod. Over half of heart failure patients are prescribed RAAS inhibitors. Our proprietary research also suggests that up to200,000 patients with ESRD in the U.S. could benefit from an agent that treats hyperkalemia.We are aware of at least two drugs on the market for the treatment of hyperkalemia. Veltassa (patiromer FOS), an oral,polymer-based potassium binder, was approved for marketing by the FDA in October 2015 and was commercially launchedby Relypsa, which was acquired by Galenica AG for $1.5 billion in September 2016. Additionally, Lokelma (sodiumzirconium cyclosilicate), an oral, potassium binder developed by ZS Pharma (acquired by AstraZeneca in December 2015 for$2.7 billion) was approved in May 2018 and launched by AstraZeneca.We believe that, unlike these agents which require large amounts of drug for the desired effect, RDX013 may havethe potential to lower serum potassium whether or not potassium is present in the diet and could result in very low pillburden, allowing better compliance, longer-term use and potentially better efficacy than potassium binders.10 Table of ContentsIf we are successful in developing RDX013 and obtaining marketing authorization from the FDA, we would expectto leverage the renal sales and marketing organization that we intend to build to support commercialization in the UnitedStates of tenapanor for treating hyperphosphatemia in dialysis patients.Tenapanor: NHE3 Inhibitor for Treating IBS-CIn addition to its development for hyperphosphatemia, we have completed development of tenapanor for thetreatment of IBS-C and are pursuing strategic collaborations to bring it to market in this indication. We completed two Phase3 clinical trials in patients with IBS-C, T3MPO-1 and T3MPO-2, along with a long-term safety study, T3MPO-3, andsubmitted an NDA to the FDA in September 2018. We have been granted a target action date under PDUFA of September 12,2019.IBS-C is a GI disorder in which abdominal pain or discomfort is associated with constipation, and whichsignificantly impacts the health and quality of life of affected patients. Tenapanor is a minimally-systemic small moleculethat acts locally in the GI tract to inhibit the sodium transporter NHE3 and reduce sodium uptake from the gut. Part of itsmechanism to treat constipation caused by IBS-C is an osmotic effect in the intestines – water follows salt and stool is gentlyloosened by the body’s own fluids. In addition to this mechanism, data from nonclinical studies, which were presented inNovember 2017 at the American Society of Nephrology Annual Meeting, suggest that tenapanor reduced abdominal paincaused by IBS-C through the inhibition of TRPV-1 dependent signaling. TRPV-1, better known as the "hot chili pepperreceptor," is a well-established pain target known for transmitting painful stimuli from a variety of sources including heat,protons and inflammatory molecules. Using an established rodent model of IBS-like colonic hypersensitivity, preclinicaldata showed that tenapanor treatment reduced visceral hypersensitivity (pain in the internal organs) and normalized colonicsensory neuronal excitability and TRPV-1 currents. Treatment with tenapanor also increased stool excretion and stool watercontent. In these nonclinical studies, tenapanor had a superior effect on visceral hypersensitivity than placebo orpolyethylene glycol, a well-known laxative not known to have an analgesic effect. Phase 3 clinical data supporting tenapanor in IBS-CAt the end of 2017, we completed our Phase 3 program, the T3MPO program, for tenapanor for the treatment of IBS-C. This included two Phase 3 studies, T3MPO-1 and T3MPO-2, and a long-term safety extension study, T3MPO-3. In thediscussion below, statistical significance is denoted by p-values. The p-value is the probability that the reported result wasachieved purely by chance (e.g., a p-value <0.001 means that there is a less than a 0.1% probability that the observed changewas purely due to chance). Generally, a p-value less than 0.05 is considered statistically significant.In May 2017, we reported data from the first Phase 3 study, T3MPO-1. T3MPO-1 was a 12-week, double-blind,placebo-controlled, multi-center, randomized trial with a four-week, randomized withdrawal period conducted in a total of610 patients meeting the ROME III criteria for the diagnosis of IBS-C. Patients were randomized one to one to receive either50 mg of tenapanor or placebo twice-daily. The trial included a two-week screening period, during which patients with activedisease, based on bowel movement frequency and abdominal pain score recorded in a daily phone diary, were randomizedinto the trial.The study achieved statistical significance for the primary endpoint and seven of eight secondary endpoints. Theprimary endpoint, the combined responder rate for six of 12 weeks, showed that a greater proportion of tenapanor-treatedpatients compared to placebo-treated patients (27.0% vs 18.7%, p=0.02) had at least a 30% reduction in abdominal pain andan increase of one or more complete spontaneous bowel movements, or CSBM, in the same week for at least six of the 12weeks of the treatment period. The CSBM responder rate in the six of 12 weeks (defined as having an increase of at least oneCSBM from baseline during a week for six of 12 weeks) did not reach statistical significance (33.9% vs. 29.4%, p=0.27);however, the abdominal pain responder rate in the six of 12 weeks (defined as having at least a 30% decrease in abdominalpain from baseline during a week for six of 12 weeks) did achieve statistical significance (44.0% vs. 33.1%, p=0.008). In thenine of 12 treatment weeks, the study achieved statistical significance for the combined responder rate (13.7% vs. 3.3%,p<0.001), in which patients must have had an increase of at least one CSBM from baseline and at least three CSBMs during aweek for nine of 12 weeks as well as a 30% or greater reduction in abdominal pain for nine of the 12 weeks. In addition, forthe nine of 12 weeks, the study achieved statistical11 Table of Contentssignificance for the individual CSBM responder rate (16.9% vs. 5%, p<0.001) and the abdominal pain responder rate (30.3%vs. 19.4%, p=0.003).Tenapanor was well-tolerated in the study. The only adverse events observed in more than 2% of patients treatedwith tenapanor, as compared with placebo, were diarrhea (14.6% vs 1.7%) and nausea (2.6% vs 1.7%). The placebo adjusteddiscontinuation rate due to diarrhea was 5.3%.In October 2017, we reported results from the second Phase 3 study of tenapanor for the treatment of IBS-C, T3MPO-2, a 26-week, double-blind, placebo-controlled, multi-center, randomized trial in 593 patients. Patients were randomized oneto one to receive either 50 mg of tenapanor or placebo twice-daily. The trial included a two-week screening period, duringwhich patients with active disease, based on bowel movement frequency and abdominal pain score recorded in a daily phonediary, were randomized into the trial.The study achieved statistical significance for the primary endpoint and all secondary endpoints evaluated for thetopline results and demonstrated the ability to normalize bowel movements. The primary endpoint, the combined responderrate for six of 12 weeks, showed that a greater proportion of tenapanor-treated patients compared to placebo-treated patients(36.5% vs. 23.7%, p<0.001) had at least a 30% reduction in abdominal pain and an increase of one or more CSBMs in thesame week for at least six of the 12 weeks of the treatment period. The study achieved statistical significance for the CSBMand abdominal pain responder rates in the six of 12 weeks (47.4% vs. 33.3%, p<0.001; 49.8% vs. 38.3%, p=0.004). In thenine of 12 treatment weeks, the study achieved statistical significance for the combined responder rate (18.4% vs. 5.3%,p<0.001), in which patients must have had an increase of at least one bowel movement from baseline and at least three perweek and a 30% reduction in abdominal pain for nine of the 12 weeks. In addition, for the nine of 12 weeks, the studyachieved statistical significant for the individual CSBM responder rate (22.2% vs. 6.0%, p<0.001) and the abdominal painresponder rate (35.8% vs. 26.7%, p=0.015). The study also achieved statistical significance for all three durable responderendpoints, the combined responder rate (18.1% vs. 5.0%, p<0.001), CSBM responder rate (21.2% vs. 5.7%, p<0.001) andabdominal pain responder rate (34.8% vs. 26.7%, p=0.028), which are identical to the nine of 12-week responder endpoints,except the response must also occur in three of the last four treatment period weeks.Tenapanor was well-tolerated in the T3MPO-2 study. The only adverse events observed in more than 2% of patientsin the tenapanor-treated group that were also greater than placebo were diarrhea (16.0% vs. 3.7%), flatulence (3.1% vs. 1.0%),nasopharyngitis (4.4% vs. 3.7%) and abdominal distension (3.4% vs. 0.3%). The placebo adjusted discontinuation rate dueto diarrhea was 5.8%.Patients who completed T3MPO-1 and T3MPO-2 were eligible to enter T3MPO-3, our open-label, long-term safetytrial where patients could continue to receive tenapanor for up to one year. In October 2018, data from the T3MPO-3 trial waspresented at the American College of Gastroenterology (ACG) 2018 Annual Meeting in a poster (P0338), entitled “An OpenLabel Long-Term Safety Trial (T3MPO-3) of Tenapanor in Patients with Irritable Bowel Syndrome with Constipation (IBS-C).” The T3MPO-3 trial enrolled a total of 240 patients who completed either the T3MPO-1 or T3MPO-2 Phase 3 trials.All participants in T3MPO-3 received 50 mg of tenapanor twice-daily for up to 55 weeks. Results from T3MPO-3 showed amean compliance rate with tenapanor of approximately 98%. Overall, tenapanor was well-tolerated, with the most commonadverse event being diarrhea (9.2%). There were limited discontinuations (2.1%), with only 1.7% of patients discontinuingdue to diarrhea.The IBS-C marketNumerous treatments exist for the constipation component of IBS-C, many of which are over-the-counter. There arethree prescription products marketed for IBS-C: Linzess (linaclotide); Amitiza (lubiprostone); and Trulance (plecanatide).We believe that tenapanor may offer a significant benefit over currently marketed drugs like Amitiza, Linzess andTrulance in part because of the profile demonstrated in our Phase 3 program, which showed best-in-class efficacy12 Table of Contentsresults for the 9-of-12 week combined responder rates. Within the United States, there are approximately 11 million patientsthat suffer that suffer from IBS-C. There is significant unmet need for prescription medications, where, according a 2015American Gastroenterological Association report, only one in four treated patients are very satisfied with the current FDAapproved treatments in IBS-C.INTELLECTUAL PROPERTYOur commercial success depends in part on our ability to obtain and maintain proprietary protection for our drugcandidates, manufacturing and process discoveries, and other know-how, to operate without infringing the proprietary rightsof others and to prevent others from infringing our proprietary rights. Our policy is to seek to protect our intellectual propertyby, among other methods, filing U.S. and foreign patent applications related to our proprietary technology and inventionsthat are important to the development and operation of our business. We also rely on trade secrets and careful monitoring ofour proprietary information to protect aspects of our business that are not amenable to, or that we do not consider appropriatefor, patent protection.The patent positions of biopharmaceutical companies like us are generally uncertain and involve complex legal,scientific and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced beforethe patent is issued, and its scope can be reinterpreted after issuance. Consequently, we do not know whether any of ourproduct candidates will be protectable or remain protected by enforceable patents. We cannot predict whether the patentapplications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of our issuedpatents will provide sufficient proprietary protection from competitors. Any patents that we hold may be challenged,circumvented or invalidated by third parties. If third parties prepare and file patent applications in the United States that alsoclaim technology or therapeutics to which we have rights, we may have to participate in interference proceedings in the U.S.Patent and Trademark Office, or USPTO, to determine priority of invention, which would result in substantial costs to us evenif the eventual outcome is favorable to us.The term of individual patents depends upon the legal term of the patents in countries in which they are obtained. Inmost countries, including the United States, the patent term is generally 20 years from the earliest date of filing a non-provisional patent application in the applicable country. In the United States, a patent’s term may, in certain cases, belengthened by patent term adjustment, which compensates a patentee for administrative delays by the USPTO in examiningand granting a patent, or may be shortened if a patent is terminally disclaimed over a commonly owned patent or a patentnaming a common inventor and having an earlier expiration date.In addition, in the United States, the Hatch-Waxman Act permits a patent term extension of up to five years beyondthe expiration of a U.S. patent as partial compensation for the patent term lost during the FDA regulatory review processoccurring while the patent is in force. A patent extension cannot extend the remaining term of a patent beyond a total of14 years from the date of product approval, and only one patent applicable to each regulatory review period may be extendedand only those claims covering the approved drug, a method for using it or a method for manufacturing it may be extended.Similar provisions are available in the European Union and certain other foreign jurisdictions to extend the term of a patentthat covers an approved drug.We may rely, in some circumstances, on trade secrets to protect our technology. Although we take steps to protectour proprietary information and trade secrets, including through contractual means with our employees and consultants, thirdparties may independently develop substantially equivalent proprietary information and techniques or otherwise gain accessto our trade secrets or disclose our technology. Thus, we may not be able to meaningfully protect our trade secrets. It is ourpolicy to require our employees, consultants, outside scientific collaboration partners, sponsored researchers and otheradvisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us.These agreements provide that all confidential information concerning the business or financial affairs developed or madeknown to the individual during the course of the individual’s relationship with us is to be kept confidential and notdisclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that allinventions conceived by the individual, and which are related to our current or planned business or research anddevelopment or made during the normal working hours, on our premises or using our equipment or proprietary information,are our exclusive property.13 Table of ContentsNHE3 patentsOur NHE3 patent portfolio is wholly owned by us. This portfolio includes four issued U.S. patents, two issuedJapanese patents, two issued patents in each of Korea, Hong Kong, Israel and Mexico and one issued patent in each of thefollowing territories: Australia, China, and the European Union. These issued patents cover the composition and methods ofusing tenapanor and are predicted, without extension or adjustment, to expire in December 2029. We have related nationalpatent applications pending in Europe, China, India, Israel and a number of other countries. Any patents issuing from thesepatent applications are also predicted without extension or adjustment to expire in December 2029.Additional U.S. and international patent applications are pending covering additional methods of using tenapanor,and composition of matter and methods of using compounds that we believe may be follow on compounds to tenapanor.Other program patentsWe have patent applications pending in the United States and internationally that cover the compositions andmethods of using our TGR5 agonists, our FXR agonists and compounds in our RDX013 program.MANUFACTURINGTo date, we have relied upon third-party contract manufacturing organizations, or CMOs, to manufacture both theactive pharmaceutical ingredient and final drug product dosage forms of our potential drug candidates used as clinical trialmaterial. We expect that we will continue to rely upon CMOs for the manufacture of our clinical trial materials and for ourcommercial product requirements, when and if regulatory approval is received. Our license agreements with KHK and FosunPharma require us to supply active pharmaceutical ingredient and final drug product dosage forms of tenapanor for their usein the development of tenapanor in each of their respective territories, and we are further obligated to continue to supplyactive pharmaceutical ingredient to support their commercialization of tenapanor in each of their territories. We expect thatwe will use CMOs to satisfy our supply obligations to our collaboration partners.GOVERNMENT REGULATION/FDAThe FDA and comparable regulatory authorities in state and local jurisdictions and in other countries imposesubstantial and burdensome requirements upon companies involved in the clinical development, manufacture, marketingand distribution of drugs. These agencies and other federal, state and local entities regulate research and developmentactivities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval,advertising and promotion, distribution, post-approval monitoring and reporting, sampling, and export and import of ourproduct candidates.In the United States, the FDA regulates drug products under the Federal Food, Drug, and Cosmetic Act, or FFDCA,and the FDA’s implementing regulations. If we fail to comply with applicable FDA or other requirements at any time duringthe drug development process, the approval process or after approval, we may become subject to administrative or judicialsanctions. These sanctions could include the FDA’s refusal to approve pending applications, license suspension orrevocation, withdrawal of an approval, warning letters, product recalls, product seizures, total or partial suspension ofproduction or distribution, injunctions, fines, civil penalties or criminal prosecution. Any FDA enforcement action couldhave a material adverse effect on us. FDA approval is required before any new unapproved drug or dosage form, including anew use of a previously approved drug, can be marketed in the United States.The process required by the FDA before a drug may be marketed in the United States generally involves:·completion of extensive preclinical laboratory tests, preclinical animal studies and formulation studies,some performed in accordance with the FDA’s current Good Laboratory Practice, or GLP, regulations;14 Table of Contents·submission to the FDA of an Investigational New Drug, or IND, application which must become effectivebefore human clinical trials in the United States may begin;·approval by an independent institutional review board, or IRB, or ethics committee at each clinical trial sitebefore each trial may be initiated;·performance of adequate and well-controlled human clinical trials in accordance with Good ClinicalPractice, or GCP, regulations to establish the safety and efficacy of the drug candidate for each proposedindication;·submission to the FDA of a new drug application, or NDA;·satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug isproduced to assess compliance with current Good Manufacturing Practice, or cGMP, regulations;·satisfactory completion of a potential review by an FDA advisory committee, if applicable; and·FDA review and approval of the NDA prior to any commercial marketing, sale or commercial shipment ofthe drug.The preclinical and clinical testing and approval process requires substantial time, effort and financial resources,and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all. Nonclinicaltests include laboratory evaluation of product chemistry, formulation, stability and toxicity, as well as animal studies toassess the characteristics and potential safety and efficacy of the product. The results of preclinical tests, together withmanufacturing information, analytical data and a proposed clinical trial protocol and other information, are submitted as partof an IND to the FDA. Some preclinical testing may continue even after the IND is submitted. The IND automaticallybecomes effective 30 days after receipt by the FDA, unless the FDA, within the 30‑day time period, raises concerns orquestions relating to the IND and places the clinical trial on a clinical hold, including concerns that human research subjectswill be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstandingconcerns before the clinical trial can begin. A separate submission to an existing IND must also be made for each successiveclinical trial conducted during product development.Clinical trials involve the administration of the investigational drug to human subjects under the supervision ofqualified investigators. Clinical trials are conducted under protocols detailing, among other things, the objectives of theclinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be used. Each protocol must besubmitted to the FDA as part of the IND.An independent IRB or ethics committee for each medical center proposing to conduct a clinical trial must alsoreview and approve a plan for any clinical trial before it can begin at that center and the IRB must monitor the clinical trialuntil it is completed. The FDA, the IRB, or the sponsor may suspend or discontinue a clinical trial at any time on variousgrounds, including a finding that the subjects are being exposed to an unacceptable health risk. Clinical testing also mustsatisfy extensive GCP requirements, including the requirements for informed consent.All clinical research performed in the United States in support of an NDA must be authorized in advance by the FDAunder the IND regulations and procedures described above. However, a sponsor who wishes to conduct a clinical trial outsidethe United States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND. If a foreign clinicaltrial is not conducted under an IND, the sponsor may submit data from the clinical trial to the FDA in support of an NDA solong as the clinical trial is conducted in compliance with GCP and if the FDA is able to validate the data from the studythrough an onsite inspection, if necessary. GCP includes review and approval by an independent ethics committee, such asan IRB, and obtaining and documenting the freely given informed consent of the subject before study initiation. If theapplicant seeks approval of an NDA solely on the basis of foreign data, the FDA will only accept such data if they areapplicable to the U.S. population and U.S. medical practice, the studies have been performed15 Table of Contentsby clinical investigators of recognized competence, and the data may be considered valid without the need for an on-siteinspection by the FDA, or if the FDA considers such an inspection to be necessary, the FDA is able to validate the datathrough an on-site inspection or through other appropriate means.Clinical trialsThe clinical investigation of a new drug is typically conducted in three or four phases, which may overlap or becombined, and generally proceed as follows.·Phase 1: Clinical trials are initially conducted in a limited population of subjects to test the drug candidatefor safety, dose tolerance, absorption, metabolism, distribution and excretion in healthy humans or, onoccasion, in patients with severe problems or life-threatening diseases to gain an early indication of itseffectiveness.·Phase 2: Clinical trials are generally conducted in a limited patient population to evaluate dosagetolerance and appropriate dosage, identify possible adverse effects and safety risks, and evaluatepreliminarily the efficacy of the drug for specific targeted indications in patients with the disease orcondition under study.·Phase 3: Clinical trials are typically conducted when Phase 2 clinical trials demonstrate that a dose rangeof the product candidate is effective and has an acceptable safety profile. Phase 3 clinical trials arecommonly referred to as “pivotal” studies, which typically denotes a study which presents the data that theFDA or other relevant regulatory agency will use to determine whether or not to approve a drug. Phase 3clinical trials are generally undertaken with large numbers of patients, such as groups of several hundred toseveral thousand, to further evaluate dosage, to provide substantial evidence of clinical efficacy and tofurther test for safety in an expanded and diverse patient population at multiple, geographically-dispersedclinical trial sites.·Phase 4: In some cases, the FDA may condition approval of an NDA for a product candidate on thesponsor’s agreement to conduct additional clinical trials after NDA approval. In other cases, a sponsor mayvoluntarily conduct additional clinical trials post approval to gain more information about the drug. Suchpost approval trials are typically referred to as Phase 4 clinical trials.Concurrent with clinical trials, companies usually complete additional nonclinical studies and must also developadditional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturingthe drug in commercial quantities in accordance with GMP requirements. The manufacturing process must be capable ofconsistently producing quality batches of the drug candidate and, among other things, the manufacturer must developmethods for testing the identity, strength, quality and purity of the final drug product. Additionally, appropriate packagingmust be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergounacceptable deterioration over its shelf life.The FDA, the IRB or the clinical trial sponsor may suspend or terminate a clinical trial at any time on variousgrounds, including a finding that the research subjects are being exposed to an unacceptable health risk.Additionally, some clinical trials are overseen by an independent group of qualified experts organized by theclinical trial sponsor, known as a data safety monitoring board or committee. This group provides authorization for whetheror not a trial may move forward at designated check points based on access to certain data from the study. We may alsosuspend or terminate a clinical trial based on evolving business objectives and/or competitive climate.New drug applicationsThe results of preclinical studies and of the clinical trials, together with other detailed information, includingextensive manufacturing information and information on the composition of the drug, are submitted to the FDA in the16 Table of Contentsform of an NDA requesting approval to market the drug for one or more specified indications. The FDA reviews an NDA todetermine, among other things, whether a drug is safe and effective for its intended use.Under the Prescription Drug User Fee Act, the FDA has a goal of responding to standard review NDAs of newmolecular entities within ten months after the 60‑day filing review period, or six months after the 60‑day filing review periodfor priority review NDAs, but this timeframe is often extended by FDA requests for additional information or clarification.The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether theapplication should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generallyfollows such recommendations.Before approving an application, the FDA will inspect the facility or the facilities at which the finished drugproduct, and sometimes the active pharmaceutical ingredient, or API, is manufactured, and will not approve the drug unlesscGMP compliance is satisfactory. The FDA may also inspect the sites at which the clinical trials were conducted to assesstheir compliance, and will not approve the drug unless compliance with cGCP requirements is satisfactory.After the FDA evaluates the NDA and conducts inspections of manufacturing facilities where the drug productand/or its API will be produced, it may issue an approval letter or a Complete Response Letter. An approval letter authorizescommercial marketing of the drug with specific prescribing information for specific indications. A Complete Response Letterindicates that the review cycle of the application is complete and the application is not ready for approval. A CompleteResponse Letter may require additional clinical data and/or an additional pivotal Phase 3 clinical trial(s), and/or othersignificant, expensive and time-consuming requirements related to clinical trials, preclinical studies or manufacturing. Evenif such additional information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria forapproval. The FDA could also approve the NDA with a Risk Evaluation and Mitigation Strategy, or REMS, to mitigate risks,which could include medication guides, physician communication plans, or elements to assure safe use, such as restricteddistribution methods, patient registries and other risk minimization tools. The FDA also may condition approval on, amongother things, changes to proposed labeling, development of adequate controls and specifications, or a commitment toconduct one or more post-market studies or clinical trials. Such post-market testing may include Phase 4 clinical trials andsurveillance to further assess and monitor the product’s safety and effectiveness after commercialization. The FDA has theauthority to prevent or limit further marketing of a drug based on the results of these post-marketing programs. Once the FDAapproves an NDA, or supplement thereto, the FDA may withdraw the approval if ongoing regulatory requirements are not metor if safety problems are identified after the drug reaches the market.Drugs may be marketed only for the FDA approved indications and in accordance with the provisions of theapproved labeling. Further, if there are any modifications to the drug, including changes in indications, labeling, ormanufacturing processes or facilities, the applicant may be required to submit and obtain FDA approval of a new NDA orNDA supplement, which may require the applicant to develop additional data or conduct additional preclinical studies andclinical trials.The testing and approval processes require substantial time, effort and financial resources, and each may takeseveral years to complete. The FDA may not grant approval on a timely basis, or at all. Even if we believe a clinical trial hasdemonstrated safety and efficacy of one of our drug candidates for the proposed indication, the results may not besatisfactory to the FDA. Nonclinical and clinical data may be interpreted by the FDA in different ways, which could delay,limit or prevent regulatory approval. We may encounter difficulties or unanticipated costs in our efforts to secure necessarygovernmental approvals which could delay or preclude us from marketing drugs. The FDA may limit the indications for useor place other conditions on any approvals that could restrict the commercial application of the drugs. After approval, certainchanges to the approved drug, such as adding new indications, manufacturing changes, or additional labeling claims aresubject to further FDA review and approval. Depending on the nature of the change proposed, an NDA supplement must befiled and approved before the change may be implemented.Other regulatory requirementsAny drugs manufactured or distributed by us or our collaboration partners pursuant to FDA approvals would besubject to continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences17 Table of Contentsassociated with the drug. Drug manufacturers and their subcontractors are required to register their establishments with theFDA and certain state agencies, and are subject to periodic announced and unannounced inspections by the FDA and certainstate agencies for compliance with ongoing regulatory requirements, including cGMP, which impose certain procedural anddocumentation requirements upon us and our third-party manufacturers. Failure to comply with the statutory and regulatoryrequirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension ofmanufacturing, seizure of product, injunctive action or possible civil penalties. We cannot be certain that we or our present orfuture third-party manufacturers or suppliers will be able to comply with the cGMP regulations and other ongoing FDAregulatory requirements. If we or our present or future third-party manufacturers or suppliers are not able to comply with theserequirements, the FDA may, among other things, halt our clinical trials, require us to recall a drug from distribution orwithdraw approval of the NDA for that drug.The FDA closely regulates the post-approval marketing and promotion of drugs, including standards andregulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activitiesand promotional activities involving the Internet. A company can make only those claims relating to safety and efficacy thatare approved by the FDA. Failure to comply with these requirements can result in, among other things, adverse publicity,warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally availabledrugs for uses that are not described in the product’s labeling and that differ from those tested by us and approved by theFDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the besttreatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice oftreatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use.Hatch-Waxman ActSection 505 of the FFDCA describes three types of marketing applications that may be submitted to the FDA torequest marketing authorization for a new drug. A Section 505(b)(1) NDA is an application that contains full reports ofinvestigations of safety and efficacy. A 505(b)(2) NDA is an application that contains full reports of investigations of safetyand efficacy but where at least some of the information required for approval comes from investigations that were notconducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person byor for whom the investigations were conducted. This regulatory pathway enables the applicant to rely, in part, on the FDA’sprior findings of safety and efficacy for an existing product, or published literature, in support of its application.Section 505(j) establishes an abbreviated approval process for a generic version of approved drug products through thesubmission of an Abbreviated New Drug Application, or ANDA. An ANDA provides for marketing of a generic drug productthat has the same active ingredients, dosage form, strength, route of administration, labeling, performance characteristics andintended use, among other things, to a previously approved product. ANDAs are termed “abbreviated” because they aregenerally not required to include nonclinical (animal) and clinical (human) data to establish safety and efficacy. Instead,generic applicants must scientifically demonstrate that their product is bioequivalent to, or performs in the same manner as,the innovator drug through in vitro, in vivo, or other testing. The generic version must deliver the same amount of activeingredients into a subject’s bloodstream in the same amount of time as the innovator drug and can often be substituted bypharmacists under prescriptions written for the reference listed drug. In seeking approval for a drug through an NDA,applicants are required to list with the FDA each patent with claims that cover the applicant’s drug or a method of using thedrug. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’sApproved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed inthe Orange Book can, in turn, be cited by potential competitors in support of approval of an ANDA or 505(b)(2) NDA.Upon submission of an ANDA or a 505(b)(2) NDA, an applicant must certify to the FDA that (1) no patentinformation on the drug product that is the subject of the application has been submitted to the FDA; (2) such patent hasexpired; (3) the date on which such patent expires; or (4) such patent is invalid or will not be infringed upon by themanufacture, use or sale of the drug product for which the application is submitted. Generally, the ANDA or 505(b)(2) NDAcannot be approved until all listed patents have expired, except where the ANDA or 505(b)(2) NDA applicant challenges alisted patent through the last type of certification, also known as a paragraph IV certification. If the applicant does notchallenge the listed patents or indicates that it is not seeking approval of a patented method of use,18 Table of Contentsthe ANDA or 505(b)(2) NDA application will not be approved until all of the listed patents claiming the referenced producthave expired.If the ANDA or 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant mustsend notice of the Paragraph IV certification to the NDA and patent holders once the application has been accepted for filingby the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of theparagraph IV certification. If the paragraph IV certification is challenged by an NDA holder or the patent owner(s) asserts apatent challenge to the paragraph IV certification, the FDA may not approve that application until the earlier of 30 monthsfrom the receipt of the notice of the paragraph IV certification, the expiration of the patent, when the infringement caseconcerning each such patent was favorably decided in the applicant’s favor or settled, or such shorter or longer period as maybe ordered by a court. This prohibition is generally referred to as the 30‑month stay. In instances where an ANDA or 505(b)(2) NDA applicant files a paragraph IV certification, the NDA holder or patent owner(s) regularly take action to trigger the30‑month stay, recognizing that the related patent litigation may take many months or years to resolve. Thus, approval of anANDA or 505(b)(2) NDA could be delayed for a significant period of time depending on the patent certification the applicantmakes and the reference drug sponsor’s decision to initiate patent litigation.The Hatch-Waxman Act establishes periods of regulatory exclusivity for certain approved drug products, duringwhich the FDA cannot approve (or in some cases accept) an ANDA or 505(b)(2) application that relies on the brandedreference drug. For example, the holder of an NDA, including a 505(b)(2) NDA, may obtain five years of exclusivity uponapproval of a new drug containing new chemical entities, or NCEs, that have not been previously approved by the FDA. Adrug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety,which is the molecule or ion responsible for the therapeutic activity of the drug substance. During the exclusivity period, theFDA may not accept for review an ANDA or a 505(b)(2) NDA submitted by another company that contains the previouslyapproved active moiety. However, an ANDA or 505(b)(2) NDA may be submitted after four years if it contains a certificationof patent invalidity or non-infringement.The Hatch-Waxman Act also provides three years of marketing exclusivity to the holder of an NDA (including a505(b)(2) NDA) for a particular condition of approval, or change to a marketed product, such as a new formulation for apreviously approved product, if one or more new clinical studies (other than bioavailability or bioequivalence studies) wasessential to the approval of the application and was conducted/sponsored by the applicant. This three-year exclusivity periodprotects against FDA approval of ANDAs and 505(b)(2) NDAs for the condition of the new drug’s approval. As a generalmatter, the three-year exclusivity does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for generic versionsof the original, unmodified drug product. Five-year and three-year exclusivity will not delay the submission or approval of afull NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all ofthe preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and efficacy.Fraud and abuse lawsIn the United States, the research, manufacturing, distribution, sale and promotion of drug products and medicaldevices are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, includingthe Centers for Medicare & Medicaid Services, or CMS, other divisions of the U.S. Department of Health and Human Services(e.g., the Office of Inspector General), the U.S. Department of Justice, state Attorneys General, and other state and localgovernment agencies. These laws include but are not limited to, the Anti-Kickback Statute, the federal False Claims Act, thefederal Physician Payments Sunshine Act, and other state and federal laws and regulations.The Anti-Kickback Statute makes it illegal for any person, including a prescription drug manufacturer (or a partyacting on its behalf) to knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce thereferral of business, including the purchase, order, or prescription of a particular drug, for which payment may be made undera federal healthcare program, such as Medicare or Medicaid. Violations of this law are punishable by up to five years inprison, criminal fines, administrative civil money penalties, and exclusion from participation in federal healthcare programs.In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order tohave committed a violation. Moreover, the Affordable Care Act provides that the19 Table of Contentsgovernment may assert that a claim including items or services resulting from a violation of the federal Anti-KickbackStatute constitutes a false or fraudulent claim for purposes of the False Claims Act.The federal False Claims Act prohibits anyone from knowingly presenting, or causing to be presented, for paymentto federal programs (including Medicare and Medicaid) claims for items or services, including drugs, that are false orfraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services.Although we would not submit claims directly to payors, manufacturers can be held liable under these laws if they aredeemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or codinginformation to customers or promoting a product off-label. In addition, our future activities relating to the reporting ofwholesaler or estimated retail prices for our products, the reporting of prices used to calculate Medicaid rebate informationand other information affecting federal, state, and third-party reimbursement for our products, and the sale and marketing ofour products, are subject to scrutiny under this law. For example, pharmaceutical companies have been prosecuted under thefederal False Claims Act in connection with their off-label promotion of drugs. Penalties for a False Claims Act violationinclude three times the actual damages sustained by the government, plus mandatory civil penalties of between $11,181 and$22,363 for each separate false claim, the potential for exclusion from participation in federal healthcare programs, and,although the federal False Claims Act is a civil statute, conduct that results in a False Claims Act violation may alsoimplicate various federal criminal statutes. If the government were to allege that we were, or convict us of, violating thesefalse claims laws, we could be subject to a substantial fine and may suffer a decline in our stock price. In addition, privateindividuals have the ability to bring actions under the federal False Claims Act and certain states have enacted laws modeledafter the federal False Claims Act.In addition to the laws described above, the Patient Protection and Affordable Care Act, as amended by the HealthCare and Education Reconciliation Act, collectively known as the Affordable Care Act, also imposed new reportingrequirements on drug manufacturers for payments made to physicians and teaching hospitals, as well as ownership andinvestment interests held by physicians and their immediate family members. Failure to submit required information mayresult in civil monetary penalties of up to an aggregate of $165,786 per year (or up to an aggregate of $1.105 million per yearfor “knowing failures”), for all payments, transfers of value or ownership or investment interests that are not timely,accurately and completely reported in an annual submission. Manufacturers must submit reports by the 90th day of eachsubsequent calendar year.Many states have also adopted laws similar to the federal laws discussed above. Some of these state prohibitionsapply to the referral of patients for healthcare services reimbursed by any insurer, not just federal healthcare programs such asMedicare and Medicaid. There has also been a recent trend of increased regulation of payments made to physicians and otherhealthcare providers. Certain states mandate implementation of compliance programs, impose restrictions on drugmanufacturers’ marketing practices and/or require the tracking and reporting of pricing and marketing information as well asgifts, compensation and other remuneration to physicians. Many of these laws contain ambiguities as to what is required tocomply with such laws, which may affect our sales, marketing, and other promotional activities by imposing administrativeand compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their implementation, ourreporting actions could be subject to the penalty provisions of the pertinent state and perhaps federal, authorities.Because we intend to commercialize products that could be reimbursed under a federal healthcare program and othergovernmental healthcare programs, we plan to develop a comprehensive compliance program that establishes internalcontrols to facilitate adherence to the rules and program requirements to which we will or may become subject. Althoughcompliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot beentirely eliminated. Due to the breadth of these laws, the absence of guidance in the form of regulations or court decisions,and the potential for additional legal or regulatory change in this area, it is possible that our future sales and marketingpractices and/or our future relationships with physicians and other healthcare providers might be challenged under such laws.Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significantlegal expenses and divert our management’s attention from the operation of our business.20 Table of ContentsThird-party coverage and reimbursementSales of pharmaceutical products depend in significant part on the availability of coverage and adequatereimbursement by third-party payors, such as state and federal governments, including Medicare and Medicaid, andcommercial managed care providers. In the United States, no uniform policy of coverage and reimbursement for drugproducts exists among third-party payors. Accordingly, decisions regarding the extent of coverage and amount ofreimbursement to be provided for our product candidates, if approved, will be made on a payor by payor basis. As a result, thecoverage determination process is often a time-consuming and costly process that will require us to provide scientific andclinical support for the use of our product candidates to each payor separately, with no assurance that coverage and adequatereimbursement will be obtained. Third-party payors may limit coverage to specific drug products on an approved list, orformulary, which might not include all of the FDA-approved drugs for a particular indication. A decision by a third-partypayor not to cover our product candidates could reduce physician utilization of our products once approved and have amaterial adverse effect on our future sales, results of operations and financial condition. Moreover, a payor’s decision toprovide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return onour investment in product development.In addition, in July 2010, CMS released its final rule to implement a bundled prospective payment system for thetreatment of ESRD patients as required by the Medicare Improvements for Patients and Providers Act, or MIPPA. Thebundled payment includes all renal dialysis services furnished for outpatient maintenance dialysis, including ESRD-relateddrugs and biologicals. The final rule delayed the inclusion of oral medications without intravenous equivalents in thebundled payment until January 1, 2014 and in April 2014, due to subsequent legislative amendments, CMS provided thatsuch inclusion will remain delayed until January 1, 2025. Unless additional Congressional action is taken, beginning in2025 ESRD-related drugs will be included in the bundle and separate Medicare reimbursement will no longer be availablefor such drugs, as it is today under Medicare Part D. While it is too early to project the full impact that bundling may have ondrugs for the treatment of hyperphosphatemia, the impact could potentially cause dramatic price reductions for tenapanor, ifapproved.Healthcare reformIn March 2010, Congress passed and President Obama signed into law, the Patient Protection and Affordable CareAct, a healthcare reform measure, often called, the Affordable Care Act. The Affordable Care Act substantially changes theway healthcare is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry.The Affordable Care Act contains a number of provisions, including those governing enrollment in federalhealthcare programs, reimbursement changes and fraud and abuse measures, which have impacted existing governmenthealthcare programs and have resulted in the development of new programs, including Medicare payment for performanceinitiatives and improvements to the physician quality reporting system and feedback program.Additionally, the Affordable Care Act:·increases the minimum level of Medicaid rebates payable by manufacturers of brand-name drugs from15.1% to 23.1%;·requires collection of rebates for drugs paid by Medicaid managed care organizations;·expands eligibility criteria for Medicaid programs by, among other things, allowing states to offerMedicaid coverage to additional individuals and by adding new mandatory eligibility categories forcertain individuals with income at or below 133% of the federal poverty level, thereby potentiallyincreasing a manufacturer’s Medicaid rebate liability;·expands access to commercial health insurance coverage through new state-based health insurancemarketplaces, or exchanges;21 Table of Contents·requires manufacturers to participate in a coverage gap discount program, under which they must agree tooffer 50 percent point-of-sale discounts off negotiated prices of applicable brand drugs to eligiblebeneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to becovered under Medicare Part D, beginning January 2011; and·imposes a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “brandedprescription drugs” to specified federal government programs.Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable CareAct. We expect that the new presidential administration and U.S. Congress will likely continue to seek to modify, repeal, orotherwise invalidate all or certain provisions of, the Affordable Care Act. There is still uncertainty with respect to the impactPresident Trump’s administration and the U.S. Congress may have, if any, and any changes will likely take time to unfold,and could have an impact on coverage and reimbursement for healthcare items and services covered by plans that wereauthorized by the Affordable Care Act.In addition, other legislative changes have been proposed and adopted in the United States since the AffordableCare Act was enacted. For example, in August 2011, the Budget Control Act of 2011, among other things, includedaggregate reductions to Medicare payments to providers of 2 percent per fiscal year, which went into effect on April 1, 2013,and, due to subsequent legislative amendments, will remain in effect through 2025 unless additional Congressional action istaken. In January 2013, the American Taxpayer Relief Act, among other things, further reduced Medicare payments to severalproviders, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations periodfor the government to recover overpayments to providers from three to five years. Additionally, individual states have alsobecome increasingly active in passing legislation and implementing regulations designed to control pharmaceutical productpricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access, and toencourage importation from other countries and bulk purchasing. Recently, there has also been heightened governmentalscrutiny over the manner in which drug manufacturers set prices for their marketed products, which has resulted in severalCongressional inquiries and proposed bills designed to, among other things, bring more transparency to product pricing,review the relationship between pricing and manufacturer patient programs, and reform government program reimbursementmethodologies for drug products. These new laws and the regulations and policies implementing them, as well as otherhealthcare reform measures that may be adopted in the future, may have a material adverse effect on our industry generallyand on our ability to successfully develop and commercialize our products.Other regulationsWe are also subject to numerous federal, state and local laws relating to such matters as safe working conditions,manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardoussubstances. We may incur significant costs to comply with such laws and regulations now or in the future.EMPLOYEESAs of December 31, 2018, we had a total of 86 employees, all of which were full-time employees, including a total of 16employees with Ph.D. degrees. Within our workforce, 61 employees are engaged in research and development and theremaining 25 in general management and administration, including finance, legal, and business development. None of ouremployees are represented by labor unions or covered by collective bargaining agreements. We believe that we maintaingood relations with our employees. CORPORATE INFORMATIONWe were incorporated in Delaware on October 17, 2007, under the name Nteryx and changed our name toArdelyx, Inc. in June 2008. We operate in only one business segment, which is the research, development andcommercialization of biopharmaceutical products. See Note 1 to our financial statements included in this Annual Report22 Table of Contentson Form 10‑K. Our principal offices are located at 34175 Ardenwood Blvd., Suite 200, Fremont, CA 94555, and ourtelephone number is (510) 745‑1700. Our website address is www.ardelyx.com.We file electronically with the Securities and Exchange Commission, or SEC, our annual reports on Form 10‑K,quarterly reports on Form 10‑Q and current reports on Form 8‑K pursuant to Section 13(a) or 15(d) of the Securities ExchangeAct of 1934, as amended. We make available on our website at www.ardelyx.com, free of charge, copies of these reports, assoon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The public may read orcopy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549.The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1‑800‑SEC‑0330.The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuersthat file electronically with the SEC. The address of that website is www.sec.gov.23 Table of Contents ITEM 1A. RISK FACTORSOur business involves significant risks, some of which are described below. You should carefully consider theserisks, as well as other information in this Annual Report on Form 10-K, including our financial statements and the relatednotes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence ofany of the events or developments described below could harm our business, financial condition, results of operations, cashflows, the trading price of our common stock and our growth prospects. Additional risks and uncertainties not presentlyknown to us or that we currently deem immaterial may also impair our business operations.Risks Related to Our Limited Operating History, Financial Condition and Capital RequirementsWe have a limited operating history, have incurred significant losses since our inception and we will incur losses in thefuture, which makes it difficult to assess our future viability.We are a clinical-stage biopharmaceutical company with a limited operating history. Biopharmaceutical productdevelopment is a highly speculative undertaking and involves a substantial degree of risk. To date, we have focusedsubstantially all of our efforts on our research and development activities, including developing tenapanor and developingour proprietary drug discovery and design platform. To date, we have not commercialized any products or generated anyrevenue from the sale of products.We are not profitable and have incurred losses in each year since our inception in October 2007, and we do notknow whether or when we will become profitable. We have only a limited operating history upon which to evaluate ourbusiness and prospects. We continue to incur significant research, development and other expenses related to our ongoingoperations. As of December 31, 2018, we had an accumulated deficit of $365.5 million.We expect that our operating losses will substantially increase for the foreseeable future as we prepare for thepotential commercialization of, and incur manufacturing and development costs for, tenapanor, including costs associatedwith completing the ongoing Phase 3 development of tenapanor for the treatment of hyperphosphatemia in end stage renaldisease, or ESRD, patients on dialysis, and if such Phase 3 development is successful, preparing the new drug application, orNDA, for submission to the U.S. Food and Drug Administration, or FDA, to request marketing authorization for tenapanor forthe treatment of hyperphosphatemia in ESRD patients on dialysis, and continuing our discovery and research activities.Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on ourstockholders’ equity and working capital. Further, the net losses we incur may fluctuate significantly from quarter-to-quarterand year-to-year, such that a period-to-period comparison of our results of operations may not be a good indication of ourfuture performance.We have substantial net operating loss and tax credit carryforwards for Federal and California income tax purposes.Such net operating losses and tax credits carryforwards may be reduced as a result of certain intercompany restructuringtransactions. In addition, the future utilization of such net operating loss and tax credit carryforwards and credits will besubject to limitations, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that haveoccurred previously and additional limitations may be applicable as a result of ownership changes that could occur in thefuture.We have never generated any revenue from product sales and may never be profitable.We have no products approved for sale and have never generated any revenue from product sales. Our ability togenerate revenue from product sales and achieve profitability depends on our ability to successfully complete thedevelopment of, and obtain the regulatory and marketing approvals necessary to commercialize tenapanor for one or moreindications, either on our own, or with one or more collaboration partners. We do not anticipate generating revenue fromproduct sales for the foreseeable future. Our ability to generate future revenue from product sales or pursuant to milestonepayments depends heavily on many factors, including but not limited to:24 Table of Contents·the successful completion of nonclinical and clinical development of tenapanor;·obtaining regulatory approvals for tenapanor, either on our own, or with one or more collaboration partners;··our ability to identify a collaboration partnership and negotiate acceptable terms for a collaborationpartnership for the commercialization of tenapanor for IBS-C in the United States;··our ability to successfully commercialize tenapanor, if approved, either on our own, or with one or morecollaboration partners;··developing a sustainable and scalable manufacturing process for tenapanor and establishing andmaintaining supply and manufacturing relationships with third parties that can provide an adequate (inamount and quality) supply of product to support the market demand for tenapanor, if approved;··obtaining market acceptance of tenapanor, if approved, as a viable treatment option for the indications forwhich it is approved;··addressing any competing technological and market developments;··identifying, assessing, acquiring, in-licensing and/or developing new product candidates;··negotiating favorable terms in any collaboration partnership, licensing or other arrangements into which wemay enter;··maintaining, protecting, and expanding our portfolio of intellectual property rights, including patents,trade secrets, and know-how, and our ability to develop, manufacture and commercialize our productcandidates and products without infringing intellectual property rights of others; and··attracting, hiring, and retaining qualified personnel.In cases where we are successful in obtaining regulatory approvals to market tenapanor for one or more indications,our revenue will be dependent, in part, upon the size of the markets in the territories for which regulatory approval is granted,the accepted price for the product, the ability to get reimbursement at any price and whether we are commercializing theproduct or the product is being commercialized by a collaboration partner, and in such case, whether we have royalty and/orco-promotion rights for that territory, and whether any royalty we have a right to receive from a collaboration partner is inexcess of the royalty we owe AstraZeneca as a result of the termination of our License Agreement with AstraZeneca in 2015.See NOTE 10. COLLABORATION AND LICENSING AGREEMENTS for details on our obligations to AstraZeneca. If thenumber of patients suitable for tenapanor is not as significant as we estimate, the indications approved by regulatoryauthorities are narrower than we expect, coverage and reimbursement for tenapanor are not available in the manner and to theextent which we expect, or the reasonably accepted population for treatment is narrowed by competition, physician choice ortreatment guidelines, we may not generate significant revenue from the sale of tenapanor, even if approved. Even if weachieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our failure to generaterevenue from product sales would likely depress our market value and could impair our ability to raise capital, expand ourbusiness, discover or develop other product candidates or continue our operations. A decline in the value of our commonstock could cause our stockholders to lose all or part of their investment.25 Table of ContentsOur operating activities may be restricted as a result of covenants related to the indebtedness under our loan and securityagreement and we may be required to repay the outstanding indebtedness in an event of default, which could have amaterially adverse effect on our business.On May 16, 2018, we entered into a loan and security agreement with Solar Capital, Ltd. and Western AllianceBank, or collectively the Lenders, pursuant to which the Lenders agreed to provide us a $50.0 million term loan facility witha maturity date of November 1, 2022. The full amount of the loan was funded on May 16, 2018. Until we have repaid suchindebtedness, the loan and security agreement subjects us to various customary covenants, including requirements as tofinancial reporting and insurance and restrictions on our ability to dispose of our business or property, to change our line ofbusiness, to liquidate or dissolve, to enter into any change in control transaction, to merge or consolidate with any otherentity or to acquire all or substantially all the capital stock or property of another entity, to incur additional indebtedness, toincur liens on our property, to pay any dividends or other distributions on capital stock other than dividends payable solelyin capital stock, to redeem capital stock, to enter into licensing agreements, to engage in transactions with affiliates, and toencumber our intellectual property. Our business may be adversely affected by these restrictions on our ability to operate ourbusiness.Additionally, we may be required to repay the outstanding indebtedness under the loan facility if an event of defaultoccurs under the loan and security agreement. An event of default will occur if, among other things, we fail to makepayments under the loan and security agreement; we breach any of our covenants under the loan and security agreement,subject to specified cure periods with respect to certain breaches; the Lenders determine that a material adverse change hasoccurred; we or our assets become subject to certain legal proceedings, such as bankruptcy proceedings; we are unable to payour debts as they become due; or we default on contracts with third parties which would permit the Lenders to accelerate thematurity of such indebtedness or that could have a material adverse change on us. We may not have enough available cash orbe able to raise additional funds through equity or debt financings to repay such indebtedness at the time any such event ofdefault occurs. In this case, we may be required to delay, limit, reduce or terminate our product development orcommercialization efforts or grant to others’ rights to develop and market product candidates that we would otherwise preferto develop and market ourselves. The Lenders could also exercise their rights as collateral agent to take possession of and todispose of the collateral securing the term loans, which collateral includes substantially all of our property (excludingintellectual property, which is subject to a negative pledge). Our business, financial condition and results of operations couldbe materially adversely affected as a result of any of these events.We will require substantial additional financing to achieve our goals, and the inability to access this necessary capitalwhen needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our pre-commercializationefforts for tenapanor and our other product development and platform development activities.Since our inception, most of our resources have been dedicated to our research and development activities,including developing our clinical product candidate tenapanor and developing our proprietary drug discovery and designplatform. We believe that we will continue to expend substantial resources for the foreseeable future, including costsassociated with completing the clinical program for tenapanor for the treatment of hyperphosphatemia in ESRD patients ondialysis, research and development, conducting preclinical studies and clinical trials for our other programs, obtainingregulatory approvals, developing and maintaining scalable manufacturing processes for our product candidates and sales andmarketing. Because the outcome of any clinical trial and/or regulatory approval process is highly uncertain, we cannotreasonably estimate the actual amounts necessary to successfully complete the development, regulatory approval process andcommercialization or co-promotion of any of our product candidates. Our future funding requirements will depend on manyfactors, including, but not limited to:··the progress, timing, scope, results and costs of our clinical trial program evaluating tenapanor for thetreatment of hyperphosphatemia in ESRD patients on dialysis, and if our clinical program is successful, thesubmission of an NDA with the FDA to request marketing authorization for tenapanor for the treatment ofhyperphosphatemia in ESRD patients on dialysis, as well as our decision whether or not to pursue otherindications for tenapanor;26 Table of Contents··whether or not we receive approval from the FDA to market tenapanor for the treatment of patients withIBS-C;··our ability to identify a collaboration partner and negotiate acceptable terms for a collaboration partnershipfor the commercialization of tenapanor in IBS-C in the United States;··our ability to successfully commercialize tenapanor, if approved, either alone or with one or morecollaboration partners;··the manufacturing costs of our product candidates, and the availability of one or more suppliers for ourproduct candidates at reasonable costs, both for clinical and commercial supply;··the selling and marketing costs associated with tenapanor, including the cost and timing of building oursales and marketing capabilities, should we elect to do so;··our ability to maintain our existing collaboration partnerships and to establish additional collaborationpartnerships, in-license/out-license, joint ventures or other similar arrangements and the financial terms ofsuch agreements;··the timing, receipt, and amount of sales of, or royalties on, tenapanor, if any;··the sales price and the availability of adequate third-party reimbursement for tenapanor, if approved;··the cash requirements of any future acquisitions or discovery of product candidates;··the number and scope of preclinical and discovery programs that we decide to pursue or initiate, and anyclinical trials we decide to pursue for other product candidates;··the time and cost necessary to respond to technological and market developments;··the costs of filing, prosecuting, maintaining, defending and enforcing any patent claims and otherintellectual property rights, including litigation costs and the outcome of such litigation, including costs ofdefending any claims of infringement brought by others in connection with the development, manufactureor commercialization of tenapanor or any of our product candidates; and··the payment of interest and principal related to our loan and security agreement entered into with SolarCapital Ltd. and Western Alliance Bank during May 2018.Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequatefunds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate our research activities,preclinical and clinical trials for our product candidates and our establishment and maintenance of sales and marketingcapabilities or other activities that may be necessary to commercialize tenapanor, either alone or with collaboration partners.Additionally, our inability to access capital on a timely basis and on terms that are acceptable to us may force us torestructure certain aspects of our business or identify and complete one or more strategic collaborations or other transactionsin order to fund the development or commercialization of tenapanor or certain of our product candidates through the use ofalternative structures.27 Table of ContentsRisks Related to Our BusinessWe are substantially dependent on the success of our lead product candidate, tenapanor, which may not be successful infurther clinical trials, receive regulatory approval or be successfully commercialized.To date, we have invested a significant amount of our efforts and financial resources in the research anddevelopment of tenapanor, which is currently our lead product candidate. The clinical and commercial success of tenapanorwill depend on a number of factors, including the following:··our ability to, in a timely manner and under terms that are acceptable to us, establish a collaborationpartnership for the commercialization of tenapanor for the treatment of IBS-C in the United States;··the ability of the third-party manufacturers we contract with to successfully execute and scale up themanufacturing processes for tenapanor, which has not yet been demonstrated, and to manufacture suppliesof tenapanor and to develop, validate and maintain commercially viable manufacturing processes that arecompliant with cGMP, requirements;··whether the FDA or foreign regulatory authorities require us or our collaboration partners to conductclinical trials in addition to those anticipated prior to approval to market tenapanor, which could delay thecommercialization of tenapanor;··whether we will be required to conduct clinical trials in addition to those anticipated to obtain adequatecommercial pricing;··the prevalence and severity of adverse side effects of tenapanor;··whether tenapanor’s safety and efficacy profile is satisfactory to the FDA and foreign regulatory authoritiesto gain marketing approval;··the timely receipt of necessary marketing approvals from the FDA and foreign regulatory authorities;··our ability, either alone, or with a collaboration partner, to successfully commercialize tenapanor, ifapproved for marketing and sale by the FDA or foreign regulatory authorities, including educatingphysicians and patients about the benefits, administration and use of tenapanor;··achieving and maintaining compliance with all regulatory requirements applicable to tenapanor;··acceptance of tenapanor as safe, effective and well-tolerated by patients and the medical community;··our ability, alone or with collaboration partners, to manage the complex pricing and reimbursementnegotiations associated with marketing the same product at different doses for separate indications, iftenapanor is approved for marketing and sale by the FDA or foreign regulatory authorities for both IBS-Cand hyperphosphatemia in dialysis patients;··the availability, perceived advantages, relative cost, relative safety and relative efficacy of tenapanorcompared to alternative and competing treatments;··obtaining and sustaining an adequate level of coverage and reimbursement for tenapanor by third-partypayors;··enforcing intellectual property rights in and to tenapanor;28 Table of Contents··avoiding third-party interference, opposition, derivation or similar proceedings with respect to our patentrights, and avoiding other challenges to our patent rights and patent infringement claims; and··a continued acceptable safety and tolerability profile of tenapanor following approval.As tenapanor is a first-in-class drug, there is a higher likelihood that approval may not be attained as compared to aclass of drugs with approved products. While tenapanor met the primary endpoint in two Phase 3 clinical studies evaluatingtenapanor for the treatment of patients with IBS-C, there can be no assurance that we will receive marketing authorizationfrom FDA. In addition, a prolonged government shutdown may cause significant regulatory delays, and therefore, delay ourefforts to seek and obtain approvals from the FDA, including approval of our NDA for tenapanor for the treatment of IBS-C. Although tenapanor met the primary endpoint in the first Phase 3 clinical trial for the treatment of hyperphosphatemia inESRD patients on dialysis, there can be no assurances that the second Phase 3 trial of tenapanor in this indication willachieve the primary endpoint, or that our ongoing clinical trial evaluating tenapanor as adjuvant therapy to phosphatebinders will achieve the primary endpoint. There can be no assurances that we will receive regulatory approval to markettenapanor for the treatment of hyperphosphatemia in ESRD patients on dialysis, either as monotherapy or as adjuvanttherapy to phosphate binders. Further, it may not be possible or practicable to demonstrate, or if approved, to markettenapanor on the basis of certain of the benefits we believe tenapanor possesses. If the number of patients in the market fortenapanor or the price that the market can bear is not as significant as we estimate, or if we are not able to secure adequatecoverage and reimbursement for tenapanor, we may not generate sufficient revenue from sales of tenapanor, if approved.Accordingly, there can be no assurance that tenapanor will ever be successfully commercialized or that we will ever generateincome from sales of tenapanor. If we are not successful in completing the development of, obtaining approval for, andcommercializing tenapanor, or are significantly delayed in doing so, our business will be materially harmed.Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and we may encountersubstantial delays in completing our clinical development of tenapanor for the treatment of hyperphosphatemia.Furthermore, results of earlier studies and trials may not be predictive of future trial results.Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we mustconduct extensive clinical studies to demonstrate the safety and efficacy of the product candidates in humans. Clinicaltesting is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at anytime during the clinical trial process. The results of preclinical and clinical studies of our product candidates may not bepredictive of the results of later-stage clinical trials. An unexpected adverse event profile, or the results of drug-druginteraction studies, may present challenges for the future development and commercialization of a product candidate for aparticular condition despite receipt of positive efficacy data in a clinical study. We are currently conducting our secondPhase 3 clinical trial for tenapanor as monotherapy for the treatment of hyperphosphatemia in ESRD patients on dialysis, aswell as a Phase 3 clinical trial evaluating tenapanor as adjuvant therapy to phosphate binders for the treatment ofhyperphosphatemia in this patient population. Although tenapanor met the primary endpoint in the first Phase 3 clinicaltrial for the treatment of hyperphosphatemia in ESRD patients on dialysis, there can be no assurances that the second Phase 3trial results of tenapanor in that indication will show the desired safety and efficacy. There can also be no assurances that theongoing clinical trial evaluating tenapanor as adjuvant therapy to phosphate binders will show the desired safety andefficacy for this indication. A number of companies in the pharmaceutical, biopharmaceutical and biotechnology industrieshave suffered significant setbacks in advanced clinical trials for similar indications that we are pursuing due to lack ofefficacy or adverse safety profiles, notwithstanding promising results in earlier studies, and we cannot be certain that we willnot face similar setbacks. Even if our clinical development program for tenapanor for the treatment of hyperphosphatemia iscompleted, and despite the completion of our Phase 3 program for tenapanor for IBS-C, the results for indications sought maynot be sufficient to obtain the desired regulatory approval for tenapanor, or if such regulatory approval is obtained, thecontent of the label approved by regulatory authorities may materially and adversely impact our ability to commercialize theproduct for the approved indication.We do not know whether our clinical trial evaluating tenapanor as adjuvant therapy to phosphate binders for thetreatment of hyperphosphatemia will enroll an adequate number of patients on time or whether that trial and our Phase 3clinical trial for tenapanor monotherapy for the treatment of hyperphosphatemia will be completed on schedule, if at all.Clinical trials can be delayed or terminated for a variety of reasons, including delay or failure to:29 Table of Contents··reach agreement on acceptable terms with prospective contract research organizations, or CROs, andclinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantlyamong different CROs and trial sites;··obtain institutional review board, or IRB, approval at each site;··recruit suitable patients in a timely manner to participate in our trials;··have patients complete a trial or return for post-treatment follow-up;··ensure that clinical sites observe trial protocol, comply with good clinical practices, or GCPs, or continue toparticipate in a trial;··address any patient safety concerns that arise during the course of a trial;··address any conflicts with new or existing laws or regulations; or··initiate or add a sufficient number of clinical trial sites.Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including thesize and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, thedesign of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantagesof the drug being studied in relation to other available therapies, including any new drugs or treatments that may beapproved for the indications we are investigating.We could also encounter delays if either of our ongoing clinical trials are suspended or terminated by us, by theIRBs of the institutions in which the trial is being conducted, or by the FDA or other regulatory authorities. Such authoritiesmay suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial inaccordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site bythe FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse sideeffects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions orlack of adequate funding to continue the clinical trial.Further, if there are delays in the completion of, or termination of, either the Phase 3 clinical trial or the adjuvanttherapy clinical trial for tenapanor for the treatment of hyperphosphatemia, the commercial prospects of tenapanor for suchindication may be harmed, and our ability to generate revenue from product sales of tenapanor for such indication will bedelayed. In addition, any delays in completing the clinical trial will increase costs, slow down our regulatory approvalprocess for tenapanor for hyperphosphatemia and jeopardize the ability to commence product sales and generate revenuefrom product sales for this indication. Any of these occurrences may significantly harm our business, financial condition andprospects. In addition, many of the factors that may cause, or lead to, a delay in the completion of either or both of ourongoing hyperphosphatemia clinical trials may also ultimately lead to the denial of regulatory approval.Even if we successfully obtain regulatory approval for tenapanor for one or more indications, it may never achieve marketacceptance, sufficient third-party coverage or reimbursement, or commercial success, which will depend, in part, upon thedegree of acceptance among physicians, patients, patient advocacy groups, health care payors and the medical community.Even if we obtain FDA or other regulatory approvals required to market tenapanor, and it is ultimatelycommercialized for one or more indications, it may not achieve market acceptance among physicians, patients, third-partypayors, patient advocacy groups, and the medical community. Market acceptance of tenapanor, in the event that marketingapproval is obtained, depends on a number of factors, including:30 Table of Contents··with respect to tenapanor for IBS-C in the United States, our ability to obtain a collaboration partner forcommercialization and the strength of such collaboration partner’s financial resources and marketing anddistribution organizations, as well as the commitment of such collaboration partner’s sales organization totenapanor;··the efficacy demonstrated in clinical trials;··the prevalence and severity of any side effects and overall safety and tolerability profile of the product;··the clinical indications for which it is approved;··advantages over new or traditional or existing therapies, including recently approved therapies or therapiesthat the physician community anticipate will be approved;··acceptance by physicians, major operators of clinics and patients of tenapanor as a safe, effective and well-tolerated treatment;··relative convenience and ease of administration of tenapanor;··the potential and perceived advantages of tenapanor over current treatment options or alternativetreatments, including future alternative treatments;··the cost of treatment in relation to alternative treatments and willingness to pay for tenapanor, if approved,on the part of physicians and patients;··the availability of alternative products and their ability to meet market demand; and··the quality of our relationships with patient advocacy groups.Any failure by us to obtain a collaboration partner for the commercialization of tenapanor in the United States forIBS-C and any failure of tenapanor to achieve market acceptance, sufficient third-party coverage or reimbursement, orcommercial success, should it receive regulatory approval, would adversely affect our results of operations.We currently have no sales organization. If we are unable to establish sales capabilities on our own or through thirdparties, we may not be able to commercialize tenapanor or any of our other product candidates.We currently do not have a sales organization. In order to commercialize or co-promote tenapanor or any of ourother product candidates, we must enter collaborative relationships with one or more third parties, or build internalmarketing, sales, distribution, managerial and other non-technical capabilities. There can be no assurances that we will besuccessful in establishing collaborative relationships in a timely manner or on terms that are acceptable to us. If tenapanorreceives regulatory approval and we have not entered collaborative relationships for the commercialization of tenapanor inthe United States, we would have to establish appropriate sales organizations with technical expertise supporting distributioncapabilities to commercialize the product candidate, which will be expensive and time consuming, or delay the commerciallaunch of tenapanor for such indication. As a company, we have no prior experience in the marketing, sale and distribution ofpharmaceutical products and there are significant risks involved in building and managing a sales organization, includingour ability to secure the capital necessary to fund such efforts on acceptable terms, hire, retain, and incentivize qualifiedindividuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel, comply withregulatory requirements applicable to the marketing and sale of drug products and effectively manage a geographicallydispersed sales and marketing team.If we are unable to enter collaborative relationships a timely manner, or on acceptable terms, and/or we fail or aredelayed in the development of our internal sales, marketing and distribution capabilities, we may choose to delay thecommercialization of our products and/or the commercialization of our products could be adversely impacted.31 Table of ContentsThird-party payor coverage and reimbursement status of newly-approved products is uncertain. Failure to obtain ormaintain adequate coverage and reimbursement for our products, if approved, could limit our ability to market thoseproducts and decrease our ability to generate revenue.The pricing, coverage and reimbursement of our product candidates, if approved, must be adequate to support acommercial infrastructure. The availability and adequacy of coverage and reimbursement by governmental and privatepayors are essential for most patients to be able to afford treatments such as ours, assuming approval. Sales of our productcandidates will depend substantially, both domestically and abroad, on the extent to which the costs of our productcandidates will be paid for by health maintenance, managed care, pharmacy benefit, and similar healthcare managementorganizations, or reimbursed by government authorities, private health insurers, and other third-party payors. If coverage andreimbursement are not available, or are available only to limited levels, we, or our collaboration partners, may not be able tosuccessfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount maynot be high enough to allow us to establish or maintain pricing sufficient to realize a return on our investment.There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. Inthe United States, the principal decisions about coverage and reimbursement for new drugs are typically made by the Centersfor Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services responsiblefor administering the Medicare program, as CMS decides whether and to what extent a new drug will be covered andreimbursed under Medicare. Private payors tend to follow the coverage reimbursement policies established by CMS to asubstantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for products such as ours.There is increased uncertainty related to insurance coverage and reimbursement for drugs, like tenapanor, which, ifapproved, will be marketed for the treatment of hyperphosphatemia in ESRD patients. In July 2010, CMS released its finalrule to implement a bundled prospective payment system for the treatment of ESRD patients as required by the MedicareImprovements for Patients and Providers Act, or MIPPA. The bundled payment covers a bundle of items and servicesroutinely required for dialysis treatments furnished to Medicare beneficiaries in Medicare-certified ESRD facilities or at theirhome, including the cost of certain routine drugs. The final rule delayed the inclusion of oral medications withoutintravenous equivalents in the bundled payment until January 1, 2014 and in April 2014, President Obama signed theProtecting Access to Medicare Act of 2014, which further extended this implementation date to January 1, 2024.Additionally, section 204 of the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014, or ABLE, provides thatpayment for oral-only ESRD drugs cannot be made under the ESRD Prospective Payment System prior to January 1, 2025. Asa result, absent further legislation on this matter, beginning in 2025, oral-only ESRD-related drugs may be included in thebundle and separate Medicare reimbursement will no longer be available for such drugs, as it is today under Medicare Part D.While it is too early to project the full impact that bundling may have on the industry, the impact could potentially causedramatic price reductions for tenapanor, if approved. We may be unable to sell tenapanor, if approved, to dialysis providerson a profitable basis if third-party payors reduce their current levels of payment, or if our costs of production increase fasterthan increases in reimbursement levels.Outside the United States, international operations are generally subject to extensive governmental price controlsand other market regulations, and we believe the increasing emphasis on cost-containment initiatives in Europe, Canada,Japan, China and other countries has and will continue to put pressure on the pricing and usage of our product candidates. Inmany countries, the prices of medical products are subject to varying price control mechanisms as part of national healthsystems. Other countries allow companies to fix their own prices for medicinal products, but monitor and control companyprofits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able tocharge for our product candidates. Accordingly, in markets outside the United States, the reimbursement for our products maybe reduced compared with the United States and may be insufficient to generate commercially reasonable revenue andprofits.Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to cap orreduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for newlyapproved products and, as a result, these caps may not cover or provide adequate payment for our product candidates. Weexpect to experience pricing pressures in connection with the sale of any of our product candidates due to the trend32 Table of Contentstoward managed healthcare, the increasing influence of health maintenance organizations, and additional legislativechanges. The downward pressure on healthcare costs in general, particularly prescription drugs and surgical procedures andother treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of newproducts.We may not be successful in our efforts to develop our product candidates that are at an early stage of development, orexpand our pipeline of product candidates, as a result of numerous factors, which may include the inability to accesscapital necessary to fund such efforts on acceptable terms.A key element of our strategy has been focused on the expansion of our pipeline of product candidates utilizing ourproprietary drug discovery and design platform and to advance such product candidates through clinical development. Ourinability to access capital in a timely manner or on acceptable terms to fund our early stage product candidates may force usto consider certain restructuring activities to enable the funding of those early assets through the use of alternative structures.In addition, of the large number of drugs in development, only a small percentage of such drugs successfully complete theFDA regulatory approval process and are commercialized. Accordingly, even if we are able to continue to fund our researchand early stage development programs, there can be no assurance that any product candidates will reach the clinic or besuccessfully developed or commercialized.Research programs to identify product candidates require substantial technical, financial and human resources,whether or not any product candidates are ultimately identified. Although our research and development efforts to date haveresulted in several development programs, we may not be able to develop product candidates that are safe, effective and well-tolerated. Our research programs may initially show promise in identifying potential product candidates, and we may selectcandidates for development, yet we may fail to advance product candidates to clinical development for many reasons,including the following:··we may be unable to access sufficient capital on acceptable terms to fund the development of all of ourassets and as a result we may be forced to delay or terminate the development of certain product candidates,or to consider restructuring efforts to secure alternate funding for those assets;··the research methodology used and our drug discovery and design platform may not be successful inidentifying potential product candidates;··competitors may develop alternatives that render our product candidates obsolete or less attractive;··product candidates we develop may nevertheless be covered by third parties’ patents or other exclusiverights;··the market for a product candidate may change during our program so that the continued development ofthat product candidate is no longer reasonable;··a product candidate may on further study be shown to have harmful side effects or other characteristics thatindicate it is unlikely to be effective, well-tolerated or otherwise does not meet applicable regulatory orcommercial criteria;··a product candidate may not be capable of being produced in commercial quantities at an acceptable cost,or at all; and··a product candidate may not be accepted as safe, effective and well-tolerated by patients, the medicalcommunity or third-party payors, if applicable.Even if we are successful in continuing to expand our pipeline, through our own research and development efforts,the potential product candidates that we identify or for which we acquire rights may not be suitable for clinical development,including as a result of being shown to have harmful side effects or other characteristics that indicate that33 Table of Contentsthey are unlikely to receive marketing approval and achieve market acceptance. If we do not successfully develop andcommercialize a product pipeline, we may not be able to generate revenue from product sales in future periods or everachieve profitability.We rely on third parties to conduct some of our nonclinical studies and all of our clinical trials. If these third parties do notsuccessfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approvalfor or commercialize our product candidates.We do not have the ability to independently conduct clinical trials and, in some cases, nonclinical studies. We relyon medical institutions, clinical investigators, contract laboratories, and other third parties, such as CROs, to conduct clinicaltrials on our product candidates. The third parties with whom we contract for execution of the clinical trials play a significantrole in the conduct of these trials and the subsequent collection and analysis of data. However, these third parties are not ouremployees, and except for contractual duties and obligations, we control only certain aspects of their activities and havelimited ability to control the amount or timing of resources that they devote to our programs. Although we rely, and willcontinue to rely, on these third parties to conduct some of our nonclinical studies and all of our clinical trials, we remainresponsible for ensuring that each of our studies and clinical trials is conducted in accordance with the applicable protocol,legal, regulatory and scientific standards and our reliance on third parties does not relieve us of our regulatoryresponsibilities. We, and these third parties are required to comply with current GLPs for nonclinical studies, and goodclinical practices, or GCPs, for clinical studies. GLPs and GCPs are regulations and guidelines enforced by the FDA, theCompetent Authorities of the Member States of the European Economic Area, or EEA, and comparable foreign regulatoryauthorities for all of our products in nonclinical and clinical development, respectively. Regulatory authorities enforce GCPsthrough periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our third-party contractorsfail to comply with applicable regulatory requirements, including GCPs, the clinical data generated in our clinical trials maybe deemed unreliable and the FDA, the European Medicines Agency, or EMA, or comparable foreign regulatory authoritiesmay require us to perform additional clinical trials before approving our marketing applications. There can be no assurancethat upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trialscomply with GCP regulations. In addition, our clinical trials must be conducted with product produced under cGMPregulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay theregulatory approval process.Our product candidates may cause undesirable side effects or have other properties that could delay our clinical trials, ordelay or prevent regulatory approval, limit the commercial profile of an approved label, or result in significant negativeconsequences following any regulatory approval that is achieved. If tenapanor or any of our other product candidatesreceives marketing approval and we or others later identify undesirable side effects caused by the product candidate, theability to market the product candidates could be compromised.Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delayor halt clinical trials, result in the delay or denial of regulatory approval by the FDA or other comparable foreign regulatoryauthorities or limit the commercial profile of an approved label. To date, patients treated with tenapanor have experienceddrug-related side effects including diarrhea, nausea, vomiting, flatulence, abdominal discomfort, abdominal pain, abdominaldistention and changes in electrolytes. In the event that trials conducted by us with tenapanor or trials we conduct with ourother product candidates, reveal an unacceptable severity and prevalence of these or other side effects, such trials could besuspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease furtherdevelopment of or deny approval of tenapanor, or any such other product candidate, for any or all targeted indications.Additionally, despite a positive efficacy profile, the prevalence and/or severity of these or other side effects could cause us tocease further development of a product candidate for a particular indication, or entirely. The drug-related side effects couldaffect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims.Any of these occurrences may harm our business, financial condition and prospects significantly.In addition, in the event that any of our product candidates receives regulatory approval and we or others lateridentify undesirable side effects caused by one of our products, a number of potentially significant negative consequencescould occur, including:34 Table of Contents··regulatory authorities may withdraw their approval of the product or seize the product;··we, or a collaboration partner, may be required to recall the product;··additional restrictions may be imposed on the marketing of the particular product or the manufacturingprocesses for the product or any component thereof, including the imposition of a Risk Evaluation andMitigation Strategies, or REMS, plan that may require creation of a Medication Guide outlining the risks ofsuch side effects for distribution to patients, as well as elements to assure safe use of the product, such as apatient registry and training and certification of prescribers;··we, or a collaboration partner, may be subject to fines, injunctions or the imposition of civil or criminalpenalties;··regulatory authorities may require the addition of labeling statements, such as a “black box” warning or acontraindication;··we could be sued and held liable for harm caused to patients;··the product may become less competitive; and··our reputation may sufferAny of the foregoing events could prevent us, or a collaboration partner, from achieving or maintaining marketacceptance of a particular product candidate, if approved, and could result in the loss of significant revenue to us, whichwould materially and adversely affect our results of operations and business.We face substantial competition and our competitors may discover, develop or commercialize products faster or moresuccessfully than us.The biotechnology and pharmaceutical industries are highly competitive, and we face significant competition fromcompanies in the biotechnology, pharmaceutical and other related markets that are researching and marketing productsdesigned to address diseases that we are currently developing products to treat. If approved for marketing by the FDA or otherregulatory agencies, tenapanor, as well as our other product candidates, would compete against existing treatments.For example, tenapanor will, if approved for the treatment of hyperphosphatemia in ESRD patients on dialysis,compete directly with phosphate binders for the treatment of hyperphosphatemia in ESRD patients on dialysis. The varioustypes of phosphate binders commercialized in the United States include the following:··Calcium carbonate (many over-the-counter brands including Tums and Caltrate)··Calcium acetate (several prescription brands including PhosLo and Phoslyra)··Lanthanum carbonate (Fosrenol)··Sevelamer hydrochloride (Renagel)··Sevelamer carbonate (Renvela)··Sucroferric oxyhydroxide (Velphoro)··Ferric citrate (Auryxia)35 Table of ContentsThe hydrochloride form of sevelamer, Renagel, was launched in the United States by Genzyme Corporation in 1998prior to its acquisition by Sanofi, and the carbonate form, Renvela, was launched in 2008. Sanofi booked €411 million ($470million) in worldwide sales of sevelamer during 2018. Generic sevelamer carbonate has been approved in certainjurisdictions in Europe since 2015 and in the U.S. market since June 2017. In addition to the currently marketed phosphatebinders, we are aware of at least two other binders in development, including fermagate (Alpharen), an iron-based binder inPhase 3 being developed by Opko Health, Inc., and PT20, an iron-based binder in Phase 3 being developed by ShieldTherapeutics.In respect of tenapanor for the treatment of IBS-C, numerous treatments exist for constipation and the constipationcomponent of IBS-C, many of which are over-the-counter. These include psyllium husk (such as Metamucil), methylcellulose(such as Citrucel), calcium polycarbophil (such as FiberCon), lactulose (such as Cephulac), polyethylene glycol (such asMiraLax), sennosides (such as Exlax), bisacodyl (such as Ducolax), docusate sodium (such as Colace), magnesium hydroxide(such as Milk of Magnesia), saline enemas (such as Fleet) and sorbitol. These agents are generally inexpensive and work wellto temporarily relieve constipation.We are aware of three prescription products marketed for IBS-C, including Linzess (linaclotide), Amitiza(lubiprostone), and Trulance (plecanatide). Finally, we are also aware of two products that have recently received US FDAmarketing authorization or are currently in review for marketing authorization by the US FDA: Motegrity (prucalopride)which was approved by FDA in December 2018 for the treatment of chronic idiopathic constipation in adults and tegaserodmaleate, for which a supplemental new drug application was submitted for the treatment of women with IBS-C who are at lowrisk for cardiovascular disease. It is possible that our competitors will develop and market drugs or other treatments that are less expensive and moreeffective than our product candidates, or that will render our product candidates obsolete. It is also possible that ourcompetitors will commercialize competing drugs or treatments before we, or our collaboration partners, can launch anyproducts developed from our product candidates. We also anticipate that we will face increased competition in the future asnew companies enter into our target markets.Many of our competitors have materially greater name recognition and financial, manufacturing, marketing,research and drug development resources than we do. Additional mergers and acquisitions in the biotechnology andpharmaceutical industries may result in even more resources being concentrated in our competitors. Large pharmaceuticalcompanies in particular have extensive expertise in preclinical and clinical testing and in obtaining regulatory approvals fordrugs. In addition, academic institutions, government agencies, and other public and private organizations conductingresearch may seek patent protection with respect to potentially competitive products or technologies. These organizationsmay also establish exclusive collaboration partnerships or licensing relationships with our competitors.Our proprietary drug discovery and design platform, and, in particular, APECCS, is a new approach to the discovery,design and development of new product candidates and may not result in any products of commercial value. Furthermore,the APECCS aspects of our drug discovery and design platform may have diminished relevance to our efforts focused onthe discovery of targets and therapies for the treatment of renal diseases.We have developed a proprietary drug discovery and design platform to enable the identification, screening, testing,design and development of new product candidates, and have developed APECCS as a component of this of this platform.We have utilized APECCS in the design of our small molecules and to identify new and potentially novel targets in the GItract. However, there can be no assurance that APECCS will be able to identify new targets in the GI tract or that any of thesepotential targets or other aspects of our proprietary drug discovery and design platform will yield product candidates thatcould enter clinical development and, ultimately, be commercially valuable. In addition, as we focus our efforts on thediscovery and design of therapies for the treatment of cardiorenal diseases, we may need to further develop our proprietarydrug discovery and design platform to enhance its usefulness in the identification, screening, testing, design anddevelopment of new product candidates for the treatment of cardiorenal diseases. There can be no assurances that we will besuccessful in such additional development of our platform or that our platform will yield product candidates for the treatmentof renal diseases.36 Table of ContentsWe may experience difficulties in managing our current activities and growth given our level of managerial, operational,financial and other resources.While we have continued to work to optimize our management composition, personnel and systems to support ourcurrent activities for future growth, these resources may not be adequate for this purpose. Our need to effectively execute ourbusiness strategy requires that we:··manage our clinical trials effectively, including the Phase 3 trial of tenapanor and the clinical trialevaluating tenapanor as adjuvant therapy to phosphate binders, both of which are being conducted atmultiple trial sites;··manage our internal research and development efforts effectively while carrying out our contractualobligations to licensors, contractors, collaborators, government agencies and other third parties;··continue to improve our operational, financial and management controls, reporting systems andprocedures; and··retain and motivate our remaining employees and potentially identify, recruit, and integrate additionalemployees.If we are unable to maintain or expand our managerial, operational, financial and other resources to the extentrequired to manage our development and pre-commercialization activities, our business will be materially adversely affected.We rely completely on third parties to manufacture our nonclinical and clinical drug supplies, and we intend to rely onthird parties to produce commercial supplies of tenapanor, if approved. Our business would be harmed if those thirdparties fail to obtain approval of the FDA or comparable regulatory authorities, fail to provide us with sufficient quantitiesof drug, or fail to do so at acceptable quality levels or prices.We do not currently have, nor do we plan to acquire, the infrastructure or capability internally to manufacturetenapanor or any of other our product candidates on a commercial scale, or to manufacture our drug supplies for use in theconduct of our nonclinical and clinical studies. The facilities used by our contract manufacturers to manufacture our drugsupply must be approved by the FDA pursuant to inspections that will be conducted after an NDA is submitted to the FDAincluding the NDA we submitted in September 2018. Our ability to control the manufacturing process of our productcandidates is limited to the contractual requirements and obligations we impose on our contract manufacturer. Althoughthey are contractually required to so do, we are completely dependent on our contract manufacturing partners for compliancewith the regulatory requirements, known as cGMPs, for manufacture of both active drug substances and finished drugproducts.If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and thestrict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval fortheir manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintainadequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authoritydoes not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in thefuture, we may need to find alternative manufacturing facilities, which would require a transfer of technology to suchalternative facilities and potentially additional capital investment. In addition, the use of alternative manufacturing facilitieswould require qualification with the FDA or comparable foreign regulatory authorities, all of which would significantlyimpact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.We rely on our manufacturers to purchase from third-party suppliers the materials necessary to produce our productcandidates for our clinical studies. There are a limited number of suppliers for raw materials and certain processes, such asspray drying, that we use to manufacture our drugs, and there may be a need to identify alternate suppliers to prevent apossible disruption of the manufacture of the materials necessary to produce our product37 Table of Contentscandidates for our clinical studies, and, if approved, ultimately for commercial sale. We do not have any control over theprocess or timing of the acquisition of these raw materials or processes by our manufacturers. Although we generally do notbegin a clinical study unless we believe we have on hand, or will be able to manufacture, a sufficient supply of a productcandidate to complete such study, any significant delay or discontinuity in the supply of a product candidate, or the rawmaterial components thereof, for an ongoing clinical study due to the need to replace a third-party manufacturer couldconsiderably delay completion of our clinical studies, product testing, and potential regulatory approval of our productcandidates, which could harm our business and results of operations.If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limitcommercialization of our product candidates.We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will facean even greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedlycauses injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any suchproduct liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangersinherent in the product, negligence, strict liability, and a breach of warranties. Claims could also be asserted under stateconsumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incursubstantial liabilities or be required to limit commercialization of our product candidates. Even successful defense wouldrequire significant financial and management resources. Regardless of the merits or eventual outcome, liability claims mayresult in:··decreased demand for our product candidates;··injury to our reputation;··withdrawal of clinical trial participants;··costs to defend the related litigation;··a diversion of management’s time and our resources;··substantial monetary awards to trial participants or patients;··regulatory investigations, product recalls or withdrawals, or labeling, marketing or promotional restrictions;··loss of revenue; and··the inability to commercialize or co-promote our product candidates.Our inability to obtain and maintain sufficient product liability insurance at an acceptable cost and scope ofcoverage to protect against potential product liability claims could prevent or inhibit the commercialization of any productswe develop. We currently carry product liability insurance covering use in our clinical trials in the amount of $10.0 millionin the aggregate. Although we maintain such insurance, any claim that may be brought against us could result in a courtjudgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limitsof our insurance coverage. Our insurance policies also have various exclusions and deductibles, and we may be subject to aproduct liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated ina settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able toobtain, sufficient capital to pay such amounts. Moreover, in the future, we may not be able to maintain insurance coverage ata reasonable cost or in sufficient amounts to protect us against losses.38 Table of ContentsWe are highly dependent on the services of our President and Chief Executive Officer, Michael Raab and our ChiefDevelopment Officer, David Rosenbaum, Ph.D. If we are not able to retain these members of our management team, orrecruit additional management and clinical personnel, our business will suffer.Our success depends in part on our continued ability to attract, retain and motivate highly qualified personnel. Inparticular, we are highly dependent upon Michael Raab, our President and Chief Executive Officer and David Rosenbaum,Ph.D., our Chief Development Officer. The loss of services of any of these individuals could delay or impair the successfuldevelopment of our product pipeline, completion of our planned clinical trials or the commercialization of our productcandidates. Although we have entered into employment agreements with our senior management team, including Mr. Raaband Dr. Rosenbaum, these agreements are terminable at will with or without notice and, therefore, we may not be able toretain their services as expected. Although we have not historically experienced unique difficulties attracting and retainingqualified employees, we could experience such problems in the future. For example, competition for qualified personnel inthe biotechnology and pharmaceuticals field is intense due to the limited number of individuals who possess the skills andexperience required by our industry. In addition to the competition for personnel, the San Francisco Bay area in particular ischaracterized by a high cost of living. As such, we could have difficulty attracting experienced personnel to our companyand may be required to expend significant financial resources in our employee recruitment and retention efforts.We and our collaborators, CROs and other contractors and consultants depend on information technology systems, andany failure of these systems could harm our business. Security breaches, loss of data, and other disruptions couldcompromise sensitive information related to our business or prevent us from accessing critical information and expose usto liability, which could adversely affect our business, results of operations and financial condition.We and our collaborators, CROs, and other contractors and consultants collect and maintain information in digitalform that is necessary to conduct our business, and we are increasingly dependent on information technology systems andinfrastructure to operate our business. In the ordinary course of our business, we and our collaborators, CROs and othercontractors and consultants collect, store and transmit large amounts of confidential information, including intellectualproperty, proprietary business information and personal information. It is critical that we and our collaborators, CROs andother contractors and consultants do so in a secure manner to maintain the confidentiality and integrity of such confidentialinformation. We have established physical, electronic and organizational measures to safeguard and secure our systems toprevent a data compromise, and rely on commercially available systems, software, tools, and monitoring to provide securityfor our information technology systems and the processing, transmission and storage of digital information. We have alsooutsourced elements of our information technology infrastructure, and as a result a number of third-party vendors may orcould have access to our confidential information. Our internal information technology systems and infrastructure, and thoseof our current and any future collaborators, CROs, contractors and consultants and other third parties on which we rely, arevulnerable to damage from computer viruses, malware, natural disasters, terrorism, war, telecommunication and electricalfailures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or personswith access to systems inside our organization.The risk of a security breach or disruption or data loss, particularly through cyber-attacks or cyber intrusion,including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensityand sophistication of attempted attacks and intrusions from around the world have increased. In addition, the prevalent use ofmobile devices that access confidential information increases the risk of data security breaches, which could lead to the lossof confidential information or other intellectual property. The costs to us to mitigate network security problems, bugs,viruses, worms, malicious software programs and security vulnerabilities could be significant, and while we haveimplemented security measures to protect our data security and information technology systems, our efforts to address theseproblems may not be successful, and these problems could result in unexpected interruptions, delays, cessation of service andother harm to our business and our competitive position. If such an event were to occur and cause interruptions in ouroperations, it could result in a material disruption of our product development programs. For example, the loss of clinicaltrial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts andsignificantly increase our costs to recover or reproduce the data. Moreover, if a computer security breach affects our systemsor those of our collaborators, CROs or other contractors, or results in the unauthorized release of personally identifiableinformation, our reputation could be materially damaged. In addition,39 Table of Contentssuch a breach may require notification to governmental agencies, the media or individuals pursuant to various federal andstate privacy and security laws, if applicable, including the Health Insurance Portability and Accountability Act of 1996, orHIPAA, as amended by the Health Information Technology for Clinical Health Act of 2009, or HITECH, and itsimplementing rules and regulations, as well as regulations promulgated by the Federal Trade Commission and state breachnotification laws. We would also be exposed to a risk of loss or litigation and potential liability, which could materiallyadversely affect our business, results of operations and financial condition.We incur significant costs as a result of operating as a public company, and our management will devote substantial timeto new compliance initiatives. We may fail to comply with the rules that apply to public companies, including Section 404of the Sarbanes-Oxley Act of 2002, which could result in sanctions or other penalties that would harm our business.We incur significant legal, accounting and other expenses as a public company, including costs resulting frompublic company reporting obligations under the Securities Exchange Act of 1934, as amended, or the Exchange Act, andregulations regarding corporate governance practices. The listing requirements of The Nasdaq Global Market require that wesatisfy certain corporate governance requirements relating to director independence, distributing annual and interim reports,stockholder meetings, approvals and voting, soliciting proxies, conflicts of interest and a code of conduct. Our managementand other personnel will need to devote a substantial amount of time to ensure that we comply with all of these requirements.Moreover, the reporting requirements, rules and regulations will increase our legal and financial compliance costs and willmake some activities more time consuming and costly. Any changes we make to comply with these obligations may not besufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all. These reporting requirements,rules and regulations, coupled with the increase in potential litigation exposure associated with being a public company,could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or boardcommittees or to serve as executive officers, or to obtain certain types of insurance, including directors’ and officers’insurance, on acceptable terms.We are subject to Section 404 of The Sarbanes-Oxley Act of 2002, or Section 404, and the related rules of theSecurities and Exchange Commission, or SEC, which generally require our management and independent registered publicaccounting firm to report on the effectiveness of our internal control over financial reporting. Section 404 requires an annualmanagement assessment of the effectiveness of our internal control over financial reporting. However, for so long as weremain an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, we intendto take advantage of certain exemptions from various reporting requirements that are applicable to public companies that areemerging growth companies, including, but not limited to, not being required to comply with the auditor attestationrequirements of Section 404. Once we are no longer an emerging growth company or, if prior to such date, we opt to nolonger take advantage of the applicable exemption, we will be required to include an opinion from our independentregistered public accounting firm on the effectiveness of our internal controls over financial reporting. We will remain anemerging growth company until December 31, 2019.During the course of our review and testing of our internal controls, we may identify deficiencies and be unable toremediate them before we must provide the required reports. Furthermore, if we have a material weakness in our internalcontrols over financial reporting, we may not detect errors on a timely basis and our financial statements may be materiallymisstated. We or our independent registered public accounting firm may not be able to conclude on an ongoing basis that wehave effective internal control over financial reporting, which could harm our operating results, cause investors to loseconfidence in our reported financial information and cause the trading price of our stock to fall. In addition, as a publiccompany we are required to file accurate and timely quarterly and annual reports with the SEC under the Exchange Act. Anyfailure to report our financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of our sharesfrom The Nasdaq Global Market or other adverse consequences that would materially harm our business.We have formed in the past, and may form in the future, collaboration partnerships, joint ventures and/or licensingarrangements, and we may not realize the benefits of such collaborations.We have current collaboration partnerships for the commercialization of tenapanor in certain foreign countries, andwe currently expect to form additional collaboration partnerships, create joint ventures or enter into additional40 Table of Contentslicensing arrangements with third parties in the United States and abroad that we believe will complement or augment ourexisting business. In particular, we have formed collaboration partnerships with Kyowa Hakko Kirin Co., Ltd. forcommercialization of tenapanor for hyperphosphatemia in Japan, with Shanghai Fosun Pharmaceutical IndustrialDevelopment Co. Ltd. for commercialization of tenapanor for hyperphosphatemia and IBS-C in China and related territories,and in Canada with Knight Therapeutics Inc. for commercialization of tenapanor for IBS-C and hyperphosphatemia. We facesignificant competition in seeking appropriate collaboration partners, and the process to identify an appropriate partner andnegotiate appropriate terms is time-consuming and complex. Any delays in identifying suitable additional collaborationpartners and entering into agreements to develop our product candidates could also delay the commercialization of ourproduct candidates, which may reduce their competitiveness even if they reach the market. Moreover, we may not besuccessful in our efforts to establish such additional collaboration partnerships for tenapanor for IBS-C commercialization inthe United States or for any future product candidates and programs on terms that are acceptable to us, or at all. With respectto tenapanor, this may be because third parties may not view tenapanor for the treatment of IBS-C as having sufficientpotential to be successfully commercialized. If we are unable to establish a collaboration partnership for thecommercialization of IBS-C in the United States, the commercialization of tenapanor for IBS-C, if approved, could bematerially and adversely impacted, which could have a material adverse effect on our business, results of operations,financial condition and prospects. Additionally, we may not be successful in our efforts to establish collaborationpartnerships for our other product candidates because our product candidates and programs may be deemed to be at too earlyof a stage of development for collaborative effort, our research and development pipeline may be viewed as insufficient,and/or third parties may not view such other product candidates and programs as having sufficient potential forcommercialization, including the likelihood of an adequate safety and efficacy profile. There is no guarantee that our currentcollaboration partnerships or any such arrangements we enter into in the future will be successful, or that any collaborationpartner will commit sufficient resources to the development, regulatory approval, and commercialization effort for suchproducts, or that such alliances will result in us achieving revenues that justify such transactions.We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significantdistractions to our management.We may consider strategic transactions, such as acquisitions of companies, asset purchases, and or in-licensing ofproducts, product candidates or technologies. In addition, if we are unable to access capital on a timely basis and on termsthat are acceptable to us, we may be forced to restructure certain aspects of our business or identify and complete one or morestrategic collaborations or other transactions in order to fund the development or commercialization of tenapanor or certainof our product candidates through the use of alternative structures. Additional potential transactions that we may considerinclude a variety of different business arrangements, including spin-offs, spin outs, collaboration partnerships, joint ventures,restructurings, divestitures, business combinations and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near- and long-term expenditures and may pose significant integrationchallenges or disrupt our management or business, which could adversely affect our operations and financial results. Forexample, these transactions may entail numerous operational and financial risks, including:··up-front, milestone and royalty payments, equity investments and financial support of new research anddevelopment candidates including increase of personnel, all of which may be substantial;··exposure to unknown liabilities;··disruption of our business and diversion of our management’s time and attention in order to developacquired products, product candidates or technologies;··incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions;··higher-than-expected acquisition and integration costs;··write-downs of assets or goodwill or impairment charges;41 Table of Contents··increased amortization expenses;··difficulty and cost in combining the operations and personnel of any acquired businesses with ouroperations and personnel;··impairment of relationships with key suppliers or customers of any acquired businesses due to changes inmanagement and ownership; and··inability to retain key employees of any acquired businesses.Accordingly, although there can be no assurance that we will undertake or successfully complete any transactions ofthe nature described above, any transactions that we do complete may be subject to the foregoing or other risks and couldhave a material adverse effect on our business, results of operations, financial condition and prospects.If we seek and obtain approval to commercialize our product candidates outside of the United States, manufacture ourproduct candidates outside of the United States, or otherwise engage in business outside of the United States, a variety ofrisks associated with international operations could materially adversely affect our business.In addition to Japan, China and Canada, we or our collaboration partners may decide to seek marketing approval forcertain of our product candidates outside the United States or otherwise engage in business outside the United States,including entering into contractual agreements with third-parties. We currently utilize contract manufacturing organizationslocated outside of the United States to manufacture our active drug substance for tenapanor. We expect that we are subject toadditional risks related to entering these international business markets and relationships, including:··different regulatory requirements for drug approvals in foreign countries;··differing United States and foreign drug import and export rules;··reduced protection for intellectual property rights in foreign countries;··unexpected changes in tariffs, trade barriers and regulatory requirements;··different reimbursement systems, and different competitive drugs;··economic weakness, including inflation, or political instability in particular foreign economies andmarkets;··compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;··foreign taxes, including withholding of payroll taxes;··foreign currency fluctuations, which could result in increased operating expenses and reduced revenues,and other obligations incident to doing business in another country;··workforce uncertainty in countries where labor unrest is more common than in the United States;··production shortages resulting from any events affecting raw material supply or manufacturing capabilitiesabroad;··potential liability resulting from development work conducted by these distributors; and42 Table of Contents··business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.Our business involves the use of hazardous materials and we and third-parties with whom we contract must comply withenvironmental laws and regulations, which can be expensive and restrict how we do business.Our research and development activities involve the controlled storage, use and disposal of hazardous materials,including the components of our product candidates and other hazardous compounds. We and manufacturers and supplierswith whom we may contract are subject to laws and regulations governing the use, manufacture, storage, handling anddisposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use arestored at our and our manufacturers’ facilities pending their use and disposal. We cannot eliminate the risk of contamination,which could cause an interruption of our commercialization efforts, research and development efforts and businessoperations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulationsgoverning the use, storage, handling and disposal of these materials and specified waste products. We cannot guarantee thatthe safety procedures utilized by third-party manufacturers and suppliers with whom we may contract will comply with thestandards prescribed by laws and regulations or will eliminate the risk of accidental contamination or injury from thesematerials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resourcesand state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our businessoperations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to becomemore stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. We do notcurrently carry biological or hazardous waste insurance coverage.We may be adversely affected by the global economic environment.Our ability to attract and retain collaboration partners or customers, invest in and grow our business and meet ourfinancial obligations depends on our operating and financial performance, which, in turn, is subject to numerous factors,including the prevailing economic conditions and financial, business and other factors beyond our control, such as the rateof unemployment, the number of uninsured persons in the United States, presidential elections, other political influences andinflationary pressures. Our results of operations could be adversely affected by general conditions in the global economy andin the global financial markets. The 2008 global financial crisis caused extreme volatility and disruptions in the capital andcredit markets. We cannot anticipate all the ways in which the global economic climate and global financial marketconditions could adversely impact our business in the future.We are exposed to risks associated with reduced profitability and the potential financial instability of ourcollaboration partners or customers, many of which may be adversely affected by volatile conditions in the financial markets.For example, unemployment and underemployment, and the resultant loss of insurance, may decrease the demand forhealthcare services and pharmaceuticals. If fewer patients are seeking medical care because they do not have insurancecoverage, our collaboration partners or customers may experience reductions in revenues, profitability and/or cash flow thatcould lead them to reduce their support of our programs or financing activities. If collaboration partners or customers are notsuccessful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or maydelay payment of, accounts receivable that are owed to us. In addition, volatility in the financial markets could causesignificant fluctuations in the interest rate and currency markets. We currently do not hedge for these risks. The foregoingevents, in turn, could adversely affect our financial condition and liquidity. In addition, if economic challenges in the UnitedStates result in widespread and prolonged unemployment, either regionally or on a national basis, or if certain provisions ofthe Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act,collectively known as the Affordable Care Act, are repealed, a substantial number of people may become uninsured orunderinsured. To the extent economic challenges result in fewer individuals pursuing or being able to afford our productcandidates once commercialized, our business, results of operations, financial condition and cash flows could be adverselyaffected.43 Table of ContentsWe may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recoveryplans may not adequately protect us from a serious disaster.Our corporate headquarters and other facilities are located in the San Francisco Bay Area, which in the past hasexperienced severe earthquakes. We do not carry earthquake insurance. Earthquakes or other natural disasters could severelydisrupt our operations, and have a material adverse effect on our business, results of operations, financial condition andprospects.If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion ofour headquarters, that damaged critical infrastructure, such as our enterprise financial systems or manufacturing resourceplanning and enterprise quality systems, or that otherwise disrupted operations, it may be difficult or, in certain cases,impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuityplans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similarevent. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuityplans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect onour business.Risks Related to Government RegulationThe regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming andinherently unpredictable. If we are ultimately unable to obtain regulatory approval for our product candidates, ourbusiness will be substantially harmed.The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drugproducts are subject to extensive regulation by the FDA and other regulatory authorities in the United States and othercountries, which regulations differ from country to country. Neither we nor any of our collaboration partners is permitted tomarket any drug product in the United States until we receive marketing approval from the FDA. In September 2018, wesubmitted our first NDA to the FDA seeking marketing approval for tenapanor for IBS-C. Neither we, nor our collaborationpartners have submitted additional applications or obtained marketing approval for any of our product candidates anywherein the world. Obtaining regulatory approval of a NDA can be a lengthy, expensive and uncertain process. In addition, failureto comply with FDA and other applicable United States and foreign regulatory requirements may subject us to administrativeor judicially imposed sanctions or other actions, including:··warning letters;··civil and criminal penalties;··injunctions;··withdrawal of regulatory approval of products;··product seizure or detention;··product recalls;··total or partial suspension of production; and··refusal to approve pending NDAs or supplements to approved NDAs.Prior to obtaining approval to commercialize a drug candidate in the United States or abroad, we or ourcollaboration partners must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfactionof the FDA or other foreign regulatory agencies, that such drug candidates are safe and effective for their intended uses. Thenumber of nonclinical studies and clinical trials that will be required for FDA approval varies44 Table of Contentsdepending on the drug candidate, the disease or condition that the drug candidate is designed to address, and the regulationsapplicable to any particular drug candidate. Results from nonclinical studies and clinical trials can be interpreted in differentways. Even if we believe the nonclinical or clinical data for our drug candidates are promising, such data may not besufficient to support approval by the FDA and other regulatory authorities. Administering drug candidates to humans mayproduce undesirable side effects, which could interrupt, delay or halt clinical trials and result in the FDA or other regulatoryauthorities denying approval of a drug candidate for any or all targeted indications.The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable, typicallytakes many years following the commencement of clinical studies, and depends upon numerous factors. The FDA andcomparable foreign authorities have substantial discretion in the approval process and we may encounter matters with theFDA or such comparable authorities that requires us to expend additional time and resources and delay or prevent theapproval of our product candidates. For example, the FDA may require us to conduct additional studies or trials for drugproduct either prior to or post-approval, such as additional drug-drug interaction studies or safety or efficacy studies or trials,or it may object to elements of our clinical development program such as the number of subjects in our current clinical trialsfrom the United States. In addition, approval policies, regulations or the type and amount of clinical data necessary to gainapproval may change during the course of a product candidate’s clinical development and may vary among jurisdictions,which may cause delays in the approval or result in a decision not to approve an application for regulatory approval. Despitethe time and expense exerted, failure can occur at any stage.Applications for our product candidates could fail to receive regulatory approval for many reasons, including butnot limited to the following:··the FDA or comparable foreign regulatory authorities may disagree with the design or implementation ofour, or our collaboration partners’, clinical studies;··the population studied in the clinical program may not be sufficiently broad or representative to assuresafety in the full population for which approval is sought;··the FDA or comparable foreign regulatory authorities may disagree with the interpretation of data frompreclinical studies or clinical studies;··the data collected from clinical studies of our product candidates may not be sufficient to support thesubmission of a NDA or other submission or to obtain regulatory approval in the United States orelsewhere;··we or our collaboration partners may be unable to demonstrate to the FDA or comparable foreign regulatoryauthorities that a product candidate’s risk-benefit ratio for its proposed indication is acceptable;··the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes, testprocedures and specifications, or facilities of third-party manufacturers responsible for clinical andcommercial supplies; and··the approval policies or regulations of the FDA or comparable foreign regulatory authorities maysignificantly change in a manner rendering our clinical data insufficient for approval.This lengthy approval process, as well as the unpredictability of the results of clinical studies, may result in ourfailure and/or that of our collaboration partners to obtain regulatory approval to market any of our product candidates, whichwould significantly harm our business, results of operations, and prospects. Additionally, if the FDA requires that we conductadditional clinical studies, places limitations in our label, delays approval to market our product candidates or limits the useof our products, our business and results of operations may be harmed.45 Table of ContentsIn addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidatesfor fewer or more limited indications than we request, may not approve the price we intend to charge for our products, maygrant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidatewith a label that does not include the labeling claims necessary or desirable for the successful commercialization of thatproduct candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our productcandidates.Even if we receive regulatory approval for a product candidate, we will be subject to ongoing regulatory obligations andcontinued regulatory review, which may result in significant additional expense. Additionally, any product candidates, ifapproved, could be subject to labeling and other restrictions and market withdrawal, and we may be subject to penalties ifwe fail to comply with regulatory requirements or experience unanticipated problems with our products.Even if a drug is approved by the FDA or foreign regulatory authorities, the manufacturing processes, labeling,packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will besubject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMPs and GCP regulations for anyclinical trials that we conduct post-approval. As such, we and our third-party contract manufacturers will be subject tocontinual review and periodic inspections to assess compliance with regulatory requirements. Accordingly, we and otherswith whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, includingmanufacturing, production, and quality control. Regulatory authorities may also impose significant restrictions on aproduct’s indicated uses or marketing or impose ongoing requirements for potentially costly post-marketing studies.Furthermore, any new legislation addressing drug safety issues could result in delays or increased costs to assure compliance.We will also be required to report certain adverse reactions and production problems, if any, to the FDA, and tocomply with requirements concerning advertising and promotion for our products. Promotional communications with respectto prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the informationin the product’s approved label. As such, we may not promote our products for indications or uses for which they do not haveFDA approval.Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity orfrequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatoryrequirements, may result in, among other things:··warning letters, fines or holds on clinical trials;··restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market orvoluntary or mandatory product recalls;··injunctions or the imposition of civil or criminal penalties;··suspension or revocation of existing regulatory approvals;··suspension of any of our ongoing clinical trials;··refusal to approve pending applications or supplements to approved applications submitted by us;··restrictions on our or our contract manufacturers’ operations; or··product seizure or detention, or refusal to permit the import or export of products.46 Table of ContentsAny government investigation of alleged violations of law could require us to expend significant time and resourcesin response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements maysignificantly and adversely affect our ability to commercialize our product candidates. If regulatory sanctions are applied orif regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected.In addition, the FDA’s policies may change and additional government regulations may be enacted that couldprevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existingrequirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, wemay lose any marketing approval that we may have obtained, which would adversely affect our business, prospects andability to achieve or sustain profitability.We also cannot predict the likelihood, nature or extent of government regulation that may arise from futurelegislation or administrative or executive action, either in the United States or abroad. For example, certain policies of theTrump administration may impact our business and industry. Namely, the Trump administration has taken several executiveactions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwisematerially delay, the FDA's ability to engage in routine regulatory and oversight activities such as implementing statutesthrough rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict howthese Executive Orders will be implemented, and the extent to which they will impact the FDA's ability to exercise itsregulatory authority. If these executive actions impose constraints on FDA's ability to engage in oversight andimplementation activities in the normal course, our business may be negatively impacted.We and our contract manufacturers are subject to significant regulation with respect to manufacturing our productcandidates. The manufacturing facilities on which we rely may not continue to meet regulatory requirements or may not beable to meet supply demands.All entities involved in the preparation of product candidates for clinical studies or commercial sale, including ourexisting contract manufacturers for our product candidates are subject to extensive regulation. Components of a finishedtherapeutic product approved for commercial sale or used in late-stage clinical studies must be manufactured in accordancewith cGMP regulations. These regulations govern manufacturing processes and procedures (including record keeping) andthe implementation and operation of quality systems to control and assure the quality of investigational products andproducts approved for sale. Poor control of production processes can lead to the introduction of contaminants or toinadvertent changes in the properties or stability of our product candidates that may not be detectable in final producttesting. We or our contract manufacturers must supply all necessary documentation in support of an NDA or comparableregulatory filing on a timely basis and must adhere to cGMP regulations enforced by the FDA and other regulatory agenciesthrough their facilities inspection programs. The facilities and quality systems of some or all of our third-party contractorsmust pass a pre-approval inspection for compliance with the applicable regulations as a condition of regulatory approval ofour product candidates. In addition, the regulatory authorities may, at any time, audit or inspect a manufacturing facilityinvolved with the preparation of our product candidates or our other potential products or the associated quality systems forcompliance with the regulations applicable to the activities being conducted. Although we oversee the contractmanufacturers, we cannot control the manufacturing process of, and are completely dependent on, our contractmanufacturing partners for compliance with the regulatory requirements. If these facilities do not pass a pre-approval plantinspection, regulatory approval of the products may not be granted or may be substantially delayed until any violations arecorrected to the satisfaction of the regulatory authority, if ever. In addition, we have no control over the ability of ourcontract manufacturers to maintain adequate quality control, quality assurance and qualified personnel.The regulatory authorities also may, at any time following approval of a product for sale, audit the manufacturingfacilities of our third-party contractors. If any such inspection or audit identifies a failure to comply with applicableregulations or if a violation of our product specifications or applicable regulations occurs independent of such an inspectionor audit, we or the relevant regulatory authority may require remedial measures that may be costly and/or time consuming forus or a third party to implement, and that may include the temporary or permanent suspension of a clinical study orcommercial sales or the temporary or permanent suspension of production or closure of a facility. Any such remedialmeasures imposed upon us or third parties with whom we contract could materially harm our business.47 Table of ContentsIf we or any of our third-party manufacturers fail to maintain regulatory compliance, the FDA or other applicableregulatory authority can impose regulatory sanctions including, among other things, refusal to approve a pendingapplication for a new drug product, withdrawal of an approval, or suspension of production. As a result, our business,financial condition, and results of operations may be materially harmed.Additionally, if supply from one approved manufacturer is interrupted, an alternative manufacturer would need to bequalified through an NDA, a supplemental NDA or equivalent foreign regulatory filing, which could result in further delay.The regulatory agencies may also require additional studies if a new manufacturer is relied upon for commercial production.Switching manufacturers may involve substantial costs and is likely to result in a delay in our desired clinical andcommercial timelines.These factors could cause us to incur higher costs and could cause the delay or termination of clinical studies,regulatory submissions, required approvals, or commercialization of our product candidates. Furthermore, if our suppliers failto meet contractual requirements and we are unable to secure one or more replacement suppliers capable of production at asubstantially equivalent cost, our clinical studies may be delayed or we could lose potential revenue.If we fail to comply or are found to have failed to comply with FDA and other regulations related to the promotion of ourproducts for unapproved uses, we could be subject to criminal penalties, substantial fines or other sanctions and damageawards.The regulations relating to the promotion of products for unapproved uses are complex and subject to substantialinterpretation by the FDA and other government agencies. If tenapanor or our other product candidates receive marketingapproval, we and our collaboration partners, if any, will be restricted from marketing the product outside of its approvedlabeling, also referred to as off-label promotion. However, physicians may nevertheless prescribe an approved product totheir patients in a manner that is inconsistent with the approved label, which is an off-label use. We intend to implementcompliance and training programs designed to ensure that our sales and marketing practices comply with applicableregulations regarding off-label promotion. Notwithstanding these programs, the FDA or other government agencies mayallege or find that our practices constitute prohibited promotion of our product candidates for unapproved uses. We alsocannot be sure that our employees will comply with company policies and applicable regulations regarding the promotion ofproducts for unapproved uses.Over the past several years, a significant number of pharmaceutical and biotechnology companies have been thetarget of inquiries and investigations by various federal and state regulatory, investigative, prosecutorial and administrativeentities in connection with the promotion of products for unapproved uses and other sales practices, including theDepartment of Justice and various U.S. Attorneys’ Offices, the Office of Inspector General of the Department of Health andHuman Services, the FDA, the Federal Trade Commission and various state Attorneys General offices. These investigationshave alleged violations of various federal and state laws and regulations, including claims asserting antitrust violations,violations of the Food, Drug and Cosmetic Act, the False Claims Act, the Prescription Drug Marketing Act, anti-kickbacklaws, and other alleged violations in connection with the promotion of products for unapproved uses, pricing and Medicareand/or Medicaid reimbursement. Many of these investigations originate as “qui tam” actions under the False Claims Act.Under the False Claims Act, any individual can bring a claim on behalf of the government alleging that a person or entity haspresented a false claim, or caused a false claim to be submitted, to the government for payment. The person bringing a quitam suit is entitled to a share of any recovery or settlement. Qui tam suits, also commonly referred to as “whistleblower suits,”are often brought by current or former employees. In a qui tam suit, the government must decide whether to intervene andprosecute the case. If it declines, the individual may pursue the case alone.If the FDA or any other governmental agency initiates an enforcement action against us or if we are the subject of aqui tam suit and it is determined that we violated prohibitions relating to the promotion of products for unapproved uses, wecould be subject to substantial civil or criminal fines or damage awards and other sanctions such as consent decrees andcorporate integrity agreements pursuant to which our activities would be subject to ongoing scrutiny and monitoring toensure compliance with applicable laws and regulations. Any such fines, awards or other sanctions would have an adverseeffect on our revenue, business, financial prospects and reputation.48 Table of ContentsIf approved, tenapanor and our other product candidates may cause or contribute to adverse medical events that we arerequired to report to regulatory agencies and if we fail to do so we could be subject to sanctions that would materiallyharm our business.Some participants in clinical studies of tenapanor have reported adverse effects after being treated with tenapanor,including diarrhea, nausea, flatulence, abdominal discomfort, abdominal pain, abdominal distention and changes inelectrolytes. If we are successful in commercializing any products, FDA and foreign regulatory agency regulations requirethat we report certain information about adverse medical events if those products may have caused or contributed to thoseadverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse eventas well as the nature of the event. We may fail to report adverse events we become aware of within the prescribed timeframe.We may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to usas an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail tocomply with our reporting obligations, the FDA or a foreign regulatory agency could take action, including criminalprosecution, the imposition of civil monetary penalties, seizure of our products or delay in approval or clearance of futureproducts.Our employees, independent contractors, principal investigators, CROs, collaboration partners, consultants and vendorsmay engage in misconduct or other improper activities, including noncompliance with regulatory standards andrequirements.We are exposed to the risk that our employees, independent contractors, principal investigators, CROs,collaboration partners, consultants and vendors may engage in fraudulent conduct or other illegal activity. Misconduct bythese parties could include intentional, reckless and/or negligent conduct or unauthorized activities that violate any of thefollowing: FDA regulations, including those laws that require the reporting of true, complete and accurate financial andother information to the FDA; manufacturing standards; or federal and state healthcare fraud and abuse laws and regulations.Specifically, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws andregulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations mayrestrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentiveprograms and other business arrangements. These activities also include the improper use of information obtained in thecourse of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not alwayspossible to identify and deter misconduct by employees and other third parties, and the precautions we take to detect andprevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us fromgovernmental investigations or other actions or lawsuits stemming from a failure to comply with such laws or regulations.Additionally, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if noneoccurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights,those actions could have a significant impact on our business, including the imposition of significant civil, criminal andadministrative penalties, damages, monetary fines, disgorgements, possible exclusion from participation in Medicare,Medicaid and other federal healthcare programs, individual imprisonment, other sanctions, contractual damages, reputationalharm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect ourability to operate our business and our results of operations.Failure to obtain regulatory approvals in foreign jurisdictions would prevent us from marketing our productsinternationally.In order to market any product in the EEA (which is composed of the 28 Member States of the European Union plusNorway, Iceland and Liechtenstein), and many other foreign jurisdictions, separate regulatory approvals are required. In theEEA, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. Before granting theMA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balanceof the product on the basis of scientific criteria concerning its quality, safety and efficacy.The approval procedures vary among countries and can involve additional clinical testing, and the time required toobtain approval may differ from that required to obtain FDA approval. Clinical trials conducted in one country may not beaccepted by regulatory authorities in other countries. Approval by the FDA does not ensure approval by49 Table of Contentsregulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approvalby regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatoryapproval in one country may have a negative effect on the regulatory process in others. The foreign regulatory approvalprocess may include all of the risks associated with obtaining FDA approval. We may not be able to file for regulatoryapprovals or to do so on a timely basis, and even if we do file we may not receive necessary approvals to commercialize ourproducts in any market.We and our collaboration partners may be subject to healthcare laws, regulation and enforcement; our failure or thefailure of any such collaboration partners to comply with these laws could have a material adverse effect on our results ofoperations and financial conditions.Although we do not currently have any products on the market, once we begin commercializing our products, weand our collaboration partners may be subject to additional healthcare statutory and regulatory requirements andenforcement by the federal government and the states and foreign governments in which we conduct our business. The lawsthat may affect our ability to operate as a commercial organization include:··the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly andwillfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or toinduce either the referral of an individual for, or the purchase, order or recommendation of, any good orservice for which payment may be made under federal healthcare programs such as the Medicare andMedicaid programs;··federal false claims laws which prohibit, among other things, individuals or entities from knowinglypresenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-partypayors that are false or fraudulent;··federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or makingfalse statements relating to healthcare matters;··the federal Health Insurance Portability and Accountability Act of 1996, as amended by the HealthInformation Technology for Economic and Clinical Health Act, which governs the conduct of certainelectronic healthcare transactions and protects the security and privacy of protected health information;··the federal physician sunshine requirements under the Affordable Care Act, which requires manufacturers ofdrugs, devices, biologics, and medical supplies to report annually to CMS information related to paymentsand other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownershipand investment interests held by physicians and other healthcare providers and their immediate familymembers;··state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws whichmay apply to items or services reimbursed by any third-party payor, including commercial insurers;··state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntarycompliance guidelines and the applicable compliance guidance promulgated by the federal government, orotherwise restrict payments that may be made to healthcare providers and other potential referral sources;··state laws that require drug manufacturers to report information related to payments and other transfers ofvalue to physicians and other healthcare providers or pricing information and marketing expenditures; andstate laws governing the privacy and security of health information in certain circumstances, many of whichdiffer from each other in significant ways, thus complicating compliance efforts; and50 Table of Contents··European and other foreign law equivalents of each of the laws, including reporting requirements detailinginteractions with and payments to healthcare providers.Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it ispossible that some of our business activities could be subject to challenge under one or more of such laws. The risk of ourbeing found in violation of these laws is increased by the fact that many of them have not been fully interpreted by theregulatory authorities or the courts, and their provisions are open to a variety of interpretations. Further, the Affordable CareAct, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes. Aperson or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, theAffordable Care Act provides that the government may assert that a claim including items or services resulting from aviolation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes.Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significantlegal expenses and divert our management’s attention from the operation of our business. If our operations are found to be inviolation of any of the laws described above or any other governmental laws and regulations that apply to us, we may besubject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations,the exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adverselyaffect our ability to market our products and adversely impact our financial results.Legislative or regulatory healthcare reforms in the United States may make it more difficult and costly for us to obtainregulatory clearance or approval of our product candidates and to produce, market and distribute our products afterclearance or approval is obtained.From time to time, legislation is drafted and introduced in Congress that could significantly change the statutoryprovisions governing the regulatory clearance or approval, manufacture, and marketing of regulated products or thereimbursement thereof. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways thatmay significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existingregulations may impose additional costs or lengthen review times of our product candidates. We cannot determine whateffect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted mayhave on our business in the future. Such changes could, among other things, require:··additional clinical trials to be conducted prior to obtaining approval;··changes to manufacturing methods;··recall, replacement, or discontinuance of one or more of our products; and··additional record keeping.Each of these would likely entail substantial time and cost and could materially harm our business and our financialresults. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for any future products wouldharm our business, financial condition and results of operations.In addition, the full impact of recent healthcare reform and other changes in the healthcare industry and inhealthcare spending is currently unknown, and may adversely affect our business model. In the United States, the AffordableCare Act was enacted in 2010 with a goal of reducing the cost of healthcare and substantially changing the way healthcare isfinanced by both government and private insurers. The Affordable Care Act, among other things, increased the minimumMedicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extended the rebate program toindividuals enrolled in Medicaid managed care organizations, established annual fees and taxes on manufacturers of certainbranded prescription drugs, and created a new Medicare Part D coverage gap discount program, in which manufacturers mustagree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries duringtheir coverage gap period as a condition for the manufacturer’s51 Table of Contentsoutpatient drugs to be covered under Medicare Part D. The Bipartisan Budget Act of 2018 increases this discount to 70%beginning in 2019.We currently expect that federal and state legislatures within the United States and foreign governments willcontinue to consider changes to existing healthcare legislation, and we currently expect that the current PresidentialAdministration will continue to seek to modify, or repeal all, or certain provisions of, the Affordable Care Act. There is stilluncertainty with respect to any regulatory changes, and such regulatory changes could have an impact on coverage andreimbursement for healthcare items and services covered by plans that were otherwise authorized by the Affordable Care Act.However, we cannot predict the reform initiatives that may be adopted in the future or whether initiatives that have beenadopted will be repealed or modified. The continuing efforts of the government, insurance companies, managed careorganizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect thedemand for any drug products for which we may obtain regulatory approval, our ability to set a price that we believe is fairfor our products, our ability to obtain coverage and reimbursement approval for a product, our ability to generate revenuesand achieve or maintain profitability, and the level of taxes that we are required to pay.Other legislative changes have been proposed and adopted in the United States since the Affordable Care Act wasenacted. These new laws, among other things, included aggregate reductions of Medicare payments of 2% per fiscal year toproviders that will remain in effect through 2027 unless additional action is taken by Congress, additional specificreductions in Medicare payments to several types of providers, including hospitals, imaging centers and cancer treatmentcenters, and an increase in the statute of limitations period for the government to recover overpayments to providers fromthree to five years. Additionally, individual states have become increasingly active in passing legislation and implementingregulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints,discounts, restrictions on certain product access, and to encourage importation from other countries and bulk purchasing.Recently, there has also been heightened governmental scrutiny over the manner in which drug manufacturers set prices fortheir marketed products, which has resulted in several Congressional inquiries and proposed bills designed to, among otherthings, bring more transparency to product pricing, review the relationship between pricing and manufacturer patientprograms, and reform government program reimbursement methodologies for drug products.Risks Related to Intellectual PropertyWe may become subject to claims alleging infringement of third parties’ patents or proprietary rights and/or claimsseeking to invalidate our patents, which would be costly, time consuming and, if successfully asserted against us, delay orprevent the development and commercialization of tenapanor or our other product candidates, or prevent or delay thecontinued use of our drug discovery and development platform, including APECCS.There have been many lawsuits and other proceedings asserting infringement or misappropriation of patents andother intellectual property rights in the pharmaceutical and biotechnology industries. There can be no assurances that we willnot be subject to claims alleging that the manufacture, use or sale of tenapanor or any other product candidates, or that theuse of our drug discovery and development platform, including APECCS, infringes existing or future third-party patents, orthat such claims, if any, will not be successful. Because patent applications can take many years to issue and may beconfidential for 18 months or more after filing, and because pending patent claims can be revised before issuance, there maybe applications now pending which may later result in issued patents that may be infringed by the manufacture, use or sale oftenapanor or other product candidates or by the use of APECCS. Moreover, we may face patent infringement claims fromnon-practicing entities that have no relevant product revenue and against whom our own patent portfolio may thus have nodeterrent effect. We may be unaware of one or more issued patents that would be infringed by the manufacture, sale or use oftenapanor or our other product candidates, or by the use of APECCS.We may be subject to third-party patent infringement claims in the future against us or our that would cause us toincur substantial expenses and, if successful against us, could cause us to pay substantial damages, including treble damagesand attorney’s fees if we are found to be willfully infringing a third party’s patents. We may be required to indemnify futurecollaboration partners against such claims. We are not aware of any threatened or pending claims related to these matters, butin the future litigation may be necessary to defend against such claims. If a patent infringement suit were brought against uswe could be forced to stop or delay research, development, manufacturing or52 Table of Contentssales of the product or product candidate that is the subject of the suit. In addition, if a patent infringement suit were broughtagainst us regarding the use of aspects of our drug discovery and development platform, we could be forced to stop our useof APECCS or of other aspects of our platform, or we could be forced to modify our processes to avoid infringement, whichmay not be possible at a reasonable cost, if at all, and which could result in substantial delay in our use of our platform for thediscovery of new product candidates or potential targets. As a result of patent infringement claims, or in order to avoidpotential claims, we may choose to seek, or be required to seek, a license from the third party and would most likely berequired to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if wewere able to obtain a license, we may be unable to maintain such licenses and the rights may be nonexclusive, which wouldgive our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing aproduct, or forced to redesign it, or to cease our use of APECCS or some other aspect of our drug discovery and developmentplatform or our business operations if, as a result of actual or threatened patent infringement claims, we are unable to enterinto licenses on acceptable terms, or unable to maintain such licenses when granted. Even if we are successful in defendingagainst such claims, such litigation can be expensive and time consuming to litigate and would divert management’sattention from our core business. Any of these events could harm our business significantly.In addition to infringement claims against us, if third parties prepare and file patent applications in the United Statesthat also claim technology similar or identical to ours, we may have to participate in interference or derivation proceedingsin the United States Patent and Trademark Office, or the USPTO, to determine which party is entitled to a patent on thedisputed invention. We may also become involved in similar opposition proceedings in the European Patent Office or similaroffices in other jurisdictions regarding our intellectual property rights with respect to our products and technology. Sincepatent applications are confidential for a period of time after filing, we cannot be certain that we were the first to file anypatent application related to our product candidates.If our intellectual property related to our product candidates is not adequate or if we are not able to protect our tradesecrets or our confidential information, we may not be able to compete effectively in our market.We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect theintellectual property related to our product candidates, our drug discovery and development platform and our developmentprograms. Any disclosure to or misappropriation by third parties of our confidential or proprietary information could enablecompetitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in ourmarket.The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientificquestions and can be uncertain. The patent applications that we own or license may fail to result in issued patents in theUnited States or in foreign countries. Additionally, our research and development efforts may result in product candidates forwhich patent protection is limited or not available. Even if patents do successfully issue, third parties may challenge thevalidity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable.For example, U.S. patents can be challenged by any person before the new USPTO Patent Trial and Appeals Board at anytime before one year after that person is served an infringement complaint based on the patents. Patents granted by theEuropean Patent Office may be similarly opposed by any person within nine months from the publication of the grant.Similar proceedings are available in other jurisdictions, and in the United States, Europe and other jurisdictions third partiescan raise questions of validity with a patent office even before a patent has granted. Furthermore, even if they areunchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent othersfrom designing around our claims. For example, a third party may develop a competitive product that provides therapeuticbenefits similar to one or more of our product candidates but has a sufficiently different composition to fall outside the scopeof our patent protection. If the breadth or strength of protection provided by the patents and patent applications we hold orpursue with respect to our product candidates is successfully challenged, then our ability to commercialize such productcandidates could be negatively affected, and we may face unexpected competition that could have a material adverse impacton our business. Further, if we encounter delays in our clinical trials, the period of time during which we or our collaborationpartners could market tenapanor or other product candidates under patent protection would be reduced.53 Table of ContentsEven where laws provide protection, costly and time-consuming litigation could be necessary to enforce anddetermine the scope of our proprietary rights, and the outcome of such litigation would be uncertain. If we or one of ourcollaboration partners were to initiate legal proceedings against a third party to enforce a patent covering the productcandidate, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in theUnited States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validitychallenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness ornon-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecutionof the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Theoutcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example,we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware duringprosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability against our intellectualproperty related to a product candidate, we would lose at least part, and perhaps all, of the patent protection on such productcandidate. Such a loss of patent protection would have a material adverse impact on our business. Moreover, our competitorscould counterclaim that we infringe their intellectual property, and some of our competitors have substantially greaterintellectual property portfolios than we do.We also rely on trade secret protection and confidentiality agreements to protect proprietary know-how that may notbe patentable, processes for which patents may be difficult to obtain and/or enforce and any other elements of our drugdiscovery and development processes that involve proprietary know-how, information or technology that is not covered bypatents. Although we require all of our employees, consultants, advisors and any third parties who have access to ourproprietary know-how, information or technology, to assign their inventions to us, and endeavor to execute confidentialityagreements with all such parties, we cannot be certain that we have executed such agreements with all parties who may havehelped to develop our intellectual property or who had access to our proprietary information, nor can we be certain that ouragreements will not be breached by such consultants, advisors or third parties, or by our former employees. The breach ofsuch agreements by individuals or entities who are actively involved in the discovery and design of our potential drugcandidates, or in the development of our discovery and design platform, including APECCS, could require us to pursue legalaction to protect our trade secrets and confidential information, which would be expensive, and the outcome of which wouldbe unpredictable. If we are not successful in prohibiting the continued breach of such agreements, our business could benegatively impacted. We cannot guarantee that our trade secrets and other confidential proprietary information will not bedisclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantiallyequivalent information and techniques.Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manneras the laws of the United States. As a result, we may encounter significant problems in protecting and defending ourintellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the intellectualproperty related to our technologies to third parties, we will not be able to establish or maintain a competitive advantage inour market, which could materially adversely affect our business, results of operations and financial condition.If we do not obtain patent term extension in the United States under the Hatch-Waxman Act and in foreign countries undersimilar legislation, thereby potentially extending the term of marketing exclusivity for our product candidates, ourbusiness may be materially harmed.Depending upon the timing, duration and specifics of FDA marketing approval of our product candidates, if any,one of the U.S. patents covering each of such approved product(s) or the use thereof may be eligible for up to five years ofpatent term restoration under the Hatch-Waxman Act. The Hatch-Waxman Act allows a maximum of one patent to beextended per FDA approved product. Patent term extension also may be available in certain foreign countries uponregulatory approval of our product candidates. Nevertheless, we may not be granted patent term extension either in theUnited States or in any foreign country because of, for example, failing to apply within applicable deadlines, failing to applyprior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the term ofextension, as well as the scope of patent protection during any such extension, afforded by the governmental authority couldbe less than we request.54 Table of ContentsIf we are unable to obtain patent term extension or restoration, or the term of any such extension is less than werequest, the period during which we will have the right to exclusively market our product will be shortened and ourcompetitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced,possibly materially.Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission,fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reducedor eliminated for non-compliance with these requirements.The USPTO and various foreign patent agencies require compliance with a number of procedural, documentary, feepayment and other provisions to maintain patent applications and issued patents. Noncompliance with these requirementscan result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights inthe relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise havebeen the case.We may not be able to enforce our intellectual property rights throughout the world.The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of theUnited States. Many companies have encountered significant problems in protecting and defending intellectual propertyrights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favorthe enforcement of patents and other intellectual property protection, especially those relating to life sciences. This couldmake it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual propertyrights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licensesto third parties.Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result insubstantial costs and divert our efforts and attention from other aspects of our business. Furthermore, while we intend toprotect our intellectual property rights in our expected significant markets, we cannot ensure that we will be able to initiateor maintain similar efforts in all jurisdictions in which we may wish to market our products. Accordingly, our efforts toprotect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legaldecisions by courts in the United States and foreign countries may affect our ability to obtain and enforce adequateintellectual property protection for our technology.We may be subject to claims that we or our employees have misappropriated the intellectual property, including know-howor trade secrets, of a third party, or claiming ownership of what we regard as our own intellectual property.Many of our employees, consultants and contractors were previously employed at or engaged by otherbiotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees,consultants and contractors, executed proprietary rights, non-disclosure and non-competition agreements in connection withsuch previous employment. Although we try to ensure that our employees, consultants and contractors do not use theintellectual property and other proprietary information or know-how or trade secrets of others in their work for us, and do notperform work for us that is in conflict with their obligations to another employer or any other entity, we may be subject toclaims that we or these employees, consultants and contractors have used or disclosed such intellectual property, includingknow-how, trade secrets or other proprietary information. In addition, an employee, advisor or consultant who performs workfor us may have obligations to a third party that are in conflict with their obligations to us, and as a result such third partymay claim an ownership interest in the intellectual property arising out of work performed for us. We are not aware of anythreatened or pending claims related to these matters, but in the future litigation may be necessary to defend against suchclaims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectualproperty rights or personnel, or access to consultants and contractors. Even if we are successful in defending against suchclaims, litigation could result in substantial costs and be a distraction to management.55 Table of ContentsIn addition, while we typically require our employees, consultants and contractors who may be involved in thedevelopment of intellectual property to execute agreements assigning such intellectual property to us, we may beunsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as ourown, which may result in claims by or against us related to the ownership of such intellectual property. If we fail inprosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectualproperty rights. Even if we are successful in prosecuting or defending against such claims, litigation could result insubstantial costs and be a distraction to our management and scientific personnel.Risks Related to Our Common StockOur stock price may be volatile and our stockholders may not be able to resell shares of our common stock at or above theprice they paid.The trading price of our common stock is highly volatile and could be subject to wide fluctuations in response tovarious factors, some of which are beyond our control. These factors include those discussed in this “Risk Factors” sectionand others such as:··results from, or any delays in, clinical trial programs relating to our product candidates, including theongoing clinical trials for tenapanor for hyperphosphatemia;··the success of our efforts to establish a collaboration partnership for the commercialization of tenapanor forIBS-C in the United States;··our ability, alone or with collaboration partners, to commercialize or obtain regulatory approval fortenapanor, or delays in commercializing or obtaining regulatory approval;··announcements of regulatory approval, a complete response letter with respect to our NDA filed with theFDA in September 2018 seeking marketing approval for tenapanor for IBS-C, results of regulatoryinspections of our facilities or those of our contract manufacturing organizations, or specific labelrestrictions or patient populations for tenapanor’s use, or changes or delays in the regulatory reviewprocess;··announcements relating to our current or future collaboration partnerships;··announcements of therapeutic innovations or new products by us or our competitors;··adverse actions taken by regulatory agencies with respect to our clinical trials, manufacturing supply chainor sales and marketing activities;··changes or developments in laws or regulations applicable to our product candidates;··the success of our testing and clinical trials;··failure to meet any of our projected timelines or goals with regard to the clinical development of any of ourproduct candidates, including the ongoing Phase 3 and adjuvant therapy clinical trials for tenapanorfor hyperphosphatemia;··the success of our efforts to acquire or license or discover additional product candidates;··any intellectual property infringement actions in which we may become involved;··the success of our efforts to obtain adequate intellectual property protection for our product candidates;56 Table of Contents··announcements concerning our competitors or the pharmaceutical industry in general;··achievement of expected product sales and profitability;··manufacture, supply or distribution shortages;··actual or anticipated fluctuations in our operating results;··FDA or other U.S. or foreign regulatory actions affecting us or our industry or other healthcare reformmeasures in the United States;··changes in financial estimates or recommendations by securities analysts;··trading volume of our common stock;··sales of our common stock by us, our executive officers and directors or our stockholders in the future;··sales of debt securities and sales or licensing of assets;··general economic and market conditions and overall fluctuations in the United States equity markets; and··the loss of any of our key scientific or management personnel.In addition, the stock markets in general, and the markets for pharmaceutical, biopharmaceutical and biotechnologystocks in particular, have experienced extreme volatility that may have been unrelated to the operating performance of theissuer. These broad market fluctuations may adversely affect the trading price or liquidity of our common stock. In the past,when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class actionlitigation against the issuer. If any of our stockholders were to bring such a lawsuit against us, we could incur substantialcosts defending the lawsuit and the attention of our management would be diverted from the operation of our business, whichcould seriously harm our financial position. Any adverse determination in litigation could also subject us to significantliabilities.One of our stockholders owns a significant percentage of our stock and, together with our management, will be able toexert significant control over matters subject to stockholder approval.As of December 31, 2018, entities affiliated with New Enterprise Associates, or NEA, a venture capital fundassociated with one of our directors, collectively beneficially owned approximately 26.2% of our common stock, includingshares that NEA has the right to acquire within 60 days of December 31, 2018. NEA together with our executive officers anddirectors beneficially owned approximately 29.3% of our capital stock, including outstanding restricted stock units that willvest within 60 days of December 31, 2018, and warrants and stock options exercisable for shares of our common stock within60 days of December 31, 2018. Therefore, these stockholders may be able to determine all matters requiring stockholderapproval, and the entities affiliated with NEA alone will have significant ability to influence decisions through theirownership position. For example, these stockholders may be able to influence or control elections of directors, amendmentsto our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This mayprevent or discourage unsolicited acquisition proposals or offers for our common stock that certain stockholders may feel arein their best interest as one of our stockholders.If we sell shares of our common stock in future financings, stockholders may experience immediate dilution and, as aresult, our stock price may decline.We may from time to time issue additional shares of common stock at a discount from the current trading price ofour common stock. As a result, our stockholders would experience immediate dilution upon the purchase of any57 Table of Contentsshares of our common stock sold at such discount. In addition, as opportunities present themselves, we may enter intofinancing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. Ifwe issue common stock or securities convertible into common stock, our common stockholders would experience additionaldilution and, as a result, our stock price may decline.Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in thepublic market, the trading price of our common stock could decline. As of December 31, 2018, we had 62,516,627 shares ofcommon stock outstanding. Of those shares, approximately 15.8 million were held by current directors, executive officersand other affiliates, or may otherwise be subject to Rule 144 under the Securities Act of 1933, or the Securities Act.As of December 31, 2018, approximately 1.0 million shares of common stock issuable upon vesting of outstandingrestricted stock units and approximately 5.5 million shares of common stock issuable upon exercise of outstanding optionswere eligible for sale in the public market to the extent permitted by the provisions of the applicable vesting schedules, andRule 144 and Rule 701 under the Securities Act. In addition, as of December 31, 2018, approximately 2.2 million shares ofcommon stock issuable upon exercise of outstanding warrants were eligible for sale in the public market. If these additionalshares of common stock are issued and sold, or if it is perceived that they will be sold, in the public market, the trading priceof our common stock could decline.As of December 31, 2018, the holders of approximately 5.6 million shares of our outstanding common stock areentitled to rights with respect to the registration of their shares under the Securities Act. Registration of these shares under theSecurities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except forshares purchased by affiliates. Any sales of securities by these stockholders could have a material adverse effect on thetrading price of our common stock.Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may considerfavorable and may lead to entrenchment of management.Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions thatcould significantly reduce the value of our shares to a potential acquirer or delay or prevent changes in control or changes inour management without the consent of our board of directors. The provisions in our charter documents include thefollowing:··a classified board of directors with three-year staggered terms, which may delay the ability of stockholdersto change the membership of a majority of our board of directors;··no cumulative voting in the election of directors, which limits the ability of minority stockholders to electdirector candidates;··the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion ofthe board of directors or the resignation, death or removal of a director, which prevents stockholders frombeing able to fill vacancies on our board of directors;··the required approval of at least two-thirds of the shares entitled to vote to remove a director for cause, andthe prohibition on removal of directors without cause;··the ability of our board of directors to authorize the issuance of shares of preferred stock and to determinethe price and other terms of those shares, including preferences and voting rights, without stockholderapproval, which could be used to significantly dilute the ownership of a hostile acquirer;··the ability of our board of directors to alter our bylaws without obtaining stockholder approval;58 Table of Contents··the required approval of at least two-thirds of the shares entitled to vote at an election of directors to adopt,amend or repeal our bylaws or repeal the provisions of our amended and restated certificate of incorporationregarding the election and removal of directors;··a prohibition on stockholder action by written consent, which forces stockholder action to be taken at anannual or special meeting of our stockholders;··the requirement that a special meeting of stockholders may be called only by the chairman of the board ofdirectors, the chief executive officer, the president or the board of directors, which may delay the ability ofour stockholders to force consideration of a proposal or to take action, including the removal of directors;and··advance notice procedures that stockholders must comply with in order to nominate candidates to ourboard of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourageor deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate ofdirectors or otherwise attempting to obtain control of us.In addition, these provisions would apply even if we were to receive an offer that some stockholders may considerbeneficial.We are also subject to the anti-takeover provisions contained in Section 203 of the Delaware General CorporationLaw. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% ormore of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directorshas approved the transaction.Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-partyclaims against us and may reduce the amount of money available to us.Our amended and restated certificate of incorporation and amended and restated bylaws provide that we willindemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restatedbylaws and our indemnification agreements that we have entered into with our directors and officers provide that:··We will indemnify our directors and officers for serving us in those capacities or for serving other businessenterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that acorporation may indemnify such person if such person acted in good faith and in a manner such personreasonably believed to be in or not opposed to the best interests of the registrant and, with respect to anycriminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful.··We may, in our discretion, indemnify employees and agents in those circumstances where indemnificationis permitted by applicable law.··We are required to advance expenses, as incurred, to our directors and officers in connection with defendinga proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimatelydetermined that such person is not entitled to indemnification.··We will not be obligated pursuant to our amended and restated bylaws to indemnify a person with respectto proceedings initiated by that person against us or our other indemnitees, except with respect toproceedings authorized by our board of directors or brought to enforce a right to indemnification.59 Table of Contents··The rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enterinto indemnification agreements with our directors, officers, employees and agents and to obtain insuranceto indemnify such persons.··We may not retroactively amend our amended and restated bylaw provisions to reduce our indemnificationobligations to directors, officers, employees and agents.We do not currently intend to pay dividends on our common stock, and, consequently, our stockholders’ ability to achieve areturn on their investment will depend on appreciation in the price of our common stock.We do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We currentlyintend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our loan and security agreementscould restrict our ability to pay dividends. Therefore, our stockholders are not likely to receive any dividends on ourcommon stock for the foreseeable future. Since we do not intend to pay dividends, our stockholders’ ability to receive areturn on their investment will depend on any future appreciation in the market value of our common stock. There is noguarantee that our common stock will appreciate or even maintain the price at which our holders have purchased it. ITEM 1B. UNRESOLVED STAFF COMMENTSNone. ITEM 2. PROPERTIESOur headquarters is currently located in Fremont, California, and consists of 61,784 square feet, plus a further 10,716square feet beginning in September 2019, of leased office and laboratory space under a lease that currently expires inSeptember 2021. In addition, we lease 3,520 square feet of office space in Boston, Massachusetts, under a lease that currentlyexpires in October 2021. We believe that our existing facilities are adequate for our current needs. If we determine thatadditional or new facilities are needed in the future, we believe that sufficient options would be available to us oncommercially reasonable terms. ITEM 3. LEGAL PROCEEDINGSFrom time to time, we may be involved in legal proceedings arising in the ordinary course of business. We believethat as of December 31, 2018, there is no litigation pending that would reasonably be expected to have a material adverseeffect on our results of operations and financial condition. ITEM 4. MINE SAFETY DISCLOSURESNot applicable.60 Table of Contents PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIESCommon StockOur common stock commenced trading on The Nasdaq Global Market under the symbol “ARDX” on June 19, 2014.Prior to that date, there was no public trading market for our common stock. As of December 31, 2018, there were 34 holdersof record of our common stock.DividendsWe have never declared or paid cash dividends on our capital stock. We currently intend to retain any futureearnings to finance the growth and development of our business.Recent Sales of Unregistered SecuritiesNone.Use of ProceedsNot applicable.Issuer Purchases of Equity SecuritiesNot applicable. 61 Table of Contents ITEM 6. SELECTED FINANCIAL DATAThe data set forth below is not necessarily indicative of the results of future operations and should be read inconjunction with the financial statements and the notes included elsewhere in this annual report on Form 10‑K and also with“ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS” and our financial statements and the related notes included in this Annual Report on Form 10‑K. Year Ended December 31, Statement of Operations Data: 2018 2017 2016 2015 2014 (in thousands, except share and per share amounts)Revenue: Licensing revenue $2,320 $42,000 $ — $21,611 $18,394Collaborative development revenue — — — 2,415 13,229Other revenue 287 — — — —Total revenue 2,607 42,000 — 24,026 31,623Cost of revenue 466 8,400 — — —Gross profit 2,141 33,600 — 24,026 31,623Operating expenses: Research and development 69,373 75,484 94,161 39,885 25,900General and administrative 23,715 23,231 18,734 13,530 7,287Total operating expenses 93,088 98,715 112,895 53,415 33,187Loss from operations (90,947) (65,115) (112,895) (29,389) (1,564)Interest expense (3,534) — — — —Other income (expense), net 3,187 1,955 508 (261) 10Change in fair value of preferred stockwarrant liability — — — — (1,593)Loss before provision for income taxes (91,294) (63,160) (112,387) (29,650) (3,147)Provision for (benefit from) income taxes 4 1,179 — (29) 67Net loss $(91,298) $(64,339) $(112,387) $(29,621) $(3,214)Net loss per common share, basic anddiluted $(1.62) $(1.36) $(2.80) $(1.29) $(0.31)Shares used in computing net loss per share -basic and diluted 56,219,919 47,435,331 40,118,522 22,892,640 10,248,337 As of December 31, Balance Sheet Data: 2018 2017 2016 2015 2014 (in thousands)Cash, cash equivalents and short-term investments $168,089 $133,976 $200,823 $107,004 $107,286Total assets 183,332 157,903 213,131 116,946 113,414Deferred revenue — — — — 47,053Accumulated deficit (365,512) (278,214) (213,875) (101,488) (71,867)Total stockholders' equity 115,813 139,312 193,151 108,901 60,68262 Table of Contents ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONSYou should read the following discussion and analysis of our financial condition and results of operations in conjunctionwith the section of this report entitled “Selected Financial Data” and our financial statements and related notes includedelsewhere in this report. This discussion and other parts of this report contain forward- looking statements that involve riskand uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differmaterially from those discussed in these forward-looking statements. Factors that could cause or contribute to suchdifferences include, but are not limited to, those discussed in the section of this report entitled “Risk Factors.” Theseforward-looking statements speak only as of the date hereof. Except as required by law, we assume no obligation to updateor revise these forward-looking statements for any reason. Unless the context requires otherwise, the terms “Ardelyx”,“Company”, “we”, “us”, and “our” refer to Ardelyx, Inc.OVERVIEWWe are a biopharmaceutical company focused on developing first-in-class medicines to improve treatment choicesfor people with cardiorenal diseases. This includes patients with end-stage renal disease, or ESRD, suffering from elevatedserum phosphorus, or hyperphosphatemia; and patients with chronic kidney disease, or CKD, and/or heart failure patientswith elevated serum potassium, or hyperkalemia.Our portfolio is led by the development of tenapanor, a first-in-class inhibitor of NHE3. In our cardiorenal pipeline,tenapanor is being evaluated in a second Phase 3 clinical trial, the PHREEDOM trial, for the treatment of hyperphosphatemiain patients with ESRD who are on dialysis, with topline results expected in the fourth quarter of 2019. This trial follows asuccessful first Phase 3 clinical trial completed in 2017, which achieved statistical significance for the primary endpoint.Tenapanor, if successfully developed and approved, would be the first therapy for phosphate management that is not aphosphate binder. We are also evaluating tenapanor in combination with phosphate binders in a Phase 3 clinical trial, theAMPLIFY trial, from which results are currently expected in the second half of 2019. If our AMPLIFY trial is successful,tenapanor would, if approved, be the first and only phosphate lowering therapy to be indicated as adjunctive therapy for usein combination with binders.We are also advancing a small molecule potassium secretagogue program, RDX013, for the potential treatment ofhyperkalemia. Hyperkalemia is a common problem in patients with heart and kidney disease, particularly in patients takingcommon blood pressure medications known as RAAS inhibitors, which inhibit of the renin-angiotensin-aldosterone system.We believe that RDX013 has the potential to lower elevated potassium with a much lower pill burden than potassium bindersand may provide significant advantages as a stand-alone agent or also in combination with potassium binders.In addition to the development of tenapanor for the treatment of hyperphosphatemia for ESRD patients on dialysis,we have developed tenapanor for the treatment of patients with IBS-C. On September 12, 2018, we submitted a new drugapplication, or NDA, to the U.S. Food and Drug Administration, or FDA, for the treatment of patients with irritable bowelsyndrome with constipation, or IBS-C, and have been granted a target action date under the Prescription Drug User Fee Act,or PDUFA, of September 12, 2019. The NDA submission was supported by a clinical package encompassing more than 3,100patients and healthy volunteers who have participated in Ardelyx clinical trials and extensive clinical and preclinical datasupporting the safety profile. The data include results from the completed IBS-C registration T3MPO program, whichconsisted of two Phase 3 trials, T3MPO-1 and T3MPO-2, and a long-term safety extension trial, T3MPO-3. Both the T3MPO-1 and T3MPO-2 trials achieved statistical significance for their primary endpoint and demonstrated that tenapanor had adurable effect on reducing constipation and abdominal pain that patients with IBS-C experience. The favorable safety profileof tenapanor, which has been shown across all clinical trials, was further supported by the completed T3MPO-3 study.We have developed a proprietary drug discovery and design platform to discover targets found in the GI tract thatregulate processes in the body and design products candidates that act upon those targets to take advantage of the gut’sability to communicate with other organs.63 Table of ContentsSince commencing operations in October 2007, substantially all our efforts have been dedicated to our research anddevelopment activities, including developing our clinical product candidate tenapanor and developing our proprietary drugdiscovery and design platform. We have not generated any revenues from product sales and have no products approved forcommercialization. As of December 31, 2018, we had an accumulated deficit of $365.5 million.On May 16, 2018, we entered into a loan and security agreement, or the Loan Agreement, with Solar Capital Ltd.and Western Alliance Bank. The Loan Agreement provides for a $50.0 million term loan facility with a maturity date ofNovember 1, 2022. The full amount of the loan was funded on May 16, 2018. We received net proceeds from the loan of$49.3 million, after deducting the closing fee, legal expenses and issuance cost.On May 25, 2018, we completed an underwritten public offering of 12,500,000 shares of our common stock at aprice to the public of $4.00 per share, that were purchased by Jefferies LLC, or Jefferies, and Leerink Partners LLC, orLeerink, as representatives of several underwriters, or collectively the Underwriters, from the Company at a price of $3.76 pershare, and on June 25, 2018, we sold an additional 1,875,000 shares of our common stock at a price to the public of $4.00 pershare, that were purchased by the Underwriters from the Company at a price of $3.76 per share, following the full exercise ofthe underwriters’ option to purchase additional shares of common stock. We received net proceeds from the offering of $53.8million, after deducting the underwriting discounts, commissions and offering expenses.We expect to incur operating losses for the foreseeable future as a result of our continued development of tenapanorand our preparations for the commercialization of tenapanor, including costs associated with completing the on-going Phase3 development program for tenapanor for the treatment of hyperphosphatemia in patients with ESRD on dialysis, as well asthe advancement of our research programs into the preclinical stage. To date, we have funded our operations from the saleand issuance of common stock, convertible preferred stock, funds from our former collaboration partnerships, funds fromlicense agreements, and funds from our Loan Agreement with Solar Capital Ltd. and Western Alliance Bank.FINANCIAL OPERATIONS OVERVIEWRevenueWe have not generated any revenue from product sales. Prior to 2017, our revenue to date had been generated fromnon-refundable license payments and reimbursements for research and development expenses under license agreements withAstraZeneca AB, or AstraZeneca, and Sanofi, S.A., or Sanofi, both of which were terminated in 2015. We recognized revenuefrom upfront payments ratably over the term of our estimated period of performance under those agreements, which werecorded as licensing revenue. Reimbursements from AstraZeneca for development costs incurred under our license andcollaboration agreement with them were classified as collaborative development revenue. There has been no recognition ofcollaborative development revenue since the termination of the AstraZeneca agreement in 2015.In 2017, we executed license agreements with Kyowa Hakko Kirin Co., Ltd., or KHK, and Shanghai FosunPharmaceutical Industrial Development Co. Ltd., or Fosun Pharma, for the development, commercialization and distributionof tenapanor for certain uses in Japan and China, respectively. Under the terms of the KHK and Fosun Pharma licenseagreements, the Company received an aggregate of $30.0 million and $12.0 million, respectively, in non-refundable up-frontlicense fees. These amounts were recorded as revenue when the contracts were executed. These agreements also containmilestone payments, which will be recorded as revenue when we achieve the underlying milestone. See “ITEM 1. BUSINESS—OUR PRODUCT PIPELINE— Tenapanor: A New Approach for Treating Hyperphosphatemia in ESRD Patients onDialysis” for additional detail regarding the KHK and Fosun Pharma license agreementsDuring the first quarter of 2018, we executed a license agreement with Knight Therapeutics, Inc., or Knight, for thedevelopment, commercialization and distribution of tenapanor for hyperphosphatemia and IBS-C in Canada. Under the termsof the Knight license agreement, the Company received a nonrefundable payment of CAD 3 million, or U.S. $2.3 million, inup-front license fees, which was recorded as revenue when the contract was executed. The agreement64 Table of Contentsalso provides for development and commercialization milestone payments, which will be recorded as revenue when weachieve the underlying milestone.Our past revenue performance is not necessarily indicative of results to be expected for the future operating periods.Our non-product revenue cannot always be predicted since it is dependent upon achievement of certain milestones.On January 1, 2018 we adopted the new standard for Revenue from Contracts with Customers, ASC 606, on amodified retrospective method as an adjustment to the opening balance of retained earnings of the annual reportingperiod. See “Note 2. Summary Of Significant Accounting Policies” under Revenue Recognition, for further detail.Cost of RevenueCost of revenue represents payments due to AstraZeneca, who under the terms of a termination agreement enteredinto in 2015 are entitled to (i) future royalties at a royalty rate of 10% of net sales of tenapanor or other NHE3 products by usor our licensees, and (ii) 20% of non-royalty revenue received from a new collaboration partner should we elect to license, orotherwise provide rights to develop and commercialize tenapanor or another NHE3 inhibitor, up to a maximum of $75.0million in aggregate for (i) and (ii). We recognize these expenses as cost of revenue when we recognize the revenue thatgenerates our liability for these license payments. To date in aggregate, we have recognized $9.9 million of the $75.0million, recorded as cost of revenue comprising (i) $6.0 million and $2.4 million related to the KHK license agreement andFosun Pharma license agreement, respectively, recorded in 2017 (ii) $0.5 million related to the Knight license agreementrecorded in the year ended December 31, 2018 and (iii) $1.0 million related to the KHK license agreement associated with amilestone that KHK achieved in February 2019.Research and Development ExpensesWe recognize all research and development expenses as they are incurred to support the discovery, developmentand manufacturing of our product candidates. Research and development expenses consist of the following:·external research and development expenses incurred under agreements with consultants, third-party CROs andinvestigative sites where a substantial portion of our clinical studies are conducted, and with contract manufacturingorganizations where our clinical supplies are produced;·expenses associated with supplies and materials consumed in connection with our research operations;·employee-related expenses, which include salaries, bonuses, benefits, travel and stock-based compensation;·other costs associated with regulatory, clinical and non-clinical development activities; and·facilities and other allocated expenses, which include direct and allocated expenses for rent and maintenance offacilities, depreciation and amortization expense, information technology expense and other supplies.We expect to continue to make substantial investments in research and development activities as we progress thedevelopment of tenapanor, as well as our other product candidates, advance our research programs into the preclinical stageand continue our early stage research. The process of conducting preclinical studies and clinical trials necessary to obtainregulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for any of ourproduct candidates, including tenapanor. Additionally, if marketing approval is received for tenapanor for the treatment ofIBS-C, we may not be successful in securing one or more collaboration partners to commercialize tenapanor in the UnitedStates and other territories. The probability of success of each of the product candidates may be affected by numerous factors,including preclinical data, clinical data, market acceptance, sufficient third-party coverage or reimbursement, our ability toaccess capital on acceptable terms, competition, manufacturing capability and commercial viability.65 Table of ContentsWe anticipate that we will make determinations as to which programs to pursue and how much funding to direct toeach program on an ongoing basis in response to the scientific and clinical success of each product candidate, ongoingassessment as to each product candidate’s commercial potential, and our ability to access capital on acceptable terms. Wewill need to raise additional capital and will seek additional collaboration partnerships in order to complete the developmentand commercialization of tenapanor. If we are unable to access capital on a timely basis and on terms that are acceptable tous, we may be forced to restructure certain aspects of our business or identify and complete one or more strategiccollaborations or other transactions in order to fund the development or commercialization of tenapanor or certain of ourproduct candidates through the use of alternative structures.General and AdministrativeGeneral and administrative expenses consist primarily of salaries and related costs, including stock-basedcompensation. Other general and administrative expenses include facility related costs and professional fees for legal,accounting, investor relations and other consulting services.We anticipate that our general and administrative expenses will increase in the future primarily because of (i)increased pre-commercial activities, personnel costs and professional fees for services to support the potential launch andcommercialization of tenapanor for the treatment of hyperphosphatemia in ESRD patients on dialysis and (ii) expensesrelated to costs of operating as a public company primarily preparing for future integrated audits.Provision for Income TaxesThe provision for income taxes was not material for year ending December 31, 2018, $1.2 million for year endingDecember 31, 2017 and zero for year ending December 31, 2016. We have a net loss for all three years ending December 31,2018. Our deferred tax assets continue to be fully offset by a valuation allowance.The Tax Cuts and Jobs Act of 2017, or TCJA, makes broad and complex changes to the U.S. tax code, including, butnot limited to, reducing the U.S. federal corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, effectiveJanuary 1, 2018. The Company is able to determine a reasonable estimate of certain effects of the TCJA and has thereforerecognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities. As a result, theCompany has recorded a decrease related to net deferred tax assets of $35.6 million, with an offsetting change in valuationallowance of $35.6 million for the year ended December 31, 2017. The SEC has provided accounting and reporting guidancethat allows the Company to report provisional amounts within a measurement period of up to one year from the date ofenactment due to the complexities inherent in adopting the TCJA. The Company completed its analysis during themeasurement period and there were no measurement period adjustments recognized during the reporting period. CRITICAL ACCOUNTING POLICES AND ESTIMATESA detailed discussion of our significant accounting policies can be found in Note 1 of the Notes to ConsolidatedFinancial Statements in Part II, Item 8, and the impact and risks associated with our accounting policies are discussedthroughout this Annual Report on Form 10‑K and in the footnotes to the financial statements. Critical accounting policiesare those that require significant judgment and/or estimates by management at the time that financial statements are preparedsuch that materially different results might have been reported if other assumptions had been made. We consider certainaccounting policies related to revenue recognition, accrued liabilities, and use of estimates to be critical policies. Theseestimates form the basis for making judgments about the carrying values of assets and liabilities. We base our estimates andjudgments on historical experience and on various other assumptions that we believe to be reasonable under thecircumstances. Actual results could differ materially from these estimates.We believe the following policies to be the most critical to an understanding of our financial condition and resultsof operations because they require us to make estimates, assumptions and judgments about matters that are inherentlyuncertain.66 Table of ContentsRevenue RecognitionOn January 1, 2018 we adopted the new standard for Revenue from Contracts with Customers, ASC 606, on amodified retrospective method as an adjustment to the opening balance of retained earnings of the annual reporting period.As a result of the adoption of the new standard, on January 1, 2018, we recorded the following: (i) an increase in currentassets of $5.0 million representing a receivable related to the first milestone under our KHK license agreement, which wasachieved by KHK in February 2019, (ii) an increase in current liabilities of $1.0 million representing a payable related to thecorresponding payment to AstraZeneca in accordance with our termination agreement with AstraZeneca and (iii) a relateddecrease in its accumulated deficit of approximately $4.0 million as the new standard permits revenue from milestones thatpossess certain criteria to be recognized earlier as the new standard contains different recognition criteria related tomilestones than under the previous standard, Revenue Recognition, Multiple-Element Arrangements - Licensing revenues,ASC 605. We enter into licensing agreements which are within the scope of ASC 606, under which we license certain rights toour product candidates to third parties. The terms of these arrangements typically include payment to us of one or more ofthe following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; andfuture royalties on net sales of licensed products. Each of these payments results in license, collaboration and other revenues,except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues.In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of ouragreements, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii)determination of whether the promised goods or services are performance obligations including whether they are distinct inthe context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv)allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy eachperformance obligation. As part of the accounting for these arrangements, we must develop assumptions that requirejudgment to determine the stand-alone selling price for each performance obligation identified in the contract. We use keyassumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines,reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.Milestone Payments: At the inception of each arrangement that includes development milestone payments, weevaluate whether the milestones are considered probable of being reached and estimate the amount to be included in thetransaction price using the most likely amount method. Amounts of variable consideration are included in the transactionprice to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will notoccur and when the uncertainty associated with the variable consideration is subsequently resolved. Milestone paymentsthat are not within the control of us or the licensee, such as regulatory approvals, are not considered probable of beingachieved until those approvals are received. The transaction price is then allocated to each performance obligation on arelative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under thecontract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of suchdevelopment milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Anysuch adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenuesand earnings in the period of adjustment.Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drugproduct for either clinical development or commercial supply at the customer’s discretion are generally considered asoptions. We assess if these options provide a material right to the licensee and if so, they are accounted for as separateperformance obligations. If we are entitled to additional payments when the customer exercises these options, any paymentsare recorded in other revenues when the customer obtains control of the goods, which is upon delivery.Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level ofsales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of(i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty67 Table of Contentshas been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resultingfrom any of our licensing arrangements.Accrued Research and Development ExpensesAs part of the process of preparing our financial statements, we are required to estimate our accrued expenses. Thisprocess involves reviewing open contracts and purchase orders, communicating with our personnel to identify services thathave been performed on our behalf and estimating the level of service performed and the associated cost incurred for theservice when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providersinvoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of ouraccrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us atthat time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments ifnecessary. Examples of estimated accrued research and development expenses include fees paid to:·CROs in connection with clinical studies;·investigative sites in connection with clinical studies;·vendors related to product manufacturing, development and distribution of clinical supplies;·collaborator entities in connection with our collaboration agreements; and·vendors in connection with preclinical development activities.We record expenses related to clinical studies and manufacturing development activities based on our estimates ofthe services received and efforts expended pursuant to contracts with our CROs and manufacturing vendors that conduct andmanage these activities on our behalf. The financial terms of these agreements are subject to negotiation, vary from contractto contract, and may result in uneven payment flows. There may be instances in which payments made to our vendors willexceed the level of services provided and result in a prepayment of the expense. Payments under some of these contractsdepend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In accruingservice fees, we estimate the time period over which each component of a service will be performed, and estimate, withvendor input if appropriate, the resulting level of completion of each component of the service, with such estimates ofteninvolving drivers that provide a surrogate measurement of completion such as number of enrolled subjects and/or number ofsites activated in the calculation of clinical trial fee accruals. If the actual timing of the performance of services or the level ofeffort varies from our estimate, we adjust the accrued or prepaid expense balance accordingly. Although we do not expect ourestimates to be materially different from amounts actually incurred, if our estimates of the status and timing of servicesperformed differ from the actual status and timing of services performed, we may report amounts that are too high or too lowin any particular period. To date, there have been no material differences from our estimates to the amounts actually incurred.Stock-Based CompensationWe estimate the fair value of stock options and Employee Stock Purchase Plan, or ESPP, shares using the Black-Scholes valuation model. The Black-Scholes model requires the input of highly subjective assumptions which determine thefair value of stock-based awards. These assumptions include:Expected Term—We have limited historical information to develop reasonable expectations about future exercisepatterns and post-vesting employment termination behavior for our stock-option grants. As such, the expected termis estimated using the simplified method whereby the expected term equals the arithmetic average of the vestingterm and the original contractual term of the option.68 Table of ContentsExpected Volatility— Since January 1, 2017, we have used the historic volatility of our own stock over theretrospective period corresponding to the expected remaining term of the options, or the period since our shareswere first quoted on The Nasdaq Global Market, if that is shorter, to compute our expected stock price volatility.Prior to December 31, 2016, our stock had not been publicly traded for a sufficient period to enable us to use ourown historic volatility, so the expected volatility was calculated based on the average volatility for comparablepublicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants.The comparable companies were chosen based on their similar size, stage in the life cycle, and financial leverage ofthe Company.Risk-Free Interest Rate—The risk-free interest rate assumption is based on the zero-coupon U.S. Treasuryinstruments on the date of grant with a maturity date consistent with the expected term of our stock option grants.Expected Dividend— To date, we have not declared or paid any cash dividends and do not have any plans to do soin the future. Therefore, we use an expected dividend yield of zero.As required, we review our valuation assumptions at each grant date and, as a result, we are likely to change ourvaluation assumptions used to value employee stock-based awards granted in future periods. Employee and director stock-based compensation costs are to be recognized over the vesting period of the award, and we have elected to use the straight-line attribution method. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. We estimate forfeitures based on historical experience.Restricted stock units, or RSUs, are measured at the fair value of our common stock on the date of grant andexpensed over the period of vesting using the straight-line attribution approach.RESULTS OF OPERATIONSComparison of the Years Ended December 31, 2018 and 2017Revenue Year Ended December 31, 2018 2017Licensing revenue $2,320 $42,000Other revenue 287 —Total revenues 2,607 42,000Dollar change from prior year (39,393) Percent change from prior year (94)% Total revenue was $2.6 million for the year ended December 31, 2018, a decrease of $39.4 million, or 94%,compared to $42.0 million for the year ended December 31, 2017. Total revenue of $2.6 million in the year ended December31, 2018 included $2.3 million of licensing revenue related to the upfront payment from Knight and $0.3 million of otherrevenue related to the manufacturing supply of tenapanor and other materials to KHK, for KHK’s product development andclinical trials in Japan, in accordance with our license agreement with KHK. Total revenue of $42.0 million in the year endedDecember 31, 2017 was comprised of licensing revenue related to upfront payments in accordance with our KHK and FosunPharma license agreements.69 Table of ContentsCost of revenue Year EndedDecember 31, 2018 2017 Cost of revenue $466 $8,400 Dollar change from prior year (7,934) Percent change from prior year (94)% Cost of revenue was $0.5 million for the year ended December 31, 2018, a decrease of $7.9 million, or 94%, compared to$8.4 million for the year ended December 31, 2017. The cost of revenue in both periods represented license payments due toAstraZeneca. AstraZeneca, under the terms of a termination agreement entered into in 2015, is entitled to (i) future royaltiesat a royalty rate of 10% of net sales of tenapanor or other NHE3 products by us or our licensees, and (ii) 20% of non-royaltyrevenue received from a new collaboration partner should we elect to license, or otherwise provide rights to develop andcommercialize tenapanor or another NHE3 inhibitor, with the maximum amount due to AstraZeneca for royalties and non-royalty revenue not to exceed $75.0 million in aggregate for (i) and (ii). Research and Development Year Ended December 31, 2018 2017 Research and development $69,373 $75,484 Dollar change from prior year (6,111) Percent change from prior year (8)% Research and development expenses were $69.4 million for the year ended December 31, 2018, a decrease of $6.1million, or 8%, compared to $75.5 million for the year ended December 31, 2017. The decrease consisted of a $1.1 milliondecrease in our external program costs and a $5.0 million decrease in our internal program costs.The decrease in our external program costs of $1.1 million included a $11.7 million decrease due to discontinuationof the RDX7675 program and a $1.7 million reduction of activities associated with the RDX8940 program that was partiallyoffset by a $12.3 million increase in expense primarily related to our tenapanor programs. The $12.3 million increaseincluded an increase in expense related to the start of our second tenapanor hyperphosphatemia Phase 3 study that waspartially offset by a decrease in expenses for clinical development activities related to the completion of our tenapanor IBS-CPhase 3 clinical program as well as our first tenapanor hyperphosphatemia Phase 3 clinical trial.The decrease in our internal costs of $5.0 million was primarily due to a decrease in personnel costs, includingstock-based compensation costs as a result of a reduction in force during the third quarter of 2017, and a related decrease inresearch and development activities.General and Administrative Year Ended December 31, 2018 2017 General and administrative $23,715 $23,231 Dollar change from prior year 484 Percent change from prior year 2% General and administrative expenses were $23.7 million for the year ended December 31, 2018, an increase of $0.5million, or 2%, compared to $23.2 million for the year ended December 31, 2017. The increase was primarily due to anincrease in professional services and stock-based compensation expense, partially offset by a reduction in personnel costsdue to reduction in force during the third quarter of 2017.70 Table of ContentsComparison of the Years Ended December 31, 2017 and 2016Revenue Year Ended December 31, 2017 2016 (in thousands)Licensing revenue $42,000 $ —Dollar change from prior year 42,000 Percent change from prior year *% ________________________* not meaningful Licensing revenue for the year ended December 31, 2017, was $42.0 million, an increase of $42.0 million comparedto the year ended December 31, 2016, when we generated no licensing revenue. Licensing revenue for 2017 was related tothe recognition of revenue from upfront payments under our KHK and Fosun Pharma license agreements.Cost of revenue Year Ended December 31, 2017 2016 (in thousands)Cost of revenue $8,400 $ —Dollar change from prior year 8,400 Percent change from prior year *% ________________________* not meaningful Cost of revenue for the year ended December 31, 2017, was $8.4 million, an increase of $8.4 million compared tothe year ended December 31, 2016, when we generated no revenue and therefore incurred no related costs. Cost of revenuerepresents license payments due to AstraZeneca, which under the terms of a termination agreement entered into in 2015 isentitled to (i) future royalties at a royalty 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 a new collaboration partner should we elect to license, or otherwiseprovide rights to develop and commercialize tenapanor or another NHE3 inhibitor, with the maximum amount dueAstraZeneca for royalties and non-royalty revenue not to exceed $75.0 million in aggregate for (i) and (ii).Research and Development Year Ended December 31, 2017 2016 (in thousands)Research and development $75,484 $94,161Dollar change from prior year (18,677) Percent change from prior year (20)% Research and development expenses were $75.5 million for the year ended December 31, 2017, a decrease of $18.7million, or 20%, compared to $94.2 million for the year ended December 31, 2016. The decrease consisted of a $23.8 milliondecrease in our external program costs, partially offset by a $5.1 million increase in our internal program costs.The decrease in our external program costs of $23.8 million was primarily due to a decrease of $22.3 million inexpenses incurred for clinical development activities related to the completion of our T3MPO Phase 3 clinical program fortenapanor, our first Phase 3 clinical trial evaluating tenapanor for the treatment of hyperphosphatemia patients with71 Table of ContentsESRD on dialysis and a decrease in manufacturing development activities related to tenapanor. In addition, expensesincurred for clinical development activities, clinical manufacturing and process development activities associated withRDX8940 decreased by $3.2 million. These decreases were offset by an increase of $1.7 million in expenses incurredprimarily for clinical development activities associated with RDX7675, including costs associated with the termination ofthat program.The increase in our internal costs of $5.1 million was primarily due to an increase in salaries and related costs,including stock-based compensation, facilities-related costs, principally related to supporting the growth of our developmentteam and severance costs relating to our reduction in workforce in the third quarter 2017.General and Administrative Year Ended December 31, 2017 2016 (in thousands)General and administrative $23,231 $18,734Dollar change from prior year 4,497 Percent change from prior year 24% General and administrative expenses were $23.2 million for the year ended December 31, 2017, an increase of $4.5million, or 24%, compared to $18.7 million for the year ended December 31, 2016. The increase was primarily due toincreases in salaries and related costs, including stock-based compensation and facilities costs including depreciationexpense, due to an increase in headcount and an expansion of facilities late in 2016, increased legal fees, and severance costsdue to the refocusing of resources towards late-stage programs and subsequent reduction in the workforce in the third quarterof 2017, offset by reductions in certain professional services.LIQUIDITY AND CAPITAL RESOURCES December 31, 2018 2017Cash and cash equivalents 78,768 75,383Short-term investments 89,321 58,593Total liquid funds $168,089 $133,976 As of December 31, 2018, we had cash, cash equivalents and short-term investments totaling $168.1 millioncompared to $134.0 million as of December 31, 2017.In January 2016, we completed an underwritten public offering of 8,625,000 shares of common stock at an offeringprice of $10.00 per share for gross proceeds of $86.3 million. This offering was completed under our shelf registrationstatement filed on July 13, 2015, and we received net proceeds from the offering of approximately $80.8 million, afterdeducting the underwriters’ discounts and commissions and offering expenses.In July 2016, we sold and issued an aggregate of 12,600,230 shares of common stock in a private placementtransaction at an offering price of $8.73 per share for gross proceeds of $110.0 million. We received net proceeds from theoffering of approximately $109.8 million, after deducting offering expenses.In November and December 2017, we executed license agreements with KHK and Fosun Pharma for thedevelopment, commercialization and distribution of tenapanor for certain indications in Japan and China, respectively,under which we were entitled to an aggregate of $30.0 million and $12.0 million, respectively, in up-front license fees. The$30.0 million was collected by December 31, 2017 and the remaining $12.0 million, less $1.2 million of withholding taxes,was collected in January 2018. We accrued a liability of $8.4 million to AstraZeneca in accordance with the terms of ourtermination agreement with AstraZeneca entered into in 2015, of which $6.0 million was paid by December 31, 2017 and theremainder of which was paid in February 2018.72 Table of ContentsIn March 2018, we entered into an exclusive license agreement with Knight for the development, commercializationand distribution of tenapanor in Canada for hyperphosphatemia and IBS-C. In March and April 2018, we collected $2.3million related to the Knight license agreement, and $0.5 million of cost of revenue was paid pursuant to the AstraZenecaTermination Agreement.On May 16, 2018, we entered into a loan and security agreement, or the Loan Agreement, with Solar Capital Ltd.and Western Alliance Bank. The Loan Agreement provides for a $50.0 million term loan facility with a maturity date ofNovember 1, 2022. The full amount of the loan was funded on May 16, 2018. We received net proceeds from the loan of$49.3 million, after deducting the closing fee, legal expenses and issuance cost.On May 25, 2018, we completed an underwritten public offering of 12,500,000 shares of our common stock at aprice to the public of $4.00 per share, that were purchased by the Underwriters from the Company at a price of $3.76 pershare, and on June 25, 2018, we sold an additional 1,875,000 shares of our common stock at a price to the public of $4.00 pershare, that were purchased by the Underwriters from the Company at a price of $3.76 per share, following the full exercise ofthe underwriters’ option to purchase an additional shares of common stock. We received net proceeds from the offering of$53.8 million, after deducting the underwriting discounts, commissions and offering expenses.On August 9, 2018, we filed a prospectus supplement with the SEC pursuant to our previously filed shelfregistration statement on Form S-3 (File No. 333-217441). The prospectus covers the offering, issuance and sale of up to$50.0 million of shares of common stock from time to time in “at the market” offerings pursuant to a Sales Agreement enteredinto with Leerink on August 9, 2018. As of December 31, 2018, no shares have been offered or issued or sold against theSales Agreement with Leerink.Our primary sources of cash have been from the sale and issuance of common stock, convertible preferred stock,funds from our former collaboration partnerships, funds from license agreements, and funds from our Loan Agreement withSolar Capital Ltd. and Western Alliance Bank. Our primary uses of cash are to fund operating expenses, primarily researchand development expenditures, as well as general administrative expenditures and our obligations related to our licensetermination agreement with AstraZeneca. Cash used to fund operating expenses is impacted by the timing of when we paythese expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.We believe that our existing capital resources as of December 31, 2018 will enable us to fund our operatingexpenses and capital expenditure requirements for at least the next 12 months following our financial statement issuancedate. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capitalresources sooner than we currently expect. In particular, our operating plan can change, and we may require significantadditional capital to fund our operations, including to support the development, commercialization and manufacturingefforts for tenapanor. We may seek to obtain such additional capital through debt financings, credit facilities, additionalequity offerings and/or strategic collaborations. We currently have no unutilized credit facility or committed sources ofcapital, and there can be no assurances that such sources of capital will be available to us when needed or on acceptableterms. Because of the numerous risks and uncertainties associated with the development and commercialization of ourproduct candidates, and the extent to which we may be able to secure additional collaboration partnerships with third-partiesto participate in the development and commercialization of our potential products, our future funding requirements willdepend on many factors, including the following:·the progress, timing, scope, results and costs of our clinical trial program evaluating tenapanor for the treatment ofhyperphosphatemia in ESRD patients on dialysis alone and in combination with phosphate binders, and if ourclinical programs are successful, the submission of an NDA with the FDA to request marketing authorization fortenapanor for the treatment of hyperphosphatemia in ESRD patients on dialysis and as an adjunctive therapy withphosphate binders, as well as our decision whether or not to pursue other indications for tenapanor;·whether or not we receive approval from the FDA to market tenapanor for the treatment of patients with IBS-C;·our ability to identify a collaboration partner and negotiate acceptable terms for a collaboration partnership for thecommercialization of tenapanor in IBS-C in the United States;73 Table of Contents·our ability to successfully commercialize tenapanor, if approved, either alone or with one or more collaborationpartners;·the manufacturing costs of our product candidates, and the availability of one or more suppliers for our productcandidates at reasonable costs, both for clinical and commercial supply;·the selling and marketing costs associated with tenapanor, including the cost and timing of building our sales andmarketing capabilities, should we elect to do so;·our ability to maintain our existing collaboration partnerships and to establish additional collaborationpartnerships, in-license/out-license, joint ventures or other similar arrangements and the financial terms of suchagreements;·the timing, receipt, and amount of sales of, or royalties on, tenapanor, if any;·the sales price and the availability of adequate third-party reimbursement for tenapanor, if approved;·the cash requirements of any future acquisitions or discovery of product candidates;·the number and scope of preclinical and discovery programs that we decide to pursue or initiate, and any clinicaltrials we decide to pursue for other product candidates;·the time and cost necessary to respond to technological and market developments;·the costs of filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectualproperty rights, including litigation costs and the outcome of such litigation, including costs of defending anyclaims of infringement brought by others in connection with the development, manufacture or commercialization oftenapanor or any of our product candidates; and·the payment of interest and principal related to our loan and security agreement entered into with Solar Capital andWestern Alliance Bank during May 2018. The following table summarizes our cash flows for the periods indicated: Year Ended December 31, 2018 2017 2016Cash used in operating activities $(70,274) $(65,190) $(92,534)Cash (used in) provided by investing activities (29,894) 65,290 (131,076)Cash provided by financing activities 103,553 685 191,204Net increase (decrease) in cash and cash equivalents $3,385 $785 $(32,406) Cash Flows from Operating ActivitiesNet cash used in operating activities during the year ended December 31, 2018, was approximately $70.3 million.The net loss of $91.3 million was adjusted for (i) non-cash charges of $2.4 million related to depreciation, amortization, non-cash interest expense and change in derivative liabilities and $9.2 million for stock-based compensation, (ii) a decrease of$10.7 million in accounts receivable related to the Fosun Pharma license upfront fee received, (iii) a $0.5 million decrease inprepaid expenses primarily advances to vendors for clinical development and manufacturing, and (iv) a decrease in accountspayable and accrued liabilities of $1.8 million primarily due to expenses incurred for the clinical manufacturing, processdevelopment, and clinical development activities for tenapanor.74 Table of ContentsNet cash used in operating activities during the year ended December 31, 2017, was approximately $65.2 million.The net loss of $64.3 million was adjusted for (i) non-cash charges of $3.2 million for depreciation and amortization and $9.6million for stock-based compensation, (ii) an increase of $10.8 million in accounts receivable, solely related to the FosunPharma license upfront fee after withholding taxes, (iii) an increase of $2.1 million in prepaid expenses and (iv) a decrease inaccounts payable and accrued liabilities of $0.7 million primarily due to expenses incurred for the clinical manufacturing,process development, and clinical development activities for tenapanor and RDX7675.Net cash used in operating activities during the year ended December 31, 2016, was approximately $92.5 million.The net loss of $112.4 million was adjusted for (i) an increase of accounts payable and accrued liabilities of $11.2 millionprimarily due to expenses incurred for the clinical manufacturing, process development, and clinical development activitiesfor tenapanor, RDX7675 and RDX8940, (ii) non-cash charges of $1.8 million for depreciation and amortization and $5.3million for stock-based compensation and (iii) pre-payments of $1.6 million to vendors for clinical development andmanufacturing activities. Cash Flows from Investing ActivitiesNet cash used in investing activities was $29.9 million for the year ended December 31, 2018, primarily due topurchases of short-term investments of $169.0 million and purchase of property and equipment of $0.3 million offset bymaturities of short-term investments and redemptions of $139.4 million.Net cash provided by investing activities was $65.3 million for the year ended December 31, 2017, primarily due tomaturities and sales, less purchases, of short-term investments of $67.7 million. This was offset by the acquisition of propertyand equipment of $2.4 million related to the purchase of laboratory equipment and leasehold improvements.Net cash used by investing activities was $131.1 million for the year ended December 31, 2016, primarily due topurchases of marketable securities of $133.8 million and acquisition of property and equipment of $4.9 million related to theexpansion of our laboratory and related equipment. These uses of cash were partially offset by maturities of short-terminvestments of $7.6 million.Cash Flows from Financing ActivitiesNet cash provided by financing activities for the year ended December 31, 2018, was $103.6 million, primarily dueto (i) net proceeds of $53.8 million from an underwritten public offering of our common stock in 2018 after deducting theunderwriting discounts and commissions and offering expenses, (ii) net proceeds of $49.3 million from the term loanprovided by Solar Capital Ltd. and Western Alliance Bank after deducting the closing fee, legal expenses and issuance costs,and (iii) net proceeds of $0.5 million from issuance of common stock under the employee stock purchase plan, or ESPP.Net cash provided by financing activities for the year ended December 31, 2017, was $0.7 million, due to proceedsfrom issuance of common stock under ESPP.Net cash provided by financing activities for the year ended December 31, 2016, was $191.2 million and wasprimarily due to net proceeds of $190.6 million from public and private offerings of our common stock.75 Table of ContentsCONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS Payments Due by Period (in thousands) Lessthan 1 to 3 3 to 5 MoreThan 5 Contractual Obligation: 1 year Years Years Years TotalLease obligations $2,697 $5,329 $ — $ — $8,026Contract manufacturing obligations — 682 1,364 1,365 3,411Long-term debt obligations 5,193 37,050 26,081 — 68,324 Total contractual obligations $7,890 $43,061 $27,445 $1,365 $79,761(1)These amounts are comprised of total future estimated remaining payments under our non-cancelable existing operatinglease agreements.(2)These amounts are comprised of contractual obligations related to minimum purchase commitment of drug supply forour proposed commercial supply of our product candidates.(3)The long-term debt obligation is comprised of a Loan and Security Agreement that was executed in May 2018 andincludes estimated principle and interest payments thereupon. OFF-BALANCE SHEET ARRANGEMENTSAs of December 31, 2018, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) ofRegulation S-K as promulgated by the SEC.RECENT ACCOUNTING PRONOUNCEMENTSRefer to Note 2 in the notes to our consolidated financial statements in Part I, Item 8 of this Annual Report onForm 10‑K, for a discussion of new accounting pronouncements.JOBS ACT ACCOUNTING ELECTIONWe are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBSAct. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issuedsubsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We haveirrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, aresubject to the same new or revised accounting standards as other public companies that are not emerging growth companies.In addition, as an emerging growth company, we have reduced disclosure obligations regarding executive compensation inour periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote onexecutive compensation and stockholder approval of any golden parachute payments not previously approved. We willremain an emerging growth company until December 31, 2019.SMALLER REPORTING COMPANYOn June 28, 2018, the SEC adopted amendments that raise the thresholds in the smaller reporting company, or SRC,definition, whereby we were determined to qualify as an SRC. We elected to reflect that determination and avail ourselveswith most of the SRC scaled disclosure accommodations in our subsequent filings.76 (1)(2)(3) Table of Contents ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKInterest Rate RiskWe are exposed to market risks in the ordinary course of our business. These risks primarily include risk related tointerest rate sensitivities. We had cash, cash equivalents and short-term investments of $168.1 million as of December 31,2018, which consist of bank deposits and money market funds, as well as high quality fixed income instruments includingcorporate bonds, commercial paper, and asset-backed securities collateralized by non-mortgage consumer receivables. Thecredit rating of our short-term investments must be rated A‑1/P‑1, or better by Standard and Poor’s and Moody’s InvestorsService. Asset-backed securities must be rated AAA/Aaa. Money Market funds must be rated AAAm/Aaa. Such interest-earning instruments carry a degree of interest rate risk. However, because our investments are high quality and short-term induration, we believe that our exposure to interest rate risk is not significant and a 10% movement in market interest rateswould not have a significant impact on the total value of our portfolio, as specified below. We do not enter into investmentsfor trading or speculative purposes.We are subject to interest rate fluctuation exposure both through our borrowings under the Loan Agreement and ourinvestment in money market accounts each of which bears a variable interest rate. Borrowings under the Loan Agreementbear interest at a rate equal to one-month LIBOR plus 7.45% per annum. A hypothetical increase in one-month LIBOR of100 basis points above the current one-month LIBOR rates would have increased our interest expense by approximately $0.4million as of December 31, 2018. We had $49.2 million aggregate principal amount of loan outstanding as of December 31,2018.We are also subject to interest rate fluctuation exposure through our investments, however, the goals of ourinvestment policy are the preservation of capital, fulfillment of liquidity needs and fiduciary control of cash. To achieve ourgoal of maximizing income without assuming significant market risk, we maintain our excess cash and cash equivalents inmoney market funds and short-term debt securities. Because of the short-term maturities of our cash equivalents, we do notbelieve that a decrease in interest rates would have any material negative impact on the fair value of our cash equivalents.Foreign Currency Exchange RiskThe majority of our transactions occur in U.S. dollars. However, we do have certain transactions that aredenominated in currencies other than the U.S. dollar, primarily, Swiss francs and the euro, and we therefore are subject toforeign exchange risk. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts ofexpenses, assets and liabilities. During the year ended December 31, 2018, we entered into forward currency exchangecontracts denominated in Swiss francs, that are not designated as cash flow hedges, to secure a foreign currency exchange rateto minimize cash flow exposure to fluctuating exchange rates.We do not use derivative financial instruments for speculative trading purposes, nor do we hedge foreign currencyexchange rate exposure in a manner that entirely offsets the earnings effects of changes in foreign currency exchange rates.The counterparty to these forward foreign currency exchange contracts is a creditworthy commercial bank, which minimizesthe risk of counterparty nonperformance.As of December 31, 2018, we had open forward foreign currency exchange contracts with notional amounts of $3.4million. A hypothetical 10% strengthening in foreign currency exchange rates compared with the U.S. dollar relative toexchange rates at December 31, 2018 would have resulted in a reduction in the value of the Swiss francs, expressed in U.S.Dollars, of approximately $0.4 million which would negatively affect earnings during the remaining life of the contracts.77 Table of Contents ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAARDELYX, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSReport of Independent Registered Public Accounting Firm 79Audited Financial Statements Consolidated Balance Sheets 80Consolidated Statements of Operations and Comprehensive Loss 81Consolidated Statements of Stockholders’ Equity 82Consolidated Statements of Cash Flows 83Notes to Consolidated Financial Statements 84 78 Table of ContentsReport of Independent Registered Public Accounting FirmTo the Stockholders and the Board of Directors of Ardelyx, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Ardelyx, Inc. (the Company) as of December 31,2018 and 2017, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cashflows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all materialrespects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cashflows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally acceptedaccounting principles.Adoption of ASU No. 2014-09 As discussed in Note 2 to the consolidated financial statements, the Company changed its method for recognizingrevenue as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts withCustomers (Topic 606), and the related amendments effective January 1, 2018. Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express anopinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect tothe Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities andExchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. As part of our audits we are required to obtain an understanding of internal control overfinancial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements,whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, ona test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluatingthe accounting principles used and significant estimates made by management, as well as evaluating the overall presentationof the financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ Ernst & Young LLPWe have served as the Company’s auditor since 2009.Redwood City, CaliforniaMarch 6, 2019 79 Table of ContentsARDELYX, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share amounts) December 31, 2018 2017 Assets Current assets: Cash and cash equivalents $78,768 $75,383Short-term investments 89,321 58,593Accounts receivable 85 10,796Unbilled license revenue 5,000 —Prepaid expenses and other current assets 3,197 4,940Total current assets 176,371 149,712Property and equipment, net 5,611 8,032Other assets 1,350 159Total assets $183,332 $157,903Liabilities and stockholders’ equity Current liabilities: Accounts payable $1,148 $3,933Accrued compensation and benefits 2,723 3,229Uncharged license fees 1,000 —Accrued and other liabilities 12,857 10,709Total current liabilities 17,728 17,871Loan payable, long term 49,209 —Other long-term liabilities 582 720Total liabilities 67,519 18,591Commitments and contingencies Stockholders’ equity: Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued andoutstanding as of December 31, 2018 and December 31, 2017, respectively. — —Common stock, $0.0001 par value; 300,000,000 shares authorized; 62,516,627 and47,534,979 shares issued and outstanding as of December 31, 2018 and December 31, 2017,respectively. 6 5Additional paid-in capital 481,357 417,568Accumulated deficit (365,512) (278,214)Accumulated other comprehensive loss (38) (47)Total stockholders’ equity 115,813 139,312Total liabilities and stockholders’ equity $183,332 $157,903 See accompanying notes.80 Table of ContentsARDELYX, INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(in thousands, except share and per share amounts) Year Ended December 31, 2018 2017 2016Revenues: Licensing revenue $2,320 $42,000 $ —Other revenue 287 — —Total revenues 2,607 42,000 —Cost of revenue 466 8,400 —Gross profit 2,141 33,600 —Operating expenses: Research and development 69,373 75,484 94,161General and administrative 23,715 23,231 18,734Total operating expenses 93,088 98,715 112,895Loss from operations (90,947) (65,115) (112,895)Interest expense (3,534) — —Other income (expense), net 3,187 1,955 508Loss before provision for income taxes (91,294) (63,160) (112,387)Provision for income taxes 4 1,179 —Net loss $(91,298) $(64,339) $(112,387)Net loss per common share, basic and diluted $(1.62) $(1.36) $(2.80)Shares used in computing net loss per share - basic and diluted 56,219,919 47,435,331 40,118,522Comprehensive loss: Net loss $(91,298) $(64,339) $(112,387)Unrealized gain (loss) on available-for-sale securities, net of tax 9 24 (71)Comprehensive loss $(91,289) $(64,315) $(112,458) See accompanying notes. 81 Table of ContentsARDELYX, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands, except share amounts) Accumulated Additional Other Total Common Stock Paid-In Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income (Loss) EquityBalance as of December 31, 2015 25,964,886 $ 3 $210,386 $(101,488) $ — $108,901Issuance of common stock inconnection with PIPE, net of expensesof $263 12,600,230 1 109,735 — — 109,736Issuance of common stock inconnection with public offering, net ofexpenses of $5,413 8,625,000 1 80,836 — — 80,837Issuance of common stock underemployee stock purchase plan 69,054 — 576 — — 576Issuance of common stock for services 20,118 — 187 — — 187Issuance of common stock uponexercise of options 25,134 — 55 — — 55Issuance of common stock uponvesting of restricted stock units 5,000 — — — — —Stock-based compensation — — 5,317 — — 5,317Other comprehensive loss — — — — (71) (71)Net loss — — — (112,387) — (112,387)Balance as of December 31, 2016 47,309,422 $ 5 $407,092 $(213,875) $(71) $193,151Issuance of common stock underemployee stock purchase plan 99,343 — 623 — — 623Issuance of common stock for services 46,858 — 201 — — 201Issuance of common stock uponexercise of options 35,759 — 62 — — 62Issuance of common stock uponvesting of restricted stock units 43,597 — — — — —Stock-based compensation — — 9,590 — — 9,590Other comprehensive income — — — — 24 24Net loss — — — (64,339) — (64,339)Balance as of December 31, 2017 47,534,979 $ 5 $ 417,568 $(278,214) $(47) $139,312Issuance of common stock underemployee stock purchase plan 120,959 — 491 — — 491Issuance of common stock for services 75,183 — 303 — — 303Issuance of common stock uponexercise of options — — — — — —Issuance of common stock uponvesting of restricted stock units 410,506 — — — — —Stock-based compensation — — 9,226 — — 9,226Other comprehensive income — — — — 9 9Issuance of common stock uponunderwritten public offering 14,375,000 1 53,769 — — 53,770Adoption of ASU No. 2014-09 onJanuary 1, 2018 — — — 4,000 — 4,000Net loss — — — (91,298) — (91,298)Balance as of December 31, 2018 62,516,627 $ 6 $ 481,357 $(365,512) $(38) $115,813 See accompanying notes.82 Table of ContentsARDELYX, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2018 2017 2016Operating activities Net loss$(91,298) $(64,339) $(112,387)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 2,678 2,639 1,295Amortization of deferred financing costs 236 375 346Amortization of deferred compensation for services 253 192 194Amortization of premium on investment securities (1,136) 11 (86)Stock-based compensation 9,226 9,590 5,317Change in derivative liabilities 111 — —Non-cash interest associated with debt discount accretion 303 — —Changes in operating assets and liabilities: Accounts receivable 10,711 (10,796) —Prepaid expenses and other assets 525 (2,148) 1,562Accounts payable (2,730) (1,027) 2,148Accrued compensation and benefits (506) 68 795Accrued and other liabilities 1,353 245 8,282Net cash used in operating activities (70,274) (65,190) (92,534)Investing activities Proceeds from maturities of investments 138,600 133,701 7,600Sales and redemptions of investments 850 17,957 —Purchases of investments (169,033) (84,013) (133,810)Purchases of property and equipment (311) (2,355) (4,866)Net cash (used in) provided by investing activities (29,894) 65,290 (131,076)Financing activities Proceeds from loan payable, net of issuance costs 49,292 — —Proceeds from issuance of common stock, net of issuance costs 53,770 — 190,573Proceeds from issuance of common stock under stock plans 491 685 631Net cash provided by financing activities 103,553 685 191,204Net decrease in cash and cash equivalents 3,385 785 (32,406)Cash and cash equivalents at beginning of period 75,383 74,598 107,004Cash and cash equivalents at end of period$78,768 $75,383 $74,598Supplementary disclosure of cash flow information: Income taxes paid$ 4 $ 3 $ —Supplementary disclosure of non-cash financing information: Issuance of derivative in connection with issuance of loan payable 546 — —Acquisition of property and equipment included in accounts payable and accruedliabilities$ — $55 $730Services settled through the issuance of common stock$303 $201 $187 See accompanying notes. 83 Table of ContentsARDELYX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. ORGANIZATION AND BASIS OF PRESENTATIONArdelyx, Inc., or “the Company,” is a specialized biopharmaceutical company focused on developing first-in-classmedicines to improve treatment choices for people with cardiorenal disease. Tenapanor, a first-in-class inhibitor of NHE3, isbeing evaluated in a second Phase 3 clinical trial for the treatment of hyperphosphatemia in patients with end-stage renaldisease, or ESRD, who are on dialysis and in an additional Phase 3 clinical trial as an adjunctive therapy with phosphatebinders in the same patient population. The Company is also advancing a small molecule potassium secretagogue program,RDX013, for the potential treatment of hyperkalemia. In November 2018, the Company obtained acceptance of its New DrugApplication, or NDA, from the United States Food and Drug Administration, or FDA, for tenapanor for the treatment of peoplewith irritable bowel syndrome with constipation, or IBS-C.The Company operates in only one business segment, which is the development of biopharmaceutical products.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of PresentationThe accompanying consolidated financial statements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“U.S. GAAP”).Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of Ardelyx and its wholly-ownedsubsidiary, Ardelyx Cayman Islands, which was placed into voluntary liquidation in December 2017. Intercompanytransactions and balances have been eliminated upon consolidation.Use of EstimatesThe preparation of consolidated financial statements in conformity with U.S. GAAP requires management to makeestimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes.On an ongoing basis, management evaluates its estimates, including those related to recognition of revenue, clinical trialaccruals, contract manufacturing accruals, fair value of assets and liabilities, income taxes and stock-based compensation.Management bases its estimates on historical experience and on various other market-specific and relevant assumptions thatmanagement believes to be reasonable under the circumstances. Actual results could materially differ from those estimates.LiquidityThe Company has never been profitable on an annual basis and, as of December 31, 2018, the Company has anaccumulated deficit of $365.5 million. The Company has incurred net losses of approximately $91.3 million, $64.3 millionand $112.4 million in the years ended December 31, 2018, 2017 and 2016, respectively. The Company expects to continueto incur net operating losses for the foreseeable future, as the Company continues the development of, seeks regulatoryapproval for, and if approved, begins to commercialize and manufacture tenapanor, either directly by the Company orthrough one or more of its collaboration partners. The Company will need additional funding to support its future operatingactivities and adequate funding may not be available to the Company on acceptable terms, or at all. The Company’s failureto obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the business, results ofoperations, and financial condition. The Company will need to generate significant revenues to achieve profitability andmay never do so. The Company believes that its current available cash, cash equivalents and short-term investments will besufficient to fund its planned expenditures and meet the Company’s obligations for at least 12 months following its financialstatement issuance date.84 Table of ContentsCash and Cash EquivalentsThe Company considers all highly liquid investments purchased with an original maturity date of 90 days or less onthe date of purchase to be cash equivalents.Short-Term InvestmentsShort-term investments consist of debt securities classified as available-for-sale and have maturities greater than90 days, but less than one year, from the date of acquisition. Short-term investments are carried at fair value based uponquoted market prices. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reportedas a component of accumulated other comprehensive loss. The cost of available-for-sale securities sold is based on thespecific-identification method.Concentration of Credit RiskFinancial instruments that potentially subject the Company to significant concentrations of credit risk consistprimarily of cash, cash equivalents, short-term investments and accounts receivable. The Company is exposed to credit risksin the event of default by the counterparties to the extent of the amount recorded in its consolidated balance sheet. Cash,cash equivalents and short-term investments are invested through banks and other financial institutions in the United States.Accounts ReceivableAn allowance for doubtful accounts will be recorded based on a combination of historical experience, aginganalysis, and information on specific accounts. Account balances will be written off against the allowance after all means ofcollection have been exhausted and the potential for recovery is considered remote. No provision was made for doubtfulaccounts as of December 31, 2018 or 2017.Property and EquipmentProperty and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation iscomputed using the straight-line method over the estimated useful lives of the respective assets, generally three to five years.Leasehold improvements are amortized over the lesser of the estimated useful lives or the related remaining lease term.Impairment of Long-Lived AssetsThe carrying value of long-lived assets, including property and equipment, are reviewed for impairment wheneverevents or changes in circumstances indicate that the asset may not be recoverable. An impairment loss is recognized when thetotal of estimated future undiscounted cash flows, expected to result from the use of the asset and its eventual disposition, areless than its carrying amount. Impairment, if any, would be assessed using discounted cash flows or other appropriatemeasures of fair value. Through December 31, 2018, there have been no such impairment losses.Income TaxesThe Company uses the asset and liability method of accounting for income taxes. Under this method, deferred taxassets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets andliabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected toreverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset willnot be realized.85 Table of ContentsRevenue RecognitionOn January 1, 2018 the Company adopted the new standard for Revenue from Contracts with Customers, ASC 606,on a modified retrospective method as an adjustment to the opening balance of retained earnings of the annual reportingperiod. As a result of the adoption of the new standard, on January 1, 2018, the Company recorded the following: (i) anincrease in current assets of $5.0 million representing a future receivable related to the first milestone under the Company’slicense agreement with Kyowa Hakko Kirin Co., Ltd., or KHK, that KHK achieved in February 2019, (ii) an increase incurrent liabilities of $1.0 million representing a future payable related to the corresponding payment to AstraZeneca AB, orAstraZeneca, in accordance with the Company’s termination agreement with AstraZeneca and (iii) a related decrease in itsaccumulated deficit of approximately $4.0 million as the new standard permits revenue from milestones that possess certaincriteria to be recognized earlier as the new standard contains different recognition criteria related to milestones than underthe previous standard, Revenue Recognition, Multiple-Element Arrangements - Licensing revenues, ASC 605. The Company enters into licensing agreements which are within the scope of ASC 606, under which it licensescertain rights to its product candidates to third parties. The terms of these arrangements typically include payment to theCompany of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercialmilestone payments; and future royalties on net sales of licensed products. Each of these payments results in license,collaboration and other revenues, except for revenues from royalties on net sales of licensed products, which are classified asroyalty revenues.In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of itsagreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract;(ii) determination of whether the promised goods or services are performance obligations including whether they are distinctin the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration;(iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) theCompany satisfies each performance obligation. As part of the accounting for these arrangements, the Company mustdevelop assumptions that require judgment to determine the stand-alone selling price for each performance obligationidentified in the contract. The Company uses key assumptions to determine the stand-alone selling price, which may includeforecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities oftechnical and regulatory success.Milestone Payments: At the inception of each arrangement that includes development milestone payments, theCompany evaluates whether the milestones are considered probable of being reached and estimates the amount to beincluded in the transaction price using the most likely amount method. Amounts of variable consideration are included inthe transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenuerecognized will not occur and when the uncertainty associated with the variable consideration is subsequentlyresolved. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals,are not considered probable of being achieved until those approvals are received. The transaction price is then allocated toeach performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as orwhen the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, theCompany re-evaluates the probability of achievement of such development milestones and any related constraint, and ifnecessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-upbasis, which would affect license, collaboration and other revenues and earnings in the period of adjustment.Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drugproduct for either clinical development or commercial supply at the customer’s discretion are generally considered asoptions. The Company assess if these options provide a material right to the licensee and if so, they are accounted for asseparate performance obligations. If the Company is entitled to additional payments when the customer exercises theseoptions, any payments are recorded in other revenues when the customer obtains control of the goods, which is upondelivery.Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level ofsales, and the license is deemed to be the predominant item to which the royalties relate, the Company86 Table of Contentsrecognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some orall of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized anyroyalty revenue resulting from any of its licensing arrangements.Research and Development CostsResearch and development costs are charged to expense as incurred and consist of costs incurred to further theCompany’s research and development activities including salaries and related employee benefits, costs associated withclinical trials, costs related to pre-commercialization manufacturing activities such as manufacturing process validationactivities and the manufacturing of clinical drug supply, nonclinical research and development activities, regulatoryactivities, research-related overhead expenses and fees paid to external service providers and contract research andmanufacturing organizations that conduct certain research and development activities on behalf of the Company.Accrued Research and Development ExpensesAs part of the process of preparing its financial statements, the Company is required to estimate its accrued expenses.This process involves reviewing open contracts and purchase orders, communicating with its personnel to identify servicesthat have been performed on its behalf and estimating the level of service performed and the associated cost incurred for theservice when the Company has not yet been invoiced or otherwise notified of the actual cost. The majority of the Company’sservice providers submit its monthly invoices in arrears for services performed or when contractual milestones are met. TheCompany makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts andcircumstances known to the Company at that time. The Company periodically confirms the accuracy of its estimates with theservice providers and makes adjustments if necessary. Examples of estimated accrued research and development expensesinclude fees paid to:·contract research organizations, or CROs, in connection with clinical studies;·investigative sites in connection with clinical studies;·vendors related to product manufacturing, development and distribution of clinical supplies; and·vendors in connection with preclinical development activities.The Company records expenses related to clinical studies and manufacturing development activities based on itsestimates of the services received and efforts expended pursuant to contracts with multiple CROs and manufacturing vendorsthat conduct and manage these activities on its behalf. The financial terms of these agreements are subject to negotiation,vary from contract to contract, and may result in uneven payment flows. There may be instances in which payments made tothe Company’s vendors will exceed the level of services provided and result in a prepayment of the expense. Payments undersome of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trialmilestones. In accruing service fees, the Company estimates the time period over which services will be performed,enrollment of subjects, number of sites activated and the level of effort to be expended in each period. If the actual timing ofthe performance of services or the level of effort varies from the Company’s estimate, the Company will adjust the accrued orprepaid expense balance accordingly. To date, there have been no material differences from the Company’s estimates to theamounts actually incurred.Stock-Based CompensationThe Company recognizes compensation expense for all stock-based payment awards made to employees anddirectors based on estimated fair values. For employee stock options, the Company determines the grant date fair value of theawards using the Black-Scholes option-pricing model and generally recognizes the fair value as stock-based compensationexpense on a straight-line basis over the vesting period of the respective awards. For restricted stock and performance-basedrestricted stock, to the extent they are probable, the compensation cost for these awards is based on the closing price of theCompany’s common stock on the date of grant and recognized as compensation expense on a straight-line basis over therequisite service period. Stock-based compensation expense is based on the value of the87 Table of Contentsportion of stock-based payment awards that is ultimately expected to vest. As such, the Company’s stock-basedcompensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods ifactual forfeitures differ from those estimates.The Company accounts for equity instruments issued to nonemployees based on their fair values on themeasurement dates using the Black-Scholes option-pricing model. The estimated fair values of the options granted tononemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options withvesting conditions is affected each reporting period by changes in the fair value of the Company’s common stock.Derivatives and Hedging ActivitiesThe Company accounts for its derivative instruments as either assets or liabilities on the consolidated balance sheetand measures them at fair value. Derivatives are adjusted to fair value through other (expense) income, net in theconsolidated statements of operations and comprehensive loss.Comprehensive LossComprehensive loss is composed of two components: net loss and other comprehensive income (loss). Othercomprehensive income (loss) refers to gains and losses that under U.S. GAAP are recorded as an element of stockholders’equity, but are excluded from net loss.Net Loss per ShareBasic net loss per common share is calculated by dividing the net loss by the weighted-average number of commonshares outstanding during the period, without consideration of potential common shares. Diluted net loss per common sharein the periods presented is the same as basic net loss per common share, since the effects of potentially dilutive securities areantidilutive due to the net loss for all periods presented.Recent Accounting PronouncementsNew Accounting Pronouncements - Recently AdoptedIn August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirementscertain disclosure rules. Among the amendments is the requirement to present an analysis of changes in stockholders’ equityin the interim financial statements included in quarterly reports on Form 10-Q. The analysis, which can be presented as afootnote or separate statement, is required for the current and comparative quarter and year-to-date interim periods. Theamendments are effective for all filings made on or after November 5, 2018. In light of the anticipated timing of effectivenessof the amendments and expected proximity of effectiveness to the filing date for most filers’ quarterly reports, the SEC’sDivision of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, or CDI –Question 105.09, that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states thatthe SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Qfor the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendmentson November 5, 2018 and will present the analysis of changes in stockholders’ equity in its interim financial statements in itsMarch 31, 2019 Form 10-Q. The Company does not anticipate that the adoption of these SEC amendments will have amaterial effect on the Company’s financial position, results of operations, cash flows or shareholders’ equity.In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU,No. 2014-09, which amends the guidance for accounting for revenue from contracts with customers. This ASU supersedes therevenue recognition requirements in Topic 605, Revenue Recognition, and creates a new Topic 606, Revenue from Contractswith Customers. In 2015 and 2016, the FASB issued additional ASUs related to Topic 606 that delayed the effective date ofthe guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations,identifying performance obligations, and licensing, and they include other improvements88 Table of Contentsand practical expedients. The Company adopted this new standard on January 1, 2018 using the modified retrospectivetransition method.Impact of AdoptionThe Company, on adopting Topic 606 on January 1, 2018, has used the modified retrospective transition methodwith the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings ofthe annual reporting period that includes the date of initial application. The following adjustments were recorded in theopening balance on January 1, 2018. December 31, Adjustments January 1, 2017 Due to Topic 606 2018Total current assets $ — 5,000 $5,000Total current liabilities — 1,000 1,000Accumulated deficit $ — 4,000 $4,000 As a result of adopting Topic 606 on January 1, 2018, the following financial statement line items in the Company’sConsolidated Balance Sheet at December 31, 2018 and the Consolidated Statement of Income for the year ended December31, 2018 were affected. December 31, 2018 As Reported Under Topic 605 Effect of ChangeTotal current assets $176,371 171,371 $5,000Total current liabilities 17,728 16,728 1,000Accumulated deficit (365,512) (369,512) 4,000 Year Ended December 31, 2018 As Reported Under Topic 605 Effect of ChangeRevenue: Licensing revenue $2,320 2,320 $ —Other revenue 287 287 —Cost of revenue 466 466 — In May 2017, FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718) - Scope ofModification Accounting (ASU 2017-09). The amendments included in this update provide guidance about which changesto the terms or conditions of a share-based payment award require an entity to apply modification accounting. Theamendments in this update will be applied prospectively to an award modified on or after the adoption date. New Accounting Pronouncements – Adoption on January 1, 2019 In February 2016, the FASB issued ASU No. 2016-02—Leases, (Topic 842) (ASU 2016-02), as amended, whichgenerally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on thebalance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arisingfrom leasing arrangements. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, orASU No. 2018-11. In issuing ASU No. 2018-11, the FASB is permitting another transition method for ASU 2016-02, whichallows the transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance ofretained earnings in the period of adoption. We will elect this transition method and package of practical expedientspermitted under the transition guidance, which allows us to carryforward our historical lease classification, our assessment onwhether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the newstandard. We will also elect to combine lease and non-lease components and to keep leases with an initial term of 12 monthsor less off the balance sheet and recognize the associated lease payments in the statements of operations on a straight-linebasis over the lease term. We will adopt the ASU on January 1, 2019 using a modified retrospective approach and arefinalizing our assessment of the impact of the adoption of the ASU and expect to record a right-of-use asset and a89 Table of Contentscorresponding lease liability to account for our facility lease as a cumulative-effect adjustment to the opening balance ofaccumulated deficit in the period of adoption. In June 2018, the FASB issued ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to NonemployeeShare-Based Payment Accounting. ASU 2018-07 is intended to reduce the cost and complexity and to improve financialreporting for nonemployee share-based payments. ASU 2018-07 expands the scope of Topic 718, Compensation-StockCompensation (which currently only includes share-based payments to employees) to include share-based payments issuedto nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees andemployees will be substantially aligned. ASU 2018-07 supersedes Subtopic 505-50, Equity-Based Payments to Non-Employees. ASU 2018-07 is effective for the Company for fiscal years beginning after December 15, 2018, including interimperiods within that fiscal year and early adoption is permitted. The Company assessed there will be no material impact of thisstandard on its consolidated financial statements.New Accounting Pronouncements Not Yet AdoptedIn August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 considers cost and benefits, andremoves, modifies and adds disclosure requirements in Topic 820. The amendments on changes in unrealized gains andlosses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements,and the narrative description of measurement uncertainty is to be applied prospectively for only the most recent interim orannual period presented in the initial fiscal year of adoption. All other amendments are to be applied retrospectively to allperiods presented. ASU 2018-13 is effective for the Company for fiscal years beginning after December 15, 2019, includinginterim periods within that fiscal year and early adoption is permitted. The Company is currently assessing the impact of thisstandard on its consolidated financial statements.The Company has reviewed all other significant newly-issued accounting pronouncements and concluded that theyeither are not applicable to the Company’s operations or no material effect is expected on its consolidated financialstatements as a result of future adoption. 3. CASH, CASH EQUIVALENTS AND INVESTMENTSSecurities classified as cash, cash equivalents and short-term investments as of December 31, 2018 andDecember 31, 2017 are summarized below (in thousands). Estimated fair value is based on quoted market prices for theseinvestments. December 31, 2018 Gross Unrealized Amortized Cost Gains Losses Fair ValueCash and cash equivalents: Cash $3,733 — — $3,733Money market funds 73,238 — — 73,238Commercial paper 1,797 — — 1,797Total cash and cash equivalents $78,768 $ — $ — $78,768Short-term investments U.S. treasury securities 3,996 — — 3,996Corporate bonds 34,611 — (21) 34,590Commercial paper 41,371 — (14) 41,357Asset-backed securities 9,381 — (3) 9,378Total short-term investments $89,359 $ — $(38) $89,321Total cash equivalents and investments $168,127 $ — $(38) $168,089 90 Table of Contents December 31, 2017 Gross Unrealized Amortized Cost Gains Losses Fair ValueCash and cash equivalents: Cash $5,882 $ — $ — $5,882Money market funds 68,651 — — 68,651Commercial paper 850 — — 850Total cash equivalents and investments $75,383 $ — $ — $75,383Short-term investments U.S. treasury securities $3,994 — (1) $3,993Corporate bonds 26,853 — (26) 26,827Commercial paper 19,584 — (14) 19,570Asset-backed securities 8,209 — (6) 8,203Total short-term investments $58,640 $ — $(47) $58,593Total cash equivalents and investments $134,023 $ — $(47) $133,976 Cash equivalents consist of money market funds and other debt securities with original maturities of three months orless at the time of purchase, and the carrying amount is a reasonable approximation of fair value. The Company invests itscash in high quality securities of financial and commercial institutions. These securities are carried at fair value, which isbased on readily available market information, with unrealized gains and losses included in “accumulated othercomprehensive loss” within stockholders’ equity on the Company’s consolidated balance sheets. The Company uses thespecific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realizedgains or losses have been insignificant and are included in “other income (expense), net” in the consolidated statement ofoperations.All available-for-sale securities held as of December 31, 2018 and 2017, had contractual maturities of less thanone year. The Company’s available-for-sale securities are subject to a periodic impairment review. The Company considers adebt security to be impaired when its fair value is less than its carrying cost, in which case the Company would further reviewthe investment to determine whether it is other-than-temporarily impaired. When the Company evaluates an investment forother-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value hasbeen below cost basis, the financial condition of the issuer and any changes thereto, intent to sell, and whether it is morelikely than not the Company will be required to sell the investment before the recovery of its cost basis. If an investment isother-than-temporarily impaired, the Company writes it down through the statement of operations to its fair value andestablishes that value as a new cost basis for the investment. The Company did not identify any of its available-for-salesecurities as other-than-temporarily impaired in any of the periods presented. As of December 31, 2018 and 2017, noinvestment was in a continuous unrealized loss position for more than one year and the Company believes that it is morelikely than not that the investments will be held until maturity or a forecasted recovery of fair value.4. FAIR VALUE MEASUREMENTSFair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exitprice) in the principal or most advantageous market for the asset or liability in an orderly transaction between marketparticipants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observableinputs and minimize the use of unobservable inputs.The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:Level 1 – Valuations are based on quoted prices in active markets for identical assets or liabilities and readilyaccessible by the Company at the reporting date. Examples of assets and liabilities utilizing Level 1inputs are certain money market funds, U.S. treasuries and trading securities with quoted prices onactive markets.91 Table of ContentsLevel 2 – Valuations based on inputs other than Level 1 that are observable, either directly or indirectly, suchas quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or otherinputs that are observable or can be corroborated by observable market data for substantially the fullterm of the assets or liabilities. Examples of assets and liabilities utilizing Level 2 inputs arecorporate bonds, commercial paper, certificates of deposit and over-the-counter derivatives.Level 3 – Valuations based on unobservable inputs in which there is little or no market data, which require theCompany to develop its own assumptions.The following table sets forth the fair value of the Company’s financial assets measured on a recurring basis by levelwithin the fair value hierarchy: December 31, 2018 Total Level 1 Level 2 Level 3Assets: Money market funds $73,238 $73,238 $ — $ —U.S. treasury securities 3,996 3,996 — —Corporate bonds 34,590 — 34,590 —Commercial paper 43,154 — 43,154 —Asset-backed securities 9,378 — 9,378 —Total $164,356 $77,234 $87,122 $ — Liabilities: Derivative liability for exit fee $533 $ — $ — $533Foreign currency derivative contracts 52 $ — $52 $ —Total $585 $ — $52 $533 December 31, 2017 Total Level 1 Level 2 Level 3Assets: Money market funds $68,651 $68,651 $ — $ —U.S. treasury securities 3,993 3,993 — —Corporate bonds 26,827 — 26,827 —Commercial paper 20,420 — 20,420 —Asset-backed securities 8,203 — 8,203 —Total $128,094 $72,644 $55,450 $ — Where quoted prices are available in an active market, securities are classified as Level 1. The Company classifiesmoney market funds and U.S. treasury securities as Level 1. When quoted market prices are not available for the specificsecurity, the Company estimates fair value by using benchmark yields, reported trades, broker/dealer quotes and issuerspreads. The Company classifies corporate bonds, commercial paper, asset-backed securities and foreign currency derivativecontracts as Level 2. In certain cases, where there is limited activity or less transparency around inputs to valuation, securitiesare classified as Level 3. There were no transfers between Level 1 and Level 2 during the periods presented.In May 2018, pursuant to the loan and security agreement with Solar Capital Ltd. and Western Alliance Bank (see“Note 6. Borrowings”), the Company entered into an Exit Fee Agreement under which the Company agreed to pay $1.5million in cash, or the Exit Fee, upon any change of control transaction in respect of the Company or if the Company obtainsboth (i) FDA approval of tenapanor in the treatment of hyperphosphatemia in ESRD patients on dialysis and (ii) FDAapproval of tenapanor for the treatment of patients with IBS-C. Notwithstanding the prepayment or termination of the TermLoan, the Company’s obligation to pay the Exit Fee will expire May 16, 2028. The Company evaluated that the Exit Fee is afreestanding derivative which should be accounted for at fair value on a recurring basis. The estimated fair value of the ExitFee is recorded as a derivative liability and included in accrued and other liabilities on the accompanying92 Table of Contentsconsolidated balance sheet. As of December 31, 2018, the estimated fair value of the Exit Fee was determined to be$533,000, a decrease of $13,000 compared with $546,000, the initial estimated fair value in May 2018, primarily as a resultof changes to the inputs in the calculation including the estimated timing of payment and the time value of money, which ispresented as a component of change in derivative liabilities in the Company’s consolidated statements of operations.The fair value of the derivative liability was determined using a discounted cash flow analysis and is classified as aLevel 3 measurement within the fair value hierarchy since the Company’s valuation utilized significant unobservable inputs.Specifically, the key assumptions included in the calculation of the estimated fair value of the derivative instrument include:i) the Company’s estimates of both the probability and timing of a potential $1.5 million payment to Solar Capital Ltd. andWestern Alliance Bank as a result of the FDA approvals, and ii) a discount rate which was derived from the Company'sestimated cost of debt. Generally, increases or decreases in the probability of occurrence would result in a directionallysimilar impact in the fair value measurement of the derivative instrument and it is estimated that a 10% increase (decrease) inthe probability of occurrence would result in a fair value fluctuation of approximately $0.1 million.Changes in the fair value of recurring measurements included in Level 3 of the fair value hierarchy are presented aschanges in derivative liabilities for Exit Fee in the Company's consolidated statements of operations and were as follows forthe year ended December 31, 2018 (in thousands): Estimated Fair Value of Derivative LiabilityBalance of Level 3 Liabilities at December 31, 2017 $ —Initial estimated fair value of derivative liability for exit fee 546Change in estimated fair value of derivative liability for exit fee (13)Balance of Level 3 Liabilities at December 31, 2018 $533 The carrying amounts reflected in the balance sheets for cash equivalents, short-term investments, accountsreceivable, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values atboth December 31, 2018 and December 31, 2017, due to their short-term nature. 5. DERIVATIVE FINANCIAL INSTRUMENTS Foreign Currency Exchange Rate Exposure The Company uses forward foreign currency exchange contracts to secure a foreign currency exchange rate when acontract is executed involving payment in a foreign currency in order to minimize cash flow exposure to fluctuatingexchange rates. Such exposure results from portions of the Company’s forecasted cash outflows being denominated incurrencies other than the U.S. dollar, primarily the Swiss franc. The derivative instruments the Company uses to hedge thisexposure are not designated as cash flow hedges, and as a result, changes in their fair value are recorded in other income(expense), net, on the Company's consolidated statements of operations and comprehensive loss. The fair values of forward foreign currency exchange contracts are estimated using current exchange rates andinterest rates and take into consideration the current creditworthiness of the counterparties. Information regarding the specificinstruments used by the Company to hedge its exposure to foreign currency exchange rate fluctuations is provided below. 93 Table of ContentsThe following table summarizes the Company’s forward foreign currency exchange contracts outstanding as ofDecember 31, 2018 (notional amounts in thousands): Aggregate Notional Amount in Foreign Foreign Exchange Contracts Number of Contracts Currency MaturitySwiss francs 1 3,281 March 2019Total 1 The maximum length of time over which the Company is hedging its exposure to changes in exchange rates is March2019. The derivative liability balance of $51,756 is recorded in accrued and other liabilities on the consolidated balance sheetas of December 31, 2018, and the net loss associated with the Company's derivative instruments of $124,194 is recognized inother (expense) income, net on the consolidated statement of operations and comprehensive loss for the year endedDecember 31, 2018. There were no expenses related to such derivative instruments during 2017 and 2016. As of December 31, 2018, we had open forward foreign currency exchange contracts with notional amounts of $3.4million.6. BORROWINGS Solar Capital and Western Alliance Bank Loan Agreement On May 16, 2018, the Company entered into a loan and security agreement, or the Loan Agreement, with SolarCapital Ltd. and Western Alliance Bank, or collectively the Lenders. The Loan Agreement provides for a $50.0 million termloan facility with a maturity date of November 1, 2022, or the Term Loan. The full amount of the loan was funded onMay 16, 2018. The Company received net proceeds from the loan of approximately $49.3 million, after deducting theclosing fee, legal expenses and issuance cost. Borrowings under the Term Loan bear interest at a floating per annum rate equal to 7.45% plus the one-monthLIBOR. The Company is permitted to make interest-only payments on the Term Loan through June 1, 2020, unless theCompany achieves its primary endpoint in the Phase 3 study of tenapanor for the treatment of hyperphosphatemia in end-stage renal disease patients on dialysis, prior to June 1, 2020, in which case the Company is permitted to make interest-onlypayments on the Term Loan through December 1, 2020. Accordingly, beginning on either June 1, 2020 or December 1,2020, as applicable, through the maturity date, the Company will be required to make monthly payments of interest plusrepayment of the Term Loan in consecutive equal monthly installments of principal. The Company paid a closing fee of 1%of the Term Loan, or $0.5 million, upon the closing of the Term Loan. The Company is obligated to pay a final fee equal to3.95% of the Term Loan upon the earliest to occur of the maturity date, the acceleration of the Term Loan, the prepayment orrepayment of the Term Loan or the termination of the Loan Agreement. The Company may voluntarily prepay theoutstanding Term Loan, subject to a prepayment premium of (i) 3% of the principal amount of the Term Loan if prepaid priorto or on the first anniversary of the Closing Date, (ii) 2% of the principal amount of the Term Loan if prepaid after the firstanniversary of the Closing Date through and including the second anniversary of the Closing Date, or (iii) 1% of theprincipal amount of the Term Loan if prepaid after the second anniversary of the Closing Date and prior to the maturity date. The Term Loan is secured by substantially all the Company’s assets, except for our intellectual property and certain othercustomary exclusions. Additionally, in connection with the Term Loan, the Company entered into an Exit Fee Agreement,whereby the Company agreed to pay an exit fee in the amount of 3% of the Term Loan, or the Exit Fee, upon any change ofcontrol transaction in respect of the Company or if the Company obtains both (i) FDA approval of tenapanor in the treatmentof hyperphosphatemia in ESRD patients on dialysis and (ii) FDA approval of tenapanor for the treatment of patients withIBS-C. Notwithstanding the prepayment or termination of the Term Loan, the obligation to pay the Exit Fee will expire 10years from the Closing Date. The Loan Agreement contains customary representations and warranties and customary affirmative and negativecovenants. Additionally, if the Company elects to enter into an exclusive license agreement for the use of its intellectual94 Table of Contentsproperty in the United States (other than for tenapanor for hyperphosphatemia or for our FXR and TGR5 agonist programs)and has not obtained the written consent of the Lenders to enter into such license agreement, the Company has agreed tomaintain unrestricted cash and cash equivalents of at least $50.0 million, until the Company achieves its primary endpoint inthe second Phase 3 study of tenapanor for the treatment of hyperphosphatemia in end-stage renal disease patients on dialysis.As of December 31, 2018, the Company was in compliance with all of the covenants set forth in the Loan Agreement. In addition, the Loan Agreement contains customary events of default that entitle the Lender to cause theCompany’s indebtedness under the Loan Agreement to become immediately due and payable, and to exercise remediesagainst the Company and the collateral securing the Term Loan, including our cash. Upon the occurrence and for theduration of an event of default, an additional default interest rate equal to 4.0% per annum will apply to all obligations owedunder the Loan Agreement. As of December 31, 2018, to the Company’s knowledge, there were no facts or circumstances inexistence giving rise to an event of default. As of December 31, 2018, assuming the principal payments start on December 1, 2020, the Company’s future debtpayment obligations towards the principal and final fee, excluding interest payments and exit fee, for the respective fiscalyears are as follows (in thousands): 2019 $ —2020 2,0832021 25,0002022 24,892Total principal and final fee payments 51,975Less: Unamortized discount and debt issuance costs (1,094)Less: Unaccreted value of final fee (1,672)Loan payable, long term $49,209 7. SHAREHOLDERS EQUITY On May 22, 2018, the Company entered into an underwriting agreement with Jefferies LLC and Leerink PartnersLLC, as representatives of several underwriters, or collectively the Underwriters, pursuant to which the Company agreed toissue and sell 12,500,000 shares of its common stock, par value $0.0001 per share, or Common Stock, to the Underwriters, orthe Offering. The shares were sold at a public offering price of $4.00 per share and were purchased by the Underwriters fromthe Company at a price of $3.76 per Share. Under the terms of the underwriting agreement, the Company granted theUnderwriters the option, for 30 days, to purchase up to 1,875,000 additional shares of Common Stock at the public offeringprice. On May 25, 2018, the Offering closed and the Company completed the sale and issuance of 12,500,000 shares ofCommon Stock. The Company received net proceeds from the Offering of approximately $46.7 million, after deducting theUnderwriters’ discounts and commissions and offering expenses payable by the Company. Subsequently, on June 25, 2018,the Underwriters exercised their option to purchase the full 1,875,000 shares of Common Stock at the public offering price of$4.00 per share that were purchased by the Underwriters from the Company at a price of $3.76 per Share and the Companyreceived additional net proceeds of $7.1 million, after deducting the Underwriters’ commissions. In aggregate, the Companycompleted the sale and issuance of 14,375,000 shares of Common Stock and received net proceeds from the Offering ofapproximately $53.8 million, after deducting the Underwriters’ discounts, commissions and offering expenses. 95 Table of Contents8. PROPERTY AND EQUIPMENTProperty and equipment consist of the following: December 31, 2018 2017 (in thousands)Laboratory equipment $6,965 $6,857Office equipment and furniture 889 815Leasehold improvements 7,949 7,949Property and equipment, gross 15,803 15,621Less: accumulated depreciation (10,192) (7,589)Total property and equipment, net $5,611 $8,032 Depreciation expense totaled $2.7 million, $2.6 million and $1.3 million for the years ended December 31, 2018,2017 and 2016, respectively.9. ACCRUED AND OTHER LIABILITIESAccrued and other liabilities consist of the following (in thousands): December 31, 2018 2017Accrued clinical and non-clinical expenses$9,790 $5,447Accrued contract manufacturing expenses 1,971 3,980Derivative liability for exit fee 533 —Accrued professional and consulting services 112 530Foreign currency derivative contract 52 —Other 399 752 $12,857 $10,709 10. COLLABORATION AND LICENSING AGREEMENTSKyowa Hakko Kirin Co., Ltd., or KHKIn November 2017, the Company entered into an exclusive license agreement with KHK, or the KHK Agreement, for thedevelopment, commercialization and distribution of tenapanor in Japan for cardiorenal indications. The Company assessedthese arrangements in accordance with Topic 606 and concluded that the contract counterparty, KHK, is a customer. Underthe terms of the KHK Agreement, the Company received $30.0 million in up-front license fees which was recognized asrevenue when the agreement was executed. Based on the Company’s assessment, it identified that the license and themanufacturing supply services were its material performance obligations at the inception of the agreement, and as such eachof the performance obligations are distinct. Additionally, on January 1, 2018, the Company recorded an increase in currentassets of $5.0 million and an increase in current liabilities of $1.0 million related to the first milestone under the KHKAgreement that KHK achieved in February 2019, reflecting revenues and cost of revenue, respectively, that would have beenrecognized in the fourth quarter 2017 if the Company had adopted Topic 606 prior to January 1, 2018.In addition to the up-front license fee of $30.0 million, the Company may be entitled to receive up to $55.0 million intotal development milestones, of which $5.0 million has been recognized to date and 8.5 billion yen in commercializationmilestones, worth up to $77.5 million at the currency exchange rate on December 31, 2018, as well as reimbursement of cost,plus a reasonable overhead for the supply of product and high-teen royalties on net sales throughout the term of theagreement.96 Table of ContentsFor the year ended December 31, 2018, $0.3 million of other revenue was recorded for manufacturing supply oftenapanor and other materials to KHK, for KHK’s product development and clinical trials in Japan, in accordance with theCompany’s agreement with KHK, and a negligible cost of revenue was recorded pursuant to the AstraZeneca TerminationAgreement.Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd., or Fosun PharmaIn December 2017, the Company entered into an exclusive license agreement with Fosun Pharma, or the FosunAgreement, for the development, commercialization and distribution of tenapanor in China for both hyperphosphatemia andirritable bowel syndrome with constipation, or IBS-C. The Company assessed these arrangements in accordance with Topic606 and concluded that the contract counterparty, Fosun Pharma, is a customer. Under the terms of the Fosun Agreement, theCompany received $12.0 million in up-front license fees which was recognized as revenue when the agreement was executed.Based on the Company’s assessment, it identified that the license and the manufacturing supply services were its materialperformance obligations at the inception of the agreement, and as such each of the performance obligations are distinct. In addition, the Company may be entitled to additional development and commercialization milestones of up to $113.0million, as well as reimbursement of cost plus a reasonable overhead for the supply of product and tiered royalties on netsales ranging from the mid-teens to 20%.For the year ended December 31, 2018, there was no revenue recorded related to the Fosun Agreement.Knight Therapeutics, Inc., or Knight In March 2018, the Company entered into an exclusive license agreement with Knight Therapeutics, Inc., or the KnightAgreement, for the development, commercialization and distribution of tenapanor in Canada for hyperphosphatemia andIBS-C. The Company assessed these arrangements in accordance with Topic 606 and concluded that the contractcounterparty, Knight, is a customer. Based on the Company’s assessment, it identified that the license and the manufacturingsupply services were its material performance obligations at the inception of the agreement, and as such each of theperformance obligations are distinct.Under the terms of the agreement, the Company is eligible to receive up to CAD 25 million in total payments includingan up-front payment and development and sales milestones, reimbursement of supply costs on a schedule specifying cost pertablet, with a reasonable mark up for overhead, as well as tiered royalty rates on net sales ranging from the mid-single digitsto the low twenties.For the year ended December 31, 2018, $2.3 million of revenue was recorded related to the Knight Agreement, and $0.5million of cost of revenue was recorded pursuant to the AstraZeneca Termination Agreement. AstraZenecaIn June 2015, the Company entered into a termination agreement with AstraZeneca, or the AstraZeneca TerminationAgreement, pursuant to which the Company remains liable to pay AstraZeneca license fees for (i) future royalties at a royaltyrate of 10% of net sales of tenapanor or other NHE3 products by the Company or its licensees, and (ii) 20% of non-royaltyrevenue received from a new collaboration partner should the Company elect to license, or otherwise provide rights todevelop and commercialize tenapanor or another NHE3 inhibitor, up to a maximum of $75.0 million in aggregate for (i) and(ii). To date in aggregate, the Company has recognized $9.9 million of the $75.0 million, recorded as cost of revenuecomprising (i) $6.0 million and $2.4 million related to the KHK Agreement and Fosun Agreement, respectively, recorded in2017 (ii) $0.5 million related to the Knight Agreement recorded in the year ended December 31, 2018 and (iii) $1.0 millionrelated to the KHK Agreement associated with a future milestone that KHK achieved in February 2019 for which theCompany recorded an increase in current liabilities in the year ended December 31, 2018 reflecting the amount that is owedto AstraZeneca upon achievement of the KHK milestone in February 2019.97 Table of Contents11. EQUITY INCENTIVE PLANS2008 PlanThe Company granted options under its 2008 Stock Incentive Plan (the “2008 Plan”) until June 2014 when it wasterminated as to future awards, although it continues to govern the terms of options that remain outstanding under the 2008Plan. The 2008 Plan provided for the granting of incentive and non-qualified stock options, and stock purchase rights toemployees, directors and consultants at the discretion of the Board of Directors. Stock options granted generally vest over aperiod of four years from the date of grant. In connection with the Board of Directors and stockholders’ approval of the 2014Plan, all remaining shares available for future award under the 2008 Plan were transferred to 2014 Plan, and the 2008 Planwas terminated.2014 PlanThe 2014 Equity Incentive Award Plan (the “2014 Plan”) became effective on June 18, 2014. Under the 2014 Plan,1,419,328 shares of common stock were initially reserved for issuance pursuant to a variety of stock-based compensationawards, including stock options, stock appreciation rights, or SARs, restricted stock awards, service-based restricted stockunit (“RSU”) awards, performance-based restricted stock unit (“PRSU”) awards, deferred stock awards, deferred stock unitawards, dividend equivalent awards, stock payment awards and performance awards. In addition, 35,221 shares that had beenavailable for future awards under the 2008 Plan as of June 18, 2014, were added to the initial reserve available under the2014 Plan, bringing the total reserve upon the effective date of the 2014 Plan to 1,454,549. The number of shares initiallyreserved for issuance or transfer pursuant to awards under the 2014 Plan will be increased by (i) the number of sharesrepresented by awards outstanding under 2008 Plan on June 18, 2014, that are either forfeited or lapse unexercised or that arerepurchased for the original purchase price thereof, up to a maximum of 1,153,279 shares, and (ii) if approved by theAdministrator of the 2014 Plan, an annual increase on the first day of each fiscal year ending in 2024 equal to the lesser of(A) four percent (4.0%) of the shares of stock outstanding (on an as converted basis) on the last day of the immediatelypreceding fiscal year and (B) such smaller number of shares of stock as determined by our board of directors; provided,however, that no more than 10,683,053 shares of stock may be issued upon the exercise of incentive stock options. EffectiveJanuary 1, 2019, the 2014 Plan share reserve was increased by 2,490,417 shares.2016 PlanIn November 2016, the Company’s board of directors approved the 2016 Employment Commencement IncentivePlan (the “Inducement Plan”) under which 1,000,000 shares were reserved. As of December 31, 2018, no shares of theCompany’s common stock were subject to inducement grants that were issued pursuant to the Inducement Plan.98 Table of ContentsStock Plan ActivityThe following table summarizes activity under the 2008 Plan and the 2014 Plan, including grants issued tononemployees, in the three years ended December 31, 2018: Options Issued and Outstanding Weighted Weighted-Average Average Shares Available Exercise Price per Remaining Aggregate for Grant Number of Shares Share Contractual Term Intrinsic Value (in Years) (in thousands)Balance at December 31, 2015 1,634,420 1,281,086 $9.78 Options authorized 1,038,595 — $ — Options granted (1,524,014) 1,524,014 $11.42 Options exercised — (25,134) $2.19 Options canceled 67,743 (67,743) $16.67 Issuance of common stock forservices and restricted stockunits, net of 5,000 forfeitures (189,507) — — Balance at December 31, 2016 1,027,237 2,712,223 $10.60 Options authorized 1,892,376 — $ — Options granted (1,723,906) 1,723,906 $11.73 Options exercised — (35,759) $1.70 Options canceled 445,029 (445,029) $14.15 Issuance of common stock forservices and restricted stockunits, net of 79,850 forfeitures (601,008) — — Balance at December 31, 2017 1,039,728 3,955,341 $10.78 Options authorized 1,901,339 — $ — Options granted (2,566,339) 2,566,339 $6.01 Options exercised — — $ — Options canceled 1,014,920 (1,014,920) $12.05 Issuance of common stock forservices and restricted stockunits, net of 197,437 forfeitures (781,120) — — Balance at December 31, 2018 608,528 5,506,760 $8.32 7.44 $648Vested and expected to vest atDecember 31, 2018 5,015,765 $8.45 7.28 $648Exercisable at December 31, 2018 2,916,825 $8.92 6.19 $648 The aggregate intrinsic value represents the difference between the total pre-tax value (i.e., the difference betweenthe Company’s stock price and the exercise price) of stock options outstanding as of December 31, 2018, based on theCompany’s common stock closing price of $1.79 per share, which would have been received by the option holders had alltheir in-the-money options been exercised as of that date.For the year ended December 31, 2018, zero options were exercised to purchase shares of the Company's commonstock. The intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016, was zero, $0.3million and $0.3 million, respectively.The weighted-average grant-date estimated fair value of options granted during the years ended December 31, 2018,2017 and 2016 was $4.29, $8.19 and $7.69 per share, respectively. The estimated grant date fair value of99 Table of Contentsemployee stock options was calculated using the Black-Scholes option-pricing model, based on the following weighted-average assumptions: Year Ended December 31, 2018 2017 2016 Expected term (years) 6.01 5.93 5.99 Expected volatility 83% 82% 77%Risk-free interest rate 2.60% 2.08% 1.62%Dividend yield —% —% —% Expected Term—The Company has limited historical information to develop reasonable expectations about futureexercise patterns and post-vesting employment termination behavior for its stock-option grants. As such, the expected termwas estimated using the simplified method whereby the expected term equals the arithmetic average of the vesting term andthe original contractual term of the option.Expected Volatility—Since January 1, 2017, the Company has used the historic volatility of its own stock over theretrospective period corresponding to the expected remaining term of the options, or the period since its shares were firstquoted on The Nasdaq Global Market, if that is shorter, to compute its expected stock price volatility. Prior to December 31,2016, the expected stock price volatility was calculated based on the average historical volatility for comparable publiclytraded pharmaceutical companies, and the Company selected companies with comparable characteristics, includingenterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet theexpected life of the Company’s stock-based awards.Risk-Free Interest Rate—The risk-free interest rate assumption is based on the zero-coupon U.S. treasury instrumentson the date of grant with a maturity date consistent with the expected term of the Company’s stock option grants.Dividend Yield—To date, the Company has not declared or paid any cash dividends and does not have any plans todo so in the future. Therefore, the Company used an expected dividend yield of zero.100 Table of ContentsRestricted Stock UnitsThe following table summarizes restricted stock unit activity under the 2014 Plan in the three years endedDecember 31, 2018, and includes restricted stock units with time or service based vesting, or RSUs, and those restricted stockunits with performance based vesting, or PRSUs: Weighted- Weighted-Average Number of Average Grant Number of Service- Grant Date Fair Performance- Date Fair Value Based RSUs Value Per Share Based RSUs Per ShareNon-vested restricted stock units atDecember 31, 2015 10,000 $18.04 — $ —Granted 174,389 $14.34 — $ —Vested (5,000) $18.04 — $ —Forfeited (5,000) $18.04 — $ —Non-vested restricted stock units atDecember 31, 2016 174,389 $14.34 — $ —Granted 472,135 $4.70 161,865 $13.90Vested (43,597) $14.34 — $ —Forfeited (61,865) $13.36 (17,985) $13.90Non-vested restricted stock units atDecember 31, 2017 541,062 $6.04 143,880 $13.90Granted — $ — 903,374 $4.30Vested (284,611) $5.55 (125,895) $13.90Forfeited (170,842) $7.53 (26,595) $10.79Non-vested restricted stock units atDecember 31, 2018 85,609 $4.70 894,764 $4.30 RSUs and PRSUs are generally subject to forfeiture if employment terminates prior to the release of vestingrestrictions. The related compensation expense, which is based on the grant date fair value of the Company’s common stockmultiplied by the number of units granted, is recognized ratably over the period during which the vesting restrictions lapse.In January 2017, the Company granted 161,865 PRSUs to certain employees that vest upon the achievement ofspecified performance conditions, subject to the employees’ continued service relationship with the Company through thedate of achievement, of which 125,895 PRSUs vested in November 2018. None of the PRSUs vested during the year endedDecember 31, 2017. The related compensation cost was recognized as an expense over the estimated vesting period ratablywhen achievement of the milestone was considered probable. The expense recognized for these awards is based on the grantdate fair value of the Company’s common stock multiplied by the number of units granted. The Company recognized $0.6million, $1.0 million and zero of related expense during the year ended December 31, 2018, 2017 and 2016, respectively.In July 2018, the Company granted 903,374 PRSUs to its employees that vest upon the achievement of certainperformance conditions, subject to the employees’ continued service relationship with the Company through theachievement date. At December 31, 2018, 894,764 of these PRSUs were outstanding and none vested. Based on theevaluation of the performance conditions at December 31, 2018, the Company has not recorded stock-based compensationexpense for the year ended December 31, 2018 related to these PRSUs. The Company will continue to evaluate theperformance conditions for these PRSUs at each reporting period and will record compensation expense related to the PRSUsaccordingly.With respect to RSUs, we recognize expense over the estimated vesting period ratably, contingent on continuedservice. The Company recognized $0.9 million, $0.9 million and $0.4 million of related expense during the year endedDecember 31, 2018, 2017 and 2016, respectively. The total estimated fair value of RSUs vested during the years endedDecember 31, 2018, 2017 and 2016 was $0.6 million, $0.4 million and $0.1 million, respectively.101 Table of ContentsIssuance of Common Stock for ServicesDuring the years ended December 31, 2018, 2017 and 2016, the Company issued 75,183, 46,858 and 20,118 shares,respectively, of its common stock to members of the board of directors who elected to receive stock in lieu of their cash feesunder the Company’s Non-Employee Director Compensation Program. The shares issued were valued at $0.3 million, $0.2million and $0.2 million, respectively, based on the fair value of the common stock on the date of grant.Employee Stock Purchase PlanThe Company adopted the 2014 Employee Stock Purchase Plan (“ESPP”) and initially reserved 202,762 shares ofcommon stock as of its effective date of June 18, 2014. If approved by the Administrator of the ESPP, on the first day of eachcalendar year, ending in 2024, the number of shares in the reserve will increase by an amount equal to the lesser of(i) one percent (1.0%) of the shares of common stock outstanding on the last day of the immediately preceding fiscal year and(ii) such number of shares of common stock as determined by the board of directors; provided, however, no more than2,230,374 shares of our common stock may be issued under the ESPP. Effective January 1, 2019, the ESPP Plan share reservewas increased by 622,604 shares.The following table summarizes ESPP activity in the three years ended December 31, 2018: Shares Available Number of Shares Purchase Price for Grant Purchased per Share Gross Proceeds (in thousands)Balance at December 31, 2015 347,074 41,580 Shares purchased (69,054) 69,054 $8.34 $576Balance at December 31, 2016 278,020 110,634 Shares purchased (99,343) 99,343 $6.27 $623Balance at December 31, 2017 178,677 209,977 Shares authorized 622,604 — Shares purchased (120,959) 120,959 $4.06 $492Balance at December 31, 2018 680,322 330,936 The following table illustrates the weighted-average assumptions for the Black-Scholes option-pricing model usedin determining the fair value of ESPP purchase rights granted to employees: Year Ended December 31, 2018 2017 2016 Expected term (years) 0.5 0.5 0.5 Expected volatility 76% 80% 76%Risk-free interest rate 2.08% 0.97% 0.48%Dividend yield —% —% —% Stock-based CompensationTotal stock-based compensation recognized was as follows (in thousands): Year Ended December 31, 2018 2017 2016 (in thousands)Research and development $3,666 $4,585 $2,786General and administrative 5,560 5,005 2,531Total $9,226 $9,590 $5,317 102 Table of ContentsAs of December 31, 2018, the Company had $11.1 million, $0.3 million, zero and immaterial amount of totalunrecognized compensation expense, net of estimated forfeitures, related to stock options, RSUs, PRSUs and ESPP,respectively, that will be recognized over an average vesting period of 3.0 years, 1.9 years, zero years and 0.2 years,respectively.12. WARRANTSOffering of Common Stock and WarrantsIn June 2015, the Company sold and issued an aggregate of 7,242,992 shares of its common stock and warrants topurchase 2,172,899 shares of common stock for aggregate gross proceeds of approximately $77.8 million or net proceeds,after deducting issuance costs, of approximately $74.3 million. The purchase price for the common stock was $10.70 pershare and the purchase price for the warrants was $0.125 per warrant. The warrants are exercisable for an exercise price of$13.91 per share at any time prior to the earlier of (i) 5 years from the date of issuance or (ii) certain changes in control of theCompany. The Company has determined that the warrants should be classified as equity. In July 2015, the Company filed aregistration statement with the SEC with respect to the common stock and warrants.Other than with respect to warrants issued to holders affiliated with New Enterprise Associates, the warrants containlimitations that prevent each holder of warrants from acquiring shares upon exercise of the warrants that would cause thenumber of shares beneficially owned by it and its affiliates to exceed 9.99% of the total number of shares of the Company’scommon stock then issued and outstanding. In addition, upon certain changes in control of the Company, each holder of awarrant can elect to receive, subject to certain limitations and assumptions, securities in a successor entity. None of thewarrants issued in June 2015 have been exercised during each of the years ended December 31, 2016, 2017 and 2018.13. INCOME TAXESThe components of the provision for income taxes for the year ended December 31, 2018, 2017 and 2016, are asfollows (in thousands): Year Ended December 31, 2018 2017 2016Current: Federal $— $— $—State 4 5 —Foreign — 1,204 —Total current 4 1,209 —Deferred: Federal (30) —State — — —Foreign — — —Total deferred — (30) —Provision for (benefit from) income taxes $ 4 $1,179 $ — 103 Table of ContentsThe following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate: December 31, 2018 2017 2016 Income tax at the federal statutory rate 21.0% 35.0% 35.0%State taxes, net of federal benefit 0.6 0.5 0.3 Net impact related to foreign subsidiary — (1.2) — Change in valuation allowance (22.5) 19.9 (36.2) Impact of tax reform rate change — (56.4) — Tax credits 1.4 1.0 0.3 Stock Based Compensation (1.2) (0.8) 0.1 Other 0.7 0.1 0.5 Income tax provision —% (1.9)% —% Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of theCompany’s deferred tax assets are as follows as of December 31, 2018 and 2017 (in thousands): December 31, 2018 2017 (in thousands)Deferred tax assets: Fixed assets and intangibles $38,376 $30,804Net operating loss carryforwards 31,621 22,355Tax credits 8,200 5,209Stock-based compensation 3,763 3,159Other 888 754Gross deferred tax assets 82,848 62,281Valuation allowance (81,645) (61,911)Deferred tax assets net of valuation allowance 1,203 370Deferred tax liabilities Adoption of New Accounting Standards (1,054) —Other (149) (370)Net deferred tax assets $ — $ — The Company assesses the available positive and negative evidence to estimate whether sufficient future taxableincome will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidenceevaluated was the cumulative loss incurred over the three-year periods ended December 31, 2018, December 31, 2017 andDecember 31, 2016. Such objective evidence limits the ability to consider other subjective evidence, such as theCompany’s projections for future growth. On the basis of this evaluation, as of December 31, 2018, December 31, 2017 andDecember 31, 2016, full valuation allowance has been recorded against Company’s net deferred tax asset. The amount of thedeferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during thecarryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longerpresent and additional weight is given to subjective evidence such as our projections for growth.Realization of deferred tax assets is dependent on future taxable income, if any, the timing and the amount of whichare uncertain. Accordingly, the deferred tax assets have been fully offset by a valuation allowance. The valuation allowanceincreased by approximately $19.7 million for the year ended December 31, 2018, decreased by approximately $12.6 millionfor the year ended December 31, 2017, and increased by approximately $40.7 million for the year ended December 31, 2016.The increase in the valuation allowance in the year ended December 31, 2018 primarily relates to the Company's netoperating loss and research and development tax credit generated in the current year.104 Table of ContentsThe TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S.federal corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, effective January 1, 2018. The Company isable to determine a reasonable estimate of certain effects of the TCJA and has therefore recognized the provisional taximpacts related to the revaluation of deferred tax assets and liabilities. As a result, the Company has recorded a decreaserelated to net deferred tax assets of $35.6 million, with an offsetting change in valuation allowance of $35.6 million for theyear ended December 31, 2017. The Securities and Exchange Commission has provided accounting and reporting guidancethat allows the Company to report provisional amounts within a measurement period of up to one year from the date ofenactment due to the complexities inherent in adopting the TCJA. The Company completed its analysis during themeasurement period and there were no measurement period adjustments recognized during the reporting period.As of December 31, 2018, the Company has net operating loss carryforwards for federal income tax purposes ofapproximately $193.3 million, of which approximately $47.0 million can be carried forward indefinitely and the remainingnet operating losses expire beginning in 2030 if not utilized. Federal research and development tax credit carryforwards ofapproximately $8.7 million that expire beginning in 2027 if not utilized, and foreign tax credit carryforwards ofapproximately $1.2 million that expire in 2027 if not utilized.In addition, the Company had net operating loss carryforwards for California income tax purposes of approximately$88.3 million that expire beginning of 2030 if not utilized, and state research and development tax credit carryforwards ofapproximately $6.9 million which can be carried forward indefinitely.The Company had other state net operating losses of approximately $2.5 million that begin to expire in 2025. TheCompany had approximately $0.1 million of minimum tax credit carryovers for California income tax purposes. Theminimum tax credits have no expiration date.The future utilization of net operating loss and tax credit carryforwards and credits may be subject to an annuallimitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may haveoccurred previously or that could occur in the future. Due to the existence of the valuation allowance, limitations underSection 382 and 383 will not impact the Company’s effective tax rate.A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: December 31, 2018 2017 2016 (in thousands)Balance at beginning of year $20,734 $3,892 $3,298Additions (subtractions) based on tax positions related to prioryear 1,634 16,103 45Additions based on tax positions related to current year 684 739 549Balance at end of year $23,052 $20,734 $3,892 The unrecognized tax benefits, if recognized and in absence of full valuation allowance, would impact the incometax provision by $9.8 million, $8.6 million and $3.5 million as of December 31, 2018, 2017 and 2016, respectively.The Company has elected to include interest and penalties as a component of tax expense. During the years endedDecember 31, 2018, 2017 and 2016, the Company did not recognize accrued interest and penalties related to unrecognizedtax benefits. Although the timing and outcome of an income tax audit is highly uncertain, the Company does not anticipatethat the amount of existing unrecognized tax benefits will change significantly during the next 12 months.The Company files income tax returns in the U.S. federal, California, Maryland, Massachusetts, New Hampshire,New Jersey and Oregon tax jurisdictions. Due to the Company’s net operating loss and tax credit105 Table of Contentscarryforwards, the income tax returns remain open to U.S. federal and California state tax examinations. The Company is notcurrently under examination in any tax jurisdiction.14. GEOGRAPHIC INFORMATION AND CONCENTRATIONSRevenue by geographic areas for the years ended December 31, 2018, 2017 and 2016, are as follows (in thousands): Year Ended December 31, 2018 2017 2016United States $ — $ — $ —International: North America (1) 2,320 — —Asia Pacific (2, 3) 287 42,000 —Total revenue $2,607 $42,000 $ —(1)Revenues from North America in 2018 comprised of $2.3 million from Canada in accordance with the KnightAgreement.(2)Revenues from Asia Pacific in 2018 comprised $0.3 million from Japan in accordance with the KHK Agreement.(3) Revenues from Asia Pacific in 2017 included $30.0 million from Japan in accordance with the KHK Agreement and$12.0 million from China in accordance with the Fosun Agreement.Revenues are attributed to geographical areas based on the domicile of the Company’s collaboration partners.Revenues recorded in the years ended December 31, 2018, 2017 and 2016, were wholly from collaborationpartnerships. Collaboration partnerships accounting for more than 10% of total revenues during the years ended December31, 2018, 2017 and 2016, are as follows: Year Ended December 31, 2018 2017 2016 Knight 89% — — KHK 11% 71% — Fosun Pharma — 29% — 15. NET LOSS PER SHAREBasic net loss per share is calculated by dividing net loss by the weighted-average number of common sharesoutstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of stock-based awards andwarrants. Diluted net loss per common share is computed giving effect to all potential dilutive common shares, includingcommon stock issuable upon exercise of stock options, and unvested restricted common stock and stock units. As theCompany had net losses for the years ended December 31, 2018, 2017 and 2016, all potential common shares106 Table of Contentswere determined to be anti-dilutive. The following table sets forth the computation of net loss per common share (inthousands, except share and per share amounts): Year Ended December 31, 2018 2017 2016Numerator: Net loss$(91,298) $(64,339) $(112,387)Denominator: Weighted average common shares outstanding - basic and diluted 56,219,919 47,435,331 40,118,522Net loss per share - basic and diluted$(1.62) $(1.36) $(2.80) For the years ended December 31, 2018, 2017 and 2016, the total numbers of securities that could potentially dilutenet income per share in the future that were not considered in the diluted net loss per share calculations because the effectwould have been anti-dilutive were as follows: Year Ended December 31, 2018 2017 2016Options to purchase common stock 5,378,008 3,977,160 2,464,089Warrants to purchase common stock 2,172,899 2,172,899 2,172,899Restricted stock units 199,135 323,819 87,079Performance-based restricted stock units 395,791 148,216 —ESPP shares issuable 63,413 60,524 37,227Total 8,209,246 6,682,618 4,761,294 The number of potential common shares that would have been included in diluted income per share were it not forthe anti-dilutive effect caused by the net loss, computed by converting these securities using the treasury stock methodduring the years ended December 31, 2018, 2017 and 2016, was approximately 1.0 million, 1.0 million and 0.8 million,respectively. 16. COMMITMENTS AND CONTINGENCIESLeasesThe Company has a lease agreement for a facility in Fremont, California that was amended in December 2012 toextend the lease agreement to September 2016. In September 2014, the Company signed the second amendment to its facilitylease agreement in Fremont, California to add space and to extend the lease term through September 2019. In addition, theamended lease agreement provides for a tenant improvement allowance of up to $0.6 million. In May 2016, the Companysigned a third amendment to its facility lease agreement in Fremont, California to add space and to extend the lease termthrough September 2021 (the “Third Amendment”). The Third Amendment provides for a tenant improvement allowance ofup to $0.4 million and the extended lease has rent escalation clauses throughout the lease term. It also provides a leaseextension option for five years on the entire premises at the higher of (i) a 3% annual escalation of the then-current base rentand (ii) the then-current fair market value for comparable premises.Rent increases, including the impact of a rent holiday and leasehold improvement allowance from the landlord, willbe recognized as deferred rent and amortized on a straight-line basis over the term of the lease. Under the terms of the leaseagreement, the Company provided the lessor with a security deposit in the amount of $0.1 million. The lessor shall beentitled to draw on the security deposit in the event of any uncured default by the Company under the terms of the lease.The Company had a lease agreement for a facility in Boston, Massachusetts for 16 months commencing March 1,2017 and terminating June 30, 2018, with no extension option. On July 26, 2018 the Company entered into a new leaseagreement for 36 months effective October 1, 2018 with an annual rent of $0.1 million as well as a separate agreement thatextended the previous lease until the new lease was made available.107 Table of ContentsThe future minimum payments under noncancelable operating leases at December 31, 2018, are as follows (inthousands):Year Ended December 31, Amounts2019 $2,6972020 3,1162021 2,2132022 —2023 —Thereafter —Total $8,026 Rent expense under operating leases was $1.8 million, $1.7 million and $1.3 million for the years endedDecember 31, 2018, 2017 and 2016, respectively.Guarantees and IndemnificationsThe Company indemnifies each of its officers and directors for certain events or occurrences, subject to certainlimits, while the officer or director is or was serving at our request in such capacity, as permitted under Delaware law and inaccordance with our certificate of incorporation and bylaws. The term of the indemnification period lasts as long as an officeror director may be subject to any proceeding arising out of acts or omissions of such officer or director in such capacity.The maximum amount of potential future indemnification is unlimited; however, the Company currently holdsdirector and officer liability insurance. This insurance allows the transfer of risk associated with our exposure and may enablethe Company to recover a portion of any future amounts paid. The Company believes that the fair value of theseindemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to theseobligations for any period presented.Legal Proceedings and ClaimsFrom time to time the Company may be involved in claims arising in connection with its business. Based oninformation currently available, the Company believes that the amount, or range, of reasonably possible losses in connectionwith any pending actions against it in excess of established reserves, in the aggregate, not to be material to its consolidatedfinancial condition or cash flows. However, losses may be material to the Company’s operating results for any particularfuture period, depending on the level of income or loss for such period.17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)Selected quarterly financial results from operations for the years ended December 31, 2018 and 2017 are as follows(in thousands, except per share amounts): 2018 Quarter End March 31 June 30 September 30 December 31Total revenue $2,320 $30 $172 $85Gross profit 1,856 30 170 85Operating expenses 19,541 22,184 23,902 27,461Net loss (17,019) (22,291) (24,126) (27,862)Net loss per share - basic and diluted $(0.36) $(0.42) $(0.39) $(0.45) 108 Table of Contents 2017 Quarter End March 31 June 30 September 30 December 31Total revenue $ — $ — $ — $42,000Gross profit — — — 33,600Operating expenses 28,434 26,418 21,225 22,638Net income (loss) (28,008) (25,721) (20,724) 10,114Net income (loss) per share - basic $(0.59) $(0.54) $(0.44) $0.21Net income (loss) per share - diluted $(0.59) $(0.54) $(0.44) $0.21 18. SUBSEQUENT EVENTS In February 2019, the company received a $5.0 million milestone payment from KHK in accordance with the termsof the license agreement with KHK, pursuant to KHK’s announcement in February 2019 of its initiation of a Phase 2 clinicalstudy of tenapanor for the treatment of hyperphosphatemia in ESRD patients on dialysis. 109 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURENone. ITEM 9A. CONTROLS AND PROCEDURESConclusions Regarding the Effectiveness of Disclosure Controls and ProceduresAs of December 31, 2018, management, with the participation of our Chief Executive Officer and Chief FinancialOfficer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures asdefined in Rules 13a‑15(e) and 15d‑15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensurethat information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms,and that such information is accumulated and communicated to our management, including the Chief Executive Officer andthe Chief Financial Officer, to allow timely decisions regarding required disclosures.Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefitrelationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that, as of December 31, 2018, the design and operation of our disclosure controls and procedures wereeffective at a reasonable assurance level.Management’s Annual Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting.Internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO, and effectedby our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles and includes those policies and procedures that:·Pertain to the maintenance of records that accurately and fairly reflect in reasonable detail the transactionsand dispositions of the assets of our company;·Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that our receipts andexpenditures are being made only in accordance with authorizations of our management and directors; and·Provide reasonable assurances regarding prevention or timely detection of unauthorized acquisition, use ordisposition of our assets that could have a material adverse effect on our financial statements.Our management assessed our internal control over financial reporting as of December 31, 2018, the end the periodcovered by this Annual Report on Form 10‑K. Management based its assessment on criteria established in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basedon management’s assessment of our internal control over financial reporting, management concluded that, as ofDecember 31, 2018, our internal control over financial reporting was effective.Internal control over financial reporting has inherent limitations. Internal control over financial reporting is aprocess that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting fromhuman failures. Internal control over financial reporting also can be circumvented by collusion or improper managementoverride. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timelybasis by internal control over financial reporting. However, these inherent limitations are known110 Table of Contentsfeatures of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though noteliminate, this risk.Attestation Report of the Registered Public Accounting FirmThis Annual Report on Form 10‑K does not include an attestation report of our registered public accounting firmdue to an exemption established by the JOBS Act for “emerging growth companies.”Changes in Internal Control over Financial ReportingThere were no changes in our internal controls over financial reporting during the quarter ended December 31, 2018,identified in connection with the evaluation required by Rule 13a‑15(d) and 15d‑15(d) of the Exchange Act that hasmaterially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATIONNone. 111 Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEInformation required by this item will be contained in our definitive proxy statement to be filed with the Securitiesand Exchange Commission on Schedule 14A in connection with our 2019 Annual Meeting of Stockholders (the “ProxyStatement”), which will be filed not later than 120 days after the end of our fiscal year ended December 31, 2018, under theheadings “Executive Officers,” “Election of Directors,” “Corporate Governance,” and “ Section 16(a) Beneficial OwnershipReporting Compliance,” and is incorporated herein by reference.We have adopted a Code of Business Conduct and Ethics that applies to our officers, directors and employees whichis available on our website at www.ardelyx.com. The Code of Business Conduct and Ethics is intended to qualify as a “codeof ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K. In addition,we intend to promptly disclose (1) the nature of any amendment to our Code of Business Conduct and Ethics that applies toour principal executive officer, principal financial officer, principal accounting officer or controller or persons performingsimilar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our code of ethics that isgranted to one of these specified officers, the name of such person who is granted the waiver and the date of the waiver on ourwebsite in the future. ITEM 11. EXECUTIVE COMPENSATIONThe information required by this item regarding executive compensation will be incorporated by reference to theinformation set forth in the sections titled “Executive Compensation” in our Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERSThe information required by this item regarding security ownership of certain beneficial owners and managementwill be incorporated by reference to the information set forth in the section titled “Security Ownership of Certain BeneficialOwners and Management” and “Equity Compensation Plan Information” in our Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item regarding certain relationships and related transactions and directorindependence will be incorporated by reference to the information set forth in the sections titled “Certain Relationships andRelated Party Transactions” and “Election of Directors”, respectively, in our Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item regarding principal accountant fees and services will be incorporated byreference to the information set forth in the section titled “Principal Accountant Fees and Services” in our Proxy Statement.112 Table of Contents PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES(a)The following documents are filed as part of this report:1.Financial StatementsSee Index to Financial Statements at Item 8 herein.2.Financial Statement SchedulesAll schedules are omitted because they are not applicable or the required information is shown in thefinancial statements or notes thereto.3.ExhibitsSee the Exhibit Index immediately following this page.ITEM 16. FORM 10-K SUMMARY None.113 Table of ContentsExhibit IndexExhibit Incorporated by Reference FiledNumber Exhibit Description Form Date Number Herewith3.1 Amended and Restated Certificate of Incorporation 8‑K 6/24/2014 3.1 3.2 Amended and Restated Bylaws 8‑K 6/24/2014 3.2 4.1 Reference is made to Exhibits 3.1 and 3.2 4.2 Form of Common Stock Certificate S‑1/A 6/18/2014 4.2 4.3 Form of Warrant issued pursuant to the Securities PurchaseAgreement by and among Ardelyx, Inc. and the purchaserssignatory thereto, dated June 2, 2015 S‑3 7/13/2015 4.3 10.1 Termination Agreement, dated June 2, 2015, by and betweenAstraZeneca AB and Ardelyx, Inc. 10‑Q 8/12/2015 10.1 10.2 Amendment No. 1 to Termination Agreement and toManufacturing and Supply Agreement, dated November 2, 2015by and between AstraZeneca AB and Ardelyx, Inc. 10‑K 3/4/2016 10.1(d) 10.3 Amended and Restated Investor’s Rights Agreement datedJune 23, 2011, by and among Ardelyx, Inc. and the investorslisted therein S‑1 5/19/2014 10.3 10.4(a) Lease, dated August 8, 2008, by and between 34175 ArdenwoodVenture, LLC and Ardelyx, Inc. S‑1 5/19/2014 10.4(a) 10.4(b) First Amendment to Lease, dated December 20, 2012, by andbetween 34175 Ardenwood Venture, LLC and Ardelyx, Inc. S‑1 5/19/2014 10.4(b) 10.4(c) Second Amendment to Lease, dated September 5, 2014, by andbetween Ardelyx, Inc. and 34175 Ardenwood Venture, LLC 8‑K 9/9/2014 10.1 10.4(d) Third Amendment to Lease, dated April 28, 2016, by andbetween Ardelyx, Inc. and 34175 Ardenwood Venture, LLC 10‑Q 8/8/2016 10.3 10.5(a)# Ardelyx, Inc. 2008 Stock Incentive Plan, as amended S‑1 5/19/2014 10.5(a) 10.5(b)# Form of Stock Option Grant Notice and Stock Option Agreementunder the 2008 Stock Incentive Plan, as amended S‑1 5/19/2014 10.5(b) 10.5(c)# Form of Restricted Stock Purchase Grant Notice and RestrictedStock Purchase Agreement under the 2008 Stock Incentive Plan,as amended S‑1 5/19/2014 10.5(c) 10.6(a)# Ardelyx, Inc. 2014 Equity Incentive Award Plan S‑8 7/14/2014 99.3 10.6(b)# Form of Stock Option Grant Notice and Stock Option Agreementunder the 2014 Equity Incentive Award Plan S‑1/A 6/9/2014 10.6(b) 10.6(c)# Form of Restricted Stock Award Agreement and Restricted StockUnit Award Grant Notice under the 2014 Equity Incentive AwardPlan S‑1/A 6/9/2014 10.6(c) 10.7# Form of Indemnification Agreement for directors and officers S‑1/A 6/9/2014 10.7 10.8# Amended and Restated Executive Employment Agreement,dated June 6, 2014, by and between Ardelyx, Inc. and MichaelRaab S‑1/A 6/9/2014 10.8 10.9# Amended and Restated Change in Control Severance Agreement,dated June 6, 2014, by and between Ardelyx, Inc. and MarkKaufmann S‑1/A 6/9/2014 10.15 114 Table of ContentsExhibit Incorporated by Reference FiledNumber Exhibit Description Form Date Number Herewith10.10# Amended and Restated Change in Control Severance Agreement,dated June 6, 2014, by and between Ardelyx, Inc. and ElizabethGrammer, Esq. S‑1/A 6/9/2014 10.16 10.11# Amended and Restated Change in Control Severance Agreement,dated June 6, 2014, by and between Ardelyx, Inc. and JeffreyJacobs, Ph.D. S‑1/A 6/9/2014 10.17 10.12# Amended and Restated Change in Control Severance Agreement,dated June 6, 2014, by and between Ardelyx, Inc. and DavidRosenbaum, Ph.D. S‑1/A 6/9/2014 10.19 10.13# Offer Letter, dated August 11, 2011, by and betweenArdelyx, Inc. and Mark Kaufmann S‑1/A 6/9/2014 10.10 10.14# Offer Letter, dated May 2, 2008, by and between Ardelyx, Inc.and Jeff Jacobs, Ph.D. S‑1/A 6/9/2014 10.12 10.15# Offer Letter, dated December 28, 2009, by and betweenArdelyx, Inc. and David Rosenbaum, Ph.D. S‑1/A 6/9/2014 10.13 10.16# Offer Letter, dated November 21, 2012, by and betweenArdelyx, Inc. and Elizabeth Grammer, Esq. S‑1/A 6/9/2014 10.14 10.19# Offer Letter, dated November 21, 2014, by and betweenArdelyx, Inc. and Jeremy S. Caldwell, Ph.D. 10‑K 3/5/2015 10.22 10.20# Change in Control Severance Agreement, dated December 19,2014, by and between Ardelyx, Inc. and Jeremy S. Caldwell,Ph.D. 10‑K 3/4/2016 10.23 10.21# Offer Letter, dated December 12, 2015, by and betweenArdelyx, Inc. and Paul Korner, MD, MBA 10‑K 3/4/2016 10.21 10.22# Ardelyx, Inc. 2014 Employee Stock Purchase Plan S‑8 7/14/2014 99.6 10.23(a)# Non-Employee Director Compensation Program S‑1/A 6/9/2014 10.21 10.23(b)# Description of amendments to Non-Employee DirectorCompensation Program 8‑K 3/9/2017 N/A 10.24 Securities Purchase Agreement by and among Ardelyx, Inc. andthe purchasers signatory thereto, dated June 2, 2015 10‑Q 8/12/2015 10.2 10.25 Registration Rights Agreement by and among Ardelyx, Inc. andthe investors signatory thereto, dated June 2, 2015 S‑3 7/13/2015 99.1 10.26 Securities Purchase Agreement by and among Ardelyx, Inc. andthe purchasers signatory thereto, dated July 14, 2016 10‑Q 8/8/2016 10.1 10.27 Registration Rights Agreement by and among Ardelyx, Inc. andthe investors signatory thereto, dated July 14, 2016 10‑Q 8/8/2016 10.2 10.28(a)# Ardelyx, Inc. 2016 Employment Commencement Incentive Plan S‑8 11/10/2016 99.1 10.28(b)# Form of Stock Option Grant Notice and Stock Option Agreementunder the 2016 Employment Commencement Incentive Plan S‑8 11/10/2016 99.2 10.28(c)# Form of Restricted Stock Unit Award Grant Notice and RestrictedStock Unit Award Agreement under the 2016 EmploymentCommencement Incentive Plan S‑8 11/10/2016 99.3 10.28(d)# Form of Restricted Stock Award Grant Notice and RestrictedStock Award Agreement under the 2016 EmploymentCommencement Incentive Plan S‑8 11/10/16 99.4 115 Table of ContentsExhibit Incorporated by Reference FiledNumber Exhibit Description Form Date Number Herewith10.29# Change in Control Severance Agreement, dated January 4, 2016,by and between Ardelyx, Inc. and Paul Korner, MD, MBA 10‑K 2/17/2017 10.29 10.30# Offer Letter, dated October 1, 2016, by and between Ardelyx, Inc.and Reginald Kim Seeto, MB.BS; B.Sc. 10‑K 2/17/2017 10.30 10.31# Change in Control Severance Agreement, dated October 22,2016, by and between Ardelyx, Inc. and Reginald Kim Seeto,MB.BS; B.Sc. 10‑K 2/17/2017 10.31 10.32# Offer Letter, dated November 15, 2016, by and betweenArdelyx, Inc. and Bryan Shaw 10‑K 2/17/2017 10.32 10.33# Change in Control Severance Agreement, dated December 6,2016, by and between Ardelyx, Inc. and Bryan Shaw 10‑K 2/17/2017 10.33 10.34# Transition and Separation Agreement dated August 21, 2017, byand between the Company and Dr. Paul Korner 10‑Q 11/7/2017 10.1 10.35†† License Agreement, dated November 27, 2017, by and betweenKyowa Hakko Kirin Co., Ltd. and Ardelyx, Inc. 10‑K 3/14/2018 10.35 10.36†† License Agreement, dated December 11, 2017, by and betweenShanghai Fosun Pharmaceutical Industrial Development Co. Ltd.and Ardelyx, Inc. 10‑K 3/14/2018 10.36 10.37# Second Amended and Restated Change in Control andSeverance Agreement by and between Ardelyx, Inc. andElizabeth Grammer. 10-Q 5/8/2018 10.0 10.38# Second Amended and Restated Change in Control andSeverance Agreement by and between Ardelyx, Inc. and David P.Rosenbaum, Ph.D. 10-Q 5/8/2018 10.1 10.39 Loan and Security Agreement, dated May 16, 2018, by andbetween the Company and Solar Capital Ltd. and WesternAlliance Bank. 10-Q 8/7/2018 10.1 10.40 Exit Fee Agreement, dated May 16, 2018, by and between theCompany and Solar Capital Ltd. and Western Alliance Bank. 10-Q 8/7/2018 10.2 10.41# Transition and Separation Agreement dated July 8, 2018, by andbetween the Company and Reginald Seeto, MBBS. 10-Q 8/7/2018 10.3 21.1 Subsidiaries of the Registrant X23.1 Consent of Independent Registered Public Accounting Firm X31.1 Certification of Principal Executive Officer Required UnderRule 13a‑14(a) and 15d‑14(a) of the Securities Exchange Act of1934, as amended X31.2 Certification of Principal Financial Officer Required UnderRule 13a‑14(a) and 15d‑14(a) of the Securities Exchange Act of1934, as amended X32.1 Certification of Principal Executive Officer and PrincipalFinancial Officer Required Under Rule 13a‑14(b) of theSecurities Exchange Act of 1934, as amended, and 18 U.S.C§1350 X101.INS XBRL Instance Document X101.SCH XBRL Taxonomy Extension Schema Document X101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X116 Table of ContentsExhibit Incorporated by Reference FiledNumber Exhibit Description Form Date Number Herewith101.DEF XBRL Taxonomy Extension Definition Linkbase Document X101.LAB XBRL Taxonomy Extension Label Linkbase Document X101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X†Confidential treatment granted as to portions of this Exhibit. The confidential portions of this Exhibit have been omittedand are marked by asterisks.††Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been filedseparately with the Securities and Exchange Commission.#Indicates management contract or compensatory plan.117 Table of Contents SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized. Ardelyx, Inc. Date: March 6, 2019 By:/s/ Michael Raab Michael Raab President Chief Executive Officer and Director (Principal Executive Officer) POWER OF ATTORNEYEach person whose individual signature appears below hereby authorizes and appoints Michael Raab and MarkKaufmann, and each of them, with full power of substitution and resubstitution and full power to act without the other, as hisor her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and onbehalf of each person, individually and in each capacity stated below, and to file any and all amendments to this annualreport on Form 10‑K and to file the same, with all exhibits thereto, and other documents in connection therewith, with theSecurities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power andauthority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agentsor any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.118 Table of ContentsPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on the dates indicated.Signature Title Date /s/ Michael Raab President, Chief Executive Officer and Director March 6, 2019Michael Raab (Principal Executive Officer) /s/ Mark Kaufmann Chief Financial Officer March 6, 2019Mark Kaufmann (Principal Financial and Accounting Officer) /s/ David Mott Chairman of the Board of Directors March 6, 2019David Mott /s/ Robert Bazemore Director March 6, 2019Robert Bazemore /s/ William Bertrand, Jr. Director March 6, 2019William Bertrand, Jr. /s/ Annalisa Jenkins Director March 6, 2019Annalisa Jenkins, MBBS, FRCP /s/ Jan M. Lundberg Director March 6, 2019Jan M. Lundberg, Ph.D. /s/ Gordon Ringold Director March 6, 2019Gordon Ringold, Ph.D. /s/ Richard Rodgers Director March 6, 2019Richard Rodgers 119 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction Ardelyx Cayman Islands (dissolved in 2018) Cayman Islands Exhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the following Registration Statements:(1) Registration Statement on Form S-8 (No. 333-197408) pertaining to the 2008 Stock Incentive Plan, as amended,the 2014 Equity Incentive Award Plan and the 2014 Employee Stock Purchase Plan of Ardelyx, Inc.(2) Registration Statement on Form S-8 (No. 333-202663) pertaining to the 2014 Equity Incentive Award Plan and the2014 Employee Stock Purchase Plan of Ardelyx, Inc.(3) Registration Statements on Form S-3 (Nos. 333-205630, 333-213085 and 333-217441) of Ardelyx, Inc.(4) Registration Statements on Form S-8 (Nos. 333-210079, 333-216154 and 333-223694) pertaining to the 2014Equity Incentive Award Plan of Ardelyx, Inc.(5) Registration Statement on Form S-8 (No. 333-214538) pertaining to the 2016 Employment CommencementIncentive Plan of Ardelyx, Inc.of our report dated March 6, 2019, with respect to the consolidated financial statements of Ardelyx, Inc. included in thisAnnual Report (Form 10-K) of Ardelyx Inc. for the year ended December 31, 2018./s/ Ernst & Young LLP Redwood City, California March 6, 2019 Exhibit 31.1CERTIFICATIONI, Michael Raab, certify that:1.I have reviewed this Annual Report on Form 10-K of Ardelyx, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly presentin all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period inwhich this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reportingto be designed under our supervision, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this reportour conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periodcovered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annualreport) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controlover financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarizeand report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role inthe registrant’s internal control over financial reporting.Date: March 6, 2019 By:/s/ Michael Raab Michael Raab President, Chief Executive Officer and Director (Principal Executive Officer) Exhibit 31.2CERTIFICATIONI, Mark Kaufmann, certify that:1.I have reviewed this Annual Report on Form 10-K of Ardelyx, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly presentin all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period inwhich this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reportingto be designed under our supervision, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this reportour conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periodcovered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annualreport) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controlover financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarizeand report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role inthe registrant’s internal control over financial reporting.Date: March 6, 2019 By:/s/ Mark Kaufmann Mark Kaufmann Chief Financial Officer (Principal Financial Officer) Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Ardelyx, Inc. (the “Company”) on Form 10-K for the period ending December31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Michael Raab, Presidentand Chief Executive Officer of the Company, and Mark Kaufmann, Chief Financial Officer of the Company, respectively, doeach hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, that:(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result ofoperations of the Company.Date: March 6, 2019 By:/s/ Michael Raab Michael Raab President, Chief Executive Officer and Director (Principal Executive Officer) Date: March 6, 2019 By:/s/ Mark Kaufmann Mark Kaufmann Chief Financial Officer (Principal Financial Officer)

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