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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-36485
ARDELYX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
26-1303944
(I.R.S. EMPLOYER
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
Common Stock, par value $0.0001 per share
Trading Symbol(s)
ARDX
Name of Each Exchange on Which Registered
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate 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 the preceding 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 past 90 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 whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐
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 revised financial
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 recently completed
second fiscal quarter, June 30, 2019, based on the last reported sales price of the Registrant’s common stock of $2.69 per share was $125,911,696.
The number of shares of Registrant’s Common Stock outstanding as of March 3, 2020, was 88,929,668.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant’s Definitive Proxy Statement for its 2020 Annual Meeting of Stockholders, which will be filed with the Commission within 120 days of December 31,
2019, the close of the Registrant’s 2019 fiscal year, are incorporated by reference into Part III of this Report.
Table of Contents
ARDELYX, INC.
FORM 10‑K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
TABLE OF CONTENTS
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART III
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
Unless 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. Any
statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In
some 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 indicate
future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking
statements include, but are not limited to, statements about:
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our expectations regarding our plans for and our participation in the commercialization of tenapanor for
the control of serum phosphorus in chronic kidney disease, or CKD, patients on dialysis, including our
expectations regarding our plans 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 irritable bowel
syndrome with constipation, or IBS-C, rather than to commercialize tenapanor for this indication on our
own;
our expectations regarding the potential market size and the size of the patient populations for our
product candidates;
our plans with respect to our pre-clinical programs;
our ability to identify and validate targets and novel drug candidates using our proprietary drug discovery
and design platform including the Ardelyx Primary Enterocyte and Colonocyte Culture System, or
APECCS, 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 and
technology;
estimates of our expenses, future revenue, capital requirements, our needs for additional financing and
our ability 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 this
Annual Report on Form 10‑K. Except as required by law, we assume no obligation to update any forward-looking
statement publicly, or to revise any forward-looking statement to reflect events or developments occurring after the date of
this Annual Report on Form 10‑K, even if new information becomes available in the future. Thus, you should not assume
that our silence over time means that actual events are bearing out as expressed or implied in any such forward-looking
statement.
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ITEM 1. BUSINESS
Company overview
We are a specialized biopharmaceutical company focused on developing first-in-class medicines to
improve treatment for people with cardiorenal diseases. This includes patients with CKD on dialysis suffering
from elevated serum phosphorus, or hyperphosphatemia; and CKD patients and/or heart failure patients with
elevated serum potassium, or hyperkalemia. Our lead program is tenapanor, a first-in-class medicine in late-
stage clinical development for the control of serum phosphorus in patients with CKD on dialysis. Tenapanor has
a unique mechanism of action and acts locally in the gut to inhibit the sodium hydrogen exchanger 3, or NHE3.
This results in the tightening of the epithelial cell junctions, thereby significantly reducing paracellular uptake of
phosphate, the primary pathway of phosphate absorption.
We have evaluated tenapanor in a Phase 3 program for the control of serum phosphorus in CKD patients on
dialysis. In December 2019, we reported statistically significant topline efficacy results from our second monotherapy
Phase 3 clinical trial, the PHREEDOM trial. The PHREEDOM trial is a one-year study with a 26-week open-label
treatment period and a 12-week double-blind, placebo-controlled randomized withdrawal period followed by a 14-week
open-label safety extension period. An active safety control group, for safety analysis only, received sevelamer, open-label,
for the entire 52-week study period. Patients completing the PHREEDOM trial from both the tenapanor arm and the
sevelamer active safety control arm had the option to participate in NORMALIZE, an ongoing open-label 18-month
extension study. The goal of this study is to further our understanding of the potential for the dual mechanism of tenapanor
and sevelamer to reduce patients’ serum phosphorus levels towards normal (<4.6 mg/dL) while minimizing medication
burden. The PHREEDOM trial followed a successful monotherapy Phase 3 clinical trial completed in 2017, which
achieved statistical significance for the primary endpoint . In addition, in September 2019, we reported positive results
from the AMPLIFY trial, a Phase 3 study evaluating tenapanor in patients with CKD on dialysis who had uncontrolled
hyperphosphatemia despite phosphate binder treatment.
We are preparing to submit a New Drug Application, or NDA, to the United States Food and Drug Administration,
or FDA, for tenapanor for the control of serum phosphorus in adult patients with CKD on dialysis in mid-2020. Tenapanor,
if approved, would be the first therapy for phosphate management that is not a phosphate binder. As tenapanor is a novel,
potent, small molecule there would be significantly less pill burden than with phosphate binders. Tenapanor is dosed as a
single pill, twice-daily, which we believe could greatly improve patient adherence and compliance and free patients from
having to take multiple pills before every meal.
We are also advancing a small molecule potassium secretagogue program, RDX013, for the potential treatment of
hyperkalemia. Hyperkalemia is a common problem in patients with heart and kidney disease, particularly in patients taking
common blood pressure medications known as RAAS inhibitors, which inhibit the renin-angiotensin-aldosterone system.
Similar to what we have done with tenapanor in developing a non-binder approach for the treatment of elevated serum
phosphate levels, RDX013 is designed to offer a non-binder alternative to lowering elevated potassium with a much lower
pill burden than potassium binders and we believe may provide significant advantages as a stand-alone agent or in
combination with potassium binders.
In addition to the development of tenapanor in our cardiorenal portfolio, we have developed tenapanor for the
treatment of patients with IBS-C. On September 12, 2019, we received US FDA approval of IBSRELA® (tenapanor) for
the treatment of irritable bowel syndrome with constipation (IBS-C) in adults. IBS-C is a burdensome gastrointestinal,
or GI, disorder affecting a significant number of people. It is characterized by significant abdominal pain, constipation,
straining during bowel movements, bloating and/or gas.
By inhibiting NHE3 on the apical surface of the enterocytes, tenapanor reduces absorption of sodium from the
small intestine and colon, resulting in an increase in water secretion into the intestinal lumen, which accelerates intestinal
transit time and results in a softer stool consistency. Tenapanor has also been shown to reduce abdominal pain by
decreasing visceral hypersensitivity and by decreasing intestinal permeability in animal models. In rat model of colonic
hypersensitivity, tenapanor reduced visceral hyperalgesia and normalized colonic sensory neuronal excitability.
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Our Commercial Strategy
We aim to build a multi-product company that commercializes its cardiorenal products in the United States. Our
strategy is to leverage ex-U.S. collaborations with established industry leaders to efficiently bring our cardiorenal
medicines and tenapanor for IBS-C to patients outside the United States. Our plan is to bring tenapanor for IBS-C to market
in the United States by leveraging domestic collaborations rather than by commercializing tenapanor for IBS-C on our
own.
We currently have three collaboration partnerships: with Kyowa Kirin Co., Ltd., or KKC, for commercialization of
tenapanor for the treatment of cardiorenal diseases, including hyperphosphatemia, in Japan; with Shanghai Fosun
Pharmaceutical Industrial Development Co. Ltd., or Fosun Pharma, for the commercialization of tenapanor for the
treatment of IBS-C and hyperphosphatemia in China; and with Knight Therapeutics, Inc., or Knight, for commercialization
of tenapanor in Canada.
OUR PROPRIETARY DRUG DISCOVERY AND DESIGN PLATFORM
We have successfully developed and expect to continue to employ our APECCS stem cell platform to emulate, in
a miniaturized format, the function and structure of cells of specific segments of the intestine. In line with our overall
strategy to focus on our cardiorenal pipeline, our research supports tenapanor, RDX013 and other potential cardiorenal
opportunities, and we expect to continue our efforts to develop a system, similar to APECCS for the kidney.
OUR PRODUCT PIPELINE
Tenapanor: A New Approach for The Control of Serum Phosphorus in CKD Patients on Dialysis
Our lead product candidate in our cardiorenal portfolio is tenapanor for the control of serum phosphorus
in patients with CKD on dialysis. Hyperphosphatemia, or elevated serum phosphorus, is an independent predictor of
morbidity and mortality in patients with CKD 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
of worsening kidney function are nonspecific, and can include having less energy, reduced appetite, dry itchy skin, swollen
feet and ankles or generally just not feeling well. If the deterioration continues and is not halted by changes in lifestyle or
with the assistance of pharmacological intervention, the disease will likely cause significant cardiovascular morbidity, and
can progress to the final stage of CKD where kidney function will be lost entirely.
Current management of CKD includes hemodialysis and peritoneal dialysis as a means to filter toxins from the
blood once kidneys have failed. Unless this intervention occurs, kidney failure results in the accumulation of waste
products that may ultimately cause death. Hemodialysis, the most common form of dialysis, generally requires a patient to
visit a dialysis 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
and excreted in urine. In adults with functioning kidneys normal serum phosphorus levels are 2.5 to 4.5 mg/dL. With
kidney failure, elevated phosphorus becomes harmful and is typically diagnosed as hyperphosphatemia when serum
phosphorus levels are greater than 4.5 mg/dL, according to guidelines published by KDIGO, the global nonprofit
foundation dedicated to improving the care and outcomes of kidney disease patients worldwide. Phosphorus levels greater
than 5.5 mg/dL have been shown to be an independent risk factor for cardiovascular morbidity and mortality in dialysis
patients, and common treatment goals are to manage serum phosphorus to less than 5.5 mg/dL. Although patients with
CKD rely on dialysis to eliminate harmful agents, phosphorus is not readily removed by the procedure and other means of
managing phosphorus levels must be employed. Studies have shown that 95% of CKD patients on dialysis need phosphate
control.
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In CKD patients on dialysis, 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 levels of FGF23 is an independent risk factor for adverse cardiac clinical outcomes as well as the development of
secondary hyperparathyroidism, or SHPT, marked by elevated parathyroid hormone. SHPT is associated with renal
osteodystrophy, a condition of abnormal bone growth characterized by brittle bones.
Since dialysis is unable to efficiently eliminate excess phosphorus, CKD patients on dialysis are put on restrictive,
low phosphorus diets and are currently prescribed medications called phosphate binders, the only interventions currently
available for the control of serum phosphorus. Phosphate binders, which usually need to be taken with meals and snacks,
act by binding dietary phosphorus and limiting its absorption. Phosphate binders have multiple limitations, including:
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systemic excess absorption of calcium, iron or lanthanum, resulting in side effects and other unintended
consequences for CKD patients on dialysis;
significant challenges with patient adherence because of the large quantity and/or mass of the binders that
must be taken each day; and
significant GI tolerability issues making frequent dosing difficult for patients
Safety and tolerability have also been significant concerns with many approved phosphate binders, with side
effects that 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-
based binders.
CKD patients on dialysis, who generally are severely restricted in their fluid intake, are prescribed as many as 12
or more phosphate binder pills per day, among other medications. The amount of phosphorus a binder can remove is
limited by its binding capacity, and therefore, increasing the dose, and hence the pill burden, of the binder is the only way
to increase the amount of phosphorus being bound and excreted. As a result of pill burden and mass, as well as a number of
side effects, on average one out of two patients is not compliant with their prescribed treatment and two out of three
patients at any point in time are not at target serum phosphorus levels.
We are developing tenapanor for the control of serum phosphorus in patients with CKD on dialysis, as we believe
it has the potential to address certain of the key limitations of current treatments and offer a completely new mechanism of
action. If approved, tenapanor will be the first small molecule/non-binder treatment for the control of serum phosphorus in
patients with CKD on dialysis, with a unique mechanism of action that acts by inhibiting, or blocking, the NHE3
transporter in the GI tract. Our scientists, in collaboration with global academic experts, discovered that phosphate
absorption in humans occurs primarily through a dynamically regulated paracellular pathway. Inhibiting the NHE3
transporter with tenapanor results in the tightening of the epithelial cell junctions, thereby significantly reducing
paracellular uptake of phosphate. This pathway of phosphate flux that is inhibited by tenapanor appears largely specific for
phosphate, whereas the overall absorption of other ions and large molecules 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 reduced leading to an increase in stool sodium and water content,
loosening stool consistency and increasing bowel movement frequency. Tenapanor’s unique mechanism of action inhibiting
paracellular phosphate absorption was published in the peer-reviewed journal Science Translational Medicine.
This unique mechanism of action could allow tenapanor to be active in many patients at a dose of 10 mg to 30 mg
twice daily as opposed to the multiple gram quantities per day required of the phosphate binders. Over the course of a
week, the amount of tenapanor required would be less than 500 milligrams, or a total of 14 small pills, whereas the amount
of phosphate binder required, based on package inserts, would be 10 to 30 grams, or up to 63 large pills, depending on the
phosphate binder. We believe this significant pill burden advantage will result in better adherence and compliance which
could lead to more consistent efficacy in patients with CKD on dialysis.
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Tenapanor has been specifically designed to work exclusively within the GI tract, thereby significantly reducing
the amount of drug that is absorbed into the bloodstream and the potential side effects that could occur. In human studies of
orally-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 in 24 clinical studies in over 3,100
individuals to date.
Clinical data supporting tenapanor in hyperphosphatemia
We have completed three Phase 3 trials evaluating tenapanor for the control of serum phosphorus in CKD patients
on dialysis, with two trials evaluating tenapanor as monotherapy and one trial evaluating tenapanor as part of a dual
mechanism approach with binders.
In December 2019, we reported positive results from the PHREEDOM trial, our long-term
Phase 3 study evaluating the efficacy and safety of tenapanor as a monotherapy for the control of
serum phosphorus in patients with CKD on dialysis. The study's design, shown in Figure 1 below,
includes a 26‑week open-label treatment period and a 12-week double-blind, placebo controlled
randomized withdrawal period followed by a 14‑week open-label safety extension. The PHREEDOM
study met its primary endpoint demonstrating a statistically significant difference in least square (LS)
mean serum phosphorus change (-1.4 mg/dL, p<0.0001), as compared to placebo. During the 26-week
treatment period, 77% of tenapanor-treated patients in the intent-to-treat population (n=408) had a
decrease in serum phosphorus, with a mean reduction from baseline of 2.0 mg/dL.
Tenapanor was generally well-tolerated. As anticipated due to the mechanism of action, the most common self-
reported adverse event was loose stools/diarrhea at an incidence rate of 52.5%, with approximately 90% of these events,
judged by the investigator, to be mild to moderate in nature. The majority of the events were reported within the first five
days of treatment and were transient in nature. In the 26-week open-label treatment period, 16% of the tenapanor-treated
patients discontinued treatment due to diarrhea. During the randomized withdrawal period, only 0.8% of tenapanor-treated
patients discontinued due to diarrhea.
In the safety analysis set of the 26-week open-label treatment period, which included tenapanor (n=419) and
sevelamer (n=137), 17.2% of tenapanor-treated patients compared to 22.6% of sevelamer-treated patients experienced a
serious adverse event. The median dose for tenapanor was 60 milligrams per day throughout the study and the median dose
for sevelamer was 4.8 grams per day after randomization and increased to 7.2 grams per day by the end of the 26-week
open-label treatment period.
Figure 1. PHREEDOM Clinical Trial Design
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Patients completing the PHREEDOM trial from both the tenapanor arm and the sevelamer active safety control
arm had the option to participate in NORMALIZE, an ongoing open-label 18-month extension study. The goal of this study
is to further our understanding of the potential for the dual mechanism of tenapanor and sevelamer to reduce patients’
serum phosphorus levels towards normal (<4.6 mg/dL) while minimizing medication burden. Patients entering the study
from the tenapanor arm with serum phosphorus levels in the normal range are followed with no medication changes.
Patients entering the study from the tenapanor arm with serum phosphorus (cid:0)4.6 mg/dL have sevelamer tablets added
incrementally to achieve normal serum phosphorus levels. Patients entering the study from the sevelamer active safety
control arm have tenapanor tablets added to their treatment regimen and have sevelamer tablets withdrawn based on their
serum phosphorus value, to achieve normal serum phosphorus levels. In December 2019, we announced initial results from
NORMALIZE, noting that as of the date of the initial analysis, 96% of eligible patients had chosen to enroll into
NORMALIZE. Of the 73 patients that had been treated for more than one month of treatment as of the date of the initial
analysis, 42% had achieved normal serum phosphorus of less than 4.6 mg/dL and of those, 58% had accomplished this with
either tenapanor alone or with tenapanor in combination with only one to three sevelamer tablets per day. These data
represent a 45% improvement compared to current treatment practice data reported in the June 2019 Dialysis Outcomes
Practice Patterns Study (DOPPS) Practice Monitor.
In September 2019, we reported statistically significant results from AMPLIFY, a Phase 3 study of tenapanor
evaluating the dual mechanism of tenapanor in combination with phosphate binders in patients with CKD on dialysis
whose hyperphosphatemia was not controlled with binders alone.
The AMPLIFY study design, shown in Figure 2, was a double-blind, placebo- controlled, randomized study that
enrolled a total of 236 patients with CKD on dialysis who, despite a high and stable phosphate binder regime, had serum
phosphorus levels greater than or equal to 5.5mg/dL and less than or equal to 10.0mg/dL at screening. After a run-in of two
to four weeks, patients were then randomized 1:1 to receive the addition of tenapanor or placebo twice daily while
continuing their established phosphate binder regimen. Baseline serum phosphorus at randomization was at a mean of
6.8mg/dL. Tenapanor was initiated at a starting dose of 30 mg twice daily with tenapanor dose adjustments allowed based
on tolerability and serum phosphorus levels. The primary endpoint of the study was the comparison of the change from
baseline in serum phosphorus levels at week 4 between placebo or tenapanor and binder arms. The key secondary
endpoints included a comparison of the proportion of patients achieving a serum phosphorus level below 5.5 mg/dL at
week four and relative change from baseline in FGF23 levels between the tenapanor and binder arms at week four.
For the primary endpoint, patients in the tenapanor arm (tenapanor in combination with phosphate binders, n=116)
had a statistically significant (p=0.0004) mean reduction in serum phosphorus from baseline to the end of the four-week
treatment period of 0.84 mg/dL, as compared to those treated in the binder arm (placebo in combination with phosphate
binders, n=119) who had a mean reduction of 0.19 mg/dL. Patients in the tenapanor arm had statistically significant
decreases in serum phosphorus during all four weeks ranging from 0.84 to 1.21 mg/dL (p-values <0.0004). During the
treatment period, up to 49.1% of patients in the tenapanor arm achieved a serum phosphorus of <5.5 mg/dL which was
statistically significant compared with up to 23.5% in the binder arm (p-values≤0.0097). In addition, over the 4-week
period there were statistically significant reductions in both intact and c-terminus FGF23 levels: 22% to 24% (p-
values≤0.0027) respectively. Although exploratory in nature, we believe this is a notable result as increasing levels of
FGF23 have a linear association with all-cause mortality and an increased risk of major cardiovascular events.
Tenapanor was well tolerated. Only 4.3% of patients in the tenapanor arm discontinued treatment compared to
2.5% in the binder arm. The single adverse event with a placebo-adjusted rate greater than 3% was loose stools/diarrhea at
36%, where most incidents were reported within the first five days of treatment, were transient in nature and the median
time to resolution was four days. Notably, only 2.6% of patients in the tenapanor arm discontinued treatment due to loose
stools/diarrhea, as compared to 0.8% in the binder arm. There were no serious adverse events related to tenapanor.
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Figure 2. AMPLIFY Clinical Trial Design
In February 2017, we announced data from our first Phase 3 clinical trial evaluating the efficacy and safety of
tenapanor as a monotherapy for the control of serum phosphorus in patients with CKD on dialysis. The Phase 3 trial was an
eight-week, double-blind, randomized trial, with a four-week placebo-controlled randomized withdrawal 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 between the tenapanor-treated group and the placebo-treated
group in the efficacy analysis population (mean -1.01 mg/dL, median of -1.3 mg/dL) and met its primary endpoint (95%
confidence interval, -1.44, -0.21, LSmean -0.82 mg/dL, p=0.01).
Tenapanor was well-tolerated in the trial. In the eight-week treatment period, the only adverse event that affected
more than five percent of patients treated with tenapanor was diarrhea (39%), a patient-reported side effect of loosened
stool or increased frequency in bowel movements regardless of magnitude. In the four-week randomized withdrawal
period, there was a diarrhea rate of 1.2% for patients treated with tenapanor compared with 2.4% on placebo. Treatment
discontinuations due to diarrhea during the eight-week treatment period for patients on tenapanor was 7.8% (n=17). There
were no discontinuations due to diarrhea during in the randomized withdrawal period.
The hyperphosphatemia market
Phosphate binders are the only drugs marketed for the control of serum phosphorus in CKD patients on dialysis.
The various types of phosphate binders commercialized in the United States include the following:
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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); and
Ferric citrate (Auryxia).
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The hydrochloride form of sevelamer, Renagel, was launched in the United States by Genzyme Corporation in
1998 prior to its acquisition by Sanofi, and the carbonate form, Renvela, was launched in 2008. Generic sevelamer
carbonate 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, an iron-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 patients
on hemodialysis in the United States. Additionally, according to the European ERA-EDTA Registry 2016 Annual Report
and a study in 2016 by the Japanese Society for Dialysis Therapy, there were approximately 327,000 patients on
hemodialysis in Europe and about 329,000 in Japan. We estimate, based on phosphate binder utilization, the only approved
therapies for hyperphosphatemia, that there are approximately 320,000, 260,000 and 289,000 end-stage renal disease, or
ESRD, patients with hyperphosphatemia in the United States, countries in Europe and Japan, respectively, resulting in
approximately 869,000 ESRD patients with hyperphosphatemia in such countries.
Because many CKD patients on dialysis with hyperphosphatemia are unable to lower serum phosphorus levels to
below 5.5 mg/dL with currently marketed phosphate binders, we believe there is a significant medical need for new agents
with new mechanisms, demonstrated efficacy, a strong safety profile, and significantly lower pill burden. We believe that
tenapanor, if approved, has the potential to have the lowest pill burden and mass among any currently marketed
hyperphosphatemia products, with milligram rather than gram quantities. In addition, we are evaluating whether tenapanor
has the potential to be used in combination with phosphate binders for those patients who cannot achieve adequate
phosphate control with a single agent.
Our intention is to build a United States-focused, highly efficient, specialized sales and marketing organization
focused on nephrology. The nephrology market is a concentrated market strongly influenced by key opinion leaders. There
were 10,798 nephrologists in the United States in 2018 and 7,578 dialysis facilities in the United States that offer in-center
dialysis. Based on the experience of our management team, we believe that a specialty salesforce is appropriate for this
marketplace. We believe that tenapanor for the control of serum phosphorus could represent a market opportunity of
between $500 million and $700 million in the United States.
With its significantly reduced pill burden and well-tolerated safety profile, tenapanor, if approved, would be the
only non-binder treatment for the control of serum phosphorus in patients with CKD on dialysis and would address the
significant pill burden challenges and intolerability that patients experience with today’s binder treatments. In
the PHREEDOM trial we demonstrated tenapanor’s ability to lower serum phosphorus as monotherapy, and in the
AMPLIFY trial we demonstrated the benefits of a dual mechanism approach to lowering serum phosphorus with tenapanor
plus binders in patients whose serum phosphorus was not previously controlled with binders alone. We believe that
tenapanor has a role to play in the management of all dialysis patients with hyperphosphatemia. With the results from these
clinical trials, we intend to submit a New Drug Application to the FDA in mid-2020 for tenapanor, for the control of serum
phosphorus in patients with CKD on dialysis.
To bring tenapanor to patients outside the United States, we intend to establish strategic collaborations with
industry leading pharmaceutical companies with established commercial infrastructures. We currently have three
collaboration partnerships: with KKC for commercialization of tenapanor for the treatment of cardiorenal diseases,
including hyperphosphatemia, in Japan; with Fosun Pharma for the commercialization of tenapanor for the treatment of
IBS-C and hyperphosphatemia in China; and with Knight for commercialization of tenapanor in Canada.
RDX013 Program: Small Molecule for Treating Hyperkalemia
RDX013 is our novel, small molecule program for the potential treatment of hyperkalemia. Our RDX013
approach works by leveraging the GI tract’s natural ability to secrete potassium into the lumen of the gut to reduce serum
potassium levels. This mechanism differs significantly from the potassium binders currently on the market. For a potassium
binder to work, it must be present when dietary potassium is ingested so that the agent can bind the potassium and prevent
its absorption in the gut. This results in the need for large quantities of binder in order to bind the large
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amounts of potassium in the diets of most individuals. In contrast, we observed in our preclinical models that a small
amount of drug could cause potassium to be secreted into the lumen of the gut. In this way, we believe that with our
approach in the RDX013 program, we may have the potential to lower serum potassium whether or not potassium is
present in the diet and could result in a very low pill burden, potentially allowing better patient compliance, longer-term use
and potentially better efficacy than potassium binders. As described below, certain medications commonly administered to
patients with CKD and/or heart failure can also cause hyperkalemia. We believe that, if successful, our approach in the
RDX013 program may provide nephrologists and cardiologists with an opportunity to treat hyperkalemia chronically
without reducing the dose of these medications by utilizing an effective potassium secretagogue to treat hyperkalemia in a
small, convenient pill format.
Hyperkalemia is generally defined as the presence of blood potassium levels greater than 5.0 mEq/L. Normal
levels are 3.5 to 5.0 mEq/L. When hyperkalemia is severe, above 7.0 mEq/L, there is a significantly increased risk of death
because of 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 the
blood, 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 be
significantly reduced in patients whose potassium levels are elevated, such as in those with CKD and heart failure. Because
of the risk of hyperkalemia, several published guidelines have suggested that physicians should reduce and possibly
discontinue RAAS inhibitors in order to manage the risk of hyperkalemia in CKD and heart failure patients. The alternative
medications used to control hypertension, including diuretics and calcium channel blockers, are less effective than RAAS
inhibitors, particularly in patients with failing kidneys and severe hypertension. According to the 2015 publication Market
Dynamix: Hyperkalemia, released by Spherix Global Insights, U.S. cardiologists reported that of the patients who would
benefit from RAAS inhibition, up to 38% of patients with heart failure and up to 55% of patients with both heart failure and
CKD are being administered a sub-optimal dose or none at all. Nephrologists reported that at least one-third of patients
who would benefit from RAAS inhibition receive a sub-optimal dose or none at all. We believe there is clearly a strong
medical need for new medications that control hyperkalemia in order to allow for optimal use of RAAS inhibitors to
control hypertension in these patient populations.
The hyperkalemia market
Of the people with CKD and/or heart failure in the United States, we estimate that there are approximately 2.1
million people who also have occurrences of hyperkalemia. According to a retrospective study conducted in 2005 of a
national cohort of 246,000 patients cared for in the Veterans Health Administration, about 21% and 42% of patients with
CKD Stage 3b and Stage 4, respectively, had a hyperkalemic event during a 12-month period, suggesting that hyperkalemia
affects about 900,000 individuals with CKD Stage 3b or Stage 4 in the United States. According to the United States Renal
Data System 2014 Atlas of CKD & ESRD, over 50% of CKD Stage 3b and Stage 4 patients are prescribed RAAS
inhibitors to control 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 collected
in the National Health and Nutrition Examination Survey, which is taken in stages over multiple years. Our proprietary
research suggests that up to 16%, or approximately 1.0 million, of these patients had hyperkalemia during a 12-month
period. Over half of heart failure patients are prescribed RAAS inhibitors. Our proprietary research also suggests that up to
200,000 CKD patients on dialysis 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
launched by Relypsa, which was acquired by Galenica AG in September 2016. Additionally, Lokelma (sodium zirconium
cyclosilicate), an oral, potassium binder developed by ZS Pharma, acquired by AstraZeneca in December 2015, 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 have
the potential to lower serum potassium whether or not potassium is present in the diet and could result in very low pill
burden, allowing better compliance, longer-term use and potentially better efficacy than potassium binders.
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If we are successful in developing RDX013 and obtaining marketing authorization from the FDA, we would
expect to leverage the renal sales and marketing organization that we intend to build to support commercialization in the
United States of tenapanor for treating hyperphosphatemia in dialysis patients.
IBSRELA® (tenapanor) for Irritable Bowel Syndrome with Constipation (IBS-C)
On September 12, 2019, we received US FDA approval of IBSRELA (tenapanor) for the treatment of IBS-C in
adults. To efficiently bring this treatment to market, we are pursuing strategic collaborations for IBSRELA for IBS-C in
certain territories. We have established agreements with Fosun Pharma in China and Knight in Canada.
IBS-C is a burdensome GI disorder affecting a significant number of people. It is characterized by significant
abdominal pain, constipation, straining during bowel movements, bloating and/or gas.
IBSRELA (tenapanor) is a locally acting inhibitor of the sodium/hydrogen exchanger 3 (NHE3), an antiporter
expressed on the apical surface of the small intestine and colon primarily responsible for the absorption of dietary sodium.
By inhibiting NHE3 on the apical surface of the enterocytes, tenapanor reduces absorption of sodium from the small
intestine and colon, resulting in an increase in water secretion into the intestinal lumen, which accelerates intestinal transit
time and results in a softer stool consistency.
The IBS-C market
Numerous treatments exist for the constipation component of IBS-C, many of which are over-the-counter. There
are four prescription products marketed for IBS-C: Linzess (linaclotide); Amitiza (lubiprostone); Trulance
(plecanatide) and Zelnorm (tegaserod).
Within the United States, there are approximately 11 million patients that suffer from IBS-C. There is significant
unmet need for prescription medications, where, according a 2015 American Gastroenterological Association report, only
one in four treated patients are very satisfied with the current FDA approved treatments in IBS-C.
OUR STRATEGIC PARTNERSHIPS
License Agreement with KKC
In November 2017, we entered into a license agreement, the 2017 KKC Agreement, with KKC under which we
granted KKC an exclusive license to develop and commercialize tenapanor in Japan for the treatment of cardiorenal
diseases and conditions, excluding cancer, the KKC Field. We retained the rights to tenapanor outside of Japan, and also
retained the rights to tenapanor in Japan for indications other than those in the KKC Field. Pursuant to the 2017 KKC
Agreement, KKC is responsible for all of the development and commercialization costs for tenapanor in the KKC Field in
Japan.
Under the 2017 KKC Agreement, we are responsible for supplying the tenapanor drug substance for KKC’s use in
development and commercialization throughout the term of the 2017 KKC Agreement, provided that KKC may exercise an
option to manufacture the tenapanor drug substance under certain conditions.
Under the terms of the 2017 KKC Agreement, we received a $30.0 million upfront payment and are eligible to
receive up to $55.0 million in total development milestones, of which we have received $5.0 million to date. Additionally,
under the 2017 KKC Agreement we are eligible to receive up to 8.5 billion yen in commercialization milestones, worth up
to $78.3 million at the exchange rate on December 31, 2019, and royalties based on aggregate annual net sales of the
licensed products at a high teens percentage, subject to certain single digit reductions under certain circumstances described
in the 2017 KKC Agreement.
The 2017 KKC Agreement will continue until all of KKC’s applicable payment obligations under the 2017 KKC
Agreement have been performed or have expired, or the agreement is earlier terminated. Under the terms of the 2017 KKC
Agreement, we and KKC each have the right to terminate the agreement for material breach by the other
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party. In addition, KKC may terminate the agreement for convenience; for certain safety reasons or if certain primary
endpoints under an applicable development plan are not met despite KKC’s commercially reasonable efforts and KKC
reasonably determines that it cannot obtain regulatory approval. KKC may also terminate the agreement if certain pivotal
clinical trials conducted by us do not meet their primary endpoints. We may terminate the 2017 KKC Agreement if KKC
challenges any patents licensed to KKC under the agreement.
Research Collaboration with KKC
In November 2019, we expanded our strategic partnership with KKC with a separate research agreement. In the
agreement, we established a two-year research collaboration, whereby we will execute a research plan, in which KKC will
also join, to advance two of our ongoing research programs focused on identification and design of compounds to two
undisclosed targets. In return, KKC will pay us $10.0 million ($5.0 million a year, for two years), of which we have
received $5.0 million to date, to support the ongoing research. Following the end of the research period, KKC will have the
option to license any candidates nominated by the companies for further development and commercialization in certain
specified territories, with additional commitments payable to us of up to $10.5 million in upfront payments and up to
$500.0 million in development and sales milestones.
License agreement with Fosun
In December 2017, we entered into a license agreement, the Fosun License Agreement, with Fosun Pharma under
which 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 marketing
approval in either the US or China, collectively, the Fosun Field. The Fosun Field excludes the treatment of cancer. We
retained the rights to tenapanor outside of China, and also retained the rights to tenapanor in China for indications other
than those in the Fosun Field. Pursuant to the terms of the Fosun License Agreement, Fosun Pharma is responsible for all
of the development 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 for
Fosun 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 and
commercialization 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
eligible to receive additional milestones of up to $113.0 million in the aggregate, of which we have recognized and
received $3.0 million to date, as well as tiered royalty payments on aggregate net sales ranging from the mid-teens percent
to twenty percent, subject to certain reductions under certain circumstances, as described in the Fosun License Agreement.
The Fosun License Agreement will continue until all of Fosun Pharma’s applicable payment obligations under the
License Agreement have been performed or have expired, or the agreement is earlier terminated. Under the terms of the
Fosun License Agreement, we and Fosun Pharma each have the right to terminate the agreement for material breach by the
other party or in the event of insolvency by the other party. In addition, Fosun Pharma may terminate the agreement for
convenience, and we may terminate the agreement if Fosun Pharma challenges any patents licensed to it under the
agreement.
License agreement with Knight Therapeutics
In March 2018, we entered into a license agreement with Knight that provides Knight with exclusive rights to
commercialize tenapanor in Canada. Under the terms of the agreement, Ardelyx is eligible to receive up to CAD 25 million
in total payments, worth up to $19.2 million at the currency exchange rate on December 31, 2019, including an upfront
payment and development and sales milestones, as well as tiered royalties on net sales ranging from the mid-single digits to
the low twenties. Knight will have the exclusive rights to market and sell tenapanor in Canada.
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CORPORATE DEVELOPMENT
In December 2019, we completed an underwritten public offering of 23,000,000 shares of common stock,
resulting in the receipt of aggregate gross proceeds of approximately $143.8 million, less underwriting discounts,
commissions and offering expenses.
Additionally, in November 2019, we enhanced our strategic partnership with KKC by entering into a stock
purchase agreement, pursuant to which we sold to KKC an aggregate of 2,873,563 shares of our common stock for
aggregate gross proceeds of approximately $20.0 million.
As of December 31, 2019, we had cash, cash equivalents and short-term investments totaling $247.5 million.
INTELLECTUAL PROPERTY
Our commercial success depends in part on our ability to obtain and maintain proprietary protection for our drug
candidates, manufacturing and process discoveries, and other know-how, to operate without infringing the proprietary
rights of others and to prevent others from infringing our proprietary rights. Our policy is to seek to protect our intellectual
property by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology and
inventions that are important to the development and operation of our business. We also rely on trade secrets and careful
monitoring of our proprietary information to protect aspects of our business that are not amenable to, or that we do not
consider appropriate for, 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
before the patent is issued, and its scope can be reinterpreted after issuance. Consequently, we do not know whether any of
our product candidates will be protectable or remain protected by enforceable patents. We cannot predict whether the patent
applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of our issued
patents 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
also claim 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 even if 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.
In most 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, be
lengthened by patent term adjustment, which compensates a patentee for administrative delays by the USPTO in examining
and granting a patent, or may be shortened if a patent is terminally disclaimed over a commonly owned patent or a patent
naming 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
beyond the expiration of a U.S. patent as partial compensation for the patent term lost during the FDA regulatory review
process occurring while the patent is in force. A patent extension cannot extend the remaining term of a patent beyond a
total of 14 years from the date of product approval, and only one patent applicable to each regulatory review period may be
extended and 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 patent that covers an approved drug.
We may rely, in some circumstances, on trade secrets to protect our technology. Although we take steps to protect
our proprietary information and trade secrets, including through contractual means with our employees and consultants,
third parties may independently develop substantially equivalent proprietary information and techniques or otherwise gain
access to our trade secrets or disclose our technology. Thus, we may not be able to meaningfully protect our trade secrets. It
is our policy to require our employees, consultants, outside scientific collaboration partners, sponsored researchers and
other advisors to execute confidentiality agreements upon the commencement of employment
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or consulting relationships with us. These agreements provide that all confidential information concerning the business or
financial affairs developed or made known to the individual during the course of the individual’s relationship with us is to
be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the
agreements provide that all inventions conceived by the individual, and which are related to our current or planned business
or research and development or made during the normal working hours, on our premises or using our equipment or
proprietary information, are our exclusive property.
Tenapanor patents
Our tenapanor patent portfolio is wholly owned by us. This portfolio includes four issued U.S. patents, two issued
Japanese patents, two issued patents in each of Korea, Hong Kong, Israel and Mexico and one issued patent in each of the
following territories: Australia, China, and the European Union. These issued patents cover the composition and certain
methods of using tenapanor and are predicted, without extension or adjustment, to expire in December 2029. The portfolio
further includes patents covering the use of tenapanor for the control of serum phosphorus that has issued in U.S., Europe,
Japan, China, Australia, Russia and Taiwan and is pending in other countries. These patents are predicted, without
extension or adjustment, to expire in April 2034. We have related national patent applications pending in Europe, China,
India, Israel and a number of other countries. Any patents issuing from these patent 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 treatment with
tenapanor, and composition of matter and methods of using compounds that we believe may be follow on compounds to
tenapanor.
Other program patents
We have patent applications pending in the United States and internationally that cover the compositions and
methods of using our TGR5 agonists, our FXR agonists and compounds in our RDX013 program.
MANUFACTURING
To date, we have relied upon third-party contract manufacturing organizations, or CMOs, to manufacture both the
active pharmaceutical ingredient and final drug product dosage forms of our potential drug candidates used as clinical trial
material. We expect that we will continue to rely upon CMOs for the manufacture of our clinical trial materials and for our
commercial product requirements, when and if regulatory approval is received. Our license agreements with KKC, Knight,
and Fosun Pharma require us to supply final drug product dosage forms of tenapanor and/or active pharmaceutical
ingredient for their use in the development of tenapanor in each of their respective territories, and we are further obligated
to continue to supply active pharmaceutical ingredient to support their commercialization of tenapanor in each of their
territories. We expect that we will use CMOs to satisfy our supply obligations to our collaboration partners.
GOVERNMENT REGULATION
The FDA and comparable regulatory authorities in state and local jurisdictions and in other countries impose
substantial and burdensome requirements upon companies involved in the clinical development, manufacture, marketing
and distribution of drugs. These agencies and other federal, state and local entities regulate research and development
activities 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 our
product 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 during the drug development process, the approval process or after approval, we may become subject to administrative
or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, license suspension
or revocation, withdrawal of an approval, warning or untitled letters, product recalls, product
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seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal prosecution.
Any FDA enforcement action could have a material adverse effect on us. FDA approval is required before any new
unapproved drug or dosage form, including a new 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:
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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;
submission to the FDA of an Investigational New Drug, or IND, application which must become
effective before 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
site before each trial may be initiated;
performance of adequate and well-controlled human clinical trials in accordance with Good Clinical
Practice, or GCP, regulations to establish the safety and efficacy of the drug candidate for each proposed
indication;
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
is produced 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
of the 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.
Nonclinical tests include laboratory evaluation of product chemistry, formulation, stability and toxicity, as well as animal
studies to assess the characteristics and potential safety and efficacy of the product. The results of preclinical tests, together
with manufacturing information, analytical data and a proposed clinical trial protocol and other information, are submitted
as part of an IND to the FDA. Some preclinical testing may continue even after the IND is submitted. The IND
automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30‑day time period, raises
concerns or questions relating to the IND and places the clinical trial on a clinical hold, including concerns that human
research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve
any outstanding concerns before the clinical trial can begin. A separate submission to an existing IND must also be made
for each successive clinical trial conducted during product development.
Clinical trials involve the administration of the investigational drug to human subjects under the supervision of
qualified investigators. Clinical trials are conducted under protocols detailing, among other things, the objectives of the
clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be used. Each protocol must be
submitted 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 also
review and approve a plan for any clinical trial before it can begin at that center and the IRB must monitor the clinical trial
until it is completed. The FDA, the IRB, or the sponsor may suspend or discontinue a clinical trial at any time on various
grounds, including a finding that the subjects are being exposed to an unacceptable health risk. Clinical testing also must
satisfy extensive GCP requirements, including the requirements for informed consent.
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All clinical research performed in the United States in support of an NDA must be authorized in advance by the
FDA under the IND regulations and procedures described above. However, a sponsor who wishes to conduct a clinical trial
outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND. If a
foreign clinical trial is not conducted under an IND, the sponsor may submit data from the clinical trial to the FDA in
support of an NDA so long as the clinical trial is conducted in compliance with GCP and if the FDA is able to validate the
data from the study through an onsite inspection, if necessary. GCP includes review and approval by an independent ethics
committee, such as an IRB, and obtaining and documenting the freely given informed consent of the subject before study
initiation. If the applicant seeks approval of an NDA solely on the basis of foreign data, the FDA will only accept such data
if they are applicable to the U.S. population and U.S. medical practice, the studies have been performed by clinical
investigators of recognized competence, and the data may be considered valid without the need for an on-site inspection by
the FDA, or if the FDA considers such an inspection to be necessary, the FDA is able to validate the data through an on-site
inspection or through other appropriate means.
Clinical trials
The clinical investigation of a new drug is typically conducted in three or four phases, which may overlap or be
combined, and generally proceed as follows.
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Phase 1: Clinical trials are initially conducted in a limited population of subjects to test the drug
candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion in healthy humans
or, on occasion, in patients with severe problems or life-threatening diseases to gain an early indication of
its effectiveness.
Phase 2: Clinical trials are generally conducted in a limited patient population to evaluate dosage
tolerance and appropriate dosage, identify possible adverse effects and safety risks, and evaluate
preliminarily the efficacy of the drug for specific targeted indications in patients with the disease or
condition under study.
Phase 3: Clinical trials are typically conducted when Phase 2 clinical trials demonstrate that a dose range
of the product candidate is effective and has an acceptable safety profile. Phase 3 clinical trials are
commonly referred to as “pivotal” studies, which typically denotes a study which presents the data that
the FDA or other relevant regulatory agency will use to determine whether or not to approve a drug.
Phase 3 clinical trials are generally undertaken with large numbers of patients, such as groups of several
hundred to several thousand, to further evaluate dosage, to provide substantial evidence of clinical
efficacy and to further test for safety in an expanded and diverse patient population at multiple,
geographically-dispersed clinical trial sites.
Phase 4: In some cases, the FDA may condition approval of an NDA for a product candidate on the
sponsor’s agreement to conduct additional clinical trials after NDA approval. In other cases, a sponsor
may voluntarily conduct additional clinical trials post approval to gain more information about the drug.
Such post approval trials are typically referred to as Phase 4 clinical trials.
Concurrent with clinical trials, companies usually complete additional nonclinical studies and must also develop
additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing
the drug in commercial quantities in accordance with GMP requirements. The manufacturing process must be capable of
consistently producing quality batches of the drug candidate and, among other things, the manufacturer must develop
methods for testing the identity, strength, quality and purity of the final drug product. Additionally, appropriate packaging
must be selected and tested, and stability studies must be conducted to demonstrate that the drug candidate does not
undergo unacceptable 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 various
grounds, including a finding that the research subjects are being exposed to an unacceptable health risk.
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Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the
clinical trial sponsor, known as a data safety monitoring board or committee. This group provides authorization for whether
or not a trial may move forward at designated check points based on access to certain data from the study. We may also
suspend or terminate a clinical trial based on evolving business objectives and/or competitive climate.
New drug applications
The results of preclinical studies and of the clinical trials, together with other detailed information, including
extensive manufacturing information and information on the composition of the drug, are submitted to the FDA in the form
of an NDA requesting approval to market the drug for one or more specified indications. The FDA reviews an NDA to
determine, 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 new
molecular entities within ten months after the 60‑day filing review period, or six months after the 60‑day filing review
period for 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 the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but
it generally follows such recommendations.
Before approving an application, the FDA will inspect the facility or the facilities at which the finished drug
product, and sometimes the active pharmaceutical ingredient, or API, is manufactured, and will not approve the drug unless
cGMP compliance is satisfactory. The FDA may also inspect the sites at which the clinical trials were conducted to assess
their 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 product
and/or its API will be produced, it may issue an approval letter or a Complete Response Letter. An approval letter
authorizes commercial marketing of the drug with specific prescribing information for specific indications. A Complete
Response Letter indicates that the review cycle of the application is complete and the application is not ready for approval.
A Complete Response Letter may require additional clinical data and/or an additional pivotal Phase 3 clinical trial(s),
and/or other significant, expensive and time-consuming requirements related to clinical trials, preclinical studies or
manufacturing. Even if such additional information is submitted, the FDA may ultimately decide that the NDA does not
satisfy the criteria for approval. 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 restricted distribution methods, patient registries and other risk minimization tools. The FDA also may
condition approval on, among other things, changes to proposed labeling, development of adequate controls and
specifications, or a commitment to conduct one or more post-market studies or clinical trials. Such post-market testing may
include Phase 4 clinical trials and surveillance to further assess and monitor the product’s safety and effectiveness after
commercialization. The FDA has the authority to prevent or limit further marketing of a drug based on the results of these
post-marketing programs. Once the FDA approves an NDA, or supplement thereto, the FDA may withdraw the approval if
ongoing regulatory requirements are not met or 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 the
approved labeling. Further, if there are any modifications to the drug, including changes in indications, labeling, or
manufacturing processes or facilities, the applicant may be required to submit and obtain FDA approval of a new NDA or
NDA supplement, which may require the applicant to develop additional data or conduct additional preclinical studies and
clinical trials.
The testing and approval processes require substantial time, effort and financial resources, and each may take
several years to complete. The FDA may not grant approval on a timely basis, or at all. Even if we believe a clinical trial
has demonstrated safety and efficacy of one of our drug candidates for the proposed indication, the results may not be
satisfactory 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 necessary
governmental approvals which could delay or preclude us from marketing drugs. The FDA may limit the
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indications for use or place other conditions on any approvals that could restrict the commercial application of the drugs.
After approval, certain changes to the approved drug, such as adding new indications, manufacturing changes, or additional
labeling claims are subject to further FDA review and approval. Depending on the nature of the change proposed, an NDA
supplement must be filed and approved before the change may be implemented.
Other regulatory requirements
Any drugs manufactured or distributed by us or our collaboration partners pursuant to FDA approvals would be
subject to continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences
associated with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the
FDA and certain state agencies, and are subject to periodic announced and unannounced inspections by the FDA and
certain state agencies for compliance with ongoing regulatory requirements, including cGMP, which impose certain
procedural and documentation requirements upon us and our third-party manufacturers. Failure to comply with the
statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning or
untitled letters, suspension of manufacturing, seizure of product, injunctive action or possible civil penalties. We cannot be
certain that we or our present or future third-party manufacturers or suppliers will be able to comply with the cGMP
regulations and other ongoing FDA regulatory requirements. If we or our present or future third-party manufacturers or
suppliers are not able to comply with these requirements, the FDA may, among other things, halt our clinical trials, require
us to recall a drug from distribution or withdraw approval of the NDA for that drug.
The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and
regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities
and promotional activities involving the Internet. A company can make only those claims relating to safety and efficacy
that are approved by the FDA. Failure to comply with these requirements can result in, among other things, adverse
publicity, warning or untitled letters, corrective advertising and potential civil and criminal penalties. Physicians may
prescribe legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by
us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such
off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of
physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’
communications regarding off-label use.
Hatch-Waxman Act
Section 505 of the FFDCA describes three types of marketing applications that may be submitted to the FDA to
request marketing authorization for a new drug. A Section 505(b)(1) NDA is an application that contains full reports of
investigations of safety and efficacy. A 505(b)(2) NDA is an application that contains full reports of investigations of safety
and efficacy but where at least some of the information required for approval comes from investigations that were not
conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person
by or for whom the investigations were conducted. This regulatory pathway enables the applicant to rely, in part, on the
FDA’s prior 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 the
submission of an Abbreviated New Drug Application, or ANDA. An ANDA provides for marketing of a generic drug
product that has the same active ingredients, dosage form, strength, route of administration, labeling, performance
characteristics and intended use, among other things, to a previously approved product. ANDAs are termed “abbreviated”
because they are generally 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 active ingredients into a subject’s bloodstream in the same amount of time as the innovator drug and can often be
substituted by pharmacists 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 the drug. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the
FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs
listed in the Orange Book can, in turn, be cited by potential competitors in support of approval of an ANDA or 505(b)
(2) NDA.
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Upon submission of an ANDA or a 505(b)(2) NDA, an applicant must certify to the FDA that (1) no patent
information on the drug product that is the subject of the application has been submitted to the FDA; (2) such patent has
expired; (3) the date on which such patent expires; or (4) such patent is invalid or will not be infringed upon by the
manufacture, use or sale of the drug product for which the application is submitted. Generally, the ANDA or 505(b)
(2) NDA cannot be approved until all listed patents have expired, except where the ANDA or 505(b)(2) NDA applicant
challenges a listed patent through the last type of certification, also known as a paragraph IV certification. If the applicant
does not challenge the listed patents or indicates that it is not seeking approval of a patented method of use, the ANDA or
505(b)(2) NDA application will not be approved until all of the listed patents claiming the referenced product have expired.
If the ANDA or 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant
must send notice of the Paragraph IV certification to the NDA and patent holders once the application has been accepted
for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice
of the paragraph IV certification. If the paragraph IV certification is challenged by an NDA holder or the patent
owner(s) asserts a patent challenge to the paragraph IV certification, the FDA may not approve that application until the
earlier of 30 months from the receipt of the notice of the paragraph IV certification, the expiration of the patent, when the
infringement case concerning each such patent was favorably decided in the applicant’s favor or settled, or such shorter or
longer period as may be 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 the 30‑month stay, recognizing that the related patent litigation may take
many months or years to resolve. Thus, approval of an ANDA or 505(b)(2) NDA could be delayed for a significant period
of time depending on the patent certification the applicant makes 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, during
which the FDA cannot approve (or in some cases accept) an ANDA or 505(b)(2) application that relies on the branded
reference drug. For example, the holder of an NDA, including a 505(b)(2) NDA, may obtain five years of exclusivity upon
approval of a new drug containing new chemical entities, or NCEs, that have not been previously approved by the FDA. A
drug 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, the FDA may not accept for review an ANDA or a 505(b)(2) NDA submitted by another company that contains the
previously approved active moiety. However, an ANDA or 505(b)(2) NDA may be submitted after four years if it contains
a certification of patent invalidity or non-infringement.
The Hatch-Waxman Act also provides three years of marketing exclusivity to the holder of an NDA (including a
505(b)(2) NDA) for a particular condition of approval, or change to a marketed product, such as a new formulation for a
previously approved product, if one or more new clinical studies (other than bioavailability or bioequivalence studies) was
essential to the approval of the application and was conducted/sponsored by the applicant. This three-year exclusivity
period protects against FDA approval of ANDAs and 505(b)(2) NDAs for the condition of the new drug’s approval. As a
general matter, the three-year exclusivity does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for
generic versions of the original, unmodified drug product. Five-year and three-year exclusivity will not delay the
submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain
a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate
safety and efficacy.
Fraud and abuse laws
In the United States, the research, manufacturing, distribution, sale and promotion of drug products and medical
devices are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including
the 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
local government agencies. These laws include but are not limited to, the Anti-Kickback Statute, the federal False Claims
Act, the federal Physician Payments Sunshine Act, and other state and federal laws and regulations.
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The Anti-Kickback Statute makes it illegal for any person, including a prescription drug manufacturer (or a party
acting on its behalf) to knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce the
referral of business, including the purchase, order, or prescription of a particular drug, for which payment may be made
under a federal healthcare program, such as Medicare or Medicaid. Violations of this law are punishable by up to five years
in prison, 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 to have committed a violation. Moreover, the Affordable Care Act provides that the government may assert that a
claim including items or services resulting from a violation of the federal Anti-Kickback Statute 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
payment to federal programs (including Medicare and Medicaid) claims for items or services, including drugs, that are false
or fraudulent, 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 are
deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding
information to customers or promoting a product off-label. In addition, our future activities relating to the reporting of
wholesaler or estimated retail prices for our products, the reporting of prices used to calculate Medicaid rebate information
and other information affecting federal, state, and third-party reimbursement for our products, and the sale and marketing of
our products, are subject to scrutiny under this law. For example, pharmaceutical companies have been prosecuted under
the federal False Claims Act in connection with their off-label promotion of drugs. Penalties for a False Claims Act
violation include 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 also implicate various federal criminal statutes. If the government were to allege that we were, or convict us of,
violating these false claims laws, we could be subject to a substantial fine and may suffer a decline in our stock price. In
addition, private individuals have the ability to bring actions under the federal False Claims Act and certain states have
enacted laws modeled after the federal False Claims Act.
In addition to the laws described above, the Patient Protection and Affordable Care Act, as amended by the Health
Care and Education Reconciliation Act, collectively known as the Affordable Care Act, also imposed new reporting
requirements on drug manufacturers for payments made to physicians and teaching hospitals, as well as ownership and
investment interests held by physicians and their immediate family members. Failure to submit required information may
result in civil monetary penalties of up to an aggregate of $165,786 per year (or up to an aggregate of $1.105 million
per year for “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
each subsequent calendar year.
Many states have also adopted laws similar to the federal laws discussed above. Some of these state prohibitions
apply to the referral of patients for healthcare services reimbursed by any insurer, not just federal healthcare programs such
as Medicare and Medicaid. There has also been a recent trend of increased regulation of payments made to physicians and
other healthcare providers. Certain states mandate implementation of compliance programs, impose restrictions on drug
manufacturers’ marketing practices and/or require the tracking and reporting of pricing and marketing information as well
as gifts, compensation and other remuneration to physicians. Many of these laws contain ambiguities as to what is required
to comply with such laws, which may affect our sales, marketing, and other promotional activities by imposing
administrative and compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their
implementation, our reporting 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
other governmental healthcare programs, we plan to develop a comprehensive compliance program that establishes internal
controls to facilitate adherence to the rules and program requirements to which we will or may become subject. Although
compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be
entirely 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
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sales and marketing practices 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 significant legal expenses and divert our management’s attention from the operation of our business.
Third-party coverage and reimbursement
Sales of pharmaceutical products depend in significant part on the availability of coverage and adequate
reimbursement by third-party payors, such as state and federal governments, including Medicare and Medicaid, and
commercial managed care providers. In the United States, no uniform policy of coverage and reimbursement for drug
products exists among third-party payors. Accordingly, decisions regarding the extent of coverage and amount of
reimbursement to be provided for our product candidates, if approved, will be made on a payor by payor basis. As a result,
the coverage determination process is often a time-consuming and costly process that will require us to provide scientific
and clinical support for the use of our product candidates to each payor separately, with no assurance that coverage and
adequate reimbursement will be obtained. Third-party payors may limit coverage to specific drug products on an approved
list, or formulary, which might not include all of the FDA-approved drugs for a particular indication. A decision by a third-
party payor not to cover our product candidates could reduce physician utilization of our products once approved and have
a material adverse effect on our future sales, results of operations and financial condition. Moreover, a payor’s decision to
provide 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 on
our investment in product development.
In addition, in July 2010, CMS released its final rule to implement a bundled prospective payment system for the
treatment of CKD patients on dialysis as required by the Medicare Improvements for Patients and Providers Act, or
MIPPA. The bundled payment includes all renal dialysis services furnished for outpatient maintenance dialysis, including
ESRD-related drugs and biologicals. The final rule delayed the inclusion of oral medications without intravenous
equivalents in the bundled payment until January 1, 2014 and in April 2014, due to subsequent legislative amendments,
CMS provided that such inclusion will remain delayed until January 1, 2025. Unless additional Congressional action is
taken, beginning in 2025 ESRD-related drugs will be included in the bundle 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 drugs for the control of serum phosphorus, the impact could potentially cause dramatic price
reductions for tenapanor, if approved.
Healthcare reform
In March 2010, Congress passed, and President Obama signed into law, the Patient Protection and Affordable
Care Act, a healthcare reform measure, or the Affordable Care Act. The Affordable Care Act substantially changes the way
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 federal
healthcare programs, reimbursement changes and fraud and abuse measures, which have impacted existing government
healthcare programs and have resulted in the development of new programs, including Medicare payment for performance
initiatives 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 from
15.1% 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 offer
Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for
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certain individuals with income at or below 133% of the federal poverty level, thereby potentially
increasing a manufacturer’s Medicaid rebate liability;
expands access to commercial health insurance coverage through new state-based health insurance
marketplaces, or exchanges;
requires manufacturers to participate in a coverage gap discount program, under which they must agree to
offer 50 percent point-of-sale discounts off negotiated prices of applicable brand drugs to eligible
beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to
be covered under Medicare Part D, beginning January 2011; and
imposes a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded
prescription drugs” to specified federal government programs.
·
·
·
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable
Care Act. We expect that the new presidential administration and U.S. Congress will likely continue to seek to modify,
repeal, or otherwise invalidate all or certain provisions of, the Affordable Care Act. There is still uncertainty with respect to
the impact President 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
were authorized by the Affordable Care Act.
In addition, other legislative changes have been proposed and adopted in the United States since the Affordable
Care Act was enacted. For example, in August 2011, the Budget Control Act of 2011, among other things, included
aggregate 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 is taken. In January 2013, the American Taxpayer Relief Act, among other things, further reduced Medicare
payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute
of limitations period for the government to recover overpayments to providers from three to five years. Additionally,
individual states have also become increasingly active in passing legislation and implementing regulations 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 for their marketed
products, which has resulted in several Congressional 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 reimbursement methodologies for drug products. These new laws and the regulations and
policies implementing them, as well as other healthcare reform measures that may be adopted in the future, may have a
material adverse effect on our industry generally and on our ability to successfully develop and commercialize our
products.
Other regulations
We 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 hazardous
substances. We may incur significant costs to comply with such laws and regulations now or in the future.
EMPLOYEES
As of December 31, 2019, we had a total of 88 employees, all of which were full-time employees, including a
total of 14 employees with Ph.D. degrees. Within our workforce, 63 employees are engaged in research and development
and the remaining 25 in general management and administration, including finance, legal, and market development. None
of our employees are represented by labor unions or covered by collective bargaining agreements. We believe that we
maintain good relations with our employees.
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CORPORATE INFORMATION
We were incorporated in Delaware on October 17, 2007, under the name Nteryx and changed our name to
Ardelyx, Inc. in June 2008. We operate in only one business segment, which is the research and development of
biopharmaceutical products. Our principal offices are located at 34175 Ardenwood Blvd., Fremont, CA 94555, and our
telephone 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
Exchange Act of 1934, as amended. We make available on our website at www.ardelyx.com, free of charge, copies of these
reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC
maintains a website that contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the SEC. The address of that website is www.sec.gov.
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ITEM 1A. RISK FACTORS
Our business involves significant risks, some of which are described below. You should carefully consider these risks,
as well as other information in this Annual Report on Form 10‑K, including our financial statements and the related notes
and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence of any of
the events or developments described below could harm our business, financial condition, results of operations, cash flows,
the trading price of our common stock and our growth prospects. Additional risks and uncertainties not presently known 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 Requirements
We have a limited operating history, have incurred significant losses since our inception and we will incur losses in the
future, which makes it difficult to assess our future viability.
We are a clinical-stage biopharmaceutical company with a limited operating history. Biopharmaceutical product
development is a highly speculative undertaking and involves a substantial degree of risk. To date, we have focused
substantially all of our efforts on our research and development activities, including developing tenapanor and developing
our proprietary drug discovery and design platform. To date, we have not commercialized any products or generated any
revenue 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 not know
whether or when we will become profitable. We have only a limited operating history upon which to evaluate our business
and prospects. We continue to incur significant research, development and other expenses related to our ongoing
operations. As of December 31, 2019, we had an accumulated deficit of $460.5 million.
We expect to continue incur substantial operating losses for the foreseeable future as we prepare for the potential
commercialization of, and incur manufacturing and development costs for, tenapanor, including costs associated with
preparing the new drug application, or NDA, for submission to the U.S. Food and Drug Administration, or FDA, to request
marketing authorization for tenapanor for the control of serum phosphorus in CKD patients on dialysis, commercializing
tenapanor for that indication, 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 our
stockholders’ equity and working capital. Further, the net losses we incur may fluctuate significantly from quarter-to-
quarter and year-to-year, such that a period-to-period comparison of our results of operations may not be a good indication
of our future 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 restructuring
transactions. In addition, the future utilization of such net operating loss and tax credit carryforwards and credits will be
subject to limitations, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that have
occurred previously and additional limitations may be applicable as a result of ownership changes that could occur in the
future.
We have never generated any revenue from product sales and may never be profitable.
We received FDA approval for our NDA for tenapanor for the treatment of IBS-C in September 2019. However, we do
not currently expect to commercialize tenapanor for IBS-C ourselves in the United States, and have not entered into a
collaboration partnership for such commercialization. We have no other products approved for sale and have never
generated any revenue from product sales. Our ability to generate revenue from product sales and achieve profitability
depends on our ability to obtain the regulatory and marketing approvals necessary to commercialize tenapanor for the
control of serum phosphorus in CKD patients on dialysis, either on our own or with one or more collaboration partners, and
on our ability to successfully identify a collaboration partner for the commercialization of tenapanor for the treatment of
IBS-C. There can be no assurances that we will generate product revenue from sales of tenapanor, either on our own,
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or with a collaboration partner. Our ability to generate future revenue from product sales or pursuant to milestone payments
depends heavily on many factors, including but not limited to:
·
·
·
·
·
·
·
·
obtaining regulatory approvals for tenapanor for the control of serum phosphorus in CKD patients on dialysis,
either on our own or with one or more collaboration partners;
our ability to identify a collaboration partner and negotiate acceptable terms for a collaboration partnership for the
commercialization of tenapanor for IBS-C in the United States;
our ability to successfully commercialize tenapanor, which has been approved by the FDA for the treatment of
IBS-C, and/or tenapanor for the control of serum phosphorus in CKD patients on dialysis, if approved, either on
our own or with one or more collaboration partners;
developing a sustainable and scalable manufacturing process for tenapanor and establishing and maintaining
supply and manufacturing relationships with third parties that can provide an adequate (in amount and quality)
supply of product to support the market demand for tenapanor for the treatment of IBS-C, and/or, if
approved, tenapanor for the control of serum phosphorus in CKD patients on dialysis;
obtaining market acceptance of tenapanor as a viable treatment option for the indications for which it is approved
and commercialized;
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 we may
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 product candidates 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, our ability to identify a collaboration partner and negotiate acceptable terms for a collaboration partnership for the
commercialization of tenapanor for the IBS-C indication in the United States, the accepted price for the product, the ability
to get reimbursement at any price and whether we are commercializing the product or the product is being commercialized
by a collaboration partner, and in such case, whether we have royalty and/or co-promotion rights for that territory, and
whether any royalty we have a right to receive from a collaboration partner is in excess of the royalty we owe AstraZeneca
as a result of the termination of our License Agreement with AstraZeneca in 2015. See NOTE 13, COLLABORATION
AND LICENSING AGREEMENTS, in the notes to our financial statements, included in Part II, Item 8, of this Annual
Report on Form 10-K, for details on our obligations to AstraZeneca. While there is significant uncertainty related to the
insurance coverage and reimbursement of newly approved products in general in the United States, there is additional
uncertainty related to insurance coverage and reimbursement for drugs, like tenapanor, which, if approved, will be
marketed for the control of serum phosphorus in CKD patients on dialysis. If we are successful in obtaining regulatory
approval to market tenapanor for the control of serum phosphorus in CKD patients on dialysis, our ability to generate and
sustain future revenues from sales of tenapanor for such indication, may be dependent upon whether tenapanor, along with
other oral only drugs for CKD patients on dialysis, are bundled into the ESRD Prospective Payment System beginning in
2025, and the manner in which such introduction into the ESRD Prospective Payment System may occur. See “Third-party
payor coverage and reimbursement status of newly-approved products is uncertain. Failure to
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obtain or maintain adequate coverage and reimbursement for our products, if approved, could limit our ability to
market those products and decrease our ability to generate revenue” below. Additionally, if the number of patients
suitable for tenapanor is not as significant as we estimate, the indication approved by regulatory authorities is narrower than
we expect, coverage and reimbursement for tenapanor are not available in the manner and to the extent which we expect, or
the reasonably accepted population for treatment is narrowed by competition, physician choice or treatment guidelines, we
may not generate significant revenue from the sale of tenapanor, even if approved. Even if we achieve profitability in the
future, we may not be able to sustain profitability in subsequent periods. Our failure to generate revenue from product sales
would likely depress our market value and could impair our ability to raise capital, expand our business, discover or
develop other product candidates or continue our operations. A decline in the value of our common stock could cause our
stockholders to lose all or part of their investment.
Our operating activities may be restricted as a result of covenants related to the indebtedness under our loan and
security agreement and we may be required to repay the outstanding indebtedness in an event of default, which could
have a materially adverse effect on our business.
On May 16, 2018, we entered into a loan and security agreement with Solar Capital, Ltd. and Western Alliance Bank,
or collectively the Lenders, pursuant to which the Lenders agreed to provide us a $50.0 million term loan facility with a
maturity date of November 1, 2022. The full amount of the loan was funded on May 16, 2018. Until we have repaid such
indebtedness, the loan and security agreement subjects us to various customary covenants, including requirements as to
financial reporting and insurance and restrictions on our ability to dispose of our business or property, to change our line of
business, to liquidate or dissolve, to enter into any change in control transaction, to merge or consolidate with any other
entity or to acquire all or substantially all the capital stock or property of another entity, to incur additional indebtedness, to
incur liens on our property, to pay any dividends or other distributions on capital stock other than dividends payable solely
in capital stock, to redeem capital stock, to enter into licensing agreements, to engage in transactions with affiliates, and to
encumber our intellectual property. Our business may be adversely affected by these restrictions on our ability to operate
our business.
We are permitted to make interest only payments on the loan facility through December 1, 2020. However, we may be
required to repay the outstanding indebtedness under the loan facility if an event of default occurs under the loan and
security agreement. An event of default will occur if, among other things, we fail to make payments 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 has occurred; we or our
assets become subject to certain legal proceedings, such as bankruptcy proceedings; we are unable to pay our debts as they
become due; or we default on contracts with third parties which would permit the Lenders to accelerate the maturity of such
indebtedness or that could have a material adverse change on us. We may not have enough available cash or be able to raise
additional funds through equity or debt financings to repay such indebtedness at the time any such event of default occurs.
In this case, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts
or grant to others’ rights to develop and market product candidates that we would otherwise prefer to develop and market
ourselves. The Lenders could also exercise their rights as collateral agent to take possession of and to dispose of the
collateral securing the term loans, which collateral includes substantially all of our property (excluding intellectual
property, which is subject to a negative pledge). Our business, financial condition and results of operations could be
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 capital
when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our pre-commercialization
efforts 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 design platform.
We believe that we will continue to expend substantial resources for the foreseeable future, including costs associated with
the preparation and submission of the NDA for, and, if approved, the commercialization of tenapanor for the control of
serum phosphorus in CKD patients on dialysis, research and development, conducting preclinical studies and clinical trials
for our other programs, obtaining regulatory approvals, developing and maintaining scalable manufacturing processes for
our product candidates and sales and marketing. Because the outcome of any clinical trial and/or regulatory approval
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process is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the
development, regulatory approval process and commercialization or co-promotion of any of our product candidates. Our
future funding requirements will depend on many factors, including, but not limited to:
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the preparation and submission of an NDA with the FDA to request marketing authorization for tenapanor for the
control of serum phosphorus in CKD patients on dialysis;
our ability to identify a collaboration partner and negotiate acceptable terms for a collaboration partnership for the
commercialization of tenapanor in IBS-C in the United States;
our ability to successfully commercialize tenapanor, which has been approved by the FDA for the treatment of
patients with IBS-C, with one or more collaboration partners; and, our ability to successfully commercialize
tenapanor for the control of serum phosphorus in CKD patients on dialysis, if approved, either alone or with one
or more collaboration partners;
the manufacturing costs of our product candidates, and the availability of one or more suppliers for our product
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 our sales and
marketing capabilities;
our ability to maintain our existing collaboration partnerships and to establish additional collaboration
partnerships, in-license/out-license, joint ventures or other similar arrangements and the financial terms of such
agreements;
the timing, receipt, and amount of 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 clinical
trials we decide to pursue for other product candidates, including RDX013;
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 intellectual
property rights, including litigation costs and the outcome of such litigation, including costs of defending any
claims of infringement brought by others in connection with the development, manufacture or commercialization
of tenapanor or any of our product candidates; and
the payment of interest and principal related to our loan and security agreement entered into with Solar Capital
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 adequate
funds 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
marketing capabilities 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 to restructure certain aspects of our business or identify and complete one or more strategic collaborations or
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other transactions in order to fund the development or commercialization of tenapanor or certain of our product candidates
through the use of alternative structures.
Risks Related to Our Business
We are substantially dependent on the success of our lead product candidate, tenapanor, which may not receive
regulatory approval for the control of serum phosphorus or be successfully commercialized for IBS-C or
hyperphosphatemia.
To date, we have invested a significant amount of our efforts and financial resources in the research and development
of tenapanor, which is currently our lead product candidate. The clinical and commercial success of tenapanor will depend
on a number of factors, including the following:
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our ability to, in a timely manner and under terms that are acceptable to us, establish a collaboration partnership
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 the
manufacturing processes for tenapanor, which has not yet been fully demonstrated, and to manufacture supplies of
tenapanor and to develop, validate and maintain commercially viable manufacturing processes that are compliant
with cGMP requirements;
whether the FDA requires us to conduct clinical trials in addition to those anticipated prior to approval to market
tenapanor for the control of serum phosphorus, which could delay the commercialization of tenapanor for the
control of serum phosphorus in CKD patients on dialysis in the U.S;
whether or not the content of the label approved by the FDA or foreign regulatory authorities may materially and
adversely impact our ability the ability of our collaboration partners to commercialize the product for the
approved indication, or for any other indication;
whether we will be required to conduct clinical trials in addition to those anticipated to obtain adequate
commercial 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 authorities to
gain marketing approval for the control of serum phosphorus;
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, if approved for
marketing and sale by the FDA or foreign regulatory authorities, including educating physicians 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 reimbursement negotiations
associated with marketing the same product at different doses for separate indications for tenapanor for the
treatment of IBS-C, and, if approved, for the control of serum phosphorus in CKD patients on dialysis;
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the availability, perceived advantages, relative cost, relative safety and relative efficacy of tenapanor compared to
alternative and competing treatments;
obtaining and sustaining an adequate level of coverage and reimbursement for tenapanor by third-party payors;
enforcing intellectual property rights in and to tenapanor;
avoiding third-party interference, opposition, derivation or similar proceedings with respect to our patent rights,
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 a
class of drugs with approved products. Although tenapanor met the primary endpoints in all of the three Phase 3 clinical
trials evaluating tenapanor for the control of serum phosphorus in CKD patients on dialysis, there can be no assurances that
we will receive regulatory approval to market tenapanor for the control of serum phosphorus in CKD patients on dialysis.
Further, it may not be possible or practicable to demonstrate, or if approved, to market tenapanor on the basis of certain of
the benefits we believe tenapanor possesses. If the number of patients in the market for tenapanor or the price that the
market can bear is not as significant as we estimate, or if we are not able to secure adequate coverage and reimbursement
for tenapanor, we may not generate sufficient revenue from sales of tenapanor for the control of serum phosphorus, if
approved, or for IBS-C. Additionally, we may not be successful in establishing a collaboration partnership for the
commercialization of tenapanor for the treatment of IBS-C in the United States in a timely manner and under terms that are
acceptable to us. Accordingly, there can be no assurance that tenapanor will ever be successfully commercialized or that we
will ever generate income from sales of tenapanor. If we are not successful in completing the NDA submission for, and
obtaining approval for, tenapanor for the control of serum phosphorus, or we are not successful in commercializing
tenapanor, or are significantly delayed in doing so, our business will be materially harmed.
Even if we are successful in obtaining regulatory approval for tenapanor for the control of serum phosphorus, and
tenapanor is ultimately commercialized for any approved indications, tenapanor may never achieve market acceptance,
sufficient third-party coverage or reimbursement, or commercial success, which will depend, in part, upon the degree of
acceptance among physicians, patients, patient advocacy groups, health care payors and the medical community.
Even if we are successful in obtaining regulatory approval for tenapanor for the control of serum phosphorus, and
tenapanor is ultimately commercialized for any approved indications, tenapanor may not achieve market acceptance among
physicians, patients, third-party payors, patient advocacy groups, and the medical community. Market acceptance of
tenapanor, in the event that marketing approval is obtained, depends on a number of factors, including:
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with respect to tenapanor for IBS-C in the United States, our ability to obtain a collaboration partner for
commercialization and the strength of such collaboration partner’s financial resources and marketing and
distribution organizations, as well as the commitment of such collaboration partner’s sales organization to
tenapanor;
the efficacy demonstrated in our clinical trials;
with respect to tenapanor for the control of serum phosphorus, whether tenapanor, along with other oral only
medications, are included in the bundled prospective payment system for the treatment of ESRD patients, and the
manner in which such transition is achieved;
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;
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advantages over new or traditional or existing therapies, including recently approved therapies or therapies that
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 alternative treatments,
including future alternative treatments;
the cost of treatment in relation to alternative treatments and the 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 for IBS-
C and any failure of tenapanor to achieve market acceptance, sufficient third-party coverage or reimbursement, or
commercial success for any approved indications 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 third
parties, 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 for the treatment of
IBS-C, we currently plan to seek a collaborative relationship with one or more third parties, rather than to build internal
marketing, sales, distribution, managerial and other non-technical capabilities for the commercialization of tenapanor for
IBS-C. There can be no assurances that we will be successful in establishing collaborative relationships in a timely manner
or on terms that are acceptable to us, and if we fail to do so, we may choose to further delay, or delay indefinitely, the
commercialization of tenapanor for IBS-C.
We currently plan to commercialize tenapanor for the control of serum phosphorus in CKD patients on dialysis, if
approved, on our own. In order to do so, we will need to establish an appropriate sales organization with technical
expertise, as well as supporting distribution capabilities. This will be expensive and time consuming. As a company, we
have no prior experience in the marketing, sale and distribution of pharmaceutical products and there are significant risks
involved in building and managing a sales organization, including our ability to secure the capital necessary to fund such
efforts on acceptable terms, hire, retain, and incentivize qualified individuals, generate sufficient sales leads, provide
adequate training to sales and marketing personnel, comply with regulatory requirements applicable to the marketing and
sale of drug products and effectively manage a geographically dispersed sales and marketing team.
If we fail or are delayed in the development of our internal sales, marketing and distribution capabilities, we may
choose to delay the commercialization tenapanor for the control of serum phosphorus, if approved, or such
commercialization could be adversely impacted.
Third-party payor coverage and reimbursement status of newly-approved products are uncertain. Failure to obtain or
maintain adequate coverage and reimbursement for our products, if approved, could limit our ability to market those
products and decrease our ability to generate revenue.
The pricing, coverage and reimbursement of our product candidates, if approved, must be adequate to support a
commercial infrastructure. The availability and adequacy of coverage and reimbursement by governmental and private
payors are essential for most patients to be able to afford treatments such as ours, assuming approval. Sales of our product
candidates will depend substantially, both domestically and abroad, on the extent to which the costs of our product
candidates will be paid for by health maintenance, managed care, pharmacy benefit, and similar healthcare management
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organizations, or reimbursed by government authorities, private health insurers, and other third-party payors. If coverage
and reimbursement are not available, or are available only to limited levels, we, or our collaboration partners, may not be
able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement
amount may not 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. In
the United States, the principal decisions about coverage and reimbursement for new drugs are typically made by the
Centers for Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services
responsible for administering the Medicare program, as CMS decides whether and to what extent a new drug will be
covered and reimbursed under Medicare. Private payors tend to follow the coverage reimbursement policies established by
CMS to a substantial 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, if
approved, will be marketed for the control of serum phosphorus in CKD patients on dialysis. In January 2011, CMS
implemented a new prospective payment system for dialysis treatment. Under the ESRD prospective payment system,
CMS generally makes a single bundled payment to the dialysis facility for each dialysis treatment that covers all items and
services routinely required for dialysis treatments furnished to Medicare beneficiaries in Medicare-certified ESRD facilities
or at their home, including the cost of certain routine drugs. The inclusion of oral medications without intravenous
equivalents in the bundled payment was initially delayed until January 1, 2014 and through several subsequent legislative
actions was delayed again January 1, 2025. As a result, absent further legislation on this matter, beginning in 2025, oral-
only ESRD-related drugs may be included in the ESRD bundle and separate Medicare payment for these drugs will no
longer be available, as is the case 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 cause dramatic price reductions for tenapanor, if approved. We may
be unable to sell tenapanor, if approved, to dialysis providers on a profitable basis if third-party payors reduce their current
levels of payment, or if our costs of production are higher than levels necessary for an appropriate gross margin after
payment of all discounts, rebates and chargebacks.
Outside the United States, international operations are generally subject to extensive governmental price controls and
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. In many
countries, the prices of medical products are subject to varying price control mechanisms as part of national health systems.
Other countries allow companies to fix their own prices for medicinal products, but monitor and control company profits.
Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge
for our product candidates. Accordingly, in markets outside the United States, the reimbursement for our products may be
reduced compared with the United States and may be insufficient to generate commercially reasonable revenue and profits.
Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to cap or reduce
healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for newly approved
products and, as a result, these caps may not cover or provide adequate payment for our product candidates. We expect to
experience pricing pressures in connection with the sale of any of our product candidates due to the trend toward managed
healthcare, the increasing influence of health maintenance organizations, and additional legislative changes. The downward
pressure on healthcare costs in general, particularly prescription drugs and surgical procedures and other treatments, has
become very intense. As a result, increasingly high barriers are being erected to the entry of new products.
We may not be successful in our efforts to develop our product candidates that are at an early stage of development, or
expand our pipeline of product candidates, as a result of numerous factors, which may include the inability to access
capital 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 our
proprietary drug discovery and design platform and to advance such product candidates through clinical development. Our
inability to access capital in a timely manner or on acceptable terms to fund our early stage product candidates may force us
to consider certain restructuring activities to enable the funding of those early assets through the use of alternative
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structures. In addition, of the large number of drugs in development, only a small percentage of such drugs successfully
complete the FDA regulatory approval process and are commercialized. Accordingly, even if we are able to continue to
fund our research and early stage development programs, there can be no assurance that any product candidates will reach
the clinic or be successfully 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 have
resulted 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
select candidates for development, yet we may fail to advance product candidates to clinical development for many
reasons, including the following:
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we may be unable to access sufficient capital on acceptable terms to fund the development of all of our assets 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 in identifying
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 exclusive rights;
the market for a product candidate may change during our program so that the continued development of that
product candidate is no longer reasonable;
a product candidate may on further study be shown to have harmful side effects or other characteristics that
indicate it is unlikely to be effective, well-tolerated or otherwise does not meet applicable regulatory or
commercial 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 medical community
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 that they are unlikely
to receive marketing approval and achieve market acceptance. If we do not successfully develop and commercialize a
product pipeline, we may not be able to generate revenue from product sales in future periods or ever achieve profitability.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome and the 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 must
conduct extensive clinical studies to demonstrate the safety and efficacy of the product candidates in humans. Clinical
testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any
time during the clinical trial process. The results of preclinical and clinical studies of our product candidates may not be
predictive of the results of later-stage clinical trials. An unexpected adverse event profile, or the results of drug-drug
interaction studies, may present challenges for the future development and commercialization of a product candidate for a
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particular condition despite receipt of positive efficacy data in a clinical study. A number of companies in the
pharmaceutical, biopharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical
trials for similar indications that we are pursuing due to lack of efficacy or adverse safety profiles, notwithstanding
promising results in earlier studies, and we cannot be certain that we will not face similar setbacks.
Furthermore, we could encounter delays if our ongoing clinical trials are suspended or terminated by us, by the IRBs
of the institutions in which the trial is being conducted, or by the FDA or other regulatory authorities. Such authorities may
suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance
with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or
other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects,
failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of
adequate funding to continue the clinical trial. Any delays in completing a clinical trial will increase costs, slow down our
development and regulatory approval process for our potential products and jeopardize the ability to commence product
sales and generate revenue from a potential product. Any of these occurrences may significantly harm our business,
financial condition and prospects.
Furthermore, even though we have completed our Phase 3 clinical development program for tenapanor for the control
of serum phosphorus, the results may not be sufficient to obtain the desired regulatory approval for tenapanor, or if such
regulatory approval is obtained, the content of the label approved by regulatory authorities may materially and adversely
impact our ability to commercialize the product for the approved indication.
We rely on third parties to conduct some of our nonclinical studies and all of our clinical trials. If these third parties do
not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory
approval for additional products or commercialize our product candidates.
We do not have the ability to independently conduct clinical trials and, in some cases, nonclinical studies. We rely on
medical institutions, clinical investigators, contract laboratories, and other third parties, such as CROs, to conduct clinical
trials on our product candidates. The third parties with whom we contract for execution of the clinical trials play a
significant role in the conduct of these trials and the subsequent collection and analysis of data. However, these third parties
are not our employees, and except for contractual duties and obligations, we control only certain aspects of their activities
and have limited ability to control the amount or timing of resources that they devote to our programs. Although we rely,
and will continue to rely, on these third parties to conduct some of our nonclinical studies and all of our clinical trials, we
remain responsible 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 regulatory
responsibilities. We, and these third parties are required to comply with current GLPs for nonclinical studies, and good
clinical practices, or GCPs, for clinical studies. GLPs and GCPs are regulations and guidelines enforced by the FDA, the
Competent Authorities of the Member States of the European Economic Area, or EEA, and comparable foreign regulatory
authorities for all of our products in nonclinical and clinical development, respectively. Regulatory authorities enforce
GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our third-party
contractors fail to comply with applicable regulatory requirements, including GCPs, the clinical data generated in our
clinical trials may be deemed unreliable and the FDA, the European Medicines Agency, or EMA, or comparable foreign
regulatory authorities may require us to perform additional clinical trials before approving our marketing applications.
There can be no assurance that upon inspection by a given regulatory authority, such regulatory authority will determine
that any of our clinical trials comply with GCP regulations. In addition, our clinical trials must be conducted with product
produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials,
which would delay the regulatory approval process.
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Our products or product candidates may cause undesirable side effects or have other properties that could delay our
clinical trials, or delay or prevent regulatory approval, limit the commercial profile of an approved label, or result in
significant negative consequences following any regulatory approval that is achieved. If we or others identify
undesirable side effects caused by any product candidate following receipt of marketing approval, the ability to market
such product candidate could be compromised.
Undesirable side effects caused by our products or product candidates could cause us or regulatory authorities to
interrupt, delay or halt clinical trials, result in the delay or denial of regulatory approval by the FDA or other comparable
foreign regulatory authorities or limit the commercial profile of an approved label. To date, patients treated with tenapanor
have experienced drug-related side effects including diarrhea, nausea, vomiting, flatulence, abdominal discomfort,
abdominal pain, abdominal distention and changes in electrolytes. Despite our receipt of marketing approval for tenapanor
for IBS-C and the completion of our Phase 3 clinical program for tenapanor for the control of serum phosphorus, in the
event that future trials conducted by us with tenapanor, or trials we conduct with our other product candidates, reveal an
unacceptable severity and prevalence of these or other side effects, such trials could be suspended or terminated and the
FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of
tenapanor for such indication, 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 to cease further
development of a product candidate for a particular indication, or entirely. The drug-related side effects could affect 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, if we or others identify undesirable side effects caused by one of our products for which we have received
regulatory approval, a number of potentially significant negative consequences could occur, including:
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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 manufacturing processes
for the product or any component thereof, including the imposition of a Risk Evaluation and Mitigation Strategy,
or REMS, which could require creation of a Medication Guide or patient package insert outlining the risks of such
side effects for distribution to patients, a communication plan to educate healthcare providers of the drugs’ risks,
as well as other elements to assure safe use of the product, such as a patient registry and training and certification
of prescribers;
we, or a collaboration partner, may be subject to fines, injunctions or the imposition of civil or criminal penalties;
regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a
contraindication;
we could be sued and held liable for harm caused to patients;
the product may become less competitive; and
our reputation may suffer.
Any of the foregoing events could prevent us, or a collaboration partner, from achieving or maintaining market
acceptance of a particular product candidate, if approved, and could result in the loss of significant revenue to us, which
would materially and adversely affect our results of operations and business.
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We face substantial competition and our competitors may discover, develop or commercialize products faster or more
successfully than us.
The biotechnology and pharmaceutical industries are highly competitive, and we face significant competition from
companies in the biotechnology, pharmaceutical and other related markets that are researching and marketing products
designed to address diseases that we are currently developing products to treat. If approved for marketing by the FDA or
other regulatory agencies, tenapanor, as well as our other product candidates, would compete against existing treatments.
For example, tenapanor will, if approved for the control of serum phosphorus in CKD patients on dialysis, compete
directly with phosphate binders for the control of serum phosphorus in CKD patients on dialysis. The various types of
phosphate binders commercialized in the United States include the following:
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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); and
Ferric citrate (Auryxia).
The hydrochloride form of sevelamer, Renagel, was launched in the United States by Genzyme Corporation in 1998
prior to its acquisition by Sanofi, and the carbonate form, Renvela, was launched in 2008. Generic sevelamer carbonate 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 being developed by Opko Health, Inc., and PT20, an iron-based binder in
Phase 3 being developed by Shield Therapeutics.
In respect of tenapanor for the treatment of IBS-C, numerous treatments exist for constipation and the constipation
component 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 as MiraLax), 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 well to temporarily relieve constipation.
We are aware of four prescription products marketed for certain patients with IBS-C, including Linzess (linaclotide),
Amitiza (lubiprostone), Trulance (plecanatide) and Zelnorm (tegaserod maleate).
It is possible that our competitors will develop and market drugs or other treatments that are less expensive and more
effective than our product candidates, or that will render our product candidates obsolete. It is also possible that our
competitors will commercialize competing drugs or treatments before we, or our collaboration partners, can launch any
products developed from our product candidates. We also anticipate that we will face increased competition in the future as
new 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 and pharmaceutical
industries may result in even more resources being concentrated in our competitors. Large pharmaceutical companies in
particular have extensive expertise in preclinical and clinical testing and in obtaining regulatory approvals for drugs. In
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addition, academic institutions, government agencies, and other public and private organizations conducting research may
seek patent protection with respect to potentially competitive products or technologies. These organizations may also
establish exclusive collaboration partnerships or licensing relationships with our competitors.
We 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 our
current activities for future growth, these resources may not be adequate for this purpose. Our need to effectively execute
our business strategy requires that we:
· manage our pre-commercialization activities effectively;
· manage our clinical trials effectively;
· manage our internal research and development efforts effectively while carrying out our contractual obligations to
licensors, contractors, collaborators, government agencies and other third parties;
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continue to improve our operational, financial and management controls, reporting systems and procedures; and
retain and motivate our remaining employees and potentially identify, recruit, and integrate additional employees.
If we are unable to maintain or expand our managerial, operational, financial and other resources to the extent required
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 on
third parties to produce commercial supplies of tenapanor, if tenapanor is ultimately commercialized for any indication.
Our business would be harmed if those third parties fail to obtain approval of the FDA or comparable regulatory
authorities, fail to provide us with sufficient quantities of 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 manufacture
tenapanor or any of other our product candidates on a commercial scale, or to manufacture our drug supplies for use in the
conduct of our nonclinical and clinical studies. The facilities used by our contract manufacturers to manufacture our drug
supply must be approved by the FDA pursuant to inspections that will be conducted after an NDA is submitted to the FDA.
Our ability to control the manufacturing process of our product candidates is limited to the contractual requirements and
obligations we impose on our contract manufacturer. Although they are contractually required to so do, we are completely
dependent on our contract manufacturing partners for compliance with the regulatory requirements, known as cGMPs, for
manufacture of both active drug substances and finished drug products.
If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the
strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval for
their manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain
adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory
authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such
approval in the future, we may need to find alternative manufacturing facilities, which would require a transfer of
technology to such alternative facilities and potentially additional capital investment. In addition, the use of alternative
manufacturing facilities would require qualification with the FDA or comparable foreign regulatory authorities, all of
which would significantly impact 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 product
candidates for our clinical studies. There are a limited number of suppliers for raw materials and certain processes, such as
spray drying, that we use to manufacture our drugs, and there may be a need to identify alternate suppliers to prevent a
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possible disruption of the manufacture of the materials necessary to produce our product candidates for our clinical studies,
and, if approved, ultimately for commercial sale. We do not have any control over the process or timing of the acquisition
of these raw materials or processes by our manufacturers. Although we generally do not begin a clinical study unless we
believe we have on hand, or will be able to manufacture, a sufficient supply of a product candidate to complete such study,
any significant delay or discontinuity in the supply of a product candidate, or the raw material components thereof, for an
ongoing clinical study due to the need to replace a third-party manufacturer could considerably delay completion of our
clinical studies, product testing, and potential regulatory approval of our product candidates, 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 limit
commercialization 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 face an
even greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly
causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such
product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers
inherent in the product, negligence, strict liability, and a breach of warranties. Claims could also be asserted under state
consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur
substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would
require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may
result in:
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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 of coverage
to protect against potential product liability claims could prevent or inhibit the commercialization of any products we
develop. We currently carry product liability insurance covering use in our clinical trials in the amount of $10.0 million in
the aggregate. Although we maintain such insurance, any claim that may be brought against us could result in a court
judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the
limits of our insurance coverage. Our insurance policies also have various exclusions and deductibles, and we may be
subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or
negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not
have, or be able to obtain, sufficient capital to pay such amounts. Moreover, in the future, we may not be able to maintain
insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses.
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If we fail to attract, retain and motivate our executives, senior management and key personnel, our business will suffer.
Recruiting and retaining qualified scientific, clinical, medical, manufacturing, and sales and marketing personnel is
critical to our success. We are also highly dependent on our executives, senior management and certain other key
employees. The loss of the services of our executives, senior management or other key employee could impede the
achievement of our research, development and commercial objectives and seriously harm our ability to successfully
implement our business strategy. Furthermore, replacing executives, senior management and other key employees may be
difficult and may take an extended period of time because of the limited number of individuals in our industry with the
breadth of skills and experience required to successfully develop, gain marketing approval of and commercialize products.
We may be unable to hire, train or motivate these key personnel on acceptable terms given the intense competition among
numerous biopharmaceutical companies for similar personnel, particularly in our geographic regions. Furthermore, we
have announced that, Mark Kaufmann, our Chief Financial Officer intends to transition out of the company on or around
March 13, 2020. While we are actively recruiting for his replacement, there can be no assurances that we will be able to
replace Mr. Kaufmann prior to his planned departure. If we are unable to continue to attract and retain high quality
personnel, our ability to grow and pursue our business strategy will be limited.
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 on the 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 GI
tract. However, there can be no assurance that APECCS will be able to identify new targets in the GI tract or that any of
these potential targets or other aspects of our proprietary drug discovery and design platform will yield product candidates
that could enter clinical development and, ultimately, be commercially valuable. In addition, as we focus our efforts on the
discovery and design of therapies for the treatment of cardiorenal diseases, we may need to further develop our proprietary
drug discovery and design platform to enhance its usefulness in the identification, screening, testing, design and
development of new product candidates for the treatment of cardiorenal diseases. There can be no assurances that we will
be successful in such additional development of our platform or that our platform will yield product candidates for the
treatment of renal diseases.
We and our collaborators, CROs and other contractors and consultants depend on information technology systems, and
any failure of these systems could harm our business. Security breaches, loss of data, and other disruptions could
compromise sensitive information related to our business or prevent us from accessing critical information and expose
us to 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 digital form
that is necessary to conduct our business, and we are increasingly dependent on information technology systems and
infrastructure to operate our business. In the ordinary course of our business, we and our collaborators, CROs and other
contractors and consultants collect, store and transmit large amounts of confidential information, including intellectual
property, proprietary business information and personal information. It is critical that we and our collaborators, CROs and
other contractors and consultants do so in a secure manner to maintain the confidentiality and integrity of such confidential
information. We have established physical, electronic and organizational measures to safeguard and secure our systems to
prevent a data compromise, and rely on commercially available systems, software, tools, and monitoring to provide
security for our information technology systems and the processing, transmission and storage of digital information. We
have also outsourced elements of our information technology infrastructure, and as a result a number of third-party vendors
may or could have access to our confidential information. Our internal information technology systems and infrastructure,
and those of our current and any future collaborators, CROs, contractors and consultants and other third parties on which
we rely, are vulnerable to damage from computer viruses, malware, natural disasters, terrorism, war, telecommunication
and electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our
organization, or persons with access to systems inside our organization.
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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, intensity and
sophistication of attempted attacks and intrusions from around the world have increased. In addition, the prevalent use of
mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss
of 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 have
implemented security measures to protect our data security and information technology systems, our efforts to address
these problems may not be successful, and these problems could result in unexpected interruptions, delays, cessation of
service and other harm to our business and our competitive position. If such an event were to occur and cause interruptions
in our operations, it could result in a material disruption of our product development programs. For example, the loss of
clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval
efforts and significantly increase our costs to recover or reproduce the data. Moreover, if a computer security breach affects
our systems or those of our collaborators, CROs or other contractors, or results in the unauthorized release of personally
identifiable information, our reputation could be materially damaged. We would also be exposed to a risk of loss or
litigation and potential liability, which could materially adversely affect our business, results of operations and financial
condition.
In addition, such a breach may require notification to governmental agencies, the media or individuals pursuant to
various federal and state privacy and security laws, if applicable, including the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Clinical Health Act of 2009,
or HITECH, and its implementing rules and regulations. Even when HIPAA does not apply, according to the Federal Trade
Commission, or the FTC, failing to take appropriate steps to keep consumers’ personnel information secure constitutes
unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, or the
FTCA, 15 U.S.C § 45(a). The FTC expects a company’s data security measures to be reasonable and appropriate in light of
the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of
available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered
sensitive data that merits stronger safeguards. The FTC’s guidance for appropriately securing consumers’ personal
information is similar to what is required by the HIPAA Security Rule. We may also be subject to state laws requiring
notification of affected individuals and state regulators in the event of a breach of personal information, which is a broader
class of information than the health information protected by HIPAA. For example, California recently enacted legislation,
the California Consumer Privacy Act, or CCPA, which went into effect January 1, 2020. The CCPA, among other things,
creates new data privacy obligations for covered companies and provides new privacy rights to California residents,
including the right to opt out of certain disclosures of their information. The CCPA also creates a private right of action
with statutory damages for certain data breaches, thereby potentially increasing risks associated with a data breach.
Although the law includes limited exceptions, including for “protected health information” maintained by a covered entity
or business associate, it may regulate or impact our processing of personal information depending on the context.
We incur significant costs as a result of operating as a public company, and our management will devote substantial
time to new compliance initiatives. We may fail to comply with the rules that apply to public companies, including
Section 404 of 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 from public
company reporting obligations under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and
regulations regarding corporate governance practices. The listing requirements of The Nasdaq Global Market require that
we satisfy 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
management and 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 will make some activities more time consuming and costly. Any changes we make to comply with
these obligations may not be sufficient 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
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serve on our board of directors or board committees 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 the
Securities and Exchange Commission, or SEC, which generally require our management and independent registered public
accounting firm to report on the effectiveness of our internal control over financial reporting. Section 404 requires an
annual management assessment of the effectiveness of our internal control over financial reporting. Prior to December 31,
2019, we were an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act,
and we took advantage of certain exemptions from various reporting requirements that were applicable to public companies
that are emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation
requirements of Section 404. We ceased to be an emerging growth company after December 31, 2019 and are required to
include an opinion from our independent registered public accounting firm on the effectiveness of our internal controls over
financial reporting as part of our Annual Report on form 10-K for the fiscal year ended December 31, 2019.
During the course of our review and testing of our internal controls, we may identify deficiencies and be unable to
remediate them before we must provide the required reports. Furthermore, if we have a material weakness in our internal
controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially
misstated. We or our independent registered public accounting firm may not be able to conclude on an ongoing basis that
we have effective internal control over financial reporting, which could harm our operating results, cause investors to lose
confidence in our reported financial information and cause the trading price of our stock to fall. In addition, as a public
company we are required to file accurate and timely quarterly and annual reports with the SEC under the Exchange Act.
Any failure to report our financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of our
shares from The Nasdaq Global Market or other adverse consequences that would materially harm our business.
We identified a material weakness in our internal control over financial reporting as of June 30, 2019. If we fail to
maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be
impaired, which could harm our operating results, our ability to operate our business and investors’ views of us and
could have a material adverse effect on the price of our common stock.
In accordance with Section 404, management assessed the effectiveness of our internal control over financial reporting
and based on our management’s assessment using criteria established in “Internal Control—Integrated Framework (2013)”
issued by the Committee of Sponsoring Organizations of the Treadway Commission, management had concluded that our
internal control over financial reporting was not effective as of June 30, 2019 and remained not effective as of September
30, 2019. Management and our independent registered public accounting firm had identified a control deficiency that
constituted a material weakness. The material weakness was due to a failure in the design and implementation of controls
over the evaluation of the terms of our clinical trial contracts for inclusion into our clinical financial model which estimates
clinical trial expenses. Specifically, we had failed to properly interpret an expense in our clinical trial contracts which
resulted in the over accrual of our clinical trial expenses during 2018 and the first quarter of 2019. This material weakness
was remediated as of December 31, 2019 and management concluded that our internal controls over financial reporting
were effective as of December 31, 2019.
We had developed and implemented a remediation plan for this material weakness which included modifications to the
design and implementation of certain internal controls. Although we have remediated this material weakness as of
December 31, 2019 as attested by our independent registered public accounting firm, we can give no assurance that an
additional material weakness or significant deficiency in our internal controls over financial reporting will not be identified
in the future. Our failure to implement and maintain effective internal controls over financial reporting could result in errors
in our financial statements that could result in a restatement of our financial statements and cause us to fail to meet our
reporting obligations. If we cannot in the future favorably assess the effectiveness of our internal controls over financial
reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a
material adverse effect on the trading price of our common stock.
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We have formed in the past, and may form in the future, collaboration partnerships, joint ventures and/or licensing
arrangements, and we may not realize the benefits of such collaborations.
We have current collaboration partnerships for the commercialization of tenapanor in certain foreign countries, and we
currently expect to form additional collaboration partnerships, create joint ventures or enter into additional licensing
arrangements with third parties in the United States and abroad that we believe will complement or augment our existing
business. In particular, we have formed collaboration partnerships with KKC for certain research programs and for
commercialization of tenapanor for hyperphosphatemia in Japan; with Fosun Pharma for commercialization of tenapanor
for hyperphosphatemia and IBS-C in China and related territories; and in Canada with Knight for commercialization of
tenapanor for IBS-C and hyperphosphatemia. We face significant competition in seeking appropriate collaboration partners,
and the process to identify an appropriate partner and negotiate appropriate terms is time-consuming and complex. Any
delays in identifying suitable additional collaboration partners and entering into agreements to develop our product
candidates could also delay the commercialization of our product candidates, which may reduce their competitiveness even
if they reach the market. Moreover, we may not be successful in our efforts to establish a collaboration partnership for
tenapanor for IBS-C commercialization in the United States or for any future product candidates and programs on terms
that are acceptable to us, or at all. With respect to tenapanor for IBS-C in the United States, this may be because third
parties may not view tenapanor for the treatment of IBS-C as having sufficient potential to be successfully commercialized.
Additionally, despite third party interest in the commercialization of tenapanor for IBS-C in the United States, we may
decide that it is not in the best interests of the Company to enter into such a collaboration partnership. If we are unable to
establish a collaboration partnership for the commercialization of IBS-C in the United States under acceptable terms, the
commercialization of tenapanor for IBS-C could be materially 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 collaboration partnerships for our other product candidates because our product
candidates and programs may be deemed to be at too early of 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 for commercialization, including the likelihood of an adequate safety and
efficacy profile. There is no guarantee that our current collaboration partnerships or any such arrangements we enter into in
the future will be successful, or that any collaboration partner will commit sufficient resources to the development,
regulatory approval, and commercialization effort for such products, 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 significant
distractions to our management.
We may consider strategic transactions, such as acquisitions of companies, asset purchases, and/or in-licensing of
products, product candidates or technologies. In addition, if we are unable to access capital on a timely basis and on terms
that are acceptable to us, we may be forced to restructure certain aspects of our business or identify and complete one or
more strategic collaborations or other transactions in order to fund the development or commercialization of tenapanor or
certain of our product candidates through the use of alternative structures. Additional potential transactions that we may
consider include 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
integration challenges or disrupt our management or business, which could adversely affect our operations and financial
results. For example, these transactions may entail numerous operational and financial risks, including:
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up-front, milestone and royalty payments, equity investments and financial support of new research and
development 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 develop acquired
products, product candidates or technologies;
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incurrence of substantial debt or dilutive issuances of equity securities;
higher-than-expected acquisition and integration costs;
write-downs of assets or goodwill or impairment charges;
increased amortization expenses;
difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and
personnel;
impairment of relationships with key suppliers or customers of any acquired businesses due to changes in
management 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 of
the nature described above, any transactions that we do complete may be subject to the foregoing or other risks and could
have 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 our
product candidates outside of the United States, or otherwise engage in business outside of the United States, a variety
of risks associated with international operations could materially adversely affect our business.
We or our collaboration partners may decide to seek marketing approval for certain 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 organizations located outside of the United States to
manufacture our active drug substance for tenapanor. We are subject to additional risks related to entering these
international business markets and relationships, including:
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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 and markets;
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;
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production shortages resulting from any events affecting raw material supply or manufacturing capabilities
abroad;
potential liability resulting from development work conducted by these distributors; and
business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.
Epidemic diseases, or the perception of their effects, could have a material adverse effect on our business, financial
condition, results of operations or cash flows.
Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus or, historically, the Ebola
virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, or the H1N1 virus, could disrupt our
business. Business disruptions could include disruptions or restrictions on our ability to travel, as well as temporary
closures of the facilities of our collaboration partners, suppliers or contract manufacturers. Any disruption of our
collaboration partners, suppliers or contract manufacturers could impact our operating results. For example, a supplier of
intermediates for our API is located in China and one of our collaboration partners is located in Japan, both of which have
recently experienced an outbreak of the novel coronavirus. While at this point, the extent to which the coronavirus outbreak
may impact our results is uncertain, it could result in delays in delivery of our intermediates from our supplier, or delays in
development activities by our collaboration partners, which may negatively impact our operating results. In addition, a
significant outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread
health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic
downturn that could affect demand for our current or future products. Any of these events could have a material adverse
effect on our business, financial condition, results of operations, or cash flows.
Our business involves the use of hazardous materials and we and third-parties with whom we contract must comply with
environmental 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 suppliers
with whom we may contract are subject to laws and regulations governing the use, manufacture, storage, handling and
disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use
are stored 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
business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations
governing the use, storage, handling and disposal of these materials and specified waste products. We cannot guarantee that
the safety procedures utilized by third-party manufacturers and suppliers with whom we may contract will comply with the
standards prescribed by laws and regulations or will eliminate the risk of accidental contamination or injury from these
materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources
and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our business
operations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become
more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. We do not
currently 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 our
financial 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 rate
of unemployment, the number of uninsured persons in the United States, presidential elections, other political influences
and inflationary pressures. Our results of operations could be adversely affected by general conditions in the global
economy and in the global financial markets. The 2008 global financial crisis caused extreme volatility and disruptions in
the capital and credit markets. We cannot anticipate all the ways in which the global economic climate and global financial
market conditions could adversely impact our business in the future.
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We are exposed to risks associated with reduced profitability and the potential financial instability of our collaboration
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 for
healthcare services and pharmaceuticals. If fewer patients are seeking medical care because they do not have insurance
coverage, our collaboration partners or customers may experience reductions in revenues, profitability and/or cash flow that
could lead them to reduce their support of our programs or financing activities. If collaboration partners or customers are
not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or
may delay payment of, accounts receivable that are owed to us. In addition, volatility in the financial markets could cause
significant fluctuations in the interest rate and currency markets. We currently do not hedge for these risks. The foregoing
events, in turn, could adversely affect our financial condition and liquidity. In addition, if economic challenges in the
United States result in widespread and prolonged unemployment, either regionally or on a national basis, or if certain
provisions of the 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 or
underinsured. To the extent economic challenges result in fewer individuals pursuing or being able to afford our product
candidates once commercialized, our business, results of operations, financial condition and cash flows could be adversely
affected.
We may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster
recovery plans 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 has
experienced severe earthquakes. We do not carry earthquake insurance. Earthquakes or other natural disasters could
severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial
condition and prospects.
If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of
our headquarters, that damaged critical infrastructure, such as our enterprise financial systems or manufacturing resource
planning 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 continuity
plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar
event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity
plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect
on our business.
Risks Related to Government Regulation
The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and
inherently unpredictable. If we are ultimately unable to obtain regulatory approval for our product candidates, our
business will be substantially harmed.
The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drug
products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other
countries, which regulations differ from country to country. Neither we nor any of our collaboration partners is permitted to
market any drug product in the United States until we receive marketing approval from the FDA. Obtaining regulatory
approval of a NDA can be a lengthy, expensive and uncertain process. In addition, failure to comply with FDA and other
applicable United States and foreign regulatory requirements may subject us to administrative or judicially imposed
sanctions or other actions, including:
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warning or untitled letters;
civil and criminal penalties;
injunctions;
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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 our collaboration
partners must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA
or other foreign regulatory agencies, that such drug candidates are safe and effective for their intended uses. The number of
nonclinical studies and clinical trials that will be required for FDA approval varies depending on the drug candidate, the
disease or condition that the drug candidate is designed to address, and the regulations applicable to any particular drug
candidate. Results from nonclinical studies and clinical trials can be interpreted in different ways. Even if we believe the
nonclinical or clinical data for our drug candidates are promising, such data may not be sufficient to support approval by
the FDA and other regulatory authorities. Administering drug candidates to humans may produce undesirable side effects,
which could interrupt, delay or halt clinical trials and result in the FDA or other regulatory authorities 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, typically takes
many years following the commencement of clinical studies, and depends upon numerous factors. The FDA and
comparable foreign authorities have substantial discretion in the approval process and we may encounter matters with the
FDA or such comparable authorities that requires us to expend additional time and resources and delay or prevent the
approval of our product candidates. For example, the FDA may require us to conduct additional studies for a drug product
either prior to or post-approval, such as additional drug-drug interaction studies or safety or efficacy studies, or it may
object to elements of our clinical development program such as the number of subjects in our current clinical trials from the
United States. In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval
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. Despite the 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 but not
limited to the following:
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the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our, or
our collaboration partners’, clinical studies;
the population studied in the clinical program may not be sufficiently broad or representative to assure safety in
the full population for which approval is sought;
the FDA or comparable foreign regulatory authorities may disagree with the interpretation of data from preclinical
studies or clinical studies;
the data collected from clinical studies of our product candidates may not be sufficient to support the submission
of a NDA or other submission or to obtain regulatory approval in the United States or elsewhere;
we or our collaboration partners may be unable to demonstrate to the FDA or comparable foreign regulatory
authorities that a product candidate’s risk-benefit ratio for its proposed indication is acceptable;
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the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes, test
procedures and specifications, or facilities of third-party manufacturers responsible for clinical and commercial
supplies; and
the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly
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 our failure
and/or that of our collaboration partners to obtain regulatory approval to market any of our product candidates, which
would significantly harm our business, results of operations, and prospects. Additionally, if the FDA requires that we
conduct additional clinical studies, places limitations in our label, delays approval to market our product candidates or
limits the use of our products, our business and results of operations may be harmed.
In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for
fewer or more limited indications than we request, may not approve the price we intend to charge for our products, may
grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate
with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that
product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product
candidates.
Even if we receive regulatory approval for a product candidate, we will be subject to ongoing regulatory obligations and
continued regulatory review, which may result in significant additional expense. Additionally, any product candidates, if
approved, could be subject to labeling and other restrictions and market withdrawal, and we may be subject to penalties
if we 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 be
subject 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
any clinical trials that we conduct post-approval. As such, we and our third-party contract manufacturers will be subject to
continual review and periodic inspections to assess compliance with regulatory requirements. Accordingly, we and others
with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including
manufacturing, production, and quality control. Regulatory authorities may also impose significant restrictions on a
product’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 to comply
with requirements concerning advertising and promotion for our products. Promotional communications with respect to
prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in
the product’s approved label. As such, we may not promote our products for indications or uses for which they do not have
FDA approval.
Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or
frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory
requirements, may result in, among other things:
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warning or untitled letters, fines or holds on clinical trials;
restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market or
voluntary or mandatory product recalls;
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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.
Any government investigation of alleged violations of law could require us to expend significant time and resources in
response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may
significantly and adversely affect our ability to commercialize our product candidates. If regulatory sanctions are applied or
if 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 could prevent,
limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing
requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we
may lose any marketing approval that we may have obtained, which would adversely affect our business, prospects and
ability to achieve or sustain profitability.
We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation
or administrative or executive action, either in the United States or abroad. For example, certain policies of the Trump
administration may impact our business and industry. Namely, the Trump administration has taken several executive
actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise
materially delay, the FDA's ability to engage in routine regulatory and oversight activities such as implementing statutes
through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict how
these Executive Orders will be implemented, and the extent to which they will impact the FDA's ability to exercise its
regulatory authority. If these executive actions impose constraints on FDA's ability to engage in oversight and
implementation 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 product
candidates. The manufacturing facilities on which we rely may not continue to meet regulatory requirements or may not
be able to meet supply demands.
All entities involved in the preparation of product candidates for clinical studies or commercial sale, including our
existing contract manufacturers for our product candidates are subject to extensive regulation. Components of a finished
therapeutic product approved for commercial sale or used in late-stage clinical studies must be manufactured in accordance
with cGMP regulations. These regulations govern manufacturing processes and procedures (including record keeping) and
the implementation and operation of quality systems to control and assure the quality of investigational products and
products approved for sale. Poor control of production processes can lead to the introduction of contaminants or to
inadvertent changes in the properties or stability of our product candidates that may not be detectable in final product
testing. We or our contract manufacturers must supply all necessary documentation in support of an NDA or comparable
regulatory filing on a timely basis and must adhere to cGMP regulations enforced by the FDA and other regulatory
agencies through their facilities inspection programs. The facilities and quality systems of some or all of our third-party
contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of regulatory
approval of our product candidates. In addition, the regulatory authorities may, at any time, audit or inspect a
manufacturing facility involved with the preparation of our product candidates or our other potential products or the
associated quality systems for compliance with the regulations applicable to the activities being conducted. Although we
oversee the contract manufacturers, we cannot control the manufacturing process of, and are completely dependent on, our
contract manufacturing partners for compliance with the regulatory requirements. If these facilities do not pass a pre-
approval plant
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inspection, regulatory approval of the products may not be granted or may be substantially delayed until any violations are
corrected to the satisfaction of the regulatory authority, if ever. In addition, we have no control over the ability of our
contract 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 manufacturing
facilities of our third-party contractors. If any such inspection or audit identifies a failure to comply with applicable
regulations or if a violation of our product specifications or applicable regulations occurs independent of such an inspection
or audit, we or the relevant regulatory authority may require remedial measures that may be costly and/or time consuming
for us or a third party to implement, and that may include the temporary or permanent suspension of a clinical study or
commercial sales or the temporary or permanent suspension of production or closure of a facility. Any such remedial
measures imposed upon us or third parties with whom we contract could materially harm our business.
If we or any of our third-party manufacturers fail to maintain regulatory compliance, the FDA or other applicable
regulatory authority can impose regulatory sanctions including, among other things, refusal to approve a pending
application 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 be
qualified 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
and commercial 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
fail to meet contractual requirements and we are unable to secure one or more replacement suppliers capable of production
at a substantially 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
our products for unapproved uses, we could be subject to criminal penalties, substantial fines or other sanctions and
damage awards.
The regulations relating to the promotion of products for unapproved uses are complex and subject to substantial
interpretation by the FDA and other government agencies. If tenapanor or our other product candidates receive marketing
approval, we and our collaboration partners, if any, will be restricted from marketing the product outside of its approved
labeling, also referred to as off-label promotion. However, physicians may nevertheless prescribe an approved product to
their patients in a manner that is inconsistent with the approved label, which is an off-label use. We intend to implement
compliance and training programs designed to ensure that our sales and marketing practices comply with applicable
regulations regarding off-label promotion. Notwithstanding these programs, the FDA or other government agencies may
allege or find that our practices constitute prohibited promotion of our product candidates for unapproved uses. We also
cannot be sure that our employees will comply with company policies and applicable regulations regarding the promotion
of products for unapproved uses.
Over the past several years, a significant number of pharmaceutical and biotechnology companies have been the target
of inquiries and investigations by various federal and state regulatory, investigative, prosecutorial and administrative
entities in connection with the promotion of products for unapproved uses and other sales practices, including the
Department of Justice and various U.S. Attorneys’ Offices, the Office of Inspector General of the Department of Health
and Human Services, the FDA, the Federal Trade Commission and various state Attorneys General offices. These
investigations have alleged violations of various federal and state laws and regulations, including claims asserting antitrust
violations, violations of the FFDCA, the False Claims Act, the Prescription Drug Marketing Act, anti-kickback laws, and
other alleged violations in connection with the promotion of products for unapproved uses, pricing and Medicare and/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 has
presented a false claim, or caused a false claim to be submitted, to the government for payment. The person bringing a qui
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tam 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 and prosecute 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 a qui
tam suit and it is determined that we violated prohibitions relating to the promotion of products for unapproved uses, we
could be subject to substantial civil or criminal fines or damage awards and other sanctions such as consent decrees and
corporate integrity agreements pursuant to which our activities would be subject to ongoing scrutiny and monitoring to
ensure compliance with applicable laws and regulations. Any such fines, awards or other sanctions would have an adverse
effect on our revenue, business, financial prospects and reputation.
Tenapanor, which has been approved by the FDA for the treatment of IBS-C, and/or our other product candidates, if
approved, may cause or contribute to adverse medical events that we are required to report to regulatory agencies and if
we fail to do so we could be subject to sanctions that would materially harm 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 in
electrolytes. If we are successful in commercializing any products, FDA and foreign regulatory agency regulations require
that we report certain information about adverse medical events if those products may have caused or contributed to those
adverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse event
as 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 us as 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 to comply with our reporting obligations, the FDA or a foreign regulatory agency could take action,
including criminal prosecution, the imposition of civil monetary penalties, seizure of our products or delay in approval or
clearance of future products.
Our employees, independent contractors, principal investigators, CROs, collaboration partners, consultants and vendors
may engage in misconduct or other improper activities, including noncompliance with regulatory standards and
requirements.
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 by these parties
could include intentional, reckless and/or negligent conduct or unauthorized activities that violate any of the
following: FDA regulations, including those laws that require the reporting of true, complete and accurate financial and
other 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 and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and
regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission,
customer incentive programs and other business arrangements. These activities also include the improper use of
information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our
reputation. It is not always possible to identify and deter misconduct by employees and other third parties, and the
precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or
losses or in protecting us from governmental 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 none occurred. 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 and administrative penalties, damages, monetary fines, disgorgements, possible
exclusion from participation in Medicare, Medicaid and other federal healthcare programs, individual imprisonment, other
sanctions, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our
operations, any of which could adversely affect our ability to operate our business and our results of operations.
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Failure to obtain regulatory approvals in foreign jurisdictions would prevent us from marketing our products
internationally.
In order to market any product in the EEA (which is composed of the 27 Member States of the European Union plus
Norway, Iceland and Liechtenstein), and many other foreign jurisdictions, separate regulatory approvals are required. In the
EEA, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. Before the MA is
granted, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit
balance of 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 to
obtain approval may differ from that required to obtain FDA approval. Clinical trials conducted in one country may not be
accepted by regulatory authorities in other countries. Approval by the FDA does not ensure approval by regulatory
authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by
regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory
approval in one country may have a negative effect on the regulatory process in others. The foreign regulatory approval
process may include all of the risks associated with obtaining FDA approval. We may not be able to file for regulatory
approvals or to do so on a timely basis, and even if we do file we may not receive necessary approvals to commercialize
our products in any market.
We and our collaboration partners may be subject to healthcare laws, regulation and enforcement; our failure or the
failure of any such collaboration partners to comply with these laws could have a material adverse effect on our results
of operations and financial conditions.
Although we do not currently have any products on the market, once we begin commercializing our products, we and
our collaboration partners may be subject to additional healthcare statutory and regulatory requirements and enforcement
by the federal government and the states and foreign governments in which we conduct our business. The laws that may
affect our ability to operate as a commercial organization include:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully
soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the
referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment
may be made under federal healthcare programs such as the Medicare and Medicaid programs. A person or entity
does not need to have actual knowledge of this statute or specific intent to violate it in order to have committed a
violation;
federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or
causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or
fraudulent. In addition, the government may assert that a claim including items or services resulting from a
violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false
claims statutes;
federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false
statements relating to healthcare matters;
the federal physician sunshine requirements under the Affordable Care Act, which requires manufacturers of
drugs, devices, biologics, and medical supplies to report annually to CMS information related to payments and
other transfers of value to physicians, certain other healthcare providers beginning in 2022, and teaching hospitals,
and ownership and investment interests held by physicians and other healthcare providers and their immediate
family members;
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may
apply to items or services reimbursed by any third-party payor, including commercial insurers;
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state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary
compliance guidelines and the applicable compliance guidance promulgated by the federal government, or
otherwise 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 of value to
physicians and other healthcare providers or pricing information and marketing expenditures; and
European and other foreign law equivalents of each of the laws, including reporting requirements detailing
interactions 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 is
possible that some of our business activities could be subject to challenge under one or more of such laws. The risk of our
being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the
regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for
violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and
divert our management’s attention from the operation of our business. If our operations are found to be in violation of any
of the laws described above or any other governmental laws and regulations that apply to us, we may be subject 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 adversely
affect 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 obtain
regulatory clearance or approval of our product candidates and to produce, market and distribute our products after
clearance or approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory
provisions governing the regulatory clearance or approval, manufacture, and marketing of regulated products or the
reimbursement thereof. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways
that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of
existing regulations may impose additional costs or lengthen review times of our product candidates. We cannot determine
what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted
may have on our business in the future. Such changes could, among other things, require:
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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 financial
results. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for any future products
would harm 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 in healthcare
spending is currently unknown, and may adversely affect our business model. In the United States, the Affordable Care Act
was enacted in 2010 with a goal of reducing the cost of healthcare and substantially changing the way healthcare is
financed by both government and private insurers. The Affordable Care Act, among other things, increased the minimum
Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to
individuals enrolled in Medicaid managed care organizations, established annual fees and taxes on manufacturers of certain
branded prescription drugs, and created a new Medicare Part D coverage gap discount program, in which manufacturers
must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries
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during their coverage gap period as a condition for the manufacturer’s outpatient drugs to be covered under Medicare
Part D. The Bipartisan Budget Act of 2018 increased this discount to 70% beginning in January 2019.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care
Act, as well as efforts by the current Presidential Administration to modify, or repeal all, or certain provisions of, the
Affordable Care Act. By way of example, the Tax Cuts and Jobs Act of 2017 includes a provision repealing, the tax-based
shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage
for all or part of a year that is commonly referred to as the “individual mandate.” On December 14, 2018, a U.S. District
Court Judge in the Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the
ACA, and therefore, because it was repealed as part of the Tax Cuts and Jobs Act, the remaining provisions of the ACA are
invalid as well. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court's decision
that the individual mandate was unconstitutional but remanded the case back to the District Court to determine whether the
remaining provisions of the ACA are invalid as well. It is unclear how these decisions, subsequent appeals, and other
efforts to challenge, repeal, or replace the ACA will impact the ACA or our business. We cannot predict the reform
initiatives that may be adopted in the future or whether initiatives that have been adopted will be repealed or modified. We
cannot predict the reform initiatives that may be adopted in the future or whether initiatives that have been adopted will be
repealed or modified. The continuing efforts of the government, insurance companies, managed care organizations and
other payors of healthcare services to contain or reduce costs of healthcare may adversely affect the demand for any drug
products for which we may obtain regulatory approval, our ability to set a price that we believe is fair for our products, our
ability to obtain coverage and reimbursement approval for a product, our ability to generate revenues and 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 was
enacted. These new laws, among other things, included aggregate reductions of Medicare payments of 2% per fiscal year to
providers that will remain in effect through 2029 unless additional action is taken by Congress, additional specific
reductions in Medicare payments to several types of providers, including hospitals, imaging centers and cancer treatment
centers, and an increase in the statute of limitations period for the government to recover overpayments to providers from
three to five years. Additionally, individual states have become increasingly active in passing legislation and implementing
regulations 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 for
their marketed products, which has resulted in several Congressional 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 reimbursement methodologies for drug products.
Risks Related to Intellectual Property
We may become subject to claims alleging infringement of third parties’ patents or proprietary rights and/or claims
seeking to invalidate our patents, which would be costly, time consuming and, if successfully asserted against us, delay
or prevent the development and commercialization of tenapanor or our other product candidates, or prevent or delay the
continued use of our drug discovery and development platform, including APECCS.
There have been many lawsuits and other proceedings asserting infringement or misappropriation of patents and other
intellectual property rights in the pharmaceutical and biotechnology industries. There can be no assurances that we will not
be subject to claims alleging that the manufacture, use or sale of tenapanor or any other product candidates, or that the use
of our drug discovery and development platform, including APECCS, infringes existing or future third-party patents, or
that such claims, if any, will not be successful. Because patent applications can take many years to issue and may be
confidential for 18 months or more after filing, and because pending patent claims can be revised before issuance, there
may be applications now pending which may later result in issued patents that may be infringed by the manufacture, use or
sale of tenapanor or other product candidates or by the use of APECCS. Moreover, we may face patent infringement claims
from non-practicing entities that have no relevant product revenue and against whom our own patent portfolio may thus
have no deterrent effect. We may be unaware of one or more issued patents that would be infringed by the manufacture,
sale or use of tenapanor or our other product candidates, or by the use of APECCS.
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We may be subject to third-party patent infringement claims in the future against us or our that would cause us to incur
substantial expenses and, if successful against us, could cause us to pay substantial damages, including treble damages and
attorney’s fees if we are found to be willfully infringing a third party’s patents. We may be required to indemnify future
collaboration partners against such claims. We are not aware of any threatened or pending claims related to these matters,
but in the future litigation may be necessary to defend against such claims. If a patent infringement suit were brought
against us we could be forced to stop or delay research, development, manufacturing or sales of the product or product
candidate that is the subject of the suit. In addition, if a patent infringement suit were brought against us regarding the use
of aspects of our drug discovery and development platform, we could be forced to stop our use of APECCS or of other
aspects of our platform, or we could be forced to modify our processes to avoid infringement, which may not be possible at
a reasonable cost, if at all, and which could result in substantial delay in our use of our platform for the discovery of new
product candidates or potential targets. As a result of patent infringement claims, or in order to avoid potential claims, we
may choose to seek, or be required to seek, a license from the third party and would most likely be required to pay license
fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a
license, we may be unable to maintain such licenses and the rights may be nonexclusive, which would give our competitors
access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or forced to
redesign it, or to cease our use of APECCS or some other aspect of our drug discovery and development platform or our
business operations if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on
acceptable terms, or unable to maintain such licenses when granted. Even if we are successful in defending against such
claims, such litigation can be expensive and time consuming to litigate and would divert management’s attention 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 States
that also claim technology similar or identical to ours, we may have to participate in interference or derivation proceedings
in the United States Patent and Trademark Office, or the USPTO, to determine which party is entitled to a patent on the
disputed invention. We may also become involved in similar opposition proceedings in the European Patent Office or
similar offices in other jurisdictions regarding our intellectual property rights with respect to our products and technology.
Since patent applications are confidential for a period of time after filing, we cannot be certain that we were the first to file
any patent 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 trade
secrets 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 the intellectual
property related to our product candidates, our drug discovery and development platform and our development programs.
Any disclosure to or misappropriation by third parties of our confidential or proprietary information could enable
competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our
market.
The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions
and can be uncertain. The patent applications that we own or license may fail to result in issued patents in the United States
or in foreign countries. Additionally, our research and development efforts may result in product candidates for which
patent protection is limited or not available. Even if patents do successfully issue, third parties may challenge the validity,
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 any time
before one year after that person is served an infringement complaint based on the patents. Patents granted by the European
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 parties can
raise questions of validity with a patent office even before a patent has granted. Furthermore, even if they are unchallenged,
our patents and patent applications may not adequately protect our intellectual property or prevent others from designing
around our claims. For example, a third party may develop a competitive product that provides therapeutic benefits similar
to one or more of our product candidates but has a sufficiently different composition to fall outside the scope of our patent
protection. If the breadth or strength of protection provided by the patents and patent applications we hold or pursue with
respect to our product candidates is successfully challenged, then our ability to commercialize such product candidates
could be negatively affected, and we may face unexpected competition that could have a material adverse impact on our
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business. Further, if we encounter delays in our clinical trials, the period of time during which we or our collaboration
partners could market tenapanor or other product candidates under patent protection would be reduced.
Even where laws provide protection, costly and time-consuming litigation could be necessary to enforce and determine
the scope of our proprietary rights, and the outcome of such litigation would be uncertain. If we or one of our collaboration
partners were to initiate legal proceedings against a third party to enforce a patent covering the product candidate, the
defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States,
defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge
could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-
enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of
the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. The
outcome 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
during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability against our
intellectual property related to a product candidate, we would lose at least part, and perhaps all, of the patent protection on
such product candidate. Such a loss of patent protection would have a material adverse impact on our business. Moreover,
our competitors could counterclaim that we infringe their intellectual property, and some of our competitors have
substantially greater intellectual property portfolios than we do.
We also rely on trade secret protection and confidentiality agreements to protect proprietary know-how that may not be
patentable, processes for which patents may be difficult to obtain and/or enforce and any other elements of our drug
discovery and development processes that involve proprietary know-how, information or technology that is not covered by
patents. Although we require all of our employees, consultants, advisors and any third parties who have access to our
proprietary know-how, information or technology, to assign their inventions to us, and endeavor to execute confidentiality
agreements with all such parties, we cannot be certain that we have executed such agreements with all parties who may
have helped to develop our intellectual property or who had access to our proprietary information, nor can we be certain
that our agreements will not be breached by such consultants, advisors or third parties, or by our former employees. The
breach of such agreements by individuals or entities who are actively involved in the discovery and design of our potential
drug candidates, or in the development of our discovery and design platform, including APECCS, could require us to
pursue legal action to protect our trade secrets and confidential information, which would be expensive, and the outcome of
which would be unpredictable. If we are not successful in prohibiting the continued breach of such agreements, our
business could be negatively impacted. We cannot guarantee that our trade secrets and other confidential proprietary
information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently
develop substantially equivalent information and techniques.
Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner
as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our
intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the intellectual
property related to our technologies to third parties, we will not be able to establish or maintain a competitive advantage in
our 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
under similar legislation, thereby potentially extending the term of marketing exclusivity for our product candidates, our
business may be materially harmed.
Following the approval by the FDA for our NDA to market tenapanor for IBS-C, we became eligible to seek and
sought patent term restoration under the Hatch-Waxman Act for one of the U.S. patents covering our approved product or
the use thereof. The Hatch-Waxman Act allows a maximum of one patent to be extended per FDA approved product.
Patent term extension also may be available in certain foreign countries upon regulatory approval of our product
candidates. Despite seeking patent term extension for tenapanor or other product candidates, we may not be granted patent
term extension either in the United States or in any foreign country because of, for example, failing to apply within
applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable
requirements. Moreover, the term of extension, as well as the scope of patent protection during any such extension,
afforded by the governmental authority could be less than we request.
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If we are unable to obtain patent term extension or restoration, or the term of any such extension is less than we
request, the period during which we will have the right to exclusively market our product will be shortened and our
competitors 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 reduced or eliminated for non-compliance with these requirements.
The USPTO and various foreign patent agencies require compliance with a number of procedural, documentary, fee
payment and other provisions to maintain patent applications and issued patents. Noncompliance with these requirements
can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in
the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have
been 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 the
United States. Many companies have encountered significant problems in protecting and defending intellectual property
rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor
the enforcement of patents and other intellectual property protection, especially those relating to life sciences. This could
make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property
rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant
licenses to third parties.
Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial
costs and divert our efforts and attention from other aspects of our business. Furthermore, while we intend to protect our
intellectual property rights in our expected significant markets, we cannot ensure that we will be able to initiate or maintain
similar efforts in all jurisdictions in which we may wish to market our products. Accordingly, our efforts to protect our
intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by
courts in the United States and foreign countries may affect our ability to obtain and enforce adequate intellectual property
protection for our technology.
We may be subject to claims that we or our employees have misappropriated the intellectual property, including know-
how or 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 other biotechnology
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 with such
previous employment. Although we try to ensure that our employees, consultants and contractors do not use the intellectual
property and other proprietary information or know-how or trade secrets of others in their work for us, and do not perform
work for us that is in conflict with their obligations to another employer or any other entity, we may be subject to claims
that we or these employees, consultants and contractors have used or disclosed such intellectual property, including know-
how, trade secrets or other proprietary information. In addition, an employee, advisor or consultant who performs work for
us may have obligations to a third party that are in conflict with their obligations to us, and as a result such third party may
claim an ownership interest in the intellectual property arising out of work performed for us. We are not aware of any
threatened or pending claims related to these matters, but in the future litigation may be necessary to defend against such
claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual
property rights or personnel, or access to consultants and contractors. Even if we are successful in defending against such
claims, litigation could result in substantial costs and be a distraction to management.
In addition, while we typically require our employees, consultants and contractors who may be involved in the
development of intellectual property to execute agreements assigning such intellectual property to us, we may be
unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as
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our own, which may result in claims by or against us related to the ownership of such intellectual property. If we fail in
prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual
property rights. Even if we are successful in prosecuting or defending against such claims, litigation could result in
substantial costs and be a distraction to our management and scientific personnel.
Risks Related to Our Common Stock
Our stock price may be volatile and our stockholders may not be able to resell shares of our common stock at or above
the price they paid.
The trading price of our common stock is highly volatile and could be subject to wide fluctuations in response to
various factors, some of which are beyond our control. These factors include those discussed in this “Risk Factors” section
and others such as:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
results from, or any delays in, clinical trial programs relating to our product candidates;
the success of our efforts to establish a collaboration partnership for the commercialization of tenapanor for IBS-C
in the United States;
our ability, alone or with collaboration partners, to commercialize or obtain regulatory approval for tenapanor, or
delays in commercializing or obtaining regulatory approval;
announcements of regulatory approval, results of regulatory inspections of our facilities or those of our contract
manufacturing organizations, or specific label restrictions or patient populations for tenapanor’s use, or changes or
delays in the regulatory review process;
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 product label, our clinical trials, manufacturing
supply chain or 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 our
product candidates;
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;
announcements concerning our competitors or the pharmaceutical industry in general;
achievement of expected product sales and profitability;
· manufacture, supply or distribution shortages;
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·
·
·
·
·
·
·
·
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 reform measures 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 biotechnology
stocks in particular, have experienced extreme volatility that may have been unrelated to the operating performance of the
issuer. 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 action
litigation against the issuer. If any of our stockholders were to bring such a lawsuit against us, we could incur substantial
costs defending the lawsuit and the attention of our management would be diverted from the operation of our business,
which could seriously harm our financial position. Any adverse determination in litigation could also subject us to
significant liabilities.
Our principal stockholders own a significant percentage of our stock and, together with our management, will be able to
exert significant control over matters subject to stockholder approval.
Based on the number of shares outstanding as of December 31, 2019, our officers, directors and affiliated stockholders
who hold at least 5% of our stock together beneficially own approximately 52.2% of our outstanding common stock. If
these officers, directors, and principal stockholders or a group of our principal stockholders act together, they will be able
to exert a significant degree of influence over our management and affairs and control matters requiring stockholder
approval, including the election of directors, amendments to our organizational documents, and approval of any merger,
sale of assets or other business combination transactions. The interests of this concentration of ownership may not always
coincide with our interests or the interests of other stockholders. For instance, officers, directors and principal stockholders,
acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this
concentration of ownership may have the effect of delaying or preventing a change in control of our company otherwise
favored by our other stockholders. As of December 31, 2019, entities affiliated with New Enterprise Associates, or NEA, a
venture capital fund associated with one of our directors, collectively beneficially owned approximately 19.4% of our
common stock, including shares that NEA has the right to acquire within 60 days of December 31, 2019 upon exercise of
warrants held by NEA.
If we sell shares of our common stock in future financings, stockholders may experience immediate dilution and, as a
result, 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 of our
common stock. As a result, our stockholders would experience immediate dilution upon the purchase of any shares of our
common stock sold at such discount. In addition, as opportunities present themselves, we may enter into financing or
similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. If we issue
common stock or securities convertible into common stock, our common stockholders would experience additional dilution
and, as a result, our stock price may decline.
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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 the public
market, the trading price of our common stock could decline. As of December 31, 2019, we had 88,817,741 shares of
common stock outstanding. Of those shares, approximately 43.9 million were held by current directors, executive officers
and stockholders owning 5% or more of our outstanding common stock.
As of December 31, 2019, approximately 0.8 million shares of common stock issuable upon vesting of outstanding
restricted stock units and approximately 7.3 million shares of common stock issuable upon exercise of outstanding options
were eligible for sale in the public market to the extent permitted by the provisions of the applicable vesting schedules, and
Rule 144 and Rule 701 under the Securities Act. In addition, as of December 31, 2019, approximately 2.2 million shares of
common stock issuable upon exercise of outstanding warrants were eligible for sale in the public market. If these additional
shares of common stock are issued and sold, or if it is perceived that they will be sold, in the public market, the trading
price of our common stock could decline.
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may
consider favorable and may lead to entrenchment of management.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could
significantly reduce the value of our shares to a potential acquirer or delay or prevent changes in control or changes in our
management without the consent of our board of directors. The provisions in our charter documents include the following:
·
·
·
·
·
·
·
·
·
a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to
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 elect director
candidates;
the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the
board of directors or the resignation, death or removal of a director, which prevents stockholders from being 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, and the
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 determine the
price and other terms of those shares, including preferences and voting rights, without stockholder approval,
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;
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 incorporation regarding
the election and removal of directors;
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or
special meeting of our stockholders;
the requirement that a special meeting of stockholders may be called only by the chairman of the board of
directors, the chief executive officer, the president or the board of directors, which may delay the ability of our
stockholders to force consideration of a proposal or to take action, including the removal of directors; and
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·
advance notice procedures that stockholders must comply with in order to nominate candidates to our board of
directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a
potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors 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 consider
beneficial.
We are also subject to the anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law.
Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of
its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors has
approved the transaction.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party
claims 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 will indemnify
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 restated bylaws
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 business
enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a
corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal 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 indemnification is
permitted by applicable law.
· We are required to advance expenses, as incurred, to our directors and officers in connection with defending a
proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately
determined 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 respect to
proceedings initiated by that person against us or our other indemnitees, except with respect to proceedings
authorized by our board of directors or brought to enforce a right to indemnification.
·
The rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into
indemnification agreements with our directors, officers, employees and agents and to obtain insurance to
indemnify such persons.
· We may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification
obligations 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 a return 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 currently
intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our loan and security agreements
could restrict our ability to pay dividends. Therefore, our stockholders are not likely to receive any dividends
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on our common stock for the foreseeable future. Since we do not intend to pay dividends, our stockholders’ ability to
receive a return on their investment will depend on any future appreciation in the market value of our common stock. There
is no guarantee that our common stock will appreciate or even maintain the price at which our holders have purchased it.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters is currently located in Fremont, California, and consists of 72,500 square feet of leased office
and laboratory space under a lease that expires in September 2021, with an option to extend the lease term subsequently by
five years. In addition, we lease 3,520 square feet of office space in Waltham, Massachusetts, under a lease that currently
expires in September 2021. We believe that our existing facilities are adequate for our current needs. If we determine that
additional or new facilities are needed in the future, we believe that sufficient options would be available to us on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in legal proceedings arising in the ordinary course of business. We believe
that as of December 31, 2019, there is no litigation pending that would reasonably be expected to have a material adverse
effect on our results of operations and financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
On June 19, 2014, our common stock commenced trading on The Nasdaq Global Market under the symbol
“ARDX”. Prior to that date, there was no public trading market for our common stock. As of December 31, 2019, there
were 35 holders of record of our common stock.
Dividends
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future
earnings to finance the growth and development of our business.
Recent Sales of Unregistered Securities
As disclosed in our Current Report on Form 8-K filed with the SEC on December 2, 2019, on November 22, 2019,
we entered into a Stock Purchase Agreement with KKC pursuant to which we sold an aggregate of 2,873,563 shares of
common stock in a private placement exempt from registration pursuant to the exemption for transactions by an issuer not
involving any public offering under Section 4(a)(2) the Securities Act of 1933, as amended (the “Securities Act”), and
Regulation D under the Securities Act. In accordance with the instructions to Part II, Item 5(a) of Form 10-K, the Item 701
information is omitted from this Annual Report on Form 10-K.
Use of Proceeds
Not applicable.
Issuer Purchases of Equity Securities
Not applicable.
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ITEM 6. SELECTED FINANCIAL DATA
The data set forth below is not necessarily indicative of the results of future operations and should be read in
conjunction 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 OF
OPERATIONS” and our financial statements and the notes thereto included in Part II, Item 8, of this Annual Report on
Form 10‑K.
Statement of Operations Data:
2019
Year Ended December 31,
2017
(in thousands, except share and per share amounts)
2016
2018
Revenue:
Licensing revenue
Collaborative development revenue
Other revenue
$
Total revenues
Cost of revenue
Gross profit
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest expense
Other income (expense), net
Loss before provision for income taxes
Provision for (benefit from) income taxes
Net loss
Net loss per common share, basic and
diluted
Shares used in computing net loss per
share - basic and diluted
$
$
4,500 $
459
322
5,281
600
4,681
71,677
24,267
95,944
(91,263)
(5,726)
2,352
(94,637)
303
(94,940) $
2,320 $
—
287
2,607
466
2,141
69,373
23,715
93,088
(90,947)
(3,534)
3,187
(91,294)
4
(91,298) $
42,000 $
—
—
42,000
8,400
33,600
75,484
23,231
98,715
(65,115)
—
1,955
(63,160)
1,179
(64,339) $
— $
—
—
—
—
—
94,161
18,734
112,895
(112,895)
—
508
(112,387)
—
(112,387) $
2015
21,611
2,415
—
24,026
—
24,026
39,885
13,530
53,415
(29,389)
—
(261)
(29,650)
(29)
(29,621)
(1.47) $
(1.62) $
(1.36) $
(2.80) $
(1.29)
64,478,066
56,219,919
47,435,331
40,118,522
22,892,640
Balance Sheet Data:
2019
2018
As of December 31,
2017
(in thousands)
2016
2015
Cash, cash equivalents and short-term investments
Total assets
Loan payable, net of current portion
Accumulated deficit
Total stockholders' equity
$ 247,512 $ 168,089 $ 133,976 $ 200,823 $ 107,004
116,946
—
(101,488)
108,901
157,903
—
(278,214)
139,312
183,332
49,209
(365,512)
115,813
213,131
—
(213,875)
193,151
259,782
48,831
(460,452)
186,655
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction
with the section of this report entitled “Selected Financial Data” and our financial statements and related notes included
elsewhere in this report. This discussion and other parts of this report contain forward-looking statements that involve risk
and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ
materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the section of this report entitled “Risk Factors.” These
forward-looking statements speak only as of the date hereof. Except as required by law, we assume no obligation to update
or revise these forward-looking statements for any reason. Unless the context requires otherwise, the terms “Ardelyx”,
“Company”, “we”, “us”, and “our” refer to Ardelyx, Inc.
OVERVIEW
We are a specialized biopharmaceutical company focused on developing first-in-class medicines to improve
treatment for people with cardiorenal diseases. This includes patients with chronic kidney disease, or CKD, on dialysis
suffering from elevated serum phosphorus, or hyperphosphatemia; and patients with CKD and/or heart failure patients with
elevated serum potassium, or hyperkalemia.
Our portfolio is led by the development of tenapanor, a first-in-class medicine in late-stage clinical development
for the control of serum phosphorus in patients with CKD on dialysis. Tenapanor has a unique mechanism of action and
acts locally in the gut to inhibit the sodium hydrogen exchanger 3, or NHE3. This results in the tightening of the epithelial
cell junctions, thereby significantly reducing paracellular uptake of phosphate, the primary pathway of phosphate
absorption.
We have evaluated tenapanor in a Phase 3 program for the control of serum phosphorus in CKD patients on
dialysis. In December 2019, we reported statistically significant topline efficacy results from our second monotherapy
Phase 3 clinical trial, the PHREEDOM trial. The PHREEDOM trial followed a successful monotherapy Phase 3 clinical
trial completed in 2017, which achieved statistical significance for the primary endpoint. PHREEDOM is a one-year study
with a 26-week open-label treatment period and a 12-week double-blind, placebo-controlled randomized withdrawal period
followed by a 14-week open-label safety extension period. An active safety control group, for safety analysis only, received
sevelamer, open-label, for the entire 52-week study period. Patients completing the PHREEDOM trial from both the
tenapanor arm and the sevelamer active safety control arm had the option to participate in NORMALIZE, an ongoing open-
label 18-month extension study. The goal of the NORMALIZE study is to further our understanding of the potential for the
dual mechanism of tenapanor and sevelamer to reduce patients’ serum phosphorus levels towards normal (<4.6 mg/dL)
while minimizing medication burden. In addition, in September 2019, we reported positive results from the AMPLIFY
trial, a Phase 3 study evaluating tenapanor in patients with CKD on dialysis who had uncontrolled hyperphosphatemia
despite phosphate binder treatment.
We are preparing to submit a New Drug Application, or NDA, to the United States Food and Drug Administration,
or FDA, for tenapanor for the control of serum phosphorus in adult patients with CKD on dialysis in mid-2020. Tenapanor,
if approved, would be the first therapy for phosphate management that is not a phosphate binder. As tenapanor is a novel,
potent, small molecule there would be significantly less pill burden than with phosphate binders. Tenapanor is dosed as a
single pill, twice-daily, which we believe could greatly improve patient adherence and compliance and free patients from
having to take multiple pills before every meal.
We are also advancing a small molecule potassium secretagogue program, RDX013, for the potential treatment of
hyperkalemia. Hyperkalemia is a common problem in patients with heart and kidney disease, particularly in patients taking
common blood pressure medications known as RAAS inhibitors, which inhibit the renin-angiotensin-aldosterone system.
Similar to what we have done with tenapanor in developing a non-binder approach for the treatment of elevated serum
phosphate levels, RDX013 is designed to offer a non-binder alternative to lowering elevated potassium with a much lower
pill burden than potassium binders and we believe may provide significant advantages as a stand-alone agent or in
combination with potassium binders.
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In addition to the development of tenapanor in our cardiorenal portfolio, we have developed tenapanor for the
treatment of patients with irritable bowel syndrome with constipation, or IBS-C. On September 12, 2019, we received US
FDA approval of IBSRELA® (tenapanor) for the treatment of IBS-C in adults. IBS-C is a burdensome GI disorder
affecting a significant number of people. It is characterized by significant abdominal pain, constipation, straining during
bowel movements, bloating and/or gas.
IBSRELA (tenapanor) is a locally acting inhibitor NHE3, an antiporter expressed on the apical surface of the
small intestine and colon primarily responsible for the absorption of dietary sodium. By inhibiting NHE3 on the apical
surface of the enterocytes, tenapanor reduces absorption of sodium from the small intestine and colon, resulting in an
increase in water secretion into the intestinal lumen, which accelerates intestinal transit time and results in a softer stool
consistency. Tenapanor has also been shown to reduce abdominal pain by decreasing visceral hypersensitivity and by
decreasing intestinal permeability in animal models. In a rat model of colonic hypersensitivity, tenapanor reduced visceral
hyperalgesia and normalized colonic sensory neuronal excitability.
We have developed a proprietary drug discovery and design platform to discover targets found in the GI tract that
regulate processes in the body and design product candidates that act upon those targets to take advantage of the gut’s
ability to communicate with other organs.
Since commencing operations in October 2007, substantially all our efforts have been dedicated to our research
and development activities, including developing our clinical product candidate tenapanor and developing our proprietary
drug discovery and design platform. We have not generated any revenues from product sales. As of December 31, 2019, we
had an accumulated deficit of $460.5 million.
We expect to continue to incur substantial operating losses for the foreseeable future as a result of costs associated
with the following activities: our continued development of tenapanor for the control of serum phosphorus in CKD patients
on dialysis; the preparation of the NDA to seek marketing approval in the United States for tenapanor for the control of
serum phosphorus in patients with CKD on dialysis; our preparations for the commercialization of tenapanor in the United
States for the control of serum phosphorus in CKD patients on dialysis, including significant increased personnel costs
associated with building out our commercial team; the performance of certain activities required as a result of our NDA
approval of tenapanor for IBS-C, including costs associated with conducting the pediatric clinical trials for IBS-C; and the
advancement of our research programs into the preclinical stage. To date, we have funded our operations from the sale and
issuance of common stock and convertible preferred stock, funds from our collaboration partnerships, and funds from our
Loan Agreement with Solar Capital Ltd. and Western Alliance Bank.
FINANCIAL OPERATIONS OVERVIEW
Revenue
Our revenue to date has been generated primarily through license, research and development collaborative
agreements with various collaboration partners. We have not generated any revenue from product sales. In the future, we
may generate revenue from a combination of license fees and other upfront payments, milestone payments, product sales
and royalties in connection with our current or future collaborative partnerships. We expect that any revenue we generate
will fluctuate in future periods as a result of, among other factors: the timing and progress of goods and services provided
pursuant to our current or future collaborative partnerships; our or our collaborators’ achievement of preclinical, clinical,
regulatory or commercialization milestones, to the extent achieved; the timing and amount of any payments to us relating to
the aforementioned milestones; and the extent to which any of our product candidates are approved and successfully
commercialized by us or a collaboration partner. If we, our current collaboration partners or any future collaboration
partners fail to develop product candidates in a timely manner or to obtain regulatory approval for product candidates, our
ability to generate future revenue from collaborative arrangements, and our results of operations and financial position,
would be materially and adversely affected. Our past revenue performance is not necessarily indicative of results to be
expected in future periods. See NOTE 2, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, in the notes to our
financial statements, included in Part II, Item 8, of this Annual Report on Form 10-K, for further details.
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Cost of Revenue
Cost of revenue currently represents payments due to AstraZeneca, which under the terms of a termination
agreement entered into in 2015 is entitled to (i) future royalties at a rate of 10% of net sales of tenapanor or other NHE3
products by us or our licensees, and (ii) 20% of non-royalty revenue received from a new collaboration partner should we
elect to license, or otherwise provide rights to develop and commercialize tenapanor or certain other NHE3 inhibitors. We
have agreed to pay AstraZeneca up to a maximum of $75.0 million in the aggregate for (i) and (ii). We recognize these
expenses as cost of revenue when we recognize the corresponding revenue that gives rise to payments due to AstraZeneca.
To date, we have recognized an aggregate of $10.5 million of the $75.0 million under the AZ Termination Agreement. See
details in NOTE 13, COLLABORATION AND LICENSING AGREEMENTS, under AstraZeneca, in the notes to our
financial statements, included in Part II, Item 8, of this Annual Report on Form 10-K.
Research and Development
We recognize all research and development expenses as they are incurred to support the discovery, research,
development and manufacturing of our product candidates. Research and development expenses consist of the following:
·
·
·
·
·
external research and development expenses incurred under agreements with consultants, third-party contract
research organizations, or CROs, and investigative sites where a substantial portion of our clinical studies are
conducted, and with contract manufacturing organizations where our clinical supplies are produced;
expenses associated with supplies and materials consumed in connection with our research operations;
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 of
facilities, 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 further
progress the development of tenapanor, as well as our other product candidates, as we advance our research programs into
the preclinical stage and as we continue our early stage research. The process of conducting preclinical studies and clinical
trials necessary to obtain regulatory approval is costly and time-consuming. We may not succeed in achieving marketing
approval for all of our product candidates, including tenapanor for the control of serum phosphorus. Additionally, for the
marketing approval received in the United States for tenapanor for the treatment of IBS-C, we may not be successful in
securing one or more collaboration partners to commercialize tenapanor in the United States or in 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 to access capital on
acceptable terms, competition, manufacturing capability and commercial viability.
We anticipate that we will make determinations as to which programs to pursue and how much funding to direct to
each program on an ongoing basis in response to the scientific and clinical success of each product candidate, ongoing
assessment as to each product candidate’s commercial potential, and our ability to access capital on acceptable terms. We
will need to raise additional capital and will seek additional collaboration partnerships in order to complete the
development and commercialization of tenapanor. If we are unable to access capital on a timely basis and on terms that are
acceptable to us, we may be forced to restructure certain aspects of our business or identify and complete one or more
strategic collaborations or other transactions in order to fund the development or commercialization of tenapanor or certain
of our product candidates through the use of alternative structures.
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General and Administrative
General and administrative expenses consist primarily of salaries and related benefits, including stock-based
compensation, for our executive, board, finance, legal, business development, market development, commercial and
support staff. Other general and administrative expenses include facility related costs and professional fees for legal,
accounting and audit, investor relations, other consulting services and allocated facility-related costs not otherwise included
in research and development expenses.
We anticipate that our general and administrative expenses will increase in the future primarily because of
increased pre-commercial activities, personnel costs and professional fees for services to support the potential launch and
commercialization of tenapanor for the control of serum phosphorus in CKD patients on dialysis.
Interest Expense
Interest expense represents the interest paid on our loan payable.
Other Income, net
Other income consists of interest income earned on our cash and cash equivalents and held-to-maturity
investments, the periodic revaluation of the exit fee related to our loan and currency exchange gains and losses.
Provision for Income Taxes
Our provision for income taxes includes current and deferred tax, including foreign withholding taxes paid on
payments received from certain collaboration partners. Deferred income taxes reflect the tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Our deferred tax assets continue to be fully offset by a valuation allowance, including deferred tax
assets related to our net operating loss carryforwards, which may be subject to annual limitations as a result of ownership
changes that may have occurred or could occur in the future.
CRITICAL ACCOUNTING POLICES AND ESTIMATES
A detailed discussion of our significant accounting policies can be found in NOTE 2, SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES, in the notes to our financial statements, included in Part II, Item 8, of this
Annual Report on Form 10-K. Critical accounting policies are those that require significant judgment and/or estimates by
management at the time that financial statements are prepared such that materially different results might have been
reported if other assumptions had been made. These estimates form the basis for making judgments about the carrying
values of assets and liabilities. We base our estimates and judgments on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these
estimates.
We consider certain accounting policies related to revenue recognition, accrued research and development
expenses and stock-based compensation to be critical policies to understanding the judgments and estimates applied in our
reported financial results.
Revenue Recognition
We generate revenue primarily from research and collaboration and license agreements with customers. Goods
and services in the agreements may include the grant of licenses for the use of our technology, the provision of services
associated with the research and development of product candidates, manufacturing services, and participation in joint
steering committees. The terms of these arrangements typically include payment to us of one or more of the following:
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non-refundable, up-front license fees; research, development, regulatory and commercial milestone payments;
reimbursement of research and development services; option payments; reimbursement of certain costs; payments for
manufacturing supply services; and future royalties on net sales of licensed products.
When two or more contracts are entered into with the same customer at or near the same time, we evaluate the
contracts to determine whether the contracts should be accounted for as a single arrangement. Contracts are combined and
accounted for as a single arrangement if one or more of the following criteria are met: (i) the contracts are negotiated as a
package with a single commercial objective; (ii) the amount of consideration to be paid in one contract depends on the
price or performance of the other contract; or (iii) the goods or services promised in the contracts (or some goods or
services promised in each of the contracts) are a single performance obligation.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our
agreements, management 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
distinct in the context of the contract; (iii) measurement of the transaction price, including any constraints on variable
consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when
(or as) we satisfy each performance obligation. As part of the accounting for contracts with customers, we develop
assumptions that require judgment to determine whether promised goods and services represent distinct performance
obligations and the standalone selling price for each performance obligation identified in the contract. This evaluation is
subjective and requires us to make judgments about the promised goods and services and whether those goods and services
are separable from other aspects of the contract. Further, determining the standalone selling price for performance
obligations requires significant judgment, and when an observable price of a promised good or service is not readily
available, we consider relevant assumptions to estimate the standalone selling price, including, as applicable, market
conditions, development timelines, probabilities of technical and regulatory success, reimbursement rates for personnel
costs, forecasted revenues, potential limitations to the selling price of the product and discount rates.
We apply judgment in determining whether a combined performance obligation is satisfied at a point in time or
over time, and, if over time, concluding upon the appropriate method of measuring progress to be applied for purposes of
recognizing revenue. We evaluate the measure of progress each reporting period and, as estimates related to the measure of
progress change, related revenue recognition is adjusted accordingly. Changes in our estimated measure of progress are
accounted for prospectively as a change in accounting estimate. We recognize collaboration revenue by measuring the
progress toward complete satisfaction of the performance obligation using an input measure. In order to recognize revenue
over the research and development period, we measure actual costs incurred to date compared to the overall total expected
costs to satisfy the performance obligation. Revenues are recognized as the program costs are incurred. We will re-evaluate
the estimate of expected costs to satisfy the performance obligation each reporting period and make adjustments for any
significant changes. Amounts received prior to satisfying the revenue recognition criteria are recorded as contract
liabilities in our balance sheets. If the related performance obligation is expected to be satisfied within the next twelve
months, this will be classified in current liabilities. Amounts recognized as revenue prior to receipt are recorded as contract
assets in our balance sheets. If we expect to have an unconditional right to receive the consideration in the next twelve
months, this will be classified in current assets. A net contract asset or liability is presented for each contract with a
customer.
Milestone Payments: At the inception of each arrangement that includes research and development milestone
payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be
included in the transaction price using the most likely amount method. Amounts of variable consideration are included in
the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue
recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved.
Milestone payments that are not within the control of us 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 to each performance
obligation on a relative standalone selling price basis, for which we recognize revenue as or when the performance
obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability
of achievement of such development milestones and any related constraints, and if necessary, adjust our estimate of the
overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect earnings
in the period of adjustment.
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Manufacturing supply services: Arrangements that include a promise for the future supply of drug substance or
drug product for either clinical development or commercial supply at the customer’s discretion are generally considered as
options. We assess if these options provide a material right to the licensee and if so, they are accounted for as separate
performance obligations. If we are entitled to additional payments when the customer exercises these options, any
payments are 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 of
sales, and where 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 royalty has
been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from
any of our licensing arrangements.
Licenses of intellectual property: If a license granted to a customer to use our intellectual property is determined to
be distinct from the other performance obligations identified in the arrangement, we recognize revenue from consideration
allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the
license. For licenses that are bundled with other promises, we apply judgment to assess the nature of the combined
performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in
time and, if over time, to conclude upon the appropriate method of measuring progress for purposes of recognizing revenue
related to consideration allocated to the performance obligation.
Options: Customer options, such as options granted to allow a licensee to choose to research, develop and
commercialize licensed compounds are evaluated at contract inception in order to determine whether those options provide
a material right (i.e., an optional good or service offered for free or at a discount) to the customer. If the customer options
represent a material right, the material right is treated as a separate performance obligation at the outset of the arrangement.
We allocate the transaction price to material rights based on the standalone selling price, and revenue is recognized when or
as the future goods or services are transferred or when the option expires. Customer options that are not material rights do
not give rise to a separate performance obligation, and as such, the additional consideration that would result from a
customer exercising an option in the future is not included in the transaction price for the current contract. Instead, the
option is deemed a marketing offer, and additional option fee payments are recognized or being recognized as revenue
when the licensee exercises the option. The exercise of an option that does not represent a material right is treated as a
separate contract for accounting purposes.
Contract costs: We recognize as an asset the incremental costs of obtaining a contract with a customer if the costs
are expected to be recovered. We have elected a practical expedient wherein we recognize the incremental costs of
obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have
recognized is one year or less. To date, we have not incurred any material incremental costs of obtaining a contract with a
customer.
Contract modifications: Contract modifications, defined as changes in the scope or price (or both) of a contract
that are approved by the parties to the contract, such as a contract amendment, exist when the parties to a contract approve
a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract.
Depending on facts and circumstances, we account for a contract modification as one of the following: (i) a separate
contract; (ii) a termination of the existing contract and a creation of a new contract; or (iii) a combination of the preceding
treatments. A contract modification is accounted for as a separate contract if the scope of the contract increases because of
the addition of promised goods or services that are distinct and the price of the contract increases by an amount of
consideration that reflects our standalone selling prices of the additional promised goods or services. When a contract
modification is not considered a separate contract and the remaining goods or services are distinct from the goods or
services transferred on or before the date of the contract modification, we account for the contract modification as a
termination of the existing contract and a creation of a new contract. When a contract modification is not considered a
separate contract and the remaining goods or services are not distinct, we account for the contract modification as an add-
on to the existing contract and as an adjustment to revenue on a cumulative catch-up basis.
We receive payments from our licensees as established in each contract. Upfront payments and fees are recorded
as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future
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period until we perform our obligations under these arrangements. Where applicable, amounts are recorded as unbilled
revenue when our right to consideration is unconditional. We do not assess whether a contract with a customer has a
significant financing component if the expectation at contract inception is such that the period between payment by the
licensees and the transfer of the promised goods or services to the licensees will be one year or less.
Accrued Research and Development Expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses.
This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services
that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for
the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service
providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates
of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known
to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if
necessary. 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 of
the services received and efforts expended pursuant to contracts with our CROs and manufacturing vendors that conduct
and manage these activities on our 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 to our
vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these
contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In
accruing service fees, we estimate the time period over which each component of a service will be performed, and estimate,
with vendor input if appropriate, the resulting level of completion of each component of the service, with such estimates
often involving drivers that provide a surrogate measurement of completion such as number of enrolled subjects and/or
number of sites activated in the calculation of clinical trial fee accruals. If the actual timing of the performance of services
or the level of effort varies from our estimate, we adjust the accrued or prepaid expense balance accordingly. Although we
do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and
timing of services performed differ from the actual status and timing of services performed, we may report amounts that are
too high or too low in any particular period.
Stock-Based Compensation
We 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
the fair value of stock-based awards. These assumptions include:
Expected Term—We have limited historical information to develop reasonable expectations about future exercise
patterns and post-vesting employment termination behavior for our stock-option grants. As such, the expected
term is estimated using the simplified method whereby the expected term equals the arithmetic average of the
vesting term and the original contractual term of the option.
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Expected Volatility— Since January 1, 2017, we have used the historic volatility of our own stock over the
retrospective period corresponding to the expected remaining term of the options, or the period since our shares
were first quoted on The Nasdaq Global Market, if that is shorter, to compute our expected stock price volatility.
Risk-Free Interest Rate—The risk-free interest rate assumption is based on the zero-coupon U.S. Treasury
instruments 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 so
in 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 our
valuation 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 actual forfeitures 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 and
expensed over the period of vesting using the straight-line attribution approach.
Performance-based RSUs, or PRSUs, are valued at grant-date fair market value. The vesting of the PRSUs is
based on performance conditions. Performance conditions include: (i) a specific performance criteria and (ii) the
employee’s continuous employment by the company for a stated period of time in order to earn the right to the related
PRSUs to vest. The Company recognizes compensation cost with respect to the vesting of the PRSUs on a ratable basis
over the requisite service period, upon the performance conditions being deemed probable of achievement.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2019 and 2018
Revenue
Licensing revenue
Collaborative development revenue
Other revenue
Total revenues
Dollar change from prior year
Percent change from prior year
Year Ended December 31,
2019
2018
(in thousands)
$
4,500
459
322
5,281
2,674
$
2,320
—
287
2,607
103 %
Total revenues for the year ended December 31, 2019 were $5.3 million, which represents an increase of $2.7
million, or 103%, as compared to total revenues of $2.6 million for the year ended December 31, 2018. The licensing
revenue of $4.5 million is attributable to the achievement of a milestone, which amounted to $3.0 million, pursuant to our
exclusive license agreement with Fosun Pharma, entered into in December 2017 for the development, commercialization
and distribution of tenapanor in China for both hyperphosphatemia and IBS-C, and the full recognition of the $1.5 million
license fee related to the XuanZhu Agreement, as discussed in NOTE 13, COLLABORATION AND LICENSING
AGREEMENTS, to our financial statements, included in Part II, Item 8 of this Annual Report on Form 10-K.
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The increase in collaborative development revenue of $0.5 million is attributable entirely to the revenue
recognized, under the input method, during the fourth quarter of 2019 related to the 2019 KKC Agreement. We expect to
recognize the remaining $9.5 million of the initial transaction price over the research and development period of the
program that is currently expected to extend through the end of 2021. However, we will revisit our current estimates and
timing of performance at the end of each future reporting period and adjust as necessary.
The other revenue of $0.3 million relates to the manufacturing supply of tenapanor and other materials sold to
KKC in connection with that collaboration partner’s product development and clinical trials in Japan.
Cost of Revenue
Cost of revenue
Dollar change from prior year
Percent change from prior year
Year Ended December 31,
2019
2018
$
$
(in thousands)
600
134
29 %
466
Cost of revenue was $0.6 million for the year ended December 31, 2019, an increase of $0.1 million, or 29%,
compared to $0.5 million for the year ended December 31, 2018. The cost of revenue in both periods represent payments
due to AstraZeneca under the AstraZeneca Termination Agreement and are related primarily to tenapanor-related up front
and milestone payments from our collaboration partners.
Research and Development
Research and development
Dollar change from prior year
Percent change from prior year
Year Ended December 31,
2019
2018
(in thousands)
$ 71,677
2,304
$ 69,373
3 %
Research and development expenses were $71.7 million for the year ended December 31, 2019, an increase of
$2.3 million, or 3%, compared to $69.4 million for the year ended December 31, 2018. The increase consisted of a $3.7
million increase in our internal program costs and a $1.4 million decrease in our external program costs.
The increase in our internal costs of $3.7 million was primarily due to an increase in headcount and related
personnel costs and an increase in stock-based compensation expenses.
The decrease in our external program costs of $1.4 million included a $4.6 million decrease in expenses primarily
related to manufacturing of tenapanor and regulatory expenses related to our IBS-C NDA in 2018, partially offset by $2.5
million increase in clinical development expenses related to our RDX013 program and a $0.7 million increase primarily
related to our tenapanor clinical trial expenses that includes an out-of-period adjustment recorded during the second quarter
of 2019 that reduced clinical trial expenses by $3.6 million related to our tenapanor clinical trials.
General and Administrative
General and administrative
Dollar change from prior year
Percent change from prior year
Year Ended December 31,
2019
2018
(in thousands)
$ 24,267
552
$ 23,715
2 %
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General and administrative expenses were $24.3 million for the year ended December 31, 2019, an increase of
$0.6 million, or 2%, compared to $23.7 million for the year ended December 31, 2018. The increase was primarily due to
an increase in personnel costs, stock-based compensation expense, audit expenses and recruiting expenses, partially offset
by a decrease in other professional services.
Interest Expense
Interest expense was $5.7 million for the year ended December 31, 2019, an increase of $2.2 million, or 62%,
compared to $3.5 million for the year ended December 31, 2018. The increase in interest expense in 2019 compared to
2018 was because the interest expense during 2018 represents only part of the year related to the loan agreement entered in
May 2018, as compared with a full year of interest expense in 2019.
Other Income, net
Other income, net, was $2.4 million for the year ended December 31, 2019, which represents a decrease of $0.8
million, or 26%, compared to $3.2 million for the year ended December 31, 2018. The decrease was primarily due to a
decrease in treasury-related income and a revaluation to higher exit fee revaluation adjustments related to our loan
agreement.
Comparison of the Years Ended December 31, 2018 and 2017
Revenue
Licensing revenue
Other revenue
Total revenues
Dollar change from prior year
Percent change from prior year
Year Ended December 31,
2018
2017
(in thousands)
$
2,320
287
2,607
(39,393)
$ 42,000
—
42,000
(94)%
Total revenues were $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 revenues of $2.6 million in the year ended
December 31, 2018 included $2.3 million of licensing revenue related to the upfront payment from Knight and $0.3 million
of other revenue related to the manufacturing supply of tenapanor and other materials to KKC, for its product development
and clinical trials in Japan, in accordance with our license agreement with KKC. Total revenue of $42.0 million in the year
ended December 31, 2017 was comprised of licensing revenue related to upfront payments in accordance with our KKC
and Fosun Pharma license agreements.
Cost of Revenue
Year Ended December 31,
2018
2017
Cost of revenue
Dollar change from prior year
Percent change from prior year
$
(in thousands)
466
(7,934)
$
8,400
(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 payments
due to AstraZeneca under the AstraZeneca Termination Agreement and are related primarily to tenapanor-related up front
and milestone payments from our collaboration partners.
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Research and Development
Research and development
Dollar change from prior year
Percent change from prior year
Year Ended December 31,
2018
2017
(in thousands)
$ 69,373
(6,111)
$ 75,484
(8)%
Research and development expenses were $69.4 million for the year ended December 31, 2018, a decrease of $6.1
million, or 8%, compared to $75.5 million for the year ended December 31, 2017. The decrease consisted of a $1.1 million
decrease 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
discontinuation of the RDX7675 program and a $1.7 million reduction of activities associated with the RDX8940 program
that was partially offset by a $12.3 million increase in expense primarily related to our tenapanor programs. The $12.3
million increase included an increase in expense related to the start of our second tenapanor hyperphosphatemia Phase 3
study that was partially offset by a decrease in expenses for clinical development activities related to the completion of our
tenapanor IBS-C Phase 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, including
stock-based compensation costs as a result of a reduction in force during the third quarter of 2017, and a related decrease in
research and development activities
General and Administrative
General and administrative
Dollar change from prior year
Percent change from prior year
Year Ended December 31,
2018
2017
(in thousands)
$ 23,715
484
$ 23,231
2 %
General and administrative expenses were $23.7 million for the year ended December 31, 2018, an increase of
$0.5 million, or 2%, compared to $23.2 million for the year ended December 31, 2017. The increase was primarily due to
an increase in professional services and stock-based compensation expense, partially offset by a reduction in personnel
costs due to reduction in force during the third quarter of 2017.
Interest Expense
Interest expense was $3.5 million for the year ended December 31, 2018, an increase of $3.5 million, compared to
zero for the year ended December 31, 2017. The increase in 2018 represents loan and interest expense related to the loan
agreement entered in May 2018.
Other Income, net
Other income, net was $3.2 million for the year ended December 31, 2018, an increase of $1.2 million, or 63%,
compared to $2.0 million for the year ended December 31, 2017. The increase was primarily due to an increase in treasury-
related income, partially offset by currency exchange loss.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents
Short-term investments
Total liquid funds
December 31, December 31,
2019
2018
(in thousands)
$ 181,133 $
78,768
89,321
$ 247,512 $ 168,089
66,379
As of December 31, 2019, we had cash, cash equivalents and short-term investments totaling $247.5 million
compared to $168.1 million as of December 31, 2018.
On December 9, 2019, we completed an underwritten public offering of 20,000,000 shares of common stock at a
price of $6.25 per share before underwriting discounts and commissions, or the 2019 Offering. In connection with the 2019
Offering, we entered into an underwriting agreement, or the 2019 Underwriting Agreement, with Citigroup Global Markets
Inc., Cowen and Company LLC, SVB Leerink LLC and Piper Jaffray & Co., or collectively the 2019 Underwriters,
pursuant to which we granted to the 2019 Underwriters a 30-day option to purchase up to an additional 3,000,000 shares of
our common stock, or the 2019 Overallotment. We completed the sale of 23,000,000 shares, inclusive of the 2019
Overallotment, to the 2019 Underwriters and that sale resulted in our receipt of aggregate gross proceeds of approximately
$143.8 million, less underwriting discounts, commissions and offering expenses totaling approximately $8.9 million, which
resulted in net proceeds of approximately $134.9 million.
On November 22, 2019, we and KKC entered into a stock purchase agreement, pursuant to which we sold an
aggregate of 2,873,563 shares of our common stock at $6.96 per share for aggregate net proceeds of approximately
$20.0 million, or the Private Placement. The Private Placement closed on November 25, 2019.
On August 9, 2018, we filed a prospectus supplement with the SEC pursuant to our previously filed shelf
registration 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
entered into with SVB Leerink (formerly known as Leerink Partners LLC), or Leerink, on August 9, 2018. As of December
31, 2019, no shares have been offered or issued or sold against the Sales Agreement with Leerink.
On May 25, 2018, we completed an underwritten public offering of 12,500,000 shares of common stock at a price
of $4.00 per share before underwriting discounts and commissions, or the 2018 Offering. In connection with the 2018
Offering, we entered into an underwriting agreement, or the 2018 Underwriting Agreement, with Jefferies LLC and SVB
Leerink (formerly known as Leerink Partners LLC), or together the 2018 Underwriters, pursuant to which we granted to the
2018 Underwriters a 30-day option to purchase up to an additional 1,875,000 shares of our common stock, or the 2018
Overallotment. We completed the sale of 14,375,000 shares, inclusive of the 2018 Overallotment, to the 2018 Underwriters,
and that sale resulted in our receipt of aggregate gross proceeds of approximately $57.5 million, less underwriting
discounts, commissions and offering expenses totaling approximately $3.7 million, which resulted in net proceeds of
approximately $53.8 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 of
November 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.
Our primary sources of cash have been from the sale and issuance of common stock, public offerings, private
placement and convertible preferred stock, funds from our collaboration partnerships, and funds from our loan agreement.
Our primary uses of cash are to fund operating expenses, primarily research and development expenditures. Cash used to
fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our
outstanding accounts payable and accrued expenses.
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We believe that our existing capital resources as of December 31, 2019 will enable us to fund our operating
expenses and capital expenditure requirements for at least the next 12 months following our financial statement issuance
date. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital
resources sooner than we currently expect. In particular, our operating plan can change, and we may require significant
additional capital to fund our operations, including to support the development, commercialization and manufacturing
efforts for tenapanor. We may seek to obtain such additional capital through debt financings, credit facilities, additional
equity offerings and/or strategic collaborations. We currently have no unutilized credit facility or committed sources of
capital, and there can be no assurances that such sources of capital will be available to us when needed or on acceptable
terms. There are numerous risks and uncertainties associated with research, development and commercialization initiatives,
and actual results could vary materially as a result of a number of factors, many of which are outside of our control. Our
future capital requirements are difficult to forecast and will depend on many factors, including:
·
·
·
·
·
·
·
·
·
·
·
·
·
the preparation and submission of an NDA with the FDA to request marketing authorization for tenapanor for the
control of serum phosphorus in CKD patients on dialysis;
our ability to identify a collaboration partner and negotiate acceptable terms for a collaboration partnership for the
commercialization of tenapanor in IBS-C in the United States;
our ability to successfully commercialize tenapanor for the control of serum phosphorus in CKD patients on
dialysis, if approved, either alone or with one or more collaboration partners;
the manufacturing costs of our product candidates, and the availability of one or more suppliers for our product
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 our sales and
marketing capabilities;
our ability to maintain our existing collaboration partnerships and to establish additional collaboration
partnerships, in-license/out-license, joint ventures or other similar arrangements and the financial terms of such
agreements;
the timing, receipt, and amount of 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 clinical
trials we decide to pursue for other product candidates, including RDX013;
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 intellectual
property rights, including litigation costs and the outcome of such litigation, including costs of defending any
claims of infringement brought by others in connection with the development, manufacture or commercialization
of tenapanor or any of our product candidates; and
the payment of interest and principal related to our loan and security agreement entered into with Solar Capital
and Western Alliance Bank during May 2018.
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The following table summarizes our cash flows for the periods indicated:
Cash used in operating activities
Cash provided by (used in) investing activities
Cash provided by financing activities
Net increase in cash and cash equivalents
Cash Flows from Operating Activities
2019
2017
Year Ended December 31,
2018
(in thousands)
$ (76,484) $ (70,274) $ (65,190)
65,290
685
785
23,373
155,476
$ 102,365 $
(29,894)
103,553
3,385 $
Net cash used in operating activities during the year ended December 31, 2019, was $76.5 million, as compared to
$70.3 million of net cash used in operating activities during the year ended December 31, 2018. The $6.2 million increase
in net cash used in operating activities is attributable to:
·
·
·
·
·
·
·
a $0.4 million decrease in cash received from collaboration partners during the year ended December 31, 2019 as
compared to payments received during the year ended December 31, 2018. Specifically, we received a total of
$14.1 million from collaboration partners during 2019, which was comprised of a $5.0 million upfront payment
received in connection with the 2019 KKC Agreement, a $0.7 million upfront payment received in connection
with the XuanZhu Agreement, a $5.0 million milestone payment received from KKC in connection with the 2017
KKC Agreement, a $3.0 million milestone payment received in connection with the Fosun Agreement and $0.4
million of manufacturing supply service revenue, as compared to a total of $14.5 million in cash payments
received from collaboration partners during 2018;
a $1.9 million decrease in payments made to AstraZeneca during 2019 in connection with the AZ Termination
Agreement, as compared to payments made in 2018;
a $0.4 million increase in cash R&D expenses (excluding working capital-related fluctuations) in 2019, as
compared to 2018;
a $0.4 million decrease in cash G&A expenses (excluding working capital-related fluctuations) in 2019, as
compared to 2018;
a $2.1 million increase in net cash interest payments in 2019, as compared to 2018;
a $0.9 million decrease in cash paid for income taxes in 2019, as compared to 2018; and
a $6.5 million net increase in cash used related to fluctuations in components of our non-revenue-related working
capital in 2019, as compared to 2018, which was comprised of a $7.8 million decrease, a $1.9 million decrease
and a $0.4 million decrease in cash provided by fluctuations in our non-payroll-related accruals and other current
liabilities, lease liability and prepaid expenses and other current assets, respectively, partially offset by a $2.2
million increase and a $1.4 million increase of cash provided by fluctuations in our accrued compensation and
benefits and accounts payable.
Net cash used in operating activities during the year ended December 31, 2018, was $70.3 million, as compared to
$65.2 million of net cash used in operating activities during the year ended December 31, 2017. The $5.1 million increase
in net cash used in operating activities is predominantly attributable to:
·
a $15.5 million decrease in cash received from collaboration partners during the year ended December 31, 2018
as compared to payments received during the year ended December 31, 2017. Specifically, we received a total of
$14.5 million from collaboration partners during 2018, which was comprised of a $12.0 million upfront payment
received in connection with the Fosun Agreement, a $2.3 million upfront payment in
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·
·
·
·
·
connection with the Knight Agreement and a $0.2 million of manufacturing supply service revenue, as compared
to a total of $30.0 million in cash payments received from collaboration partners during 2017;
a $3.1 million decrease in payments made to AstraZeneca during 2018 in connection with the AZ Termination
Agreement, as compared to payments made in 2017;
a $5.3 million decrease in cash R&D expenses (excluding working capital-related fluctuations) in 2018, as
compared to 2017;
a $3.2 million increase in net cash interest payments in 2018, as compared to 2017;
a $1.1 million increase in cash paid for income taxes in 2018, as compared to 2017; and
a $6.3 million net decrease in cash used related to fluctuations in components of our non-revenue-related
working capital in 2018, as compared to 2017, which was comprised of a $2.7 million increase, a $3.1 million
increase and a $1.1 million increase in cash provided by fluctuations in our prepaid expenses and other current
assets, accounts payable and our non-payroll-related accruals and other current liabilities, respectively, partially
offset by a $0.6 million decrease of cash provided by fluctuations in our accrued compensation and benefits.
Cash Flows from Investing Activities
Net cash provided by investing activities increased by $53.3 million during the year ended December 31, 2019, as
compared to the year ended December 31, 2018. This increase was attributable to a $66.3 million decrease in purchases of
short-term available-for-sale investments and a $1.2 million increase in sales and redemptions of investments, partially
offset by a decrease in proceeds from the sale of short-term investments of $14.2 million.
Net cash used in investing activities increased by $95.2 million during the year ended December 31, 2018 as
compared to the year ended December 31, 2017. This increase was attributable to an $85.0 million increase in purchases of
short-term available-for-sales investments and a decrease of $17.1 million in sales and redemptions of investments,
partially offset by a $4.9 million increase in proceeds from the sales of short-term investments and a $2.0 million decrease
in the purchases of property and equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities increased by $51.9 million during the year ended December 31, 2019, as
compared to the year ended December 31, 2018. This increase was predominantly attributable to an $81.2 million increase
in net proceeds received in connection with underwritten public offering initiatives and a $20.0 million increase in net
proceeds received in connection with the Private Placement, partially offset by a net $49.3 million decrease in proceeds
received in connection with a long-term loan borrowing.
Net cash provided by financing activities increased by $102.9 million during the year ended December 31, 2018,
as compared to the year ended December 31, 2017. This increase was attributable to a $53.8 million increase in net
proceeds received in connection with an underwritten equity offering and a $49.3 million increase in net proceeds received
in connection with a long-term borrowing, partially offset by a $0.2 million decrease in proceeds received pursuant to the
issuance of common stock under stock plans and the exercise of stock options.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2019, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of
Regulation S-K as promulgated by the SEC.
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JOBS ACT ACCOUNTING ELECTION
Up to December 31, 2019 we were an “emerging growth company,” as defined in the Jumpstart Our Business
Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or
revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply
to private companies. We had irrevocably elected not to avail ourselves of this exemption from new or revised accounting
standards, and, therefore, were subject 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 had reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of
holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. We ceased to be an emerging growth company on January 1, 2020.
SMALLER REPORTING COMPANY
On 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
ourselves with most of the SRC scaled disclosure accommodations in our filings subsequent to the adoption.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are subject to market risks, including interest rate fluctuation exposure through our investments, in the
ordinary course of our business. However, the goals of our investment policy are the preservation of capital, fulfillment of
liquidity needs and fiduciary control of cash. To achieve our goal of maximizing income without assuming significant
market risk, we maintain our excess cash and cash equivalents in money market funds and short-term debt securities.
Because of the short-term maturities of our cash equivalents, we do not believe that a decrease in interest rates would have
any material negative impact on the fair value of our cash equivalents.
As of December 31, 2019, we had cash, cash equivalents and short-term investments of $247.5 million, which
consist of bank deposits and money market funds, as well as high quality fixed income instruments including corporate
bonds, commercial paper, and asset-backed securities collateralized by non-mortgage consumer receivables. The credit
rating of our short-term investments must be rated A‑1/P‑1, or better by Standard and Poor’s and Moody’s Investors
Service. 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
in duration, we believe that our exposure to interest rate risk is not significant and that a 10% movement in market interest
rates would not have a significant impact on the total value of our portfolio, as noted above. We do not enter into
investments for trading or speculative purposes.
We are subject to interest rate fluctuation exposure through our borrowings under the Loan Agreement and our
investment in money market accounts which bear a variable interest rate. Borrowings under the Loan Agreement bear
interest at a rate equal to one-month London Interbank Offered Rate, or LIBOR, plus 7.45% per annum. A hypothetical
increase in one-month LIBOR of 100 basis points above the current one-month LIBOR rates would have increased our
interest expense by approximately $0.5 million for the year ended December 31, 2019. As of December 31, 2019, we had
an aggregate principal amount of $50.0 million outstanding pursuant to our Loan Agreement.
Foreign Currency Exchange Risk
The majority of our transactions are denominated in U.S. dollars. However, we do have certain transactions that
are denominated in currencies other than the U.S. dollar, primarily Swiss francs and the euro, and we therefore are subject
to foreign exchange risk. The fluctuation in the value of the U.S. dollar against other currencies affects the reported
amounts of expenses, assets and liabilities associated with a limited number of manufacturing activities.
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We do not use derivative financial instruments for speculative trading purposes, nor do we hedge foreign currency
exchange rate exposure in a manner that entirely offsets the earnings effects of changes in foreign currency exchange rates.
The counterparties to our forward foreign currency exchange contracts are creditworthy commercial banks, which
minimizes the risk of counterparty nonperformance.
As of December 31, 2019, we had no open forward foreign currency exchange contracts.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ARDELYX, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations and Comprehensive Loss
Statements of Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
79
80
81
82
83
84
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Ardelyx, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Ardelyx, Inc. (the “Company”) as of December 31, 2019 and
2018, the related statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (2013 Framework) and our report dated March 6, 2020 expressed an unqualified opinion
thereon.
Adoption of ASU No. 2014-09
As discussed in Note 2 to the financial statements, the Company changed its method for recognizing revenue as a
result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers
(Topic 606), and the related amendments effective January 1, 2018.
Basis for Opinion
These financial statements are the responsibility of the Company‘s management. Our responsibility is to express
an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. 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, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2009.
Redwood City, California
March 6, 2020
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ARDELYX, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable
Unbilled revenue
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Right-of-use assets
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued compensation and benefits
Uncharged license fees
Current portion of operating lease liability
Loan payable, current portion
Deferred revenue
Accrued expenses and other current liabilities
Total current liabilities
Operating lease liability, net of current portion
Loan payable, net of current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 17)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued
and outstanding as of December 31, 2019 and December 31, 2018, respectively.
Common stock, $0.0001 par value; 300,000,000 shares authorized; 88,817,741 and
62,516,627 shares issued and outstanding as of December 31, 2019 and
December 31, 2018, respectively.
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2019
2018
181,133 $
66,379
—
750
3,800
252,062
3,436
3,970
314
78,768
89,321
85
5,000
3,197
176,371
5,611
—
1,350
259,782 $ 183,332
2,187 $
4,453
—
2,608
1,183
4,541
7,248
22,220
2,076
48,831
—
73,127
1,148
2,723
1,000
—
—
—
12,857
17,728
—
49,209
582
67,519
—
—
6
9
481,357
647,078
(365,512)
(460,452)
(38)
20
186,655
115,813
259,782 $ 183,332
$
$
$
$
The accompanying notes are an integral part of these financial statements.
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ARDELYX, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
Year Ended December 31,
2019
2018
2017
Revenues:
Licensing revenue
Collaborative development revenue
Other revenue
Total revenues
Cost of revenue
Gross profit
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest expense
Other income, net
Loss before provision for income taxes
Provision for income taxes
Net loss
Net loss per common share, basic and diluted
Shares used in computing net loss per share - basic and diluted
Comprehensive loss:
Net loss
Unrealized gains on available-for-sale securities
Comprehensive loss
$
$
$
$
$
4,500 $
459
322
5,281
600
4,681
71,677
24,267
95,944
(91,263)
(5,726)
2,352
(94,637)
303
(94,940) $
(1.47) $
2,320 $
—
287
2,607
466
2,141
42,000
—
—
42,000
8,400
33,600
69,373
23,715
93,088
(90,947)
(3,534)
3,187
(91,294)
4
(91,298) $
(1.62) $
75,484
23,231
98,715
(65,115)
—
1,955
(63,160)
1,179
(64,339)
(1.36)
47,435,331
64,478,066
56,219,919
(94,940) $
58
(94,882) $
(91,298) $
9
(91,289) $
(64,339)
24
(64,315)
The accompanying notes are an integral part of these financial statements.
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ARDELYX, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Common Stock
Shares
47,309,422 $
Additional
Accumulated
Other
Total
Paid-In Accumulated Comprehensive Stockholders'
Amount Capital
Deficit
(Loss) Income
Equity
5 $ 407,092 $ (213,875) $
(71) $ 193,151
99,343
46,858
—
—
35,759
—
43,597
—
—
—
—
—
—
—
623
201
62
—
9,590
—
—
—
—
—
—
—
—
(64,339)
47,534,979 $
5 $ 417,568 $ (278,214) $
—
—
—
4,000
120,959
75,183
410,506
—
—
—
—
—
491
303
—
9,226
—
—
—
—
—
—
—
—
—
—
—
—
—
623
201
62
—
9,590
24
24
—
(64,339)
(47) $ 139,312
—
—
—
—
—
9
4,000
491
303
—
9,226
9
14,375,000
—
1
—
53,769
—
—
(91,298)
62,516,627 $
6 $ 481,357 $ (365,512) $
53,770
—
—
(91,298)
(38) $ 115,813
160,744
113,136
—
—
68,062
—
396
312
178
85,609
—
—
—
—
9,936
—
—
—
—
—
—
—
—
—
—
—
—
—
—
58
396
312
178
—
9,936
58
23,000,000
3
134,924
—
—
134,927
Balance as of December 31, 2016
Issuance of common stock under
employee stock purchase plan
Issuance of common stock for services
Issuance of common stock upon exercise
of options
Issuance of common stock upon vesting
of restricted stock units
Stock-based compensation
Unrealized gains on available-for-sale
securities
Net loss
Balance as of December 31, 2017
Adoption of ASU No. 2014-09 on
January 1, 2018
Issuance of common stock under
employee stock purchase plan
Issuance of common stock for services
Issuance of common stock upon vesting
of restricted stock units
Stock-based compensation
Unrealized gains on available-for-sale
securities
Issuance of common stock upon
underwritten public offering, net of
issuance costs
Net loss
Balance as of December 31, 2018
Issuance of common stock under
employee stock purchase plan
Issuance of common stock for services
Issuance of common stock upon exercise
of options
Issuance of common stock upon vesting
of restricted stock units
Stock-based compensation
Unrealized gains on available-for-sale
securities
Issuance of common stock upon
underwritten public offering, net of
issuance costs
Issuance of common stock upon private
placement, net of issuance costs
Net loss
Balance as of December 31, 2019
88,817,741 $
2,873,563
—
19,975
—
—
—
9 $ 647,078 $ (460,452) $
—
(94,940)
19,975
—
—
(94,940)
20 $ 186,655
The accompanying notes are an integral part of these financial statements.
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ARDELYX, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
$ (94,940) $ (91,298) $ (64,339)
Year Ended December 31,
2019
2018
2017
Depreciation expense
Amortization of deferred financing costs
Amortization of deferred compensation for services
Amortization of (premium) discount on investment securities
Non-cash lease expense
Stock-based compensation
Change in derivative liabilities
Non-cash interest associated with debt discount accretion
Changes in operating assets and liabilities:
Unbilled revenue
Accounts receivable
Prepaid expenses and other assets
Accounts payable
Accrued compensation and benefits
Lease liabilities
Accrued and other liabilities
Deferred revenue
Net cash used in operating activities
Investing activities
Proceeds from maturities of investments
Sales and redemptions of investments
Purchases of investments
Purchases of property and equipment
Net cash provided by (used in) investing activities
Financing activities
Proceeds from underwritten public offering, net of issuance costs
Proceeds from issuance of common stock upon private placement, net of
issuance costs
Proceeds from issuance of common stock under stock plans
Issuance of common stock upon exercise of options
Proceeds from loan payable, net of issuance costs
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplementary disclosure of cash flow information:
Income taxes paid
Supplementary disclosure of non-cash activities:
Right-of-use assets obtained in exchange for lease obligations
Issuance of common stock for services
Issuance of derivative in connection with issuance of loan payable
Acquisition of property and equipment included in accounts payable and
accrued liabilities
2,501
670
309
(698)
1,839
9,936
436
478
4,250
85
93
39
1,730
(1,892)
(5,861)
4,541
(76,484)
2,678
236
253
(1,136)
—
9,226
111
303
—
10,711
525
(2,730)
(506)
—
1,353
—
(70,274)
2,639
375
192
11
—
9,590
—
—
—
(10,796)
(2,148)
(1,027)
68
—
245
—
(65,190)
124,369
2,000
(102,671)
(325)
23,373
138,600
850
(169,033)
(311)
(29,894)
133,701
17,957
(84,013)
(2,355)
65,290
134,927
53,770
—
19,975
396
178
—
155,476
102,365
78,768
$ 181,133 $
—
—
623
491
62
—
—
49,292
685
103,553
785
3,385
75,383
74,598
78,768 $ 75,383
$
$
$
$
$
2 $
4 $
3
5,810 $
312 $
— $
— $
303 $
546 $
—
201
—
— $
— $
55
The accompanying notes are an integral part of these financial statements.
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ARDELYX, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Ardelyx, Inc. (the “Company,” “we,” “us” or “our”) is a specialized biopharmaceutical company focused on
developing first-in-class medicines to improve treatment choices for people with cardiorenal diseases.
The Company operates in only one business segment, which is the research and development of
biopharmaceutical products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”).
Prior Period Errors
In connection with our review of our financial statements as of and for the six months ended June 30, 2019, we
corrected errors related to the accounting for clinical trial accruals that had resulted in an overstatement of research and
development expenses during the year ended December 31, 2018. Specifically, management concluded that the Company’s
research and development expenses recorded during the year ended December 31, 2018 had been overstated by $3.6
million and that the Company’s accrued expenses and other current liabilities as of December 31, 2018 had been overstated
by the same amount.
Management analyzed the potential impact of these errors in accordance with the U.S. Securities and Exchange
Commission’s (“SEC”) Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements, and concluded that while the errors were significant to
the Company’s financial statements as of and for the six months ended June 30, 2019, a correction of the errors would not
have been material to the full year results for 2019 and 2018 nor affect the trend of financial results. Accordingly, the
Company reduced accrued and other liabilities by $3.6 million and recorded a cumulative adjustment of $3.6 million in the
statement of operations and comprehensive loss to reduce research and development expenses in 2019.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates
and judgments that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis,
management evaluates its estimates, including those related to recognition of revenue, clinical trial accruals, 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 that management
believes to be reasonable under the circumstances. Actual results could materially differ from those estimates.
Liquidity
As of December 31, 2019, the Company had cash and cash equivalents and short-term investments of
approximately $247.5 million, which include net proceeds of approximately $134.9 million and approximately $20.0
million received in connection with the 2019 Offering and the Private Placement, respectively, as defined and discussed in
Note 7. We believe our current available cash, cash equivalents and short-term investments will be sufficient to fund
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our planned expenditures and meet the Company’s obligations for at least 12 months following March 6, 2020, which is the
date that the financial statements are being issued.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity date of 90 days or less
on the date of purchase to be cash equivalents.
Short-Term Investments
Short-term investments consist of debt securities classified as available-for-sale and have maturities greater than
90 days, but less than one year, from the date of acquisition. Short-term investments are carried at fair value based upon
quoted market prices. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are
reported as a component of accumulated other comprehensive loss. The cost of available-for-sale securities sold is based on
the specific-identification method.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist
primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company is exposed to credit
risks in the event of default by the counterparties to the extent of the amount recorded in its balance sheet. Cash, cash
equivalents and short-term investments are invested through banks and other financial institutions in the United States.
Accounts Receivable
An allowance for doubtful accounts will be recorded based on a combination of historical experience, aging
analysis, and information on specific accounts. Account balances will be written off against the allowance after all means
of collection have been exhausted and the potential for recovery is considered remote. No provision was made for doubtful
accounts as of December 31, 2019, 2018 and 2017.
Foreign Currency and Forward Contracts
The Company manages its foreign currency exposures with the use of foreign currency purchases as well as
currency spot and forward contracts. The Company primarily conducts its business in U.S. dollars; however, a portion of
the Company’s expense and capital activities are transacted in foreign currencies which are subject to exchange rate
fluctuations that can affect cash or earnings. The Company has been in a loss position and therefore its primary objective is
to conserve and manage cash. There are generally two methods by which the Company manages the cash flow risk of
foreign exchange fluctuations when a contract is signed (i) it can purchase the foreign funds, in full or in part, upon the
execution of the contract, or (ii) it can obtain the right to purchase such funds, in full or in part, at the execution of the
contract, i.e., obtain a forward contract from an appropriate bank, that can be exercised to obtain the currency of interest at
a particular point in time. The derivative instruments that the Company uses to hedge the exposure shall generally not be
designated as cash flow hedges, and as a result, changes in their fair value will be recorded in other income (expense), net,
in the Company's statements of operations and comprehensive loss. The fair values of forward foreign currency exchange
contracts are estimated using current exchange rates and interest rates and the current creditworthiness of the counterparties
is taken into consideration.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the estimated useful lives of the respective assets, with ranges generally from
three to five years. Leasehold improvements are amortized over the lesser of the estimated useful lives or the related
remaining lease term.
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Impairment of Long-Lived Assets
The carrying value of long-lived assets, including property and equipment, are reviewed for impairment whenever
events or changes in circumstances indicate that the asset may not be recoverable. An impairment loss is recognized when
the total of estimated future undiscounted cash flows, expected to result from the use of the asset and its eventual
disposition, are less than the asset’s carrying amount. Impairment, if any, would be assessed using discounted cash flows or
other appropriate measures of fair value. For the years ending December 31, 2019, 2018 and 2017 there have been no
impairment losses.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to
reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset
will not be realized.
Revenue Recognition
On January 1, 2018 the Company adopted the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments
(“ASC 606”), on a modified retrospective basis, which resulted in an adjustment to the opening accumulated deficit balance
on the adoption date. As a result of the adoption of the new standard, on January 1, 2018, the Company recorded the
following: (i) unbilled revenue under current assets of $5.0 million representing a future receivable related to the first
milestone under the Company’s license agreement with Kyowa Kirin Co., Ltd. (formerly known as Kyowa Hakko Kirin
Co., Ltd, or KHK) (“KKC”), which was subsequently achieved by KKC and collected in February 2019, thereby reducing
the unbilled revenue balance to zero, (ii) uncharged license fees under current liabilities of $1.0 million representing the
corresponding future payable related to AstraZeneca AB, or AstraZeneca, in accordance with the Company’s termination
agreement with AstraZeneca, which, upon KKC achieving the milestone, was reclassified to accounts payable and
subsequently paid to AstraZeneca during the second quarter of 2019, and (iii) a related decrease in accumulated deficit of
approximately $4.0 million as the new standard permitted revenue from milestones that possess certain criteria to be
recognized earlier and also contained different recognition criteria related to milestones than under the previous accounting
standard.
The Company generates revenue primarily from research and collaboration and license agreements with
customers. Goods and services in the agreements may include the grant of licenses for the use of the Company’s
technology, the provision of services associated with the research and development of product candidates, manufacturing
services, and participation in joint steering committees. The terms of these arrangements typically include payment to the
Company of one or more of the following: non-refundable, up-front license fees; research, development, regulatory and
commercial milestone payments; reimbursement of research and development services; option payments; reimbursement of
certain costs; payments for manufacturing supply services; and future royalties on net sales of licensed products.
When two or more contracts are entered into with the same customer at or near the same time, the Company
evaluates the contracts to determine whether the contracts should be accounted for as a single arrangement. Contracts are
combined and accounted for as a single arrangement if one or more of the following criteria are met: (i) the contracts are
negotiated as a package with a single commercial objective; (ii) the amount of consideration to be paid in one contract
depends on the price or performance of the other contract; or (iii) the goods or services promised in the contracts (or some
goods or services promised in each of the contracts) are a single performance obligation.
In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under
each of its agreements, management 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 distinct in the context of the contract; (iii) measurement of the transaction price, including the constraints on
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variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of
revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for contracts with
customers, the Company develops assumptions that require judgment to determine whether promised goods and services
represent distinct performance obligations and the standalone selling price for each performance obligation identified in the
contract. This evaluation is subjective and requires the Company to make judgments about the promised goods and services
and whether those goods and services are separable from other aspects of the contract. Further, determining the standalone
selling price for performance obligations requires significant judgment, and when an observable price of a promised good
or service is not readily available, the Company considers relevant assumptions to estimate the standalone selling price,
including, as applicable, market conditions, development timelines, probabilities of technical and regulatory success,
reimbursement rates for personnel costs, forecasted revenues, potential limitations to the selling price of the product and
discount rates.
The Company applies judgment in determining whether a combined performance obligation is satisfied at a point
in time or over time, and, if over time, concluding upon the appropriate method of measuring progress to be applied for
purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, as estimates
related to the measure of progress change, related revenue recognition is adjusted accordingly. Changes in the Company’s
estimated measure of progress are accounted for prospectively as a change in accounting estimate. The Company
recognizes collaboration revenue by measuring the progress toward complete satisfaction of the performance obligation
using an input measure. In order to recognize revenue over the research and development period, the Company measures
actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation. Revenues
are recognized as the program costs are incurred. The Company will re-evaluate the estimate of expected costs to satisfy
the performance obligation each reporting period and make adjustments for any significant changes.
Amounts received prior to satisfying the revenue recognition criteria are recorded as contract liabilities in the
Company’s balance sheets. If the related performance obligation is expected to be satisfied within the next twelve months
this will be classified in current liabilities. Amounts recognized as revenue prior to receipt are recorded as contract assets in
the Company's balance sheets. If the Company expects to have an unconditional right to receive the consideration in the
next twelve months, this will be classified in current assets. A net contract asset or liability is presented for each contract
with a customer.
Milestone Payments: At the inception of each arrangement that includes development milestone payments, the
Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be
included in the transaction price using the most likely amount method. Amounts of variable consideration are included in
the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue
recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved.
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 to each
performance obligation on a relative standalone selling price basis, for which the Company recognizes revenue as or when
the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company
re-evaluates the probability of achievement of such development milestones and any related constraints, and if necessary,
adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis,
which would affect earnings in the period of adjustment.
Manufacturing supply services: Arrangements that include a promise for future supply of drug substance or drug
product for either clinical development or commercial supply at the customer’s discretion are generally considered as
options. The Company assess if these options provide a material right to the licensee and if so, they are accounted for as
separate performance obligations. If the Company is entitled to additional payments when the customer exercises these
options, any payments are 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 of
sales, and where the license is deemed to be the predominant item to which the royalties relate, the Company recognizes
revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some
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or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized
any royalty revenue resulting from any of its licensing arrangements.
Licenses of intellectual property: If a license granted to a customer to use the Company’s intellectual property is
determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes
revenue from consideration allocated to the license when the license is transferred to the licensee and the licensee is able to
use and benefit from the license. For licenses that are bundled with other promises, the Company applies judgment to
assess the nature of the combined performance obligation to determine whether the combined performance obligation is
satisfied over time or at a point in time and, if over time, to conclude upon the appropriate method of measuring progress
for purposes of recognizing revenue related to consideration allocated to the performance obligation.
Options: Customer options, such as options granted to allow a licensee to choose to research, develop and
commercialize licensed compounds are evaluated at contract inception in order to determine whether those options provide
a material right (i.e., an optional good or service offered for free or at a discount) to the customer. If the customer options
represent a material right, the material right is treated as a separate performance obligation at the outset of the arrangement.
The Company allocates the transaction price to material rights based on the standalone selling price, and revenue is
recognized when or as the future goods or services are transferred or when the option expires. Customer options that are not
material rights do not give rise to a separate performance obligation, and as such, the additional consideration that would
result from a customer exercising an option in the future is not included in the transaction price for the current contract.
Instead, the option is deemed a marketing offer, and additional option fee payments are recognized or being recognized as
revenue when the licensee exercises the option. The exercise of an option that does not represent a material right is treated
as a separate contract for accounting purposes.
Contract costs: The Company recognizes as an asset the incremental costs of obtaining a contract with a customer
if the costs are expected to be recovered. The Company has elected a practical expedient wherein it recognizes the
incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that it
otherwise would have recognized is one year or less. To date, the Company has not incurred any material incremental costs
of obtaining a contract with a customer.
Contract modifications: Contract modifications, defined as changes in the scope or price (or both) of a contract
that are approved by the parties to the contract, such as a contract amendment, exist when the parties to a contract approve
a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract.
Depending on facts and circumstances, the Company accounts for a contract modification as one of the following: (i) a
separate contract; (ii) a termination of the existing contract and a creation of a new contract; or (iii) a combination of the
preceding treatments. A contract modification is accounted for as a separate contract if the scope of the contract increases
because of the addition of promised goods or services that are distinct and the price of the contract increases by an amount
of consideration that reflects the Company’s standalone selling prices of the additional promised goods or services. When a
contract modification is not considered a separate contract and the remaining goods or services are distinct from the goods
or services transferred on or before the date of the contract modification, the Company accounts for the contract
modification as a termination of the existing contract and a creation of a new contract. When a contract modification is not
considered a separate contract and the remaining goods or services are not distinct, the Company accounts for the contract
modification as an add-on to the existing contract and as an adjustment to revenue on a cumulative catch-up basis.
The Company receives payments from its licensees as established in each contract. Upfront payments and fees are
recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period
until the Company performs its obligations under these arrangements. Where applicable, amounts are recorded as unbilled
revenue when the Company’s right to consideration is unconditional. The Company does not assess whether a contract with
a customer has a significant financing component if the expectation at contract inception is such that the period between
payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less.
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Research and Development Costs
Research and development costs are charged to expense as incurred and consist of costs incurred to further the
Company’s research and development activities and include salaries and related employee benefits, costs associated with
clinical trials, costs related to pre-commercialization manufacturing activities such as manufacturing process validation
activities and the manufacturing of clinical drug supply, nonclinical research and development activities, regulatory
activities, research-related overhead expenses and fees paid to external service providers and contract research and
manufacturing organizations that conduct certain research and development activities on behalf of the Company.
Accrued Research and Development Expenses
The Company is required to estimate its accrued expenses at the end of each reporting period. This process
involves reviewing open contracts and purchase orders, communicating with Company personnel to identify services that
have been performed on the Company’s behalf and estimating the level of service performed and the associated cost
incurred for the service when the Company has not yet been invoiced or otherwise notified of the actual costs. The majority
of the Company’s service providers submit invoices in arrears for services performed or when contractual milestones are
met. The Company makes estimates of its accrued expenses as of each balance sheet date in the financial statements based
on facts and circumstances known to the Company at that time. The Company periodically confirms the accuracy of its
estimates with the service providers and makes adjustments if necessary. Examples of estimated accrued research and
development expenses include 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 its
estimates of the services received and efforts expended pursuant to contracts with multiple CROs and manufacturing
vendors that conduct and manage these activities on the Company’s 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 to the Company’s vendors will exceed the level of services provided and result in a prepayment of
the expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and
the completion of clinical trial milestones. 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 of the performance of services or the level of effort varies from the Company’s estimate, the
Company will adjust the accrued or prepaid expense balance accordingly.
Stock-Based Compensation
The Company recognizes compensation expense for all stock-based payment awards made to employees,
nonemployees and directors based on estimated fair values. For employee and nonemployee stock options, the Company
determines the grant date fair value of the awards using the Black-Scholes option-pricing model and generally recognizes
the fair value as stock-based compensation expense on a straight-line basis over the vesting period of the respective awards.
For restricted stock and performance-based restricted stock, to the extent they are probable, the compensation cost for these
awards is based on the closing price of the Company’s common stock on the date of grant and recognized as compensation
expense on a straight-line basis over the requisite service period. Stock-based compensation expense is based on the value
of the portion of stock-based payment awards that is ultimately expected to vest. As such, the Company’s stock-based
compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates.
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Derivatives and Hedging Activities
The Company accounts for its derivative instruments as either assets or liabilities on the balance sheet and
measures them at fair value. Derivatives are adjusted to fair value through other income (expense), net in the statements of
operations and comprehensive loss.
Leases
The Company determines if an arrangement is a lease at the inception of the arrangement. Operating leases are
included in right-of-use assets, current portion of operating lease liability, and operating lease liability, net of current
portion in our balance sheets. Right-of-use assets represent the Company’s right to use an underlying asset for the lease
term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-
use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over
the lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate based
on the information available at the lease commencement date. The operating lease right-of-use assets also include any lease
payments made and exclude lease incentives. The Company’s lease terms may include options to extend or terminate the
lease when it is reasonably certain that the Company will exercise any such options. Lease expense is recognized on a
straight-line basis over the expected lease term. The Company has elected not to separate lease and non-lease components,
such as common area maintenance charges, and instead it accounts for these as a single lease component.
Comprehensive Loss
Comprehensive loss is composed of two components: net loss and other comprehensive income (loss). Other
comprehensive income (loss) refers to gains and losses that are recorded as an element of stockholders’ equity but are
excluded from net loss.
Net Loss per Share
Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of
common shares outstanding during the period, without consideration of potential common shares. Diluted net loss per
common share in the periods presented is the same as basic net loss per common share, since the effects of potentially
dilutive securities are antidilutive due to the net loss for all periods presented.
Recent Accounting Pronouncements
New Accounting Pronouncements - Recently Adopted
On January 1, 2019, the Company adopted the FASB’s Accounting Standards Update (“ASU”), No. 2018-07,
Compensation – Stock Compensation, which simplifies the accounting for share-based payments to non-employees by
aligning it with the accounting guidance for share-based payments for employees. This ASU expands the scope of Topic
718, Compensation – Stock Compensation, which currently only includes share-based payments issued to employees, to
also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for
share-based payments to non-employees and employees is substantially aligned. The adoption of this standard did not have
a material impact on the Company’s financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), as amended, which
generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the
balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising
from leasing arrangements. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements
(“ASU 2018-11”). In issuing ASU 2018-11, the FASB permitted another transition method for ASU 2016-02, which allows
the transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. The Company elected the transition method and package of practical expedients
permitted under the transition guidance, which allowed the Company to carryforward its historical lease classification, its
assessment on whether a contract is or contains a lease, and its initial direct costs for
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any leases that exist prior to adoption of the new standard. The Company also elected to combine lease and non-lease
components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated
lease payments in the statements of operations on a straight-line basis over the lease term. We adopted the ASU on January
1, 2019 using a modified retrospective approach and recorded a right-of-use asset and a corresponding lease liability to
account for our facility lease as a cumulative-effect adjustment to the opening balance of accrued expense and other current
liabilities and other long-term liabilities in the period of adoption.
Impact of Adoption
The Company, on adopting Topic 842 on January 1, 2019, used the modified retrospective approach with the
cumulative effect of initially applying the standard as an adjustment to the opening balance of accrued and other liabilities
and other long-term liabilities. The following adjustments were recorded in the Company’s balance sheet on January 1,
2019 (in thousands):
December 31, Adjustments
2018
Due to Topic 842
January 1,
2019
Right-of-use assets
Current portion of operating lease liability
Operating lease liability, net of current portion
Accrued expenses and other current liabilities
Other long-term liabilities
$
$
$
$
$
— $
— $
— $
12,857 $
582 $
5,810 $
1,892 $
4,684 $
(184) $
(582) $
5,810
1,892
4,684
12,673
—
As a result of adopting Topic 842 on January 1, 2019, the following financial statement line items in the
Company’s balance sheet at December 31, 2019 and the statement of operations and comprehensive loss for the year ended
December 31, 2019 were affected compared to as would have been recorded under ASC 840, Leases (Topic 840), (in
thousands):
As Reported
under Topic
842
December 31, 2019
Under Topic 840 Effect of Change
Right-of-use assets
Current portion of operating lease liability
Operating lease liability, net of current portion
Accrued expenses and other current liabilities
Other long-term liabilities
$
$
$
$
$
3,970 $
2,608 $
2,076 $
7,248 $
— $
— $
— $
— $
7,571 $
258 $
3,970
2,608
2,076
(323)
(258)
Year Ended December 31, 2019
As Reported
under Topic
842
Under Topic 840 Effect of Change
Operating expenses:
Research and development related to leases
General and administrative related to leases
Total
$
$
2,070 $
522
2,592 $
1,962 $
498
2,460 $
108
24
132
New Accounting Pronouncements – Adoption on January 1, 2020
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the
Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between collaborative arrangement
participants should be accounted for as revenue under ASC 606 when the collaborative arrangement
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participant is a customer. For the Company, the amendment is effective January 1, 2020. Management does not expect that
adoption of this guidance will have a significant impact on the Company’s financial statements.
In 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, and removes, modifies and adds disclosure requirements in Topic 820. The amendments on changes in unrealized
gains and losses, 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 or annual period presented in the initial fiscal year of adoption. All other amendments are to be applied
retrospectively to all periods presented. ASU 2018-13 is effective for the Company for fiscal years beginning after
December 15, 2019, including interim periods within that fiscal year and early adoption was permitted. Management does
not expect that adoption of this guidance will have a significant impact on the Company’s financial statements.
New Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes, which removes certain exceptions for intra period allocations, recognizing deferred taxes for investments
and calculating income taxes in interim periods. This ASU also adds guidance to reduce complexity in certain areas,
including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The
guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2020, with early adoption permitted. Management is currently assessing the impact of this standard on the
Company’s financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, an amendment which modifies the measurement and recognition
of credit losses for most financial assets and certain other instruments. The amendment updates the guidance for measuring
and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an
“expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. The
amendment also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through
net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. For
smaller reporting companies the guidance is effective for fiscal years beginning after December 15, 2022, including interim
periods within those fiscal years. Early adoption is permitted. Management is currently assessing the impact of this
standard on the Company’s financial statements.
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3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Securities classified as cash, cash equivalents and short-term investments as of December 31, 2019 and
December 31, 2018 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these
investments.
Cash and cash equivalents:
Cash
Money market funds
Corporate bonds
Commercial paper
Total cash and cash equivalents
Short-term investments
Corporate bonds
Commercial paper
Asset-backed securities
Total short-term investments
Total cash equivalents and investments
Cash and cash equivalents:
Cash
Money market funds
Commercial paper
Total cash and cash equivalents
Short-term investments
U.S. treasury securities
Corporate bonds
Commercial paper
Asset-backed securities
Total short-term investments
Total cash equivalents and investments
Amortized Cost
Gains
Losses
Fair Value
December 31, 2019
Gross Unrealized
$
$
$
$
$
3,124
147,208
11,441
19,357
181,130
21,690
36,667
8,005
66,362
247,492
$
$
$
$
$
—
—
—
3
3
6
14
—
20
23
$
$
$
$
$
Amortized Cost
Gains
Losses
December 31, 2018
Gross Unrealized
$
$
$
$
$
3,733
73,238
1,797
78,768
3,996
34,611
41,371
9,381
89,359
168,127
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
$
$
$
$
$
—
—
—
—
—
(3)
—
—
(3)
(3)
—
—
—
—
—
(21)
(14)
(3)
(38)
(38)
$
$
$
$
$
$
$
$
$
$
3,124
147,208
11,441
19,360
181,133
21,693
36,681
8,005
66,379
247,512
Fair Value
3,733
73,238
1,797
78,768
3,996
34,590
41,357
9,378
89,321
168,089
Cash equivalents consist of money market funds and other debt securities with original maturities of three months
or less at the time of purchase, and the carrying amount is a reasonable approximation of fair value. The Company invests
its cash in high quality securities of financial and commercial institutions. These securities are carried at fair value, which is
based on readily available market information, with unrealized gains and losses included in accumulated other
comprehensive income (loss) within stockholders’ equity on the Company’s balance sheets. The Company uses the specific
identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains
or losses have been insignificant and are included in other income (expense), net, in the statement of operations.
All available-for-sale securities held as of December 31, 2019 and 2018, had contractual maturities of less than
one year. The Company’s available-for-sale securities are subject to a periodic impairment review. The Company considers
a debt security to be impaired when its fair value is less than its carrying cost, in which case the Company would further
review the investment to determine whether it is other-than-temporarily impaired. When the Company evaluates an
investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to
which fair value has been below cost basis, the financial condition of the issuer and any changes thereto,
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intent to sell, and whether it is more likely than not the Company will be required to sell the investment before the recovery
of its cost basis. If an investment is other-than-temporarily impaired, the Company writes it down through the statement of
operations to its fair value and establishes that value as a new cost basis for the investment. The Company did not identify
any of its available-for-sale securities as other-than-temporarily impaired in any of the periods presented. As of December
31, 2019 and 2018, no investment was in a continuous unrealized loss position for more than one year and the Company
believes that it is more likely than not that the investments will be held until maturity or a forecasted recovery of fair value.
4. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of
observable inputs 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 readily
accessible by the Company at the reporting date. Examples of assets and liabilities utilizing Level
1 inputs are certain money market funds, U.S. treasuries and trading securities with quoted prices
on active markets.
Level 2 – Valuations based on inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active;
or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. Examples of assets and liabilities utilizing
Level 2 inputs are corporate 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
the Company to develop its own assumptions.
The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a
recurring basis by level within the fair value hierarchy (in thousands):
Assets:
Money market funds
Corporate bonds
Commercial paper
Asset-backed securities
Total
Liabilities:
Derivative liability for Exit Fee
Total
Total
Fair Value
Level 1
Level 2
Level 3
December 31, 2019
147,208 $
33,134
56,041
8,005
244,388 $
147,208 $
—
—
—
147,208 $
— $ —
33,134
—
56,041
—
—
8,005
97,180 $ —
969 $
969 $
— $
— $
— $ 969
— $ 969
$
$
$
$
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Assets:
Money market funds
U.S. treasury securities
Corporate bonds
Commercial paper
Asset-backed securities
Total
Liabilities:
Derivative liability for exit fee
Foreign currency derivative contracts
Total
December 31, 2018
Total
Fair Value
Level 1
Level 2
Level 3
$
$
$
$
73,238 $
3,996
34,590
43,154
9,378
164,356 $
73,238 $
3,996
—
—
—
77,234 $
— $
—
34,590
43,154
9,378
87,122 $
533 $
52
585 $
— $
—
— $
— $
52
52 $
—
—
—
—
—
—
533
—
533
Where quoted prices are available in an active market, securities are classified as Level 1. The Company classifies
money market funds, U.S. treasury securities and U.S. treasury notes as Level 1. When quoted market prices are not
available for the specific security, the Company estimates fair value by using benchmark yields, reported trades,
broker/dealer quotes and issuer spreads. The Company classifies corporate bonds, commercial paper, asset-backed
securities and foreign currency derivative contracts as Level 2. In certain cases, where there is limited activity or less
transparency around inputs to valuation, securities are classified as Level 3. There were no transfers between Level 1 and
Level 2 during the periods presented.
In May 2018, in connection with entering into the Loan Agreement, as defined and discussed in Note 6, the
Company entered into an agreement pursuant to which the Company agreed to pay $1.5 million in cash, or the Exit Fee,
upon any change of control transaction in respect of the Company or if the Company obtains both (i) FDA approval of
tenapanor for the treatment of hyperphosphatemia in CKD patients on dialysis and (ii) FDA approval of tenapanor for the
treatment of patients with irritable bowel syndrome with constipation, or IBS-C, which was obtained on September 12,
2019 when the FDA approved IBSRELA® (tenapanor), a 50 mg, twice daily oral pill for the treatment of IBS-C, in adults
(the “Exit Fee Agreement”). Notwithstanding the prepayment or termination of the Term Loan, the Company’s obligation
to pay the Exit Fee will expire on May 16, 2028. The Company concluded that the Exit Fee is a freestanding derivative
which should be accounted for at fair value on a recurring basis. The estimated fair value of the Exit Fee is recorded as a
derivative liability and included in accrued expense and other current liabilities on the accompanying balance sheets.
The fair value of the derivative liability was determined using a discounted cash flow analysis and is classified as
a Level 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. and Western Alliance Bank as a result of the FDA approvals, and ii) a discount rate which was derived from the
Company's estimated cost of debt, adjusted with current LIBOR. Generally, increases or decreases in the probability of
occurrence would result in a directionally similar impact in the fair value measurement of the derivative instrument and it is
estimated that a 10% increase (decrease) in the probability of occurrence would result in a fair value fluctuation of
approximately $0.1 million.
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Changes in the fair value of recurring measurements included in Level 3 of the fair value hierarchy are presented
as other income (expense), net in the Company's statements of operations and were as follows for the year ended December
31, 2019 (in thousands):
Balance of Level 3 Liabilities at December 31, 2017
Initial estimated fair value of derivative liability for Exit Fee in May 2018
Change in estimated fair value of derivative liability for Exit Fee
Balance of Level 3 Liabilities at December 31, 2018
Change in estimated fair value of derivative liability for Exit Fee
Balance of Level 3 Liabilities at December 31, 2019
$
$
Estimated Fair Value
of Derivative Liability
—
546
(13)
533
436
969
The carrying amounts reflected in the balance sheets for cash equivalents, short-term investments, accounts
receivable, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values
at both December 31, 2019 and December 31, 2018, due to their short-term nature.
5.
DERIVATIVE FINANCIAL INSTRUMENTS
Foreign Currency Exchange Rate Exposure
The Company has used forward foreign currency exchange contracts to secure a foreign currency exchange rate
when a contract is executed involving payment in a foreign currency in order to minimize cash flow exposure to fluctuating
exchange rates. Such exposure results from portions of the Company’s forecasted cash outflows being denominated in
currencies other than the U.S. dollar, primarily the Swiss franc, or CHF, and the euro, or EUR. The derivative instruments
the Company uses to hedge this exposure are not designated as cash flow hedges, and as a result, changes in the fair value
of the derivative instruments are recorded in other income (expense), net, in the Company's statements of operations and
comprehensive loss. The fair values of forward foreign currency exchange contracts are estimated using current exchange
rates and interest rates and take into consideration the current creditworthiness of the counterparties.
In March 2019, the Company settled its forward foreign currency exchange contract in the aggregate notional
amount of CHF 3.3 million. As of December 31, 2019, the Company has no open forward foreign currency exchange
contracts. The net loss associated with the Company's derivative instruments of $60,558 and $124,194 for the years ended
December 31, 2019 and 2018, respectively, is recognized in other income (expense), net, in the statement of operations and
comprehensive loss. There were no expenses related to the Company’s derivative instruments during the year ended
December 31, 2017.
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 Solar
Capital Ltd. and Western Alliance Bank, or collectively the Lenders. The Loan Agreement provides for a $50.0 million
term loan facility with a maturity date of November 1, 2022, or the Term Loan. The full amount of the loan was funded on
May 16, 2018. The Company received net proceeds from the loan of approximately $49.3 million, after deducting the
closing fee, legal expenses and issuance costs.
Borrowings under the Term Loan bear interest at a floating per annum rate equal to 7.45% plus the one-month
London Inter-bank Offered Rate, or LIBOR. The Company is permitted to make interest-only payments on the Term Loan
through June 1, 2020, unless the Company 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-only payments on the Term Loan through December 1, 2020. On December 3, 2019, the
Company reported positive topline results for PHREEDOM, a long-term Phase 3 study evaluating the efficacy
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and safety of tenapanor as monotherapy for the treatment of hyperphosphatemia in patients with CKD on dialysis. The
Lenders are in agreement that these positive data from the Phase 3 PHREEDOM study achieve the “Phase 3 Endpoint”
required by the Loan Agreement to extend the interest only period by six months to December 1, 2020. Accordingly,
beginning on December 1, 2020 through the maturity date, the Company will be required to make monthly payments of
interest plus repayment 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 to 3.95% of the Term Loan upon the earliest to occur of the maturity date, the acceleration of the Term Loan,
the prepayment or repayment of the Term Loan or the termination of the Loan Agreement. The Company may voluntarily
prepay the outstanding Term Loan, subject to a prepayment premium of (i) 3% of the principal amount of the Term Loan if
prepaid prior to or on the first anniversary of the Closing Date, (ii) 2% of the principal amount of the Term Loan if prepaid
after the first anniversary of the Closing Date through and including the second anniversary of the Closing Date, or (iii) 1%
of the principal 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 the Company’s intellectual
property and certain other customary exclusions. Additionally, in connection with the Term Loan, the Company entered
into the Exit Fee Agreement, as discussed in Note 4.
The Loan Agreement contains customary representations and warranties and customary affirmative and negative
covenants. As of December 31, 2019, 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 the
Company’s indebtedness under the Loan Agreement to become immediately due and payable, and to exercise remedies
against the Company and the collateral securing the Term Loan, including its cash. Upon the occurrence and for the
duration of an event of default, an additional default interest rate equal to 4.0% per annum will apply to all obligations
owed under the Loan Agreement. As of December 31, 2019, to the Company’s knowledge, there were no facts or
circumstances in existence that would give rise to an event of default.
As of December 31, 2019, the Company’s future debt payment obligations towards the principal and final fee,
excluding interest payments and the Exit Fee are as follows (in thousands):
2020
2021
2022
Total principal and final fee payments
Less: Unamortized discount and debt issuance costs
Less: Unaccreted value of final fee
Loan payable
Less: Loan payable, current portion
Loan payable, net of current portion
$
2,083
25,000
24,892
51,975
(741)
(1,220)
50,014
1,183
$ 48,831
7.
STOCKHOLDERS’ EQUITY
On December 9, 2019, the Company completed an underwritten public offering of 20,000,000 shares of common
stock at a price of $6.25 per share before underwriting discounts and commissions, or the 2019 Offering. In connection
with the 2019 Offering, the Company entered into an underwriting agreement, or the 2019 Underwriting Agreement, with
Citigroup Global Markets Inc., Cowen and Company LLC, SVB Leerink LLC and Piper Jaffray & Co., or collectively the
2019 Underwriters, pursuant to which the Company granted to the 2019 Underwriters a 30-day option to purchase up to an
additional 3,000,000 shares of the Company’s common stock, or the 2019 Overallotment. The Company completed the sale
of 23,000,000 shares, inclusive of the 2019 Overallotment, to the 2019 Underwriters and that sale resulted in the receipt by
the Company of aggregate gross proceeds of approximately $143.8 million, less underwriting discounts, commissions and
offering expenses totaling approximately $8.9 million, which resulted in net proceeds of approximately $134.9 million.
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On November 22, 2019, the Company and KKC entered into a stock purchase agreement, pursuant to which the
Company sold an aggregate of 2,873,563 shares of its common stock at $6.96 per share for net proceeds of approximately
$20.0 million, or the Private Placement. The Private Placement closed on November 25, 2019.
On May 25, 2018, the Company completed an underwritten public offering of 12,500,000 shares of common stock
at a price of $4.00 per share before underwriting discounts and commissions, or the 2018 Offering. In connection with the
2018 Offering, the Company entered into an underwriting agreement, or the 2018 Underwriting Agreement, with Jefferies
LLC and SVB Leerink (formerly known as Leerink Partners LLC), or together the 2018 Underwriters, pursuant to which
the Company granted to the 2018 Underwriters a 30-day option to purchase up to an additional 1,875,000 shares of the
Company’s common stock, or the 2018 Overallotment. The Company completed the sale of 14,375,000 shares, inclusive of
the 2018 Overallotment, to the 2018 Underwriters, and that sale resulted in the receipt by the Company of aggregate gross
proceeds of approximately $57.5 million, less underwriting discounts, commissions and offering expenses totaling
approximately $3.7 million, which resulted in net proceeds of approximately $53.8 million.
8. EQUITY INCENTIVE PLANS
2008 Plan
The Company granted options under its 2008 Stock Incentive Plan (the “2008 Plan”) until June 2014 when it was
terminated as to future awards, although it continues to govern the terms of options that remain outstanding under the 2008
Plan. The 2008 Plan provided for the granting of incentive and non-qualified stock options, and stock purchase rights to
employees, directors and consultants at the discretion of the Board of Directors. Stock options granted generally vest over a
period of four years from the date of grant. In connection with the Board of Directors and stockholders’ approval of the
2014 Plan, all remaining shares available for future award under the 2008 Plan were transferred to 2014 Plan, and the 2008
Plan was terminated.
2014 Plan
The 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
compensation awards, including stock options, stock appreciation rights, or SARs, restricted stock awards, service-based
restricted stock unit (“RSU”) awards, performance-based restricted stock unit (“PRSU”) awards, deferred stock awards,
deferred stock unit awards, dividend equivalent awards, stock payment awards and performance awards. In addition,
35,221 shares that had been available for future awards under the 2008 Plan as of June 18, 2014, were added to the initial
reserve available under the 2014 Plan, bringing the total reserve upon the effective date of the 2014 Plan to 1,454,549. The
number of shares initially reserved for issuance or transfer pursuant to awards under the 2014 Plan will be increased by
(i) the number of shares represented by awards outstanding under 2008 Plan on June 18, 2014, that are either forfeited or
lapse unexercised or that are repurchased for the original purchase price thereof, up to a maximum of 1,153,279 shares, and
(ii) if approved by the Administrator 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 immediately preceding 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.
2016 Plan
In November 2016, the Company’s board of directors approved the 2016 Employment Commencement Incentive
Plan (the “Inducement Plan”) under which 1,000,000 shares were reserved. As of December 31, 2019, no shares of the
Company’s common stock were subject to inducement grants that were issued pursuant to the Inducement Plan.
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Stock Plan Activity
The following table summarizes activity under the 2008 Plan and the 2014 Plan, including grants issued to
nonemployees, in the year ended December 31, 2019:
Options Issued and Outstanding
Shares Available
for Grant
Number of Shares
Weighted-Average
Exercise Price per
Share
Weighted
Average
Remaining
Aggregate
Contractual Term Intrinsic Value
(in thousands)
(in Years)
Balance at December 31, 2018
Options authorized
Options granted
Options exercised
Options canceled
Issuance of common stock for
services
Forfeitures of PRSUs granted in
prior years
Balance at December 31, 2019
Vested and expected to vest at
December 31, 2019
Exercisable at December 31, 2019
608,528
2,490,417
(2,362,685)
—
528,615
(113,136)
45,007
1,196,746
5,506,760 $
— $
2,362,685 $
(68,062) $
(528,615) $
—
—
7,272,768 $
6,754,711 $
4,183,281 $
8.32
—
2.56
2.59
7.69
—
—
6.55
6.74
7.95
7.40 $
19,128
7.30 $
6.46 $
17,217
8,753
The aggregate intrinsic value represents the difference between the total pre-tax value (i.e., the difference between
the Company’s stock price and the exercise price) of stock options outstanding as of December 31, 2019, based on the
Company’s common stock closing price of $7.51 per share, which would have been received by the option holders had all
their in-the-money options been exercised as of that date.
The intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017, was $0.4
million, zero, and $0.3 million, respectively.
The weighted-average grant-date estimated fair value of options granted during the years ended December 31,
2019, 2018 and 2017 was $1.79, $4.29 and $8.19 per share, respectively. The estimated grant date fair value of employee
stock options was calculated using the Black-Scholes option-pricing model, based on the following weighted-average
assumptions:
Expected term (years)
Expected volatility
Risk-free interest rate
Dividend yield
Year Ended
December 31,
2019
6.00
81 %
2.42 %
— %
Expected Term—The Company has limited historical information to develop reasonable expectations about future
exercise patterns and post-vesting employment termination behavior for its stock-option grants. As such, the expected term
was estimated using the simplified method whereby the expected term equals the arithmetic average of the vesting term and
the original contractual term of the option.
Expected Volatility—Since January 1, 2017, the Company has used the historic volatility of its own stock over the
retrospective period corresponding to the expected remaining term of the options, or the period since its shares were first
quoted on The Nasdaq Global Market, if that is shorter, to compute its expected stock price volatility.
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Risk-Free Interest Rate—The risk-free interest rate assumption is based on the zero-coupon U.S. treasury
instruments on 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 to
do so in the future. Therefore, the Company used an expected dividend yield of zero.
Restricted Stock Units
The following table summarizes restricted stock unit activity under the 2014 Plan in the year ended December 31,
2019, and includes restricted stock units with time or service-based vesting and those restricted stock units with
performance-based vesting:
Non-vested restricted stock units at December 31, 2018
Granted
Vested
Forfeited
Non-vested restricted stock units at December 31, 2019
Weighted-Average
Number of Grant Date Fair
Value Per Share
Weighted-
Average Grant
Number of Date Fair Value
PRSUs
Per Share
RSUs
85,609 $
— $
(85,609) $
— $
— $
4.70 894,764 $
— $
—
— $
4.70
—
(45,007) $
— 849,757 $
4.30
—
—
4.30
4.30
RSUs and PRSUs are generally subject to forfeiture if employment terminates prior to the release of vesting
restrictions. The related compensation expense, which is based on the grant date fair value of the Company’s common
stock multiplied 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 vested upon the achievement of
specified performance conditions, subject to the employees’ continued service relationship with the Company through the
date of achievement, of which 125,895 PRSUs vested in November 2018. None of these PRSUs vested during the year
ended December 31, 2017. The related compensation cost was recognized as an expense over the estimated vesting period
ratably after achievement of the milestone was deemed probable. The expense recognized for these awards was based on
the grant date fair value of the Company’s common stock multiplied by the number of units granted. The Company
recognized zero, $0.6 million and $1.0 million of related expense during the year ended December 31, 2019, 2018 and
2017, respectively.
In July 2018, the Company granted 903,374 PRSUs to its employees that vest upon the achievement of certain
performance conditions, subject to the employees’ continued service relationship with the Company through the
achievement date. At December 31, 2019, 849,757 of these PRSUs were outstanding and none vested. Based on the
evaluation of the performance conditions at December 31, 2019, the Company recorded stock-based compensation expense
of $2.4 million for the year ended December 31, 2019. Stock-based compensation expense recorded related to these PRSUs
were zero for the year ended December 31, 2018. The related compensation cost was recognized as an expense over the
estimated vesting period ratably when achievement of the milestone was considered probable. The expense recognized for
these awards is based on the grant date fair value of the Company’s common stock multiplied by the number of units
granted.
With respect to RSUs, we recognize expense over the estimated vesting period ratably, contingent on continued
service. The Company recognized $0.3 million, $0.9 million and $0.9 million of related expense during the year ended
December 31, 2019, 2018 and 2017, respectively. The total estimated fair value of RSUs vested during the years ended
December 31, 2019, 2018 and 2017 was $0.2 million, $0.6 million and $0.4 million, respectively.
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Issuance of Common Stock for Services
During the years ended December 31, 2019, 2018 and 2017, the Company issued 113,136, 75,183 and 46,858
shares, respectively, of common stock to members of the board of directors who elected to receive stock in lieu of their
cash fees under the Company’s Non-Employee Director Compensation Program. The shares issued during the years ended
December 31, 2019, 2018 and 2017 were valued at $0.3 million, $0.3 million and $0.2 million, respectively, based on the
fair value of the common stock on the date of grant.
Employee Stock Purchase Plan
The Company adopted the 2014 Employee Stock Purchase Plan (“ESPP”) and initially reserved 202,762 shares of
common stock as of its effective date of June 18, 2014. If approved by the Administrator of the ESPP, on the first day of
each calendar 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 than
2,230,374 shares of our common stock may be issued under the ESPP.
The following table summarizes ESPP activity in the year ended December 31, 2019:
Shares Available Number of Shares Purchase Price
Purchased
per Share
for Grant
Gross Proceeds
(in thousands)
Balance at December 31, 2018
Shares purchased
Balance at December 31, 2019
680,322
(160,744)
519,578
330,936
160,744 $
491,680
2.48 $
396
The following table illustrates the weighted-average assumptions for the Black-Scholes option-pricing model used
in determining the fair value of ESPP purchase rights granted to employees:
Expected term (years)
Expected volatility
Risk-free interest rate
Dividend yield
Stock-based Compensation
Total stock-based compensation recognized was as follows:
Research and development
General and administrative
Total
102
Year Ended
December 31,
2019
0.5
69 %
2.20 %
— %
2019
Year Ended December 31,
2018
(in thousands)
2017
$ 4,104 $ 3,666 $ 4,585
5,005
$ 9,936 $ 9,226 $ 9,590
5,560
5,832
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At December 31, 2019, the Company had total unrecognized stock-based compensation expense, net of estimated
forfeitures, of the following:
Stock options grants
PRSU grants
ESPP
9. WARRANTS
Offering of Common Stock and Warrants
At December 31, 2019
Unrecognized
Compensation Expense
(in thousands)
$
$
$
8,277
965
53
Average Vesting
Period
(Years)
2.5
0.7
0.2
In June 2015, the Company sold and issued an aggregate of 7,242,992 shares of its common stock and warrants to
purchase 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 per
share 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
the Company. The Company had determined that the warrants should be classified as equity. In July 2015, the Company
filed a registration 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
contain limitations that prevent each holder of warrants from acquiring shares upon exercise of the warrants that would
cause the number of shares beneficially owned by it and its affiliates to exceed 9.99% of the total number of shares of the
Company’s common stock then issued and outstanding. In addition, upon certain changes in control of the Company, each
holder of a warrant can elect to receive, subject to certain limitations and assumptions, securities in a successor entity. None
of the warrants issued in June 2015 have been exercised including during each of the years ended December 31, 2019, 2018
and 2017.
10. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
2019
2018
Laboratory equipment
Office equipment and furniture
Leasehold improvements
Property and equipment, gross
Less: accumulated depreciation
Total property and equipment, net
$
$
(in thousands)
7,243 $
870
7,949
16,062
(12,626)
6,965
889
7,949
15,803
(10,192)
5,611
3,436 $
Depreciation expense totaled $2.5 million, $2.7 million and $2.6 million for the years ended December 31, 2019,
2018 and 2017, respectively.
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11.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in thousands):
Accrued clinical and non-clinical expenses
Accrued contract manufacturing expenses
Derivative liability for exit fee
Accrued regulatory expenses
Accrued professional and consulting services
Foreign currency derivative contract
Other
December 31,
2019
December 31,
2018
$
$
3,451
1,414
969
342
323
—
749
7,248
$
$
9,790
1,971
533
21
112
52
378
12,857
12.
LEASES
The Company has obtained the right of use for office space assets under two operating lease agreements. The
Company has evaluated its facility leases and determined that, effective upon the adoption of Topic 842, the leases
evaluated are all operating leases. The Company has performed an evaluation of its other contracts with suppliers and
collaborators in accordance with Topic 842 and has determined that, except for the facility leases described below, none of
the Company’s contracts contain a lease.
The Company obtained the right of use of office space located in Fremont, California, under a lease agreement entered
into in September 2008 that was amended in December 2012 to extend the lease agreement to September 2016. In
September 2014, the Company signed the second amendment to its facility lease agreement to add space and to extend the
lease term through September 2019. In May 2016, the Company signed a third amendment to its facility lease agreement in
Fremont, California to add space and to extend the lease term through September 2021 (the “Third Amendment”). The
office space consists of 72,500 square feet, that includes an additional 10,716 square feet added in September 2019, with
the entire lease terminating on September 10, 2021. The Company has an option to extend the term by five years as to the
entire premises at the higher of (i) a 3% annual escalation of the then-current base rent and (ii) the then-current fair market
value for comparable premises, by giving written notice of its election to exercise such option at least 12 months but not
more than 18 months prior to the end of the expiration of the lease term. This option to extend the lease term by five years
has not been included in the calculation since currently the exercise of the option is uncertain and therefore deemed not
probable. The Company also obtained the right of use of 3,520 square feet of office space located in Waltham,
Massachusetts, in October 2018 that terminates on September 30, 2021.
All of the Company’s leases are operating leases. Certain of the leases have both lease and non-lease components. The
Company has elected to account for each separate lease component and the non-lease components associated with that
lease component as a single lease component for all classes of underlying assets. As of December 31, 2019, the weighted
average discount rate used for the calculations was 12.99% and the weighted average remaining lease term was 1.8 years.
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The following table provides additional details of the leases presented in the balance sheets (in thousands except
remaining life and discount rate):
Facilities
Right of use assets
Current portion of lease liabilities
Operating lease liability, net of current portion
Total liabilities
Weighted-average remaining life
Weighted-average discount rate
$
$
December 31, 2019
3,970
2,608
2,076
4,684
1.8 years
12.99 %
The lease costs, which are included in operating expenses in our statements of operations, were as follows (in
thousands):
Facilities
Operating lease cost
Cash paid for operating lease
Year Ended
December 31, 2019
$
$
2,592
2,645
The following table summarizes the Company’s undiscounted cash payment obligations for its operating lease
liabilities as of December 30, 2019 (in thousands):
Years Ending December 31,
2020
2021
Total undiscounted operating lease payments
Imputed interest expenses
Total operating lease liabilities
Less: Current portion of operating lease liability
Operating lease liability, net of current portion
$
$
3,065
2,183
5,248
(564)
4,684
2,608
2,076
Rent expense under operating leases was $2.6 million, $1.8 million and $1.7 million for the years ended
December 31, 2019, 2018 and 2017, respectively.
13. COLLABORATION AND LICENSING AGREEMENTS
Kyowa Kirin Co., Ltd. (2019 KKC Agreement)
In November 2019, the Company entered into a research collaboration and option agreement with KKC, or the 2019
KKC Agreement, for the research to identify two pre-clinical study-ready compounds that are ready for designation as
development compounds, with one compound inhibiting the first undisclosed target, or Program 1, and a second inhibiting
the second undisclosed target, or Program 2. Pursuant to the 2019 KKC Agreement, upon completion of the research and
designation by the research steering committee of one or more development candidates, or DCs, KKC, has the right to
execute one or more separate collaborative agreements relating to the development and commercialization of one or both
DCs in certain specified territories.
Under the terms of the 2019 KKC Agreement, KKC agreed to pay the Company a non-refundable, non-creditable
upfront fee of $10.0 million, which is payable as follows: the first installment of $5.0 million within 30 days of the
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Effective Date, and the second installment of $5.0 million on the first anniversary of the Effective Date, unless the 2019
KKC Agreement is earlier terminated by KKC due to material breach by the Company. The term of the 2019 KKC
Agreement commenced on November 11, 2019, or the Effective Date, and ends on the earliest of: (a) two years following
the Effective Date, or (b) the nomination of a program DC for both programs, (c) or the nomination of one program DC and
the decision by the parties to cease research for the other program, (d) or the decision by the parties to cease research for
both programs. The Company assessed the 2019 KKC Agreement in accordance with ASC 606 and concluded that the
contract’s counterparty, KKC, is a customer. Management also considered the modification guidance prescribed in ASC
606 and concluded that the 2019 KKC Agreement should be accounted for as a separate contract from the 2017 KKC
Agreement, as defined and discussed below.
The Company identified various promises in the 2019 KKC Agreement, including the grant of an initial research
license, the Program 1 research, the Program 2 research, the right to obtain certain development and commercialization
rights with Program 1 in certain territories and the right to obtain development and commercialization rights with Program
2 in certain territories, and participation in a joint steering committee, or JSC, and determined that KKC could not benefit
from either of the research programs without the research license and participation in the JSC. As such, the combined
license, research programs and participation in the JSC were deemed to be the highest level of goods and services that can
be deemed distinct for each of the Program 1 research and Program 2 research. The Company concluded that the options to
obtain additional development and commercialization rights that are exercisable by KKC under certain circumstances are
not performance obligations of the contract at inception because the option fees reflect the standalone selling price of the
options, and therefore, the options are not considered to be material rights.
At the outset of the 2019 KKC Agreement, the Company determined that the initial transaction price is $10.0 million
and that revenue associated with the combined performance obligations will be recognized as services are provided using a
input method. Since transfer of control occurs over time, in management’s judgment this input method is the best measure
of progress towards satisfying the performance obligations and reflects a faithful depiction of the transfer of goods and
services. Revenue will be recognized over the Program 1 and Program 2 research periods, which are currently expected to
extend through the end of 2021. Management will re-evaluate the estimates related to the transaction price at the end of
each reporting period and as uncertain events are resolved or other changes in circumstances occur and adjust the timing of
revenue recognition as necessary.
During the year ended December 31, 2019, the Company recognized $0.5 million as revenue under the 2019 KKC
Agreement in the statement of operations and comprehensive loss. The aggregate amount of the transaction price allocated
to the Company’s partially unsatisfied performance obligations as of December 31, 2019 was $9.5 million, of which $4.5
million is presented in the balance sheet as deferred revenue. As of December 31, 2019, the Company expects to recognize
the remaining transaction price allocated to the Company’s partially unsatisfied performance obligations over the remaining
research terms, which, as noted above, are currently expected to extend through the end of 2021.
Xuanzhu (HK) Biopharmaceutical Limited, or XuanZhu
In November 2019, the Company entered into a license agreement with XuanZhu, or the XuanZhu Agreement, for a
license to certain specific patent and patent applications. The Company assessed these arrangements in accordance with
ASC 606 and concluded that the contract counterparty, XuanZhu, is a customer. Under the terms of the XuanZhu
Agreement, the Company recognized $1.5 million in license fees when the agreement was executed, of which, $750,000
was received upfront in November 2019 and achievement for the second $750,000 payment was determined to be not
materially at risk and probable of achievement and it was included in the transaction price and the amount was not probable
of revenue reversal. Based on the Company’s assessment, it identified that it has one combined performance obligation,
which is the license and the specific patent grant.
In addition to the license fee of $1.5 million, the Company may be entitled to receive milestone payments. The variable
consideration related to the remaining milestone payments has not been included in the transaction price as these were fully
constrained at December 31, 2019.
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For the year ended December 31, 2019, $1.5 million of license revenue was recorded with no cost of revenue related to
the XuanZhu Agreement.
2017 KKC Agreement
In November 2017, the Company entered into an exclusive license agreement with KKC, or the 2017 KKC
Agreement, for the development, commercialization and distribution of tenapanor in Japan for cardiorenal indications. The
Company granted KKC an exclusive license to develop and commercialize certain NHE3 inhibitors including tenapanor in
Japan for the treatment of cardiorenal diseases and conditions, excluding cancer. The Company retained the rights to
tenapanor outside of Japan, and also retained the rights to tenapanor in Japan for indications other than those stated above.
Pursuant to the License Agreement, KKC is responsible for all of the development and commercialization costs for
tenapanor in treatment of cardiorenal diseases and conditions, excluding cancer in Japan. Under the 2017 KKC Agreement,
the Company is responsible for supplying the tenapanor drug product for KKC’s use in development and during
commercialization until KKC has assumed such responsibility. Additionally, the Company is responsible for supplying the
tenapanor drug substance for KKC’s use in development and commercialization throughout the term of the 2017 KKC
Agreement, provided that KKC may exercise an option to manufacture the tenapanor drug substance under certain
conditions
The Company assessed these arrangements in accordance with ASC 606 and concluded that the contract counterparty,
KKC, is a customer. Under the terms of the 2017 KKC Agreement, the Company received $30.0 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 material performance obligations at the inception of the
agreement, and as such each of the performance obligations are distinct. Additionally, on January 1, 2018, the Company
recorded unbilled revenue under current assets of $5.0 million and an increase in uncharged license fees under current
liabilities of $1.0 million related to the first milestone under the 2017 KKC Agreement that KKC achieved in February
2019, reflecting revenues and cost of revenue, respectively, that would have been recognized in the fourth quarter 2017 if
the Company had adopted ASC 606 prior to January 1, 2018. On KKC’s achievement of the milestone in February 2019,
the balance related to unbilled revenue was adjusted to zero. Correspondingly, the $1.0 million balance related to uncharged
license fees that the Company owed to AstraZeneca was reclassified to accounts payable during the first quarter of 2019,
and subsequently paid to AstraZeneca during the second quarter of 2019.
In addition to the up-front license fee received of $30.0 million, the Company may be entitled to receive up to $55.0
million in total development milestones, of which $5.0 million has been received to date and 8.5 billion yen in
commercialization milestones, or $78.3 million at the currency exchange rate on December 31, 2019, 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 the agreement. The variable consideration related to the remaining development milestone payments has not
been included in the transaction price as these were fully constrained at December 31, 2019.
For the years ended December 31, 2019 and 2018, $0.3 million each of other revenue was recorded for manufacturing
supply of tenapanor and other materials to KKC for its product development and clinical trials in Japan, in accordance with
the Company’s agreement with KKC, and for each period, negligible cost of revenue was recorded pursuant to the
AstraZeneca Termination Agreement.
Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd., or Fosun Pharma
In December 2017, the Company entered into an exclusive license agreement with Fosun Pharma, or the Fosun
Agreement, for the development, commercialization and distribution of tenapanor in China for both hyperphosphatemia
and irritable bowel syndrome with constipation, or IBS-C. The Company assessed these arrangements in accordance with
ASC 606 and concluded that the contract counterparty, Fosun Pharma, is a customer. Under the terms of the Fosun
Agreement, the Company 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 material performance obligations at the inception of the agreement, and as such each of the performance
obligations are distinct.
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In addition, the Company may be entitled to additional development and commercialization milestones of up to $110.0
million, as well as reimbursement of cost plus a reasonable overhead for the supply of product and tiered royalties on net
sales ranging from the mid-teens to 20%. The variable consideration related to the remaining development milestone
payments has not been included in the transaction price as these were fully constrained at December 31, 2019.
For the year ended December 31, 2019, $3.0 million revenue was recorded towards achievement of a milestone related
to the Fosun Agreement, and for the year ended December 31, 2018, there was no revenue recorded.
Knight Therapeutics, Inc., or Knight
In March 2018, the Company entered into an exclusive license agreement with Knight Therapeutics, Inc., or the
Knight Agreement, for the development, commercialization and distribution of tenapanor in Canada for hyperphosphatemia
and IBS-C. The Company assessed these arrangements in accordance with ASC 606 and concluded that the contract
counterparty, Knight, is a customer. Based on the Company’s assessment, it identified that the license and the
manufacturing supply services were its material performance obligations at the inception of the agreement, and as such
each of the performance obligations are distinct.
Under the terms of the agreement, the Company is eligible to receive up to CAD 25 million in total payments, or $19.2
million at the currency exchange rate on December 31, 2019, including an up-front payment and development and sales
milestones, reimbursement of supply costs on a schedule specifying cost per tablet, with a reasonable mark up for
overhead, as well as tiered royalty rates on net sales ranging from the mid-single digits to the low twenties. The variable
consideration related to the remaining development milestone payments has not been included in the transaction price as
these were fully constrained at December 31, 2019.
For the years ended December 31, 2019 and 2018, zero and $2.3 million of revenue was recorded, respectively, related
to the Knight Agreement, and zero and $0.5 million of cost of revenue was recorded, respectively, pursuant to the
AstraZeneca Termination Agreement.
AstraZeneca
In June 2015, the Company entered into a termination agreement with AstraZeneca, or the AstraZeneca Termination
Agreement, pursuant to which the Company remains liable to pay AstraZeneca license fees for (i) future royalties at a
royalty rate of 10% of net sales of tenapanor or other NHE3 products by the Company or its licensees, and (ii) 20% of non-
royalty revenue received from a new collaboration partner should the Company elect to license, or otherwise provide rights
to develop and commercialize tenapanor or certain other NHE3 inhibitors, up to a maximum of $75.0 million in aggregate
for (i) and (ii). To date in aggregate, the Company has recognized $10.5 million of the $75.0 million, recorded as cost of
revenue, as follows:
Cost of Revenue
Recognized Amount Paid
(in thousands)
Year 2017
Year 2018
Year 2019
Total
$
$
9,400 * $
466
600
10,466 $
Maximum payment per termination agreement
Remaining potential commitment
_______________________
* Includes the $1,000 adjustment recorded pursuant to the adoption of ASC 606, as discussed in Note 2.
$
6,000
2,864
1,002
9,866
75,000
65,134
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14. INCOME TAXES
The components of the provision for income taxes for the year ended December 31, 2019, 2018 and 2017, are as
follows (in thousands):
Year Ended December 31,
2019 2018
2017
Current:
State
Foreign
Total current
Deferred:
Federal
Total deferred
Provision for income taxes
$
2 $ 4 $
—
4
5
1,204
1,209
301
303
—
—
(30)
—
(30)
—
$ 303 $ 4 $ 1,179
The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate:
Change in valuation allowance
Income tax at the federal statutory rate
State taxes, net of federal benefit
Net impact related to foreign subsidiary
Impact of tax reform rate change
Tax credits
Stock based compensation
Other
Income tax provision
Year Ended December 31,
2019
(21.9)%
21.0
0.3
—
—
1.6
(0.9)
(0.4)
(0.3)%
2018
(22.5)%
21.0
0.6
—
—
1.4
(1.2)
0.7
— %
2017
19.9 %
35.0
0.5
(1.2)
(56.4)
1.0
(0.8)
0.1
(1.9)%
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets are as follows as of December 31, 2019 and 2018:
Deferred tax assets:
Amortization and depreciation
Net operating loss carryforwards
Tax credits
Stock-based compensation
Lease obligation
Other
Gross deferred tax assets
Valuation allowance
Deferred tax assets net of valuation allowance
Deferred tax liabilities
Right of use asset
Revenue recognition
Other
Net deferred tax assets
109
December 31,
2019
2018
(in thousands)
$
45,555 $ 38,376
31,621
40,896
8,200
10,136
3,763
4,853
—
984
888
940
82,848
103,364
(81,645)
(102,344)
1,203
1,020
(834)
(158)
(28)
— $
—
(1,054)
(149)
—
$
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Realization of deferred tax assets is dependent on future taxable income, if any, the timing and the amount of
which are uncertain. The Company assesses the available positive and negative evidence to estimate whether sufficient
future taxable income will be generated to permit use of the existing deferred tax assets. A significant component of
objective negative evidence evaluated was the Company’s cumulative loss incurred over the three-year period ended
December 31, 2019. Such objective evidence limits the ability to consider other subjective evidence, such as our
projections for future growth. On the basis of this evaluation, as of December 31, 2019, December 31, 2018 and December
31, 2017, a full valuation allowance has been recorded against Company’s net deferred tax asset. The amount of the
deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the
carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer
present and additional weight is given to subjective evidence such as our projections for growth.
As of December 31, 2019, the Company had net operating loss carryforwards for federal income tax purposes of
approximately $232.1 million, of which approximately $91.4 million can be carried forward indefinitely and the remaining
net operating losses expire beginning in 2030, if not utilized. Federal research and development tax credit carryforwards of
approximately $11.4 million that expire beginning in 2027, if not utilized, and foreign tax credit carryforwards of
approximately $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 of approximately $7.8 million which can be carried forward indefinitely. The Company had approximately
$0.1 million of minimum tax credit carryovers for California income tax purposes. The minimum tax credits have no
expiration date. The Company had other state net operating losses of approximately $1.8 million that begin to expire in
2025.
The future utilization of net operating loss and tax credit carryforwards and credits may be subject to an annual
limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may have
occurred previously or that could occur in the future. Due to the existence of the valuation allowance, limitations under
Section 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:
Balance at beginning of year
Additions based on tax positions related to
$
prior year
Additions based on tax positions related to
current year
Balance at end of year
$
2019
December 31,
2018
(in thousands)
2017
23,052 $
20,734 $
3,892
755
1,634
731
24,538 $
684
23,052 $
16,103
739
20,734
The unrecognized tax benefits, if recognized and in absence of full valuation allowance, would impact the income
tax provision by $13.2 million, $9.8 million, and $8.6 million as of December 31, 2019, 2018, and 2017, respectively.
The Company has elected to include interest and penalties as a component of tax expense. During the years ended
December 31, 2019, 2018 and 2017, the Company did not recognize accrued interest and penalties related to unrecognized
tax benefits. Although the timing and outcome of an income tax audit is highly uncertain, the Company does not anticipate
that the amount of existing unrecognized tax benefits will significantly change during the next 12 months.
The Company files a federal income tax return in the U.S. and state income tax returns in California, Georgia,
Maryland, Massachusetts, Michigan, New Hampshire, Oregon and Wisconsin. Because carryforward attributes
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generated in past years may be adjusted in a future period, the income tax returns remain open to U.S. federal and
California state tax examinations. The Company is not currently under examination in any tax jurisdiction.
15. GEOGRAPHIC INFORMATION AND CONCENTRATIONS
Revenue by geographic areas for the years ended December 31, 2019, 2018 and 2017, are as follows (in
thousands):
Year Ended December 31,
2018
2017
2019
United States
International:
North America (1)
Asia Pacific (2) (3) (4)
Total revenue
$
— $
— $
—
—
5,281
—
42,000
$ 5,281 $ 2,607 $ 42,000
2,320
287
(1) Revenues from North America in 2018 comprised of $2.3 million from Canada in accordance with the Knight
Agreement.
(2) Revenues from Asia Pacific in 2019 comprised $0.3 million and $0.5 million from Japan in accordance with the 2017
KKC Agreement and 2019 KKC Agreement, respectively, $1.5 million from Hong Kong in accordance with the
XuanZhu Agreement and $3.0 million from China in accordance with the Fosun Agreement.
(3) Revenues from Asia Pacific in 2018 comprised $0.3 million from Japan in accordance with the 2017 KKC Agreement.
(4) Revenues from Asia Pacific in 2017 included $30.0 million from Japan in accordance with the 2017 KKC 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, 2019, 2018 and 2017, were wholly from collaboration
partnerships. Collaboration partnerships accounting for more than 10% of total revenues during the years ended December
31, 2019, 2018 and 2017, are as follows:
Fosun Pharma
XuanZhu
KKC
Knight
16. NET LOSS PER SHARE
Year Ended December 31,
2019
57 %
28 %
15 %
—
2018
—
—
11 %
89 %
2017
29 %
—
71 %
—
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares
outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of stock-based awards
and warrants. Diluted net loss per common share is computed giving effect to all potential dilutive common shares,
including common stock issuable upon exercise of stock options, and unvested restricted common stock and stock units. As
the Company had net losses for the years ended December 31, 2019, 2018 and 2017, all potential common shares
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were determined to be anti-dilutive. The following table sets forth the computation of net loss per common share (in
thousands, except share and per share amounts):
Numerator:
Net loss
Denominator:
Year Ended December 31,
2019
2018
2017
$
(94,940) $
(91,298) $
(64,339)
Weighted average common shares outstanding - basic and diluted
$
Net loss per share - basic and diluted
64,478,066
56,219,919
(1.47) $
(1.62) $
47,435,331
(1.36)
For the years ended December 31, 2019, 2018 and 2017, the total numbers of securities that could potentially
dilute net income per share in the future that were not considered in the diluted net loss per share calculations because the
effect would have been anti-dilutive were as follows:
Options to purchase common stock
Warrants to purchase common stock
Restricted stock units
Performance-based restricted stock units
ESPP shares issuable
Total
2019
2017
Year Ended December 31,
2018
7,128,247 5,378,008 3,977,160
2,172,899 2,172,899 2,172,899
323,819
148,216
60,524
10,247,413 8,209,246 6,682,618
199,135
395,791
63,413
—
867,506
78,761
The number of potential common shares that would have been included in diluted income per share had it not been
for the anti-dilutive effect caused by the net loss, computed by converting these securities using the treasury stock method
during the years ended December 31, 2019, 2018 and 2017, was approximately 1.1 million, 1.0 million and 1.0 million,
respectively.
17. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has facility leases (see Note 12), as well as operating equipment leases. Future minimum payments
on the Company’s noncancelable operating leases as of December 31, 2019 are as follows (in thousands):
Year Ended December 31,
2020
2021
Total
Guarantees and Indemnifications
Amounts
3,121
$
2,213
5,334
$
The Company indemnifies each of its officers and directors for certain events or occurrences, subject to certain
limits, while the officer or director is or was serving at our request in such capacity, as permitted under Delaware law and in
accordance with our certificate of incorporation and bylaws. The term of the indemnification period lasts as long as an
officer or 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 holds
director and officer liability insurance, which allows the transfer of risk associated with our exposure and may enable the
Company to recover a portion of any future amounts paid. The Company believes that the fair value of these
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indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these
obligations for any period presented.
Legal Proceedings and Claims
From time to time the Company may be involved in claims arising in connection with its business. Based on
information currently available, management believes that the amount, or range, of reasonably possible losses in
connection with any pending actions against the Company will not be material to the Company’s financial condition or
cash flows, and no contingent liabilities were accrued as of December 31, 2019 or 2018.
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial results from operations for the years ended December 31, 2019 and 2018 are as
follows (in thousands, except per share amounts):
2019 Quarter Ended
Total revenue
Gross profit
Operating expenses
Net loss
Net loss per share - basic and diluted
Total revenue
Gross profit
Operating expenses
Net loss
Net loss per share - basic and diluted
June 30
— $
— $
September 30 December 31
March 31
2,250
3,013 $
18 $
$
2,250
2,413 $
18 $
$
$ 25,498 $ 24,846 $
24,502 $ 21,098
$ (26,144) $ (25,467) $ (23,539) $ (19,790)
(0.27)
$
(0.42) $
(0.37) $
(0.41) $
2018 Quarter Ended
June 30
2,320 $
1,856 $
September 30 December 31
March 31
85
172 $
30 $
$
85
170 $
$
30 $
$ 19,541 $ 22,184 $
23,902 $ 27,461
$ (17,019) $ (22,291) $ (24,126) $ (27,862)
(0.45)
$
(0.36) $
(0.42) $
(0.39) $
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
As of December 31, 2019, management, with the participation of our Chief Executive Officer and Chief Financial
Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures
as defined in Rules 13a‑15(e) and 15d‑15(e) of the Exchange Act. Our disclosure controls and procedures are designed to
ensure that 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 and the 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 of
achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of December 31, 2019, the design and operation of our disclosure controls and procedures were
effective at a reasonable assurance level.
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Management’s Annual Report on Internal Control Over Financial Reporting
Our 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
effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and procedures that:
·
·
·
Pertain to the maintenance of records that accurately and fairly reflect in reasonable detail the
transactions and dispositions of the assets of our company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that our receipts
and expenditures 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
or disposition 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, 2019, the end the
period covered 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. Based on management’s assessment of our internal control over financial reporting, management concluded
that, as of December 31, 2019, our internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2019, has been audited by an
independent registered public accounting firm, as stated in their report, which is included under “Item 8. Financial
Statements and Supplementary Data” of this Annual Report on Form 10-K.
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a
process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a
timely basis by internal control over financial reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate,
this risk.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the quarter ended December 31,
2019, identified in connection with the evaluation required by Rule 13a‑15(d) and 15d‑15(d) of the Exchange Act that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting other than
completion of the actions taken to remediate the material weakness identified as of June 30, 2019.
Remediation of Material Weakness
As disclosed in Item 4 in our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2019 and
September 30, 2019, we identified a material weakness in our internal control over financial reporting due to a failure in the
design and implementation of controls over the evaluation of the terms of our clinical trial contracts for inclusion into our
clinical financial model which estimates clinical trial expenses. Specifically, we had failed to properly interpret an expense
in our clinical trial contracts which resulted in the over accrual of our clinical trial expenses.
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During 2019, we executed our remediation plan for this material weakness. Our remediation activities included:
·
·
·
Designing and implementing an effective internal control related to internal communication and joint review
between the clinical, legal and accounting groups in the establishment of new clinical financial models when
clinical contracts are executed to ensure that clinical contracts are properly interpreted and that estimates of
clinical expenses are based on appropriate drivers;
Enhancing the precision of an internal control related to the tracking of invoices and comparison to the
clinical financial model to assure that clinical expenses within the clinical financial model are appropriately
included and estimated; and
Implementing an ongoing review of the accrual models where assumptions and estimates built into the
models are reassessed for reasonableness, considering any new information known as of that date that would
challenge the initial considerations made when the model was set up.
We tested such newly established policies, procedures, and control activities designed to address the above-
described material weakness. As a result, we believe that this material weakness was remediated as of December 31, 2019.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Ardelyx, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Ardelyx, Inc.’s internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (2013 framework) (“the COSO criteria”). In our opinion, Ardelyx, Inc. (“the Company”)
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on
the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (“PCAOB”), the balance sheets of the Company as of December 31, 2019 and 2018, the related statements
of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2019, and the related notes and our report dated March 6, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
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/s/ Ernst & Young LLP
Redwood City, California
March 6, 2020
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item will be contained in our definitive proxy statement to be filed with the Securities
and Exchange Commission on Schedule 14A in connection with our 2020 Annual Meeting of Stockholders (the “Proxy
Statement”), which will be filed not later than 120 days after the end of our fiscal year ended December 31, 2019, under the
headings “Executive Officers,” “Election of Directors,” “Corporate Governance,” and “ Section 16(a) Beneficial
Ownership Reporting 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
which is available on our website at www.ardelyx.com. The Code of Business Conduct and Ethics is intended to qualify as
a “code of 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 to our principal executive officer, principal financial officer, principal accounting officer or controller or
persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our
code of ethics that is granted to one of these specified officers, the name of such person who is granted the waiver and the
date of the waiver on our website in the future.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding executive compensation will be incorporated by reference to the
information set forth in the sections titled “Executive Compensation” in our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item regarding security ownership of certain beneficial owners and management
will be incorporated by reference to the information set forth in the section titled “Security Ownership of Certain Beneficial
Owners and Management” and “Equity Compensation Plan Information” in our Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item regarding certain relationships and related transactions and director
independence will be incorporated by reference to the information set forth in the sections titled “Certain Relationships and
Related Party Transactions” and “Election of Directors”, respectively, in our Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item regarding principal accountant fees and services will be incorporated by
reference to the information set forth in the section titled “Principal Accountant Fees and Services” in our Proxy Statement.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial Statements
See Index to Financial Statements at Item 8 herein.
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the
financial statements or notes thereto.
3. Exhibits
See the Exhibit Index immediately following this page.
ITEM 16. FORM 10-K SUMMARY
None.
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Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
10.1
10.2
Exhibit Index
Exhibit Description
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Reference is made to Exhibits 3.1 and 3.2
Form of Common Stock Certificate
Form of Warrant issued pursuant to the Securities Purchase
Agreement by and among Ardelyx, Inc. and the purchasers
signatory thereto, dated June 2, 2015
Description of the Registrant’s Securities Registered Pursuant
to Section 12 of the Securities Exchange Act of 1934
Form
Incorporated by Reference
Date
Number Herewith
Filed
8‑K 6/24/2014
8‑K 6/24/2014
S‑1/A 6/18/2014
S‑3 7/13/2015
3.1
3.2
4.2
4.3
X
Termination Agreement, dated June 2, 2015, by and between
10‑Q 8/12/2015
10.1
AstraZeneca AB and Ardelyx, Inc.
Amendment No. 1 to Termination Agreement and to
10‑K
3/4/2016 10.1(d)
Manufacturing and Supply Agreement, dated November 2,
2015 by and between AstraZeneca AB and Ardelyx, Inc.
10.3(a)
Lease, dated August 8, 2008, by and between 34175
S‑1 5/19/2014 10.4(a)
Ardenwood Venture, LLC and Ardelyx, Inc.
10.3(b)
10.3(c)
First Amendment to Lease, dated December 20, 2012, by and
between 34175 Ardenwood Venture, LLC and Ardelyx, Inc.
Second Amendment to Lease, dated September 5, 2014, by and
between Ardelyx, Inc. and 34175 Ardenwood Venture, LLC
S‑1 5/19/2014 10.4(b)
8‑K
9/9/2014
10.1
10.3(d)
Third Amendment to Lease, dated April 28, 2016, by and
10‑Q
8/8/2016
10.3
between Ardelyx, Inc. and 34175 Ardenwood Venture, LLC
10.4(a)#
Ardelyx, Inc. 2008 Stock Incentive Plan, as amended
S‑1 5/19/2014 10.5(a)
10.4(b)#
Form of Stock Option Grant Notice and Stock Option
S‑1 5/19/2014 10.5(b)
Agreement under the 2008 Stock Incentive Plan, as amended
10.4(c)#
Form of Restricted Stock Purchase Grant Notice and Restricted
Stock Purchase Agreement under the 2008 Stock Incentive
Plan, as amended
S‑1 5/19/2014 10.5(c)
10.5(a)#
Ardelyx, Inc. 2014 Equity Incentive Award Plan
S‑8 7/14/2014
99.3
10.5(b)#
Form of Stock Option Grant Notice and Stock Option
S‑1/A
6/9/2014 10.6(b)
Agreement under the 2014 Equity Incentive Award Plan
10.5(c)#
Form of Restricted Stock Award Agreement and Restricted
S‑1/A
6/9/2014 10.6(c)
Stock Unit Award Grant Notice under the 2014 Equity
Incentive Award Plan
10.6#
10.7#
Form of Indemnification Agreement for directors and officers
S‑1/A
6/9/2014
10.7
Amended and Restated Executive Employment Agreement,
S‑1/A
6/9/2014
10.8
dated June 6, 2014, by and between Ardelyx, Inc. and Michael
Raab
10.8#
Amended and Restated Change in Control Severance
S‑1/A
6/9/2014
10.15
Agreement, dated June 6, 2014, by and between Ardelyx, Inc.
and Mark Kaufmann
10.9#
Amended and Restated Change in Control Severance
S‑1/A
6/9/2014
10.17
Agreement, dated June 6, 2014, by and between Ardelyx, Inc.
and Jeffrey Jacobs, Ph.D.
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Table of Contents
Exhibit
Number
Exhibit Description
10.10#
Offer Letter, dated August 11, 2011, by and between
Ardelyx, Inc. and Mark Kaufmann
Form
S‑1/A
Incorporated by Reference
Date
6/9/2014
10.10
Number Herewith
Filed
10.11#
Offer Letter, dated May 2, 2008, by and between Ardelyx, Inc.
S‑1/A
6/9/2014
10.12
and Jeff Jacobs, Ph.D.
10.12#
Offer Letter, dated December 28, 2009, by and between
S‑1/A
6/9/2014
10.13
Ardelyx, Inc. and David Rosenbaum, Ph.D.
10.13#
Offer Letter, dated November 21, 2012, by and between
S‑1/A
6/9/2014
10.14
Ardelyx, Inc. and Elizabeth Grammer, Esq.
10.14#
Ardelyx, Inc. 2014 Employee Stock Purchase Plan
S‑8 7/14/2014
99.6
10.15(a)#
Non-Employee Director Compensation Program
S‑1/A
6/9/2014
10.21
10.15(b)#
Description of amendments to Non-Employee Director
8‑K
3/9/2017 N/A
Compensation Program
10.16
Securities Purchase Agreement by and among Ardelyx, Inc. and
10‑Q 8/12/2015
10.2
the purchasers signatory thereto, dated June 2, 2015
10.17
Registration Rights Agreement by and among Ardelyx, Inc. and
S‑3 7/13/2015
99.1
the investors signatory thereto, dated June 2, 2015
10.18
Securities Purchase Agreement by and among Ardelyx, Inc. and
10‑Q
8/8/2016
10.1
the purchasers signatory thereto, dated July 14, 2016
10.19
Registration Rights Agreement by and among Ardelyx, Inc. and
10‑Q
8/8/2016
10.2
the investors signatory thereto, dated July 14, 2016
10.20(a)#
Ardelyx, Inc. 2016 Employment Commencement Incentive
S‑8 11/10/2016
99.1
Plan
10.20(b)#
Form of Stock Option Grant Notice and Stock Option
S‑8 11/10/2016
99.2
Agreement under the 2016 Employment Commencement
Incentive Plan
10.20(c)#
Form of Restricted Stock Unit Award Grant Notice and
Restricted Stock Unit Award Agreement under the 2016
Employment Commencement Incentive Plan
S‑8 11/10/2016
99.3
10.20(d)#
Form of Restricted Stock Award Grant Notice and Restricted
S‑8
11/10/16
99.4
Stock Award Agreement under the 2016 Employment
Commencement Incentive Plan
10.21#
Transition and Separation Agreement dated August 21, 2017,
10‑Q 11/7/2017
10.1
by and between the Company and Dr. Paul Korner
10.22††
License Agreement, dated November 27, 2017, by and between
10‑K 3/14/2018
10.35
Kyowa Hakko Kirin Co., Ltd. and Ardelyx, Inc.
10.23††
License Agreement, dated December 11, 2017, by and between
Shanghai Fosun Pharmaceutical Industrial Development Co.
Ltd. and Ardelyx, Inc.
10‑K 3/14/2018
10.36
10.24#
Second Amended and Restated Change in Control and
10-Q
5/8/2018
10.0
Severance Agreement by and between Ardelyx, Inc. and
Elizabeth Grammer.
10.25#
Second Amended and Restated Change in Control and
10-Q
5/8/2018
10.1
Severance Agreement by and between Ardelyx, Inc. and David
P. Rosenbaum, Ph.D.
10.26
Loan and Security Agreement, dated May 16, 2018, by and
between the Company and Solar Capital Ltd. and Western
Alliance Bank.
10-Q
8/7/2018
10.1
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Exhibit
Number
10.27
Exit Fee Agreement, dated May 16, 2018, by and between the
Company and Solar Capital Ltd. and Western Alliance Bank.
Exhibit Description
Form
10-Q
Incorporated by Reference
Date
8/7/2018
10.2
Number Herewith
Filed
10.28#
Transition and Separation Agreement dated July 8, 2018, by
10-Q
8/7/2018
10.3
and between the Company and Reginald Seeto, MBBS.
10.29#
Amended and Restated Non-Employee Director Compensation
10-Q
5/7/2019
10.1
Program.
10.30#
Transition and Separation Agreement dated November 25,
2019, by and between the Company and Mark Kaufmann.
21.1
23.1
31.1
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Certification of Principal Executive Officer Required Under
Rule 13a‑14(a) and 15d‑14(a) of the Securities Exchange Act of
1934, as amended
31.2
Certification of Principal Financial Officer Required Under
Rule 13a‑14(a) and 15d‑14(a) of the Securities Exchange Act of
1934, as amended
32.1
Certification of Principal Executive Officer and Principal
Financial Officer Required Under Rule 13a‑14(b) of the
Securities Exchange Act of 1934, as amended, and 18 U.S.C
§1350
101.INS
XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
X
X
X
X
X
X
X
X
X
X
X
X
† Confidential treatment granted as to portions of this Exhibit. The confidential portions of this Exhibit have been
omitted and are marked by asterisks.
†† Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been filed
separately with the Securities and Exchange Commission.
#
Indicates management contract or compensatory plan.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 6, 2020
Ardelyx, Inc.
By:/s/ Michael Raab
Michael Raab
President Chief Executive Officer and Director
(Principal Executive Officer)
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Michael Raab and Mark
Kaufmann, and each of them, with full power of substitution and resubstitution and full power to act without the other, as
his or 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 on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this
annual report on Form 10‑K and to file the same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact
and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
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Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Michael Raab
Michael Raab
/s/ Mark Kaufmann
Mark Kaufmann
/s/ David Mott
David Mott
/s/ Robert Bazemore
Robert Bazemore
/s/ William Bertrand, Jr.
William Bertrand, Jr.
/s/ Geoffrey A. Block
Geoffrey A. Block, M.D.
/s/ Annalisa Jenkins
Annalisa Jenkins, MBBS, FRCP
/s/ Jan M. Lundberg
Jan M. Lundberg, Ph.D.
/s/ Gordon Ringold
Gordon Ringold, Ph.D.
/s/ Richard Rodgers
Richard Rodgers
Title
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date
March 6, 2020
March 6, 2020
Chairman of the Board of Directors
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
Director
Director
Director
Director
Director
Director
Director
124
DESCRIPTION OF THE REGISTRANT’S
SECURITIES REGISTERED PURSUANT TO
SECTION 12 OF THE SECURITIES
EXCHANGE ACT OF 1934
Exhibit 4.4
As of December 31, 2019, Ardelyx, Inc. (“we,” “us,” or “our”) had one class of securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended: our common stock, $0.0001 par value per share (“common stock”).
Description of Capital Stock
The following summary describes our capital stock and does not purport to be complete. It is subject to and qualified in its entirety by
reference to the material provisions of our amended and restated certificate of incorporation and our amended and restated bylaws, each
of which are incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.4 is a part, as well as of
the Delaware General Corporation Law. For a complete description, we encourage you to read amended and restated certificate of
incorporation, our amended and restated bylaws and the applicable provisions of the Delaware General Corporation Law for additional
information.
General
Our amended and restated certificate of incorporation authorizes 300,000,000 shares of common stock, $0.0001 par value per share, and
5,000,000 shares of preferred stock, $0.0001 par value per share.
Common Stock
Voting Rights
Each holder of our common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including
the election of directors. Our stockholders do not have cumulative voting rights in the election of directors. Accordingly, holders of a
majority of the voting shares are able to elect all of the directors. In addition, the affirmative vote of holders of 66 2/3% of the voting
power of all of the then outstanding voting stock will be required to take certain actions, including amending certain provisions of our
amended and restated certificate of incorporation, such as the provisions relating to amending our amended and restated bylaws, the
classified board and director liability.
Dividends
Subject to preferences that may be applicable to any then outstanding preferred stock, holders of our common stock are entitled to
receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds.
Liquidation
In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in the net assets
legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any
liquidation preference granted to the holders of any then outstanding shares of preferred stock.
Rights and Preferences
Holders of our common stock have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund
provisions applicable to our common stock. The rights, preferences and privileges of the holders of our common stock are subject to and
may be adversely affected by the rights of the holders of shares of any series of our preferred stock that we may designate in the future.
Fully Paid and Nonassessable.
All of our outstanding shares of common stock are, and the shares of common stock to be issued in this offering will be, fully paid and
nonassessable.
Preferred Stock – Limitations on Rights of Holders of Common Stock
Our board of directors has the authority, without further action by our stockholders, to issue up to 5,000,000 shares of preferred stock in
one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could
include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number
of shares constituting, or the designation of, such series, any or all of which may be greater than the rights of common stock.The issuance
of our preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will
receive dividend payments and payments upon our liquidation. In addition, the issuance of preferred stock could have the effect of
delaying, deferring or preventing a change in control of our company or other corporate action. No shares of preferred stock are
outstanding, and we have no present plan to issue any shares of preferred stock.
Anti-Takeover Effects of Provisions of our Amended and Restated Certificate of Incorporation, our Amended and Restated
Bylaws and Delaware Law
Some provisions of Delaware law and our amended and restated certificate of incorporation and our amended and restated bylaws could
make the following transactions more difficult: acquisition of us by means of a tender offer; acquisition of us by means of a proxy
contest or otherwise; or removal of our incumbent officers and directors. It is possible that these provisions could make it more difficult
to accomplish or could deter transactions that stockholders may otherwise consider to be in their best interest or in our best interests,
including transactions that might result in a premium over the market price for our shares.
These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We
believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these proposals
could result in an improvement of their terms.
Delaware Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law, which prohibits persons deemed “interested stockholders” from
engaging in a “business combination” with a publicly-held Delaware corporation for three years following the date these persons become
interested stockholders unless the business combination is, or the transaction in which the person became an interested stockholder was,
approved in a prescribed manner or another prescribed exception applies. Generally, an “interested stockholder” is a person who,
together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status did own,
15% or more of a corporation’s voting stock. Generally, a “business combination” includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder. The existence of this provision may have an anti- takeover effect
with respect to transactions not approved in advance by the board of directors, such as discouraging takeover attempts that might result in
a premium over the market price of our common stock.
Undesignated Preferred Stock
The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or
other rights or preferences that could impede the success of any attempt to change control of us. These and other provisions may have the
effect of deterring hostile takeovers or delaying changes in control or management of our company.
Special Stockholder Meetings
Our amended and restated bylaws provide that a special meeting of stockholders may be called only by our chairman of the board of
directors, Chief Executive Officer or President, or by a resolution adopted by a majority of our board of directors.
Requirements for Advance Notification of Stockholder Nominations and Proposals
Our amended and restated bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of
candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the
board of directors.
Elimination of Stockholder Action by Written Consent
Our amended and restated certificate of incorporation eliminates the right of stockholders to act by written consent without a meeting.
Classified Board; Election and Removal of Directors; Filling Vacancies
Our board of directors is divided into three classes. The directors in each class will serve for a three-year term, one class being elected
each year by our stockholders, with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our
stockholders, with the other classes continuing for the remainder of their respective three-year terms. Because our stockholders do not
have cumulative voting rights, our stockholders holding a majority of the shares of common stock outstanding will be able to elect all of
our directors. Our amended and restated certificate of incorporation provides for the removal of any of our directors only for cause and
requires at least a 66 2/3% stockholder vote. Furthermore, any vacancy on our board of directors, however occurring, including a
vacancy resulting from an increase in the size of our board, may only be filled by a resolution of the board of directors unless the board
of directors determines that such vacancies shall be filled by the stockholders. This system of electing and removing directors and filling
vacancies may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us, because it
generally makes it more difficult for stockholders to replace a majority of the directors.
Choice of Forum
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive
forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty, or other wrongdoing
by, any of our directors, officers, employees or stockholders; any action asserting a claim against us or any of our directors, officers or
employees arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our
amended and restated bylaws; any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of
incorporation or our amended and restated bylaws; or any action asserting a claim against us or any of our directors, officers or
employees that is governed by the internal affairs doctrine. Although our amended and restated certificate of incorporation contains the
choice of forum provision described above, it is possible that a court could find that such a provision is inapplicable for a particular claim
or action or that such provision is unenforceable.
Amendment of Charter Provisions
The amendment of any of the above provisions, except for the provision making it possible for our board of directors to issue preferred
stock, would require approval by holders of at least 66 2/3% of the voting power of our then outstanding voting stock.
The provisions of the Delaware General Corporation Law, our amended and restated certificate of incorporation and our amended and
restated bylaws could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also
inhibit temporary fluctuations in the market price of our Common Stock that often result from actual or rumored hostile takeover
attempts. These provisions may also have the effect of preventing changes in our management. It is possible that these provisions could
make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.
Limitations of Liability and Indemnification Matters
Our amended and restated certificate of incorporation contains provisions that limit the liability of our directors for monetary damages
for breach of fiduciary duty as a director to the fullest extent permitted by Delaware law. Consequently, our directors will not be
personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for:
(cid:0) any breach of the director’s duty of loyalty to us or our stockholders;
(cid:0) any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
(cid:0) unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or
(cid:0) any transaction from which the director derived an improper personal benefit.
Our amended and restated certificate of incorporation and amended and restated bylaws provide that we are required to indemnify our
directors and officers, in each case to the fullest extent permitted by Delaware law. Our amended and restated bylaws also provide that
we are obligated to advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and
permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions
in that capacity regardless of whether we would otherwise be permitted to indemnify him or her under Delaware law. We have entered
and expect to continue to enter into agreements to indemnify our directors, executive officers and other employees as determined by our
board of directors. With specified exceptions, these agreements provide for indemnification for related expenses including, among other
things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We
believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and
officers. We also maintain directors’ and officers’ liability insurance.
The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and
restated bylaws may discourage stockholders from bringing a lawsuit against our directors and officers for breach of their fiduciary duty.
They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might
benefit us and our stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of
settlement and damage.
The NASDAQ Global Market Listing
Our common stock is listed on The Nasdaq Global Market under the symbol “ARDX.”
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC. The transfer agent and
registrar’s address is 6201 15th Avenue, Brooklyn, New York 11219.
TRANSITION AND SEPARATION AGREEMENT
Exhibit 10.30
This Transition and Separation Agreement (the “Agreement”) by and between Mark Kaufmann (“Executive”) and Ardelyx, Inc. (the
“Company”), is made effective as of the date Executive signs this Agreement (the “Effective Date”) with reference to the following facts:
A. Executive currently serves as the Company’s Chief Financial Officer.
B. Executive and the Company entered into an Amended and Restated Change in Control Severance Agreement effective
as of June 6, 2014 (the “Severance Agreement”) pursuant to which Executive is eligible for certain severance benefits in the event of a
covered termination and Executive’s satisfaction of certain continuing obligations to the Company.
C. Executive’s employment with the Company and status as an officer and employee of the Company, will end effective
upon the Resignation Date (as defined below).
D. Executive and the Company want to end their relationship amicably and also to establish the obligations of the parties
including, without limitation, all amounts due and owing to Executive.
NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows:
1. Resignation Date. The Company and Executive acknowledge and agree that Executive’s status as an officer and employee of the
Company will end effective as of the earliest of (a) the later of (i) March 13, 2020 or (ii) the date that is five (5) business days following
the filing of the Company’s Annual Report on Form 10-K (the “Form 10-K”) for the fiscal year ended 2019 (such later date, the “Planned
Resignation Date”), (b) the date Executive takes any action that constitutes “Cause” under the Severance Agreement and (c) the date
Executive voluntarily resigns from the Company (such earliest date, the “Resignation Date”). Executive hereby agrees to execute such
further document(s) as shall be determined by the Company as reasonably necessary or desirable to give effect to the termination of
Executive’s status as an officer of the Company; provided that such documents shall not be inconsistent with any of the terms of this
Agreement. From the Effective Date through the Resignation Date, Executive’s employment with the Company shall continue in effect,
and Executive shall enjoy the same salary, benefits and other compensation terms as in effect on the Effective Date.
2. Severance Payments and Benefits. The Company hereby agrees, subject to (a) (i) the Resignation Date occurring on or after the
Planned Resignation Date or (ii) Executive’s involuntary termination of employment by the Company without Cause (as defined in the
Severance Agreement) prior to the Planned Resignation Date, (b) Executive diligently and professionally executing his responsibilities
under this Agreement, (c) Executive delivering to the Company a General Release of Claims substantially in the form attached hereto
as Exhibit A (the “Release of Claims”) on or within twenty-one (21) days following the Resignation Date, Executive not revoking the
Release of Claims within the seven (7)-day period following his execution of the Release of Claims (the “Revocation Period”), and (d)
Executive’s performance of his continuing obligations under Section 8 below and otherwise pursuant to this Agreement and the
Proprietary Information and Inventions Assignment Agreement entered into between Executive and the Company, as of August 15, 2011
(the “Confidential Information Agreement”), to provide the payments and benefits set forth in this Section 2.
(a) Severance Payments. Within five (5) business days following the end of the Revocation Period, the Company shall make a lump
sum cash payment to Executive in an amount equal to $300,000 (the “Severance Payment”). The Severance Payment shall be subject to
authorized payroll deductions and required tax withholding.
(b) COBRA Reimbursement. Provided that Executive timely elects to receive continued healthcare coverage pursuant to the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, or applicable state law
(collectively referred to as “COBRA”), the Company will pay COBRA premiums otherwise required to be paid by Executive through the
earlier of (i) the first anniversary of the Resignation Date, or (ii) the date upon which Executive and Executive’s covered dependents, if
any, become eligible for healthcare coverage under another employer’s plan(s). Notwithstanding the foregoing, (i) if any plan pursuant
to which such benefits are provided is not, or ceases prior to the expiration of the period of continuation coverage to be, exempt from the
application of Section 409A of the Code under Treasury Regulation Section 1.409A-1(a)(5), or (ii) the Company is otherwise unable to
continue to cover Executive under its group health plans without penalty under applicable law (including without limitation, Section
2716 of the Public Health Service Act), then, in either case, an amount equal to each remaining Company subsidy shall thereafter be paid
to Executive in substantially equal monthly installments. After the Company ceases to pay premiums pursuant to this Section 2(b),
Executive may, if eligible, elect to continue healthcare coverage at Executive’s expense in accordance the provisions of COBRA.
(c) Performance Restricted Stock Unit. Notwithstanding Executive’s termination of employment, the performance restricted stock
unit award granted to Executive by the Company on July 26, 2018, for 100,000 shares of the Company’s Common Stock (the “PRSU
Award”), shall vest, and the underlying shares of the Company Common Stock shall be issued, in the event that, on or prior to December
31, 2020, the Board of Directors of the Company, or its Compensation Committee, certifies that the Food & Drug Administration has
accepted for filing the Company’s New Drug Application for the tenapanor for the treatment of hyperphosphatemia. Other than as altered
by this Agreement, the PRSU Award shall at all times remain subject in all respects to the terms and conditions of the applicable
restricted stock unit award agreement between Executive and the Company (the “RSU Award Agreement”) and the Company’s
applicable equity incentive plan. For the avoidance of doubt, the PRSU Award, to the extent unvested, shall terminate in accordance with
the RSU Award Agreement on January 1, 2021.
3. 2019 Bonus; Final Paycheck; Payment of Accrued Wages and Expenses.
(a) 2019 Bonus. Regardless of the date of Executive’s termination of employment, Executive shall be paid the 2019 bonus awarded
him by the Board of Directors, or the appropriate committee thereof, which shall be determined in the manner consistent with that of all
executives of the Company. Executive shall remain eligible for his 2019 bonus in accordance with its terms irrespective of whether
Executive executes this Agreement or a Release of Claims.
(b) Final Paycheck. On, or as soon as administratively practicable following, the Resignation Date, the Company will pay
Executive all accrued but unpaid base salary and all accrued and unused vacation or other paid time off earned through the Resignation
Date, subject to standard payroll deductions and required withholding. Executive is entitled to these payments regardless of whether
Executive executes this Agreement or a Release of Claims.
(c) Business Expenses. The Company shall reimburse Executive for all outstanding expenses incurred prior to the Resignation Date
which are consistent with the Company’s policies in effect from time to time with respect to travel and other business expenses, subject
to the Company’s requirements with respect to reporting and documenting such expenses, including, without limitation, expenses
incurred pursuant to Executive’s services as a director of any of the Company’s subsidiaries. Executive is entitled to these payments
regardless of whether Executive executes this Agreement or a Release of Claims.
(d) Equity Awards. Other than with respect to the PRSU Award discussed in Section 2(c) and other than acceleration of vesting of
equity awards that may occur pursuant to the terms of Section 5 below, all unvested shares subject to equity awards held by Executive on
the Resignation Date shall terminate and be forfeited as of the Resignation Date. If Executive desires to exercise any stock option that is
vested as of the Resignation Date, Executive must follow the procedures set forth in the applicable stock option agreement applicable to
the vested option (each an “Option Agreement”), including payment of the exercise price and any tax withholding obligations. If by the
expiration dates set forth in the applicable Option Agreement, the Company has not received a duly executed notice of exercise and
remuneration in accordance with Executive’s Option Agreement, the vested option subject thereto shall automatically terminate for no
consideration and be of no further effect.
5. Full Payment. Executive acknowledges that the payment and arrangements herein shall constitute full and complete satisfaction of
any and all amounts properly due and owing to Executive as a result of his employment with the Company and the termination thereof;
provided, however, that notwithstanding the foregoing, if the
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Company experiences a Change in Control (as defined in the Severance Agreement) prior to the 3-month anniversary of the Resignation
Date, then (i) each outstanding equity award, including, without limitation, each stock option and restricted stock award, held by
Executive as of the Resignation Date shall, as of the later of (a) the Resignation Date or (b) the date of the Change in Control,
automatically become vested and, if applicable, exercisable and any forfeiture restrictions or rights of repurchase thereon shall
immediately lapse, in each case, with respect to one hundred percent (100%) of the shares subject thereto, (ii) to the extent vested after
giving effect to the acceleration provided in (i) above, each stock option held by Executive shall remain exercisable until the earlier of
the original expiration date for such stock option or the first anniversary of the Resignation Date, and (iii) Executive shall be entitled to
receive an additional $100,000 in severance, payable in a lump sum within thirty (30) days following the closing of the Change in
Control and subject to authorized payroll deductions and required tax withholding. Executive further acknowledges that, other than the
Confidential Information Agreement, the RSU Award Agreement and the Option Agreements, and except as provided in the preceding
sentence, this Agreement shall supersede each agreement entered into between Executive and the Company regarding Executive’s
employment, including, without limitation, the Severance Agreement and any offer letter, or employment agreement, and each such
agreement other than the RSU Award Agreement, the Option Agreements and the Confidential Information Agreement shall be deemed
terminated and of no further effect as of the Resignation Date.
6. Executive’s Release of the Company. Executive agrees that the consideration set forth in this Agreement represents settlement in
full of all outstanding obligations owed to Executive by the Company and its current and former officers, directors, employees, agents,
investors, attorneys, affiliates, divisions, and subsidiaries, and predecessor and successor corporations and assigns (collectively, the
“Releasees”).
(a) Executive, on his own behalf and on behalf of his family members, heirs, executors, administrators, agents, and assigns, hereby
and forever releases the Releasees from, and agrees not to sue concerning, or in any manner to institute, prosecute, or pursue, any claim,
complaint, charge, duty, obligation, or cause of action relating to any matters of any kind, whether presently known or unknown,
suspected or unsuspected, that Executive may possess against any of the Releasees arising from any omissions, acts, facts, or damages
that have occurred up until and including the Effective Date of this Agreement, including, without limitation:
(i) any and all claims relating to or arising from Executive’s employment relationship with Company and the termination of
that relationship;
(ii) any and all claims for wrongful discharge of employment; termination in violation of public policy; discrimination;
harassment; retaliation; breach of contract, both express and implied; breach of covenant of good faith and fair dealing, both express
and implied; promissory estoppel; negligent or intentional infliction of emotional distress; fraud; negligent or intentional
misrepresentation; negligent or intentional interference with contract or prospective economic advantage; unfair business practices;
defamation; libel; slander; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; conversion; and
disability benefits;
(iii) any and all claims for violation of any federal, state, or municipal statute, including, but not limited to, Title VII of the
Civil Rights Act of 1964; the Civil Rights Act of 1991; the Rehabilitation Act of 1973; the Americans with Disabilities Act of 1990;
the Equal Pay Act; the Fair Labor Standards Act, except as prohibited by law; the Fair Credit Reporting Act; the Employee
Retirement Income Security Act of 1974; the Worker Adjustment and Retraining Notification Act; the Family and Medical Leave
Act, except as prohibited by law; the Sarbanes-Oxley Act of 2002, except as prohibited by law; the Uniformed Services
Employment and Reemployment Rights Act; the California Family Rights Act; the California Labor Code, except as prohibited by
law; the California Workers’ Compensation Act, except as prohibited by law; and the California Fair Employment and Housing Act;
(iv) any and all claims for violation of the federal or any state constitution;
(v) any and all claims arising out of any other laws and regulations relating to employment or employment discrimination;
(vi) any claim for any loss, cost, damage, or expense arising out of any dispute over the non-withholding or other tax
treatment of any of the proceeds received by Executive as a result of this Agreement;
(vii) any and all claims for attorneys’ fees and costs.
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(b) Executive agrees that the release set forth in this section shall be and remain in effect in all respects as a complete general release
as to the matters released. This release does not extend to any obligations incurred under this Agreement, the RSU Award Agreement or
the Option Agreements. This release does not release claims or rights that cannot be released as a matter of law, including, but not
limited to, claims under Division 3, Article 2 of the California Labor Code (which includes California Labor Code Section 2802
regarding indemnity for necessary expenditures or losses by Executive) any other indemnification, defense, or hold-harmless rights
Executive may have, and Executive’s right to bring to the attention of the Equal Employment Opportunity Commission or California
Department of Fair Employment and Housing claims of discrimination, harassment or retaliation; provided, however, that Executive
does release his right to obtain damages for any such claims. This release does not release claims or rights that Executive may have as a
shareholder of the Company or for benefits under any benefit plan or to participation in any such plan pursuant to the terms thereof or
applicable law.
(c) Executive acknowledges that he has been advised to consult with legal counsel and is familiar with the provisions of California
Civil Code Section 1542, a statute that otherwise prohibits unknown claims, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR OR RELEASING PARTY DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, AND THAT, IF
KNOWN BY HIM OR HER WOULD HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR OR
RELEASED PARTY.
Executive, being aware of said code section, agrees to expressly waive any rights he may have thereunder, as well as under any other
statute or common law principles of similar effect.
7. Non-Disparagement; Transfer of Company Property. Executive further agrees that:
(a) Non-Disparagement. Executive agrees that he shall not disparage, criticize or defame the Company, its affiliates and their
respective affiliates, directors, officers, agents, partners, stockholders, employees, products, services, technology or business, either
publicly or privately. The Company agrees that it shall not disparage, criticize or defame Executive, either publicly or privately. Nothing
in this Section 7(a) shall have application to any evidence or testimony required by any court, arbitrator or government agency.
(b) Transfer of Company Property. On or before the Resignation Date, Executive shall turn over to the Company all files,
memoranda, records, and other documents, and any other physical or personal property which are the property of the Company and
which he has in his possession, custody or control at such date.
8. Confidentiality; Non-Solicitation.
(a) Confidentiality.
(i) While Executive is employed by the Company, and thereafter, Executive shall not directly or indirectly disclose or
make available to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, any
Confidential Information (as defined below). On the Resignation Date, all Confidential Information in Executive’s possession
that is in written or other tangible form (together with all copies or duplicates thereof, including computer files) shall be
returned to the Company and shall not be retained by Executive or furnished to any third party, in any form except as provided
herein; provided, however, that Executive shall not be obligated to treat as confidential, or return to the Company copies of any
Confidential Information that (a) was publicly known at the time of disclosure to Executive, or (b) becomes publicly known or
available thereafter other than by any means in violation of this Agreement, the Confidential Information Agreement or any
other duty owed to the Company by any person or entity. For purposes of this Agreement, the term “Confidential Information”
shall mean information, technical data, know-how or trade secrets disclosed to Executive or known by Executive as a
consequence of or through his or her relationship with the Company, relating to research, products, developments, inventions,
processes, techniques, chemical structures, finances, business plans or regulatory strategies of the Company and its affiliates. In
addition, for the avoidance of doubt, Executive shall continue to be subject to the Confidential Information Agreement.
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(ii) For the avoidance of doubt, nothing in this Agreement will be construed to prohibit Executive from filing a charge
with, reporting possible violations to, or participating or cooperating with any governmental agency or entity, including but not
limited to the EEOC, the Department of Justice, the Securities and Exchange Commission, Congress, or any agency Inspector
General, or making other disclosures that are protected under the whistleblower, anti-discrimination, or anti-retaliation
provisions of federal, state or local law or regulation; provided, however, that Executive may not disclose information of the
Company or any of its affiliates that is protected by the attorney-client privilege, except as otherwise required by law. Executive
does not need the prior authorization of the Company to make any such reports or disclosures, and Executive is not required to
notify the Company that he has made such reports or disclosures. Furthermore, in accordance with 18 U.S.C. § 1833,
notwithstanding anything to the contrary in this Agreement: (A) Executive shall not be in breach of this Agreement, and shall
not be held criminally or civilly liable under any federal or state trade secret law (x) for the disclosure of a trade secret that is
made in confidence to a federal, state, or local government official or to an attorney solely for the purpose of reporting or
investigating a suspected violation of law, or (y) for the disclosure of a trade secret that is made in a complaint or other
document filed in a lawsuit or other proceeding, if such filing is made under seal; and (B) if Executive files a lawsuit for
retaliation by the Company for reporting a suspected violation of law, Executive may disclose the trade secret to Executive’s
attorney, and may use the trade secret information in the court proceeding, if Executive files any document containing the trade
secret under seal, and does not disclose the trade secret, except pursuant to court order.
(b) Non-Solicitation. In addition to each Executive’s obligations under the Confidential Information Agreement, Executive shall not
for a period of two (2) years following Executive’s termination of employment for any reason, either on Executive’s own account or
jointly with or as a manager, agent, officer, employee, consultant, partner, joint venturer, owner or stockholder or otherwise on behalf of
any other person, firm or corporation, directly or indirectly solicit or attempt to solicit away from the Company any of its officers or
employees or offer employment to any person who is an officer or employee of the Company; provided, however, that a general
advertisement to which an employee of the Company responds shall in no event be deemed to result in a breach of this Section 8(b).
Executive also agrees not to harass or disparage the Company or its employees, clients, directors or agents or divert or attempt to divert
any actual or potential business of the Company. If it is determined by a court of competent jurisdiction in any state that any restriction in
this Section 8(b) is excessive in duration or scope or is unreasonable or unenforceable under the laws of that state, it is the intention of
the parties that such restriction may be modified or amended by the court to render it enforceable to the maximum extent permitted by
the law of that state.
9. Executive Representations. Executive warrants and represents that (a) he has not filed or authorized the filing of any complaints,
charges or lawsuits against the Company or any affiliate of the Company with any governmental agency or court, and that if,
unbeknownst to Executive, such a complaint, charge or lawsuit has been filed on his behalf, he will use reasonable best efforts to
immediately cause it to be withdrawn and dismissed, and (b) he has no known workplace injuries or occupational diseases and has been
provided and/or has not been denied any leave requested under the Family and Medical Leave Act or any similar state law, and (c) he has
received the Company’s Insider Trading Compliance Policy and agrees to continue to abide by all applicable terms therein, including
specifically, Section IV (C) which states, “With the exception of the preclearance requirement, the insider trading laws continue to apply
to all transactions in the Company’s securities even after termination of service of service to the Company. If an individual is in the
possession of material non-public information when his or her service terminates, that individual may not trade in the Company’s
securities until that information has become public or is no longer material.”
10. No Assignment by Executive. Executive warrants and represents that no portion of any of the matters released herein, and no
portion of any recovery or settlement to which Executive might be entitled, has been assigned or transferred to any other person, firm or
corporation not a party to this Agreement, in any manner, including by way of subrogation or operation of law or otherwise. If any claim,
action, demand or suit should be made or instituted against the Company or any other Releasee because of any actual assignment,
subrogation or transfer by Executive, Executive agrees to indemnify and hold harmless the Company and all other Releasees against such
claim, action, suit or demand, including necessary expenses of investigation, attorneys’ fees and costs. In the event of Executive’s death,
this Agreement shall inure to the benefit of Executive and Executive’s executors, administrators, heirs, distributees, devisees, and
legatees. None of Executive’s rights or obligations may be assigned
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or transferred by Executive, other than Executive’s rights to payments hereunder, which may be transferred only upon Executive’s death
by will or operation of law.
11. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be
governed by, the laws of the State of California or, where applicable, United States federal law, in each case, without regard to any
conflicts of laws provisions or those of any state other than California.
12. Miscellaneous. This Agreement, together with the Confidential Information Agreement, the RSU Award Agreement, the Option
Agreements and the form of General Release of Claims attached as Exhibit A hereto comprise the entire agreement between the parties
with regard to the subject matter hereof and supersedes, in their entirety, any other agreements between Executive and the Company with
regard to the subject matter hereof, including without limitation, the Severance Agreement. Executive acknowledges that there are no
other agreements, written, oral or implied, and that he may not rely on any prior negotiations, discussions, representations or agreements.
This Agreement may be modified only in writing, and such writing must be signed by both parties and recited that it is intended to
modify this Agreement. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of
which taken together constitute one and the same agreement.
13. Company Assignment and Successors. The Company shall assign its rights and obligations under this Agreement to any
successor to all or substantially all of the business or the assets of the Company (by merger or otherwise). This Agreement shall be
binding upon and inure to the benefit of the Company and its successors, assigns, personnel and legal representatives.
14. Maintaining Confidential Information. Executive reaffirms his obligations under the Confidential Information Agreement.
Executive acknowledges and agrees that the payments and benefits provided in Sections 2 and 4 above shall be subject to Executive’s
continued compliance with Executive’s obligations under the Confidential Information Agreement.
15. Executive’s Cooperation. Executive further agrees that:
(a) Transition. From the Effective Date through the Resignation Date, Executive shall continue to provide full-time services to the
Company, shall continue to fully discharge all duties of the position of the Chief Financial Officer in a diligent and professional manner,
and shall cooperate with the Company in the preparation and presentation of public statements regarding Executive’s planned departure
from the Company.
(b) Investigations. After the Resignation Date, Executive shall use reasonable efforts to cooperate with the Company and its
affiliates, upon the Company’s reasonable request, with respect to any internal investigation or administrative, regulatory or judicial
proceeding involving matters within the scope of Executive’s duties and responsibilities to the Company or its affiliates during his
employment with the Company (including, without limitation, Executive being available to the Company upon reasonable notice for
interviews and factual investigations, appearing at the Company’s reasonable request to give testimony without requiring service of a
subpoena or other legal process, and turning over to the Company all relevant Company documents which are or may have come into
Executive’s possession during his employment); provided, however, that any such request by the Company shall not be unduly
burdensome or interfere with Executive’s personal schedule or ability to engage in gainful employment, consulting or other work, and the
Company shall pay, upon invoicing by Executive, all reasonably incurred fees for his time in so cooperating (which shall not exceed one
thousand dollars ($1,000) per eight hour day), and reimburse Executive for his actual, reasonable, out-of-pocket expenses (including
without limitation, any and all reasonable attorney’s fees and costs) incurred in connection with providing any such cooperation.
IN WITNESS WHEREOF, the undersigned have caused this Transition and Separation Agreement to be duly executed and delivered
as of the date indicated next to their respective signatures below.
DATED: 11/25/2019
DATED: 11/25/2019
/Mark Kaufmann/
Mark Kaufmann
ARDELYX, INC.
By:
/Mike Raab/
Mike Raab, President & CEO
6
EXHIBIT A
GENERAL RELEASE OF CLAIMS
This General Release of Claims (“Release”) is entered into as of , between Mark Kaufmann (“Executive”) and Ardelyx, Inc.
(the “Company”) (collectively referred to herein as the “Parties”), effective eight (8) days after Executive’s signature hereto (the
“Effective Date”), unless Executive revokes his acceptance of this Release as provided in Paragraph 1(c), below.
1. Executive’s Release of the Company.
(a) Executive, on his own behalf and on behalf of his family members, heirs, executors, administrators, agents, and assigns, hereby
and forever releases the Company and its current and former officers, directors, employees, agents, investors, attorneys, affiliates,
divisions, and subsidiaries, and predecessor and successor corporations and assigns (the “Releasees”) from, and agrees not to sue
concerning, or in any manner to institute, prosecute, or pursue, any claim, complaint, charge, duty, obligation, or cause of action relating
to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that Executive may possess against any of
the Releasees arising from any omissions, acts, facts, or damages that have occurred up until and including the date Executive signs this
Release, including, without limitation:
(i) any and all claims relating to or arising from Executive’s employment relationship with Company and the termination of that
relationship;
(ii) any and all claims for wrongful discharge of employment; termination in violation of public policy; discrimination; harassment;
retaliation; breach of contract, both express and implied; breach of covenant of good faith and fair dealing, both express and implied;
promissory estoppel; negligent or intentional infliction of emotional distress; fraud; negligent or intentional misrepresentation; negligent
or intentional interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander;
negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; conversion; and disability benefits;
(iii) any and all claims for violation of any federal, state, or municipal statute, including, but not limited to, Title VII of the Civil
Rights Act of 1964; the Civil Rights Act of 1991; the Rehabilitation Act of 1973; the Americans with Disabilities Act of 1990; the Equal
Pay Act; the Fair Labor Standards Act, except as prohibited by law; the Fair Credit Reporting Act; the Age Discrimination in
Employment Act of 1967; the Older Workers Benefit Protection Act; the Employee Retirement Income Security Act of 1974; the Worker
Adjustment and Retraining Notification Act; the Family and Medical Leave Act, except as prohibited by law; the Sarbanes-Oxley Act of
2002, except as prohibited by law; the Uniformed Services Employment and Reemployment Rights Act; the California Family Rights
Act; the California Labor Code, except as prohibited by law; the California Workers’ Compensation Act, except as prohibited by law;
and the California Fair Employment and Housing Act;
(iv) any and all claims for violation of the federal or any state constitution;
(v) any and all claims arising out of any other laws and regulations relating to employment or employment discrimination;
(vi) any claim for any loss, cost, damage, or expense arising out of any dispute over the non-withholding or other tax treatment of
any of the proceeds received by Executive as a result of the Transition and Separation Agreement entered into between the Parties as of
[________], 2019 (the “Transition and Separation Agreement”);
(vii) any claim for breach of contract or breach of the implied covenant of good faith and fair dealing;
(viii) any and all claims for attorneys’ fees and costs.
(b) Executive agrees that the release set forth in this Section shall be and remain in effect in all respects as a complete general release
as to the matters released. This release does not extend to any obligations incurred under
7
the Transition and Separation Agreement or the Option Agreements (as defined in the Transition and Separation Agreement). This
release does not release claims or rights that cannot be released as a matter of law, including, but not limited to, claims under Division 3,
Article 2 of the California Labor Code (which includes California Labor Code Section 2802 regarding indemnity for necessary
expenditures or losses by Executive) any other indemnification, defense, or hold-harmless rights Executive may have, and Executive’s
right to bring to the attention of the Equal Employment Opportunity Commission or California Department of Fair Employment and
Housing claims of discrimination, harassment or retaliation; provided, however, that Executive does release his right to obtain damages
for any such claims. This release does not release claims or rights that Executive may have as a shareholder of the Company or for vested
benefits under any benefit plan or to continued participation in any such plan pursuant to the terms thereof or applicable law.
(c) Acknowledgment of Waiver of Claims under ADEA. Executive acknowledges that he is waiving and releasing any rights he may
have under the Age Discrimination in Employment Act of 1967 (“ADEA”), and that this waiver and release is knowing and voluntary.
Executive acknowledges that this waiver and release does not apply to any rights or claims that may arise under the ADEA after the
Effective Date of this Release. Executive acknowledges that the consideration given for this waiver and release is in addition to anything
of value to which Executive was already entitled. Executive further acknowledges that he has been advised by this writing that: (a) he
should consult with an attorney prior to executing this Release; (b) he has twenty-one (21) days within which to consider this Release;
(c) he has seven (7) days following his execution of this Release to revoke this Release; (d) this Release shall not be effective until after
the revocation period has expired and Executive will not receive the severance and other benefits provided by Section 2 of the Transition
and Separation Agreement unless and until the revocation period has expired; and (e) nothing in this Release prevents or precludes
Executive from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose
any condition precedent, penalties, or costs for doing so, unless specifically authorized by federal law. In the event Executive signs this
Release and returns it to the Company’s General Counsel in less than the 21-day period identified above, Executive hereby acknowledges
that he has freely and voluntarily chosen to waive the time period allotted for considering this Release. To revoke his acceptance of this
Release, Executive must contact the Company’s General Counsel by email at egrammer@ardelyx.com no later than 5 p.m. on the 7 day
following Executive’s signature of this Release.
th
(d) California Civil Code Section 1542. Executive acknowledges that he has been advised to consult with legal counsel and is
familiar with the provisions of California Civil Code Section 1542, a statute that otherwise prohibits unknown claims, which provides as
follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR OR RELEASING PARTY DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, AND THAT, IF
KNOWN BY HIM OR HER WOULD HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR OR
RELEASED PARTY.
Executive, being aware of said code section, agrees to expressly waive any rights he may have thereunder, as well as under any other
statute or common law principles of similar effect.
2. Executive Representations. Executive represents and warrants that:
(a) To Executive’s knowledge, Executive has returned to the Company all Company property in Executive’s possession and if he
discovers additional Company property in his possession he will promptly return it to the Company;
(b) Except as Executive has informed the Company in writing, Executive is not owed wages, commissions, bonuses or other
compensation, other than any payments that become due under Sections 3 and 4(b) of the Transition and Separation Agreement;
(c) During the course of Executive’s employment Executive did not sustain any injuries for which Executive might be entitled to
compensation pursuant to worker’s compensation law or Executive has disclosed any injuries of which he is currently, reasonably aware
for which he might be entitled to compensation pursuant to worker’s compensation law;
(d) From the date Executive executed the Transition and Separation Agreement through the date Executive executes this Release,
Executive has not made any disparaging comments about the Company, nor will Executive do so in the future; and
8
(e) Executive has not initiated any adversarial proceedings of any kind against the Company or against any other person or entity
released herein, nor will Executive do so in the future with respect to any claims released hereby, except as specifically allowed by this
Release.
3. Continuing Obligations. Executive reaffirms his obligations under the Transition and Separation Agreement and under the
Confidential Information Agreement (as defined in the Transition and Separation Agreement).
4. Cooperation with the Company. Executive reaffirms his obligations to cooperate with the Company pursuant to Section 15 of the
Transition and Separation Agreement.
5. Severability. The provisions of this Release are severable. If any provision is held to be invalid or unenforceable, it shall not affect
the validity or enforceability of any other provision.
6. Choice of Law. This Release shall in all respects be governed and construed in accordance with the laws of the State of California,
including all matters of construction, validity and performance, without regard to conflicts of law principles.
7. Integration Clause. This Release and the Transition and Separation Agreement, the Confidential Information Agreement, the RSU
Award Agreement and the Option Agreements contain the Parties’ entire agreement with regard to the transition and separation of
Executive’s employment, and supersede and replace any prior agreements as to those matters, whether oral or written, including without
limitation, the Severance Agreement. This Release may not be changed or modified, in whole or in part, except by an instrument in
writing signed by Executive and the President & Chief Executive Officer of the Company.
8. Execution in Counterparts. This Release may be executed in counterparts with the same force and effectiveness as though
executed in a single document. Facsimile signatures shall have the same force and effectiveness as original signatures.
9. Intent to be Bound. The Parties have carefully read this Release in its entirety; fully understand and agree to its terms and
provisions; and intend and agree that it is final and binding on all Parties.
IN WITNESS WHEREOF, and intending to be legally bound, the Parties have executed the foregoing on the dates shown below.
EXECUTIVE
Mark Kaufmann
Date:
ARDELYX, INC.
By: Mike Raab
Title: President & CEO
Date:
9
Name
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction
None
Exhibit 21.1
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We 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 Statements on Form S-8 (Nos. 333-202663 and 333-230156) pertaining to the 2014 Equity
Incentive Award Plan and the 2014 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 2014
Equity Incentive Award Plan of Ardelyx, Inc.
(5) Registration Statement on Form S-8 (No. 333-214538) pertaining to the 2016 Employment Commencement
Incentive Plan of Ardelyx, Inc.
of our reports dated March 6, 2020, with respect to the financial statements of Ardelyx, Inc. and the effectiveness of
internal control over financial reporting of Ardelyx, Inc. included in this Annual Report (Form 10-K) of Ardelyx, Inc. for
the year ended December 31, 2019.
/s/ Ernst & Young LLP
Redwood City, California
March 6, 2020
Exhibit 31.1
I, Michael Raab, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Ardelyx, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading 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 present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 6, 2020
By:
/s/ Michael Raab
Michael Raab
President, Chief Executive Officer and Director
(Principal Executive Officer)
Exhibit 31.2
I, Mark Kaufmann, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Ardelyx, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading 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 present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 6, 2020
By:
/s/ Mark Kaufmann
Mark Kaufmann
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Ardelyx, Inc. (the “Company”) on Form 10-K for the period ending
December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Michael
Raab, President and Chief Executive Officer of the Company, and Mark Kaufmann, Chief Financial Officer of the
Company, respectively, do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 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
of operations of the Company.
Date: March 6, 2020
By:
/s/ Michael Raab
Michael Raab
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 6, 2020
By:
/s/ Mark Kaufmann
Mark Kaufmann
Chief Financial Officer
(Principal Financial Officer)