Reata Pharmaceuticals
Annual Report 2017

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)☒☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017OR☐☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITIONPERIOD FROM TO Commission File Number 001-37785 Reata Pharmaceuticals, Inc.(Exact name of Registrant as specified in its Charter) DELAWARE 11-3651945(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.) 2801 Gateway Dr, Suite 150Irving, Texas 75063(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (972) 865-2219 Securities registered pursuant to Section 12(b) of the Act: Class A Common Stock, Par Value $0.001 Per Share; listed on The NASDAQ Global MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past90 days. YES ☒ NO ☐Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted 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 andpost such files). YES ☒ NO ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best ofRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growthcompany. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.(Check one): Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ (Do not check if a small reporting company) 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 financialaccounting 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 voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of Class A CommonStock on The NASDAQ Stock Market on June 30, 2017, was $317,047,608.The number of shares of Registrant’s Common Stock outstanding as of February 28, 2018 was 19,990,929 shares of Class A Common Stock and 6,164,269 shares of Class BCommon Stock.Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on June 13, 2018, are incorporated by referenceinto Part III of this Report. Table of Contents PagePART I Item 1.Business3Item 1A.Risk Factors36Item 1B.Unresolved Staff Comments68Item 2.Properties68Item 3.Legal Proceedings68Item 4.Mine Safety Disclosures68 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities69Item 6.Selected Financial Data72Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations74Item 7A.Quantitative and Qualitative Disclosures About Market Risk87Item 8.Financial Statements and Supplementary Data87Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure87Item 9A.Controls and Procedures87Item 9B.Other Information88 PART III Item 10.Directors, Executive Officers and Corporate Governance89Item 11.Executive Compensation89Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters89Item 13.Certain Relationships and Related Transactions, and Director Independence89Item 14.Principal Accounting Fees and Services89 PART IV Item 15.Exhibits, Financial Statement Schedules90Item 16.Form 10-K Summary90 i SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995(PSLRA) with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA. In this Annual Report on Form 10-K, all statements otherthan statements of historical or present facts, including statements regarding our future financial condition, business strategy, and plans and objectives ofmanagement for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as“believe,” “will,” “may,” “might,” “estimate,” “continue,” “anticipate,” “intend,” “target,” “project,” “model,” “should,” “would,” “plan,” “expect,”“predict,” “could,” “seek,” “goals,” “potential,” and similar terms or expressions that concern our expectations, strategy, plans, or intentions. These forward-looking statements include, but are not limited to, statements about: •our expectations regarding the timing, costs, conduct, and outcome of our clinical trials, including statements regarding the timing of theinitiation and availability of data from such trials; •our ability to advance our Nrf2 activators and other technologies; •the timing and likelihood of regulatory filings and approvals for our product candidates; •our ability to obtain funding for our operations, including funding necessary to complete further development and commercialization of ourproduct candidates; •our plans to research, develop, and commercialize our product candidates; •the commercialization of our product candidates, if approved; •the rate and degree of market acceptance of our product candidates; •our expectations regarding the potential market size and the size of the patient populations for our product candidates, if approved for commercialuse, and the potential market opportunities for commercializing our product candidates; •the success of competing therapies that are or may become available; •our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates; •the ability to license additional intellectual property relating to our product candidates and to comply with our existing license agreements; •our ability to maintain and establish relationships with third parties, such as contract research organizations, suppliers, and distributors; •our ability to maintain and establish collaborators with development, regulatory, and commercialization expertise; •our ability to attract and retain key scientific or management personnel; •our ability to grow our organization and increase the size of our facilities to meet our anticipated growth; •the accuracy of our estimates regarding expenses, future revenue, capital requirements, and needs for additional financing; •regulatory developments in the United States and foreign countries; •our expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012(the JOBS Act); •our expectations related to the use of our available cash; •our ability to develop, acquire, and advance product candidates into, and successfully complete, clinical trials; •the initiation, timing, progress, and results of future preclinical studies and clinical trials, and our research and development programs; •the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates; •the impact of governmental laws and regulations; and •developments and projections relating to our competitors and our industry.1These risks are not exhaustive. Other sections of this Annual Report on Form 10-K include additional factors that could adversely affect our businessand financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and itis not possible for our management to predict all risk factors nor can we assess the effects of all factors on our business or the extent to which any factor, orcombination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. Factors that maycause actual results to differ materially from current expectations include, among other things, those listed under Part I, Item 1A. Risk Factors and elsewherein this Annual Report on Form 10-K. Given these uncertainties, you should not place undue reliance on these forward-looking statements.The forward-looking statements made in this Annual Report on Form 10-K are based on circumstances as of the date on which the statements aremade. Except as required by law, we undertake no obligation to update or revise these forward-looking statements for any reason, whether as a result of newinformation, future events, or otherwise, or to conform these statements to actual results or to changes in our expectations.This Annual Report on Form 10-K also contains estimates, projections, and other information concerning our industry, our business, and the marketsfor certain diseases, including data regarding the estimated size of those markets and the incidence and prevalence of certain medical conditions. Informationthat is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events orcircumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry,business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry,medical, and general publications, government data, and similar sources. 2PART IItem 1. Business.OverviewWe are a clinical stage biopharmaceutical company focused on identifying, developing, and commercializing therapeutics to address serious and life-threatening diseases with few or no approved therapies by targeting molecular pathways that regulate cellular metabolism and inflammation. We arecurrently conducting three registrational trials with our lead product candidates, bardoxolone methyl and omaveloxolone, which activate the transcriptionfactor Nrf2 to restore mitochondrial function, reduce oxidative stress, and resolve inflammation. Our lead registrational programs are evaluating our productcandidates for the treatment of a rare form of chronic kidney disease (CKD) caused by Alport syndrome, a rare form of degenerative neuromuscular diseasecalled Friedreich’s ataxia (FA), and a rare and severe form of pulmonary arterial hypertension associated with connective tissue disease (CTD-PAH).We are developing bardoxolone methyl for the treatment of patients with CKD caused by Alport syndrome and four additional rare forms of CKD that,in the aggregate, affect more than half a million patients in the United States. CKD is characterized by a progressive worsening in the rate at which thekidney filters waste products from the blood, called the glomerular filtration rate (GFR). When GFR gets too low, patients develop end stage renal disease(ESRD) and require dialysis or a kidney transplant to survive. In 11 clinical trials, bardoxolone methyl has been shown to consistently improve kidneyfunction, as assessed by estimated GFR (eGFR) in patients with a variety of diseases that result in decreased kidney function. We believe that bardoxolonemethyl treatment has the potential to delay or prevent GFR declines that cause the need for dialysis or a transplant in patients with Alport syndrome and otherrare forms of CKD. We are conducting a Phase 2/3 trial called CARDINAL, which is an international, multi-center, randomized, double-blind, placebo-controlled trial inthe Phase 3 portion, that studies the safety and efficacy of bardoxolone methyl in patients with CKD caused by Alport syndrome. Alport syndrome is a rareand serious hereditary disease with no approved therapies that affects both children and adults. Patients with Alport syndrome experience annual declines inkidney function and, in patients with the most severe forms of the disease, approximately 50% progress to dialysis by age of 25, 90% by age 40, and nearly100% by age 60. Last year, we reported the primary endpoint data for the open label, Phase 2 portion of CARDINAL. In the Phase 2 portion, bardoxolonemethyl demonstrated a statistically significant, mean increase from baseline in eGFR in 30 patients after 12 weeks of treatment. All patients had an increasein eGFR, and these increases in eGFR translated to an improvement in CKD stage for approximately 73% of patients. Based on these results, we began enrolling the Phase 3 portion of CARDINAL last year. The Phase 3 study will enroll approximately 150 patientsrandomized evenly to either bardoxolone methyl or placebo. The U.S. Food and Drug Administration (FDA) has provided us with guidance that, in patientswith CKD caused by Alport syndrome, an analysis of retained eGFR, which is the eGFR change after a four week withdrawal of drug, demonstrating animprovement versus placebo after one year of bardoxolone methyl treatment may support accelerated approval. In addition, data demonstrating animprovement versus placebo in retained eGFR after two years of treatment may support full approval. We expect to have one year top-line results from thePhase 3 portion of CARDINAL available in the second half of 2019. If successful, we believe the results from the Phase 3 portion of CARDINAL, togetherwith other data from our development program, will be sufficient to form the basis of a New Drug Application (NDA) submission to the FDA seeking approvalof bardoxolone methyl for the treatment of CKD caused by Alport syndrome.We are developing omaveloxolone for the treatment of patients with FA, an inherited, debilitating, and degenerative neuromuscular disorder, causedby mutations in the gene for frataxin, a mitochondrial protein. Patients with FA are typically dependent on wheelchair use 10 to 15 years after disease onset,and their median age of death is in the mid-30s. There are no currently approved therapies for the treatment of FA. Omaveloxolone is being studied in theregistrational part 2 of our MOXIe trial. In part 1 of MOXIe, at the optimal dose level, omaveloxolone demonstrated a statistically significant improvementin modified Friedreich’s Ataxia Rating Scale (mFARS) scores of 3.8 points (p=0.0001) versus baseline and a placebo-corrected improvement in mFARSscores of 2.3 points (p=0.06). We expect to have top-line data from the MOXIe trial in the second half of 2019. If successful, we believe the results from theMOXIe clinical trial, together with other data from the omaveloxolone program, will be sufficient to form the basis of an NDA submission to the FDA seekingapproval of omaveloxolone for the treatment of FA.We are studying bardoxolone methyl in CTD-PAH, which is a serious and progressive disease that leads to heart failure and death. CTD-PAH patientsare less responsive to existing vasodilator therapies than patients with the idiopathic form of PAH (I-PAH) and have a worse prognosis. Bardoxolone methylis being studied for the treatment of CTD-PAH in the Phase 3 CATALYST trial. We initiated CATALYST following review of initial data from our Phase 2clinical trial, LARIAT, which demonstrated a statistically significant, mean time-averaged increase in 6-minute walk distance (6MWD) at 16 weeks in CTD-PAH patients compared to baseline. We currently expect to have top-line data from the CATALYST trial in the second half of 2018. However, the trial isdesigned to enroll between 130 and 200 patients, and the final sample size will be determined by a pre-specified, blinded sample size re-calculation based on6MWD variability and baseline characteristics. The timing of data availability may change if the sample size is increased due to the sample size re-calculation. If successful, we believe the results from the CATALYST trial, together with other data from the bardoxolone methyl development program, willbe sufficient to form the basis of an NDA submission to the FDA seeking approval of bardoxolone methyl for the treatment of CTD-PAH.3In addition to our three registrational programs, we are currently conducting a battery of additional clinical and preclinical programs in serious andlife-threatening diseases that may provide expansion opportunities for our drug candidates. We plan to evaluate data from these earlier stage programs todetermine which indications to advance into later stage trials.Our StrategyOur goal is to become a leader in the discovery, development, and commercialization of small molecule therapies for the treatment of severe and life-threatening diseases. We seek to identify and select, for development and commercialization, small molecules with novel mechanisms of action that webelieve have biological properties with broad applicability. Once we have selected a class of small molecules, we apply their biological properties to clinicalsettings with unmet needs, and we triage opportunities based on development timeline and cost, regulatory pathway, and commercial opportunity. Afteridentifying suitable molecules for clinical development, we mitigate development risk by maintaining a diversified and broad clinical pipeline, rapidlyanalyzing data to determine the potential of each program, and entering into development collaborations with industry-leading collaborators. Our strategyincludes the following key components: •Completing our ongoing registrational trials and seeking regulatory approval. We are currently studying bardoxolone methyl inregistrational clinical trials in patients with CKD caused by Alport syndrome and in patients with CTD-PAH, and omaveloxolone in aregistrational trial in patients with FA. We plan to complete these trials and, if successful, to seek regulatory approval for commercialization inall three indications. •Commercializing our product candidates currently in registrational trials in the United States. We retain commercial rights in the UnitedStates to our lead product candidates, bardoxolone methyl and omaveloxolone, and intend to commercialize these product candidates, ifapproved, in the United States. As we advance towards regulatory approvals for our lead product candidates, we intend to establish a specialtysales and marketing infrastructure and to contract with third parties for commercial scale manufacturing. •Commercializing our product candidates currently in registrational trials outside of the United States. We plan to internationallycommercialize our lead product candidates, bardoxolone methyl and omaveloxolone, subject to regulatory approvals, either alone, with ourstrategic collaborators AbbVie Inc. (AbbVie) and Kyowa Hakko Kirin Co., Ltd. (KHK), or with new collaboration partners. With the expansionof our product candidate pipeline, we may opportunistically seek additional strategic collaborations to maximize our commercial opportunitiesfor these new product candidates outside of the United States. •Continuing to advance our Phase 1 and 2 clinical programs into registrational trials. Our goal is to complete our Phase 1 and 2 clinicalprograms and evaluate data from all of these programs to determine how to prioritize and move forward into additional trials. We plan to reviewindications in all of the disease spaces in which we are working and select indications for development based on the relevancy of data andregulatory endpoints. •Advancing our preclinical programs into clinical development. We intend to advance our preclinical programs, including our RORgTinhibitors, through preclinical studies into clinical development. We believe that the anti-inflammatory effects of RORgT inhibitors may bepromising for the treatment of a variety of autoimmune and inflammatory conditions. •Leveraging our technologies to expand our development pipeline. We intend to leverage our multiple technologies by exploring preclinicaland clinical proof of concept studies with multiple new molecules. We believe that our technologies may enable us to treat indications beyondthose that we are currently exploring. •Using our expertise to identify promising novel molecules and technologies. Our management team collectively has over 200 years ofexperience in small molecule development, and we intend to use this expertise, together with our established drug selection and developmentmethodology, to advance what we believe to be the most promising small molecules that we currently own and to opportunistically in-licenseadditional small molecules for development.4Our Lead ProgramsThe chart below is a summary of our current registrational programs: Registrational ProgramsProgramNext Expected MilestoneTiming of Milestone CKD caused by Alport syndromePhase 3 Data2H 2019Bardoxolone methyl Friedreich’s ataxiaPhase 2 Part 2 Data2H 2019Omaveloxolone CTD-PAHPhase 3 Data2H 2018 1Bardoxolone methyl1 The trial will enroll between 130 and 200 patients, with the final sample size determined by a pre-specified, blinded sample size re-calculation based on 6MWDvariability and baseline characteristics. If the final sample size is at the high end of the enrollment target, the timing of data release may change.Foundational Biology of Our Nrf2 ActivatorsThe foundational biology of Nrf2 activation underlies our two lead product candidates, bardoxolone methyl and omaveloxolone. Nrf2 activators bindto Keap1, a protein that coordinates the cellular response to reactive oxygen species (ROS) and other stimuli. Binding to Keap1 activates Nrf2, atranscription factor that evolved to orchestrate the resolution of inflammation. Nrf2 coordinates this process by normalizing metabolism and increasingmitochondrial energy production (ATP), increasing cellular antioxidant capacity, and reducing production of ROS. This activity inhibits inflammatorysignaling pathways, such as NF-κB and the inflammasome. 1Multiple disease processes or external stimuli can initiate cellular responses leading to mitochondrial dysfunction, oxidative stress, andinflammation. Specific triggers can include an autoimmune response, genetic mutations, cellular damage (generating damage-associated molecular patterns(DAMPs), infections (generating pathogen-associated molecular patterns (PAMPs), or cytokine production. 2Electrons are carried in the electron transport chain by NADH and FADH2, which are reducing equivalents that transfer electrons for the production ofATP. NADH is the reduced form of nicotinamide adenine dinucleotide, and FADH2 is the reduced form of flavin adenine dinucleotide. ROS are generatedduring the production of ATP; an excess of ROS leads to oxidative stress. Reducing equivalents within the cell can either be consumed to produce energyvia ATP, or consumed to defend against oxidative stress (ROS). Nrf2 activation is also associated with an increase in the number of mitochondria withincells (mitochondrial biogenesis). 3Glutathione, SOD (superoxide dismutase), TRX (thioredoxin), GRX (glutaredoxin), PRX (peroxiredoxins), and GPX (glutathione peroxidase) are allenzymes and molecules with antioxidant activities, which convert ROS, reactive nitrogen species, and other harmful reactive molecules into less harmfulmolecules. Nrf2 activation leads to increased production of these antioxidants, which augments the ability of the cell to defend against oxidative stress,thereby allowing more reducing equivalents to be used for energy production. 4A key component of inflammatory signaling is the NLRP3 (NOD-like receptor family pyrin domain containing 3) inflammasome. NLRP3 can be activatedby a number of stimuli, including mitochondrial ROS. NLRP3 activation, together with IκBα/Nf- κ B signaling, leads to the 5 production of multiple proteins involved in pro-inflammatory signaling, including IL-1β (interleukin 1-beta), IL-6 (interleukin 6), MCP1 (monocytechemotactic protein-1), and TNF α (tumor necrosis factor-alpha). IκBα is a negative regulator of the Nf- κ B pathway. Abnormal metabolism, decreased ATP levels, increased ROS production, and chronic inflammatory signaling are common features of a variety ofdiseases. When left unresolved, these pathologic processes can lead to abnormal cellular proliferation, tissue fibrosis and remodeling, and organ damage. Bycorrecting the underlying molecular aberrations, Nrf2 activators may have the potential to prevent these longer-term consequences and improve diseasesymptoms. Since mitochondrial dysfunction, oxidative stress, and inflammation are features of many diseases, Nrf2 activators may have many potentialclinical applications and have been the subject of more than 200 peer-reviewed scientific papers.Bardoxolone Methyl for the Treatment of Rare Chronic Kidney DiseasesOverviewWe are developing bardoxolone methyl for the treatment of patients with CKD caused by Alport syndrome and four additional rare forms of CKD that,in the aggregate, affect more than half a million patients in the United States. CKD is characterized by a progressive worsening in the rate at which thekidney filters waste products from the blood, called GFR. When GFR gets too low, patients develop ESRD and require dialysis or a kidney transplant tosurvive. Dialysis increases the likelihood of serious and life-threatening complications, such as cardiovascular disease, and the five-year survival rate forhemodialysis patients is only approximately 40%. The number of patients with ESRD in the United States has nearly doubled in the last two decades with anestimated 700,000 patients as of 2015. Approximately 30% of these patients suffer from a rare form of CKD. There are no approved therapies in the UnitedStates for Alport syndrome or the four additional rare forms of CKD addressed by our program.We believe that bardoxolone methyl treatment has the potential to delay or prevent the loss of kidney function that causes the need for dialysis or atransplant in patients with Alport syndrome and other rare forms of CKD. In 11 clinical trials, bardoxolone methyl has been shown to consistently improvekidney function, as assessed by eGFR in patients with a variety of diseases that result in decreased kidney function. eGFR is an estimate of the kidney’sfiltration rate that is used to track the decline in kidney function and progression to ESRD. In addition to eGFR improvements, bardoxolone methyltreatment has been shown to significantly increase directly-measured GFR using the “gold standard” inulin clearance method and has been shown to reducethe levels of blood waste products filtered by the kidney. Further, kidney function improvements from bardoxolone methyl treatment are sustained in longterm trials. In two large, international, placebo-controlled clinical studies in patients with CKD caused by type 2 diabetes, BEAM and BEACON,bardoxolone methyl treatment produced sustained increases in eGFR for at least one year. In BEACON, patients that received bardoxolone methyl treatmentwere more than 50% less likely than patients receiving placebo to experience events that predict kidney failure. In PAH patients in LARIAT, eGFRimprovements from bardoxolone methyl treatment were durable for two years. Importantly, in BEAM and BEACON, bardoxolone methyl treatment for oneyear produced a retained eGFR benefit after the drug was withdrawn. This retained eGFR benefit provides additional evidence that bardoxolone methyltreatment may protect the structure of the kidney and may prevent or delay the need for dialysis or a transplant.The FDA has provided us with guidance that, in patients with CKD caused by Alport syndrome, data demonstrating an improvement versus placebo inretained eGFR after one year of bardoxolone methyl treatment may support accelerated approval, and data demonstrating an improvement versus placebo inretained eGFR after two years of treatment may support full approval. Based on this guidance, we are conducting a Phase 2/3 trial called CARDINAL inpatients with a severe, genetic form of CKD caused by Alport syndrome, and we expect data from the study to be available during the second half of2019. Alport syndrome is a rare and serious hereditary disease with no approved therapies that affects both children and adults. Patients with Alportsyndrome experience progressive loss of kidney function and, in patients with the most severe forms of the disease, approximately 50% progress to dialysisby age of 25, 90% by age 40, and nearly 100% by age 60. CARDINAL, which is an international, multi-center, randomized, double-blind, placebo-controlled trial in the Phase 3 portion, studies the safety andefficacy of bardoxolone methyl in patients with CKD caused by Alport syndrome. Last year, we reported the primary endpoint data for the open label, Phase2 portion of CARDINAL. In the Phase 2 portion, bardoxolone methyl demonstrated a statistically significant, mean increase from baseline in eGFR of 13.4mL/min/1.73 m2 (p<0.000000001) in 30 patients after 12 weeks of treatment. All patients had an increase in eGFR from baseline, and these increases ineGFR translated to an improvement in CKD stage for approximately 73% of patients. Patients in the Phase 2 portion of CARDINAL will continue study drugfor two years, and retained eGFR will be assessed after both one and two years of treatment. We expect to have one year retained eGFR data from the Phase 2portion of CARDINAL in the third quarter of 2018. 6Because we observed a statistically significant increase in eGFR after 12 weeks of treatment in the Phase 2 portion of CARDINAL, we began enrollingthe Phase 3 portion of CARDINAL last year. The Phase 3 study will enroll approximately 150 patients randomized evenly to either bardoxolone methyl orplacebo. We will measure on-treatment eGFR at 48 weeks and the retained eGFR at 52 weeks. After 52 weeks, patients will be restarted on study drug withtheir original treatment assignments and will continue on study drug for a second year. The second year on-treatment eGFR will be measured after 100 weeksand the retained eGFR will be measured at Week 104. We expect to have one year top-line results from the Phase 3 portion of CARDINAL available in thesecond half of 2019. If successful, we believe the results from the Phase 3 portion of CARDINAL, together with other data from our development program,will be sufficient to form the basis of an NDA submission to the FDA seeking approval for bardoxolone methyl in the United States.Because we believe the mechanism of action of bardoxolone methyl addresses a final common pathway of kidney function loss, and because we haveobserved significant increases in eGFR in patients with declining kidney function from a variety of diseases, we are conducting an additional clinical studyto assess whether bardoxolone methyl treatment can increase kidney function, as assessed by eGFR, in patients with four additional rare forms ofCKD. PHOENIX is an open-label, multi-center Phase 2 trial to evaluate the safety and efficacy of bardoxolone methyl in patients with autosomal dominantpolycystic kidney disease (ADPKD), IgA nephropathy, type 1 diabetic CKD, or focal segmental glomerulosclerosis (FSGS). We plan to enroll approximately25 patients of each of these rare forms of CKD in PHOENIX and to evaluate the effect of bardoxolone methyl treatment on eGFR at 12 weeks. We haveenrolled patients in PHOENIX from each of the four rare forms of CKD, and expect to have data from one or more of the four cohorts available during thesecond half of 2018.Background on Rare Forms of CKD, eGFR, and the Burden of ESRD and DialysisCKD is characterized by a progressive loss in the rate at which the kidney is filtering blood, called GFR. CKD typically results from diabeticcomplications, hypertension, obesity, genetic defects, or autoimmunity. The initiating events that promote CKD can be quite different, but a substantialbody of evidence has emerged that chronic inflammation is a common underlying feature for most forms of CKD. Declining kidney function leads to the buildup of high levels of waste products in the blood that causes the patient to suffer symptoms, such as nauseaand fatigue, and to develop complications including high blood pressure, anemia, weak bones, poor nutritional health, and nerve damage. eGFR is anestimate of GFR that nephrologists use to track the decline in kidney function and progression of CKD. Normal individuals have an eGFR of approximately120 mL/min/1.73 m2. When eGFR declines to approximately 15 mL/min/1.73 m2, patients develop ESRD and require dialysis or a kidney transplant tosurvive. Dialysis can lead to a reduced quality of life as patients must spend several hours at a dialysis clinic three or more times a week for the remainder oftheir life, and may suffer side effects due to dialysis. Dialysis also increases the likelihood of serious and life-threatening complications, such ascardiovascular disease, and the five-year survival rate for hemodialysis patients is only approximately 40%. The number of patients with ESRD in the UnitedStates has nearly doubled in the last two decades with an estimated 700,000 patients as of 2015. Approximately 30% of these patients suffer from a rare formof CKD. In 2015, Medicare spending for CKD was $98 billion, of which $34 billion was spent on patients with ESRD. The only approved therapies in theUnited States for any form of CKD that affect disease progression are blood pressure medications, angiotensin converting enzyme (ACE) inhibitors, andangiotensin receptor blockers (ARBs) approved for diabetic nephropathy, that modestly slow the rate of kidney function loss. There are no approvedtherapies in the United States for Alport syndrome or the four additional rare forms of CKD addressed by our program.Mechanism of Action of Bardoxolone Methyl in CKDBardoxolone methyl has been evaluated in many preclinical models of CKD and, unlike blood pressure medications, bardoxolone methyl targetsinflammation in the kidney. In preclinical studies that are the subject of more than 40 recent peer-reviewed publications, bardoxolone methyl and relatedanalogs have been shown to reduce inflammation, improve renal function, and prevent injury, remodeling, and fibrosis of the kidney in many animal modelsof kidney disease.In the kidney, the first stage of the blood filtering process takes place in the glomerulus, which consists of a small tuft of capillaries containingendothelial cells, between which are large pores, and mesangial cells, which are modified smooth muscle cells that lie between the capillaries. Tightcoordination between these cell types is necessary for proper filtration. The pores between the endothelial cells allow for the free filtration of fluid, plasmasolutes, and protein. When endothelial cells become dysfunctional, due to oxidative stress or other reasons, the pores can become more permeable andincrease spillage of protein, which can drive further inflammatory signaling and oxidative stress. The mesangial cells regulate blood flow by their contractileactivity, and contraction of the cells reduces surface area for filtration of the blood. Mesangial cells also remove proteins and other molecules trapped in theglomerular basement membrane (GBM), or filtration barrier.7In preclinical models, bardoxolone methyl improves GFR by reducing glomerular inflammation, reversing endothelial dysfunction, and restoringfiltration surface areaIn CKD (left), chronic activation of pro-inflammatory and pro-fibrotic pathwaysresults in endothelial dysfunction and thickening of the GBM, such that the filtrationsurface area is reduced.Bardoxolone methyl (right) has been shown, in preclinical models, to improve GFR bytargeting these pathways and can therefore improve GFR by reducing glomerularinflammation and fibrosis to restore filtration surface area.In animal models, bardoxolone methyl and analogs reverse endothelial dysfunction and mesangial cell contraction and increase the surface area of theglomerulus, increasing GFR. Further, data from animal models demonstrate that the compounds preserve kidney function and prevent fibrosis in multiplesettings, including in models of high blood pressure, diabetes, lupus, and excessive protein.Clinical Trials of Bardoxolone Methyl in CKDBardoxolone methyl has been evaluated in multiple clinical trials enrolling over 2,000 patients exposed to active drug, including those with CKDcaused by type 2 diabetes, PAH patients, Alport syndrome patients, patients with solid tumors or lymphoma, and healthy volunteers. Bardoxolone methylhas been shown to consistently improve kidney function as measured by eGFR and other markers of kidney function in numerous clinical trials. Key featuresof bardoxolone methyl’s effects on kidney function are summarized below.Bardoxolone Methyl Improves Kidney Function as Assessed by eGFR, Measured GFR (Inulin Clearance), and Creatinine ClearanceBardoxolone Methyl Improved Kidney Function as Assessed by eGFR in 11 Clinical Trials StudyPhase/CountryPatient Population∆eGFR (mL/min/1.73m2)402-C-0801 (Stratum 1)2a/USCKD/Diabetes6.7 (p<0.001)a402-C-0801 (Stratum 2)2b/USCKD/Diabetes7.2 (p<0.001)a402-C-0804 (BEAM)2/USCKD/Diabetes8.6 (p<0.001)b402-C-09022/USCKD/Diabetes6.5 (p<0.001)a402-C-0903 (BEACON)3/GlobalCKD/Diabetes6.4 (p<0.001)b402-C-11021/USCKD/Diabetes9.0 (p<0.05)aRTA402-005 (TSUBAKI)2/JapanCKD/Diabetes6.6 (inulin GFR) (p=0.008)b402-C-16032/USAlport Syndrome13.4 (p<0.001)a402-C-05011/USCancer18.2 (p<0.0001)a402-C-07021/2/USCancer32.2 (p=0.001)a402-C-1302 (LARIAT)2/USPAH10.6 (p<0.0001)ba Change from baselineb Placebo-corrected change from baselineIn addition to eGFR improvements, bardoxolone methyl treatment has been shown to significantly increase directly-measured GFR in patients withtype 2 diabetes and CKD using the “gold standard” inulin clearance method and to reduce the levels of blood waste products8filtered by the kidney. In 2017, our partner, KHK, presented results of its trial, TSUBAKI, a double-blind, randomized, placebo-controlled Phase 2 trialconducted in Japan. In TSUBAKI, bardoxolone methyl demonstrated statistically significant and clinically meaningful increases in directly-measuredGFR. Moreover, measured GFR increases were significantly and positively correlated with improvements in eGFR. The observed increase in GFRdemonstrates that increases in eGFR produced by bardoxolone methyl in various forms of CKD, including Alport syndrome, reflect a true increase in kidneyfunction. In TSUBAKI, bardoxolone methyl demonstrated a favorable safety profile with no adverse effect on blood pressure, urine output or sodiumexcretion, and no evidence of overt fluid overload or cardiac toxicity.In several studies, bardoxolone methyl significantly increased creatinine clearance, another assessment of kidney function. Importantly, theseincreases were not associated with a change in total 24 hour excretion of creatinine, which demonstrates that bardoxolone methyl does not affect creatininemetabolism. In other CKD studies, bardoxolone methyl has been shown to significantly reduce blood waste products in inverse correlation to eGFR increasesand to numerically reduce renal serious adverse events (SAEs) and ESRD events. Taken together, these data demonstrate that the increases in eGFR observedin multiple CKD studies of bardoxolone methyl treatment reflect true increases in GFR and support the use of eGFR as a reliable marker of renal function.Bardoxolone Methyl Demonstrated Sustained eGFR Increases for One and Two Years in DurationTwo separate trials in patients with CKD caused by type 2 diabetes, BEAM and BEACON, showed that increases in eGFR in patients treated for oneyear or longer with bardoxolone methyl, were sustained for at least one year. In BEACON, bardoxolone methyl treated patients had mean increases in eGFRthrough Week 48 of 5.6 mL/min/1.73 m2. In contrast, placebo-treated patients experienced a mean decline in eGFR of -1.2 mL/min/1.73 m2, correspondingto a statistically significant relative difference between groups of 6.8 mL/min/1.73 m2 (p<0.001). In BEAM, bardoxolone methyl treated patients at the mid-and high doses had mean increases in eGFR through Week 48 of 14.9 mL/min/1.73 m2. In contrast, placebo-treated patients experienced a mean decline ineGFR of -1.1 mL/min/1.73 m2, corresponding to a statistically significant relative difference between groups of 16.0 mL/min/1.73 m2 (p<0.001).eGFR Increased in BEAM and BEACON Mean eGFR Change ± SE (mL/min/1.73 m2) BEAMBEACONTreatment GroupneGFR ChangeneGFR ChangePlacebo57-1.1± 1.3281-1.2 ± 0.3Bardoxolone methyl56a14.9 ± 1.92415.6 ± 0.6a Combined mid/high doseIn February 2018, we announced that improvements in kidney function were durable for two years in LARIAT. These data represented the longestanalyzed duration patients have received bardoxolone methyl. Patients in the placebo-controlled, double-blind phase of LARIAT had impaired kidneyfunction upon study entry, with an average eGFR of 73.4 mL/min/1.73 m2. Patients who received treatment with bardoxolone methyl (n=71) had astatistically significant increase in eGFR compared to placebo (n=30) of 10.6 mL/min/1.73 m2 (p<0.0001) after 16 weeks of treatment. After completing 16 weeks of treatment, all patients in LARIAT were eligible to receive bardoxolone methyl in an open-label extension study. At thetime of the analysis, 56 patients had received at least 56 weeks of bardoxolone methyl treatment, of which 55 had an eGFR measurement at Week 56. After56 weeks of treatment, data demonstrated a statistically significant, mean increase in eGFR of 10.7 mL/min/1.73 m2 from baseline (p<0.0001). Additionally,26 patients had received bardoxolone methyl for at least 104 weeks, and after 104 weeks of treatment, data demonstrated a statistically significant, meanincrease in eGFR of 11.3 mL/min/1.73 m2 from baseline (p<0.0001). Notably, 88% of patients on bardoxolone methyl maintained increases in eGFR abovebaseline after two years of treatment.9In the LARIAT Trial with PAH Patients, Bardoxolone Methyl Demonstrated Changes in eGFR Durable through Two Years of TreatmentPAH patients experience an estimated annual loss of kidney function of approximately 8 to 13 mL/min/1.73 m2 and are extremely sensitive to anyadverse perturbations of renal or cardiac function. Additionally, the median survival for PAH patients from time of diagnosis is four to seven years. Uponstudy entry, the LARIAT PAH patients had a median time since diagnosis of 3.3 years (n=101; 66 weeks median duration of treatment). At the time of thisanalysis, LARIAT PAH patients had experienced a lower rate of hospitalization when compared to recent registrational and observational PAH studies, andthere were no deaths among these LARIAT PAH patients.Bardoxolone Methyl Significantly Reduced the Risk of Adverse Renal Events Validated to Predict Kidney FailureIn January 2018, a paper was published in the American Journal of Nephrology that included a characterization of bardoxolone methyl’s efficacy andlonger-term effects on kidney function in BEACON. In this study, post-hoc analysis showed that patients randomized to bardoxolone methyl weresignificantly less likely to experience adverse kidney outcomes as defined by a composite renal endpoint consisting of ≥30% decline from baseline in eGFR,eGFR <15 mL/min/1.73 m2, or ESRD events (p<0.0001). This composite endpoint has recently been validated by a joint FDA, European Medicines Agency(EMA), and the National Kidney Foundation working group. Furthermore, bardoxolone methyl treatment resulted in a decreased number of kidney-relatedSAEs and ESRD events. The authors concluded that bardoxolone methyl preserves kidney function and may delay the onset of kidney failure in patientswith type 2 diabetes and stage 4 CKD.Bardoxolone Methyl Decreased the Risk of Adverse Kidney Outcomes in BEACON10Bardoxolone Methyl Produces a Retained eGFR Benefit after Withdrawal of DrugTo further assess whether increases in eGFR from bardoxolone methyl treatment have the potential to delay or prevent ESRD and the need for dialysisor a transplant over the long term, we conducted a retained benefit analysis in the BEAM and BEACON clinical trials. In those trials, after patients had beentreated with bardoxolone methyl or placebo for approximately one year, the drug was withdrawn for four weeks, and the post-withdrawal eGFR was comparedto the patient’s baseline eGFR. Bardoxolone methyl and any active metabolites are eliminated from the body within approximately 10 days after withdrawal,so we believe the post-withdrawal eGFR change is a measure of the effect of long term bardoxolone methyl treatment on the structure of the kidney and itsdisease-modifying potential.Bardoxolone Methyl Produced Post-Withdrawal eGFR Benefit in BEAM and BEACON Baseline eGFRPlacebo-corrected Post-week 48Withdrawal Δ eGFRWK 12/Post-WithdrawalCorrelationBEAM(Mid/High Dose)324.8 (p<0.05)r=0.53(p<0.001)BEACON231.8 (p<0.001)r=0.43(p<0.001) Importantly, in both BEAM and BEACON, bardoxolone methyl treatment produced a statistically significant improvement in retained eGFR versusplacebo after withdrawal of drug. Also, the acute increase in eGFR from bardoxolone methyl treatment observed at 12 weeks was predictive of both the on-treatment and retained eGFR benefit after one year of treatment. This finding is important because it indicates that increases in eGFR from a relatively short,12 week, treatment periods with bardoxolone methyl may be predictive of a long term clinical benefit. CKD Caused by Alport SyndromeThe FDA has provided guidance to us and other sponsors that clinical trials with a retained benefit analysis may support approval in rare forms ofCKD. Specifically, the FDA has indicated that, in patients with CKD caused by Alport syndrome, data demonstrating an improvement versus placebo inretained eGFR after one year of bardoxolone methyl treatment may support accelerated approval, and data demonstrating an improvement versus placebo inretained eGFR after two years of treatment may support full approval. On the basis of this guidance, we are conducting a Phase 2/3 trial called CARDINAL inpatients with CKD caused by Alport syndrome. Alport syndrome is a rare and serious hereditary disease caused by mutations in the genes encoding type IV collagen, a major structural component ofthe GBM in the kidney. The expression of abnormal type IV collagen causes loss of GBM integrity, abnormal leakage of proteins through the GBM, andexcessive reabsorption of protein in the proximal tubules of the kidney. As in other forms of CKD, excessive reabsorption of protein in the tubules inducesoxidative stress, renal interstitial inflammation, and fibrosis. Patients with Alport syndrome experience an average annual decline in eGFR of 3 to 4mL/min/1.73 m2. In patients with the most severe forms of Alport syndrome, approximately 50% progress to dialysis by age of 25, 90% by age 40, and nearly100% by age 60. Currently, there are no approved therapies for the treatment of CKD caused by Alport syndrome. The goal of current disease management isto slow the progression of CKD, beginning with anti-hypertensives, such as ACE inhibitors or ARBs, which are intended to reduce the rate of kidney functionloss. Like patients with other forms of CKD, Alport syndrome patients receiving dialysis are at increased risk for cardiovascular disease and infections, whichare the most common causes of death in these patients.11Clinical Development for Bardoxolone Methyl in CKD Caused by Alport SyndromeCARDINAL, which is an international, multi-center, randomized, double-blind, placebo-controlled trial in the Phase 3 portion, studies the safety andefficacy of bardoxolone methyl in patients with CKD caused by Alport syndrome. Last year, we reported the primary endpoint data for the open label, Phase2 portion of CARDINAL, which enrolled 30 patients. The primary endpoint data demonstrated that bardoxolone methyl significantly increased kidneyfunction in Alport syndrome patients as measured by eGFR. From a mean baseline eGFR of 54 mL/min/1.73 m2, data showed a statistically significant meanincrease of 13.4 mL/min/1.73 m2 at Week 12 (p<0.000000001). All patients demonstrated increases in eGFR at Week 12, with 87% of patients demonstratinga clinically meaningful increase in eGFR of at least 4.0 mL/min/1.73 m2 and 63% of patients demonstrating an increase in eGFR of at least 10.0 mL/min/1.73m2. Additionally, 73% of patients had an improvement in CKD stage, and none worsened. Clinically meaningful increases in eGFR were demonstratedacross multiple subgroups, with activity in both earlier and later stages of disease. Change from Baseline in eGFR Week 1Week 4Week 8Week 12N30303030 Mean ± SE3.0 ± 0.76.7 ± 1.38.9 ± 1.313.4 ± 1.495% CI(1.6, 4.4)(4.1, 9.3)(6.2, 11.6)(10.5, 16.3) p-value0.0001<0.0001<0.000001<0.000000001All eGFR amounts in table are measured in mL/min/1.73 m2.As of the 12-week primary endpoint visit for the Phase 2 portion, no discontinuations or SAEs were reported, and reported adverse events (AEs) weregenerally mild to moderate in intensity. Consistent with prior studies, the most common AEs that were reported in more than two patients were musclespasms (15/30; 50%), headache (4/30; 13%), nausea (4/30; 13%), fatigue (4/30; 13%), and hyperkalemia (3/30; 10%). Muscle spasms were generallytransient and were associated with reductions of creatine kinase, which is evidence of improved energy metabolism and inconsistent with muscleinjury. Patients in the Phase 2 portion of CARDINAL will continue on study drug for two years, and a retained benefit analysis after withdrawal of drug willbe performed after both one and two years of treatment. Retained eGFR data at 52 weeks from the Phase 2 portion of CARDINAL are expected to be availablein the third quarter of 2018.Because we observed a significant increase in eGFR after 12 weeks of treatment in the Phase 2 portion of CARDINAL, we began enrolling the Phase 3portion of CARDINAL last year. The Phase 3 study will enroll approximately 150 patients randomized evenly to either bardoxolone methyl or placebo. Wewill assess on-treatment eGFR at 48 weeks and retained eGFR at 52 weeks. After 52 weeks, patients will be restarted on study drug with their originaltreatment assignments and will continue on study drug for a second year. The second year on-treatment eGFR will be measured after 100 weeks and theretained eGFR will be measured at Week 104. We expect to have one year top-line data from the Phase 3 portion of CARDINAL available in the second halfof 2019. We have received orphan drug designation from the FDA for bardoxolone methyl for the treatment of Alport syndrome.The trial is being overseen by a data monitoring committee (DMC) that reviews all data, including SAE and AE data, on an unblinded basis, to assesssafety. The DMC has not reported any safety concerns to date.Market Opportunity for Bardoxolone Methyl in Chronic Kidney Disease Caused by Alport SyndromeThere are no therapies currently approved for CKD caused by Alport syndrome. Alport syndrome is a rare and serious hereditary disease that webelieve, based on literature, affects approximately 12,000 children and adults in the United States and 40,000 globally. Approximately 1,200 of the UnitedStates patients are identified in the Alport Syndrome Foundation’s registry. Patients with Alport syndrome are often misdiagnosed with other congenitalkidney diseases. In addition, family members of patients with Alport syndrome may not be formally diagnosed. We believe that, with the development of aneffective treatment for Alport syndrome, identification of patients with CKD caused by Alport syndrome will increase.Bardoxolone Methyl for the Treatment of Other Rare Kidney DiseasesBecause we believe the mechanism of action of bardoxolone methyl addresses a final common pathway kidney function loss and because we haveobserved significant increases in eGFR in patients with declining kidney function from a variety of diseases, we are conducting an additional clinical studyto assess whether bardoxolone methyl treatment can improve kidney function in patients with four additional rare forms of CKD, including ADPKD, IgAnephropathy, type 1 diabetic CKD, and FSGS. There are no therapies currently approved for these rare forms of CKD, except for tolvaptan for the treatment ofADPKD, which was approved outside of the United States. ADPKD is an inherited, rare form of CKD characterized by formation of fluid-filled cysts in thekidneys. There are an estimated 116,000 diagnosed ADPKD patients in the United States. IgA nephropathy is a rare form of CKD caused by deposition ofIgA complexes in the kidney and is estimated to affect 120,000 patients in the United States. CKD is a common complication of type 1 diabetes and isestimated to affect 20% of the approximately one million type 1 diabetes patients in the United States. FSGS is a rare form of CKD that results from scarringand chronic inflammation of the glomeruli and affects an estimated 55,000 patients in the United States.12PHOENIX is an open-label, multi-center Phase 2 trial to evaluate the safety and efficacy of bardoxolone methyl in patients with ADPKD, IgAnephropathy, type 1 diabetic CKD, or FSGS. We plan to enroll approximately 25 patients of each of these rare forms of CKD and to evaluate the effect ofbardoxolone methyl treatment on kidney function, as assessed by eGFR after 12 weeks of treatment. Since eGFR data at 12 weeks has correlated with longerterm on-treatment and retained eGFR benefit, we plan to utilize information from the Phase 2 trial to determine what indications to prioritize and moveforward into registrational studies. We have enrolled patients in PHOENIX from each of the four rare forms of CKD, and expect to have top-line data from oneor more of the four cohorts available during the second half of 2018.Bardoxolone Methyl History of Development in Diabetic CKDPrior to initiating the current clinical development programs in CTD-PAH and CKD caused by Alport syndrome, bardoxolone methyl was evaluated insix Phase 1 and 2 studies that demonstrated significant improvements in kidney function as evidenced by increases in eGFR and other markers of kidneyfunction as discussed above. Based on the Phase 2 results, we conducted BEACON, a large, multinational Phase 3 trial in patients with CKD caused by type2 diabetes. In 2010, when the study was initiated, guidance from the FDA required that the study demonstrate that bardoxolone methyl treatmentsignificantly reduce the risk of ESRD and death events for approval. Because CKD patients’ kidney function declines very slowly over a long period of time,BEACON enrolled only severe or Stage 4 CKD patients that had baseline eGFR values close to the threshold for ESRD.During October 2012, BEACON was terminated early in response to the independent DMC’s recommendation to stop the trial for safetyconcerns. After the trial was terminated, analysis revealed that there was a small but significant imbalance in heart failure events of 5.0% on placebo and8.8% on active drug, but no statistical difference in mortality. The primary reason for the increase in heart failure events was fluid overload that occurred inthe first four weeks after randomization. Patients with fluid overload events who were treated with intravenous diuretics resolved their symptoms, and therewas no increase in risk for fluid overload, as compared to placebo, after the first four weeks of treatment.Further investigation, including additional preclinical studies, indicated that bardoxolone methyl modulates the endothelin pathway. In patients withStage 4 and 5 CKD caused by diabetes, the endothelin pathway is dysregulated and, under certain circumstances, activation of this pathway can put thesepatients at greater risk for fluid retention. Patients who have less compromised kidney function do not have dysregulation of this pathway, and their kidneysare able to excrete excess fluid. Similar fluid overload events had been observed previously in patients with late-stage CKD caused by diabetes treated withother therapies, including endothelin receptor antagonists (ERAs), which are vasodilating agents that are currently approved for the treatment of PAH. Thisreview of data from PAH trials prompted our interest in the applicability of the pharmacology of Nrf2 activators, particularly their mitochondrial and anti-inflammatory effects, to PAH. Post-hoc analysis from BEACON identified three major risk factors as predictors of fluid overload events: Stage 4 CKD caused by diabetes, priorhospitalization for heart failure, and baseline elevation in B-type natriuretic peptide (BNP), a clinical chemistry measure of fluid status. Bardoxolone methyl-treated patients that experienced heart failure events in BEACON had mean BNP values at baseline and before receiving study drug of approximately 550pg/mL. Normal BNP levels are 100 pg/mL, suggesting many of the patients with fluid overload were in heart failure prior to randomization. Patients withoutthese risk factors showed no imbalance in heart failure events or mortality, which is consistent with the Phase 2 trials conducted by us that primarily enrolledin patients with Stage 3 CKD caused by diabetes and did not show a risk of fluid overload. There were no other significant adverse safety findings from theBEACON trial, and patients in the treatment arm had fewer kidney and liver-related SAEs than patients in the placebo arm. Based on these findings, we resumed clinical development of bardoxolone methyl, excluding at-risk patients by using identified risk factors andclosely monitoring trial participants for signs and symptoms of fluid retention during the first few weeks after treatment initiation. Risk mitigation featureshave been implemented in all clinical trials of bardoxolone methyl in CKD patients including CARDINAL, our global Phase 2/3 study of patients withAlport syndrome, and PHOENIX, a study in patients with CKD due to FSGS, type 1 diabetes mellitus, IgA nephropathy, or ADPKD. Our partner, KHK,implemented risk mitigation features in TSUBAKI, their clinical study of bardoxolone methyl in patients with type 2 diabetes and Stage 3 and 4 CKD inJapan. We have also implemented risk mitigation procedures in CATALYST, our global Phase 3 study of patients with CTD-PAH, and LARIAT, our Phase 2study of patients with PAH. The risk mitigation strategies adopted for bardoxolone methyl and omaveloxolone are similar to those adopted by developers ofendothelin receptor antagonists. For example, the inclusion/exclusion criteria for trials studying AbbVie’s ERA atrasentan and Retrophin’s ERA/ARB drugsparsentan utilize a patient’s prior history of heart failure, current heart failure, and elevated BNP as key components of their exclusion criteria.To date, none of these studies have shown an increased risk for acute fluid overload AEs with bardoxolone methyl treatment. The absence of overtfluid overload or subclinical measures of heart failure, including meaningful increases in blood pressure, BNP, or body weight, in these studies support thatprospectively enrolling patients who are not at risk for heart failure may effectively mitigate the risk for acute heart failure with bardoxolone methylpreviously seen in patients with diabetes and late-stage CKD.Omaveloxolone for the Treatment of Neuromuscular DiseasesOur lead program in neuromuscular diseases is FA, which is currently in the registrational part 2 of a Phase 2 trial. Neuromuscular diseases arecommonly driven by impairment of mitochondrial function, due to the high energy demand of the nervous system. All13components of the neuromuscular system, including muscle, the neuromuscular junction, peripheral nerves, spinal cord, and the brain, can be affected. Thesediseases include ataxias, stroke, Parkinson's disease, multiple sclerosis, Huntington's disease, and many others. These diseases can strike as early as infancy,and symptoms can include poor growth, loss of muscle coordination, muscle weakness, visual problems, hearing problems, learning disabilities, neurologicalproblems, autonomic dysfunction, and dementia.Friedreich’s AtaxiaFA is an inherited, debilitating, and degenerative neuromuscular disorder, caused by a mutation in the frataxin gene, which is typically diagnosedduring adolescence, and can ultimately lead to early death. A mutation in the frataxin gene leads to impaired transcription and reduced expression of themitochondrial protein frataxin. Deficiency of frataxin in cells leads to a mitochondrial iron overload and poor cellular iron regulation, increased sensitivityto oxidative stress, and impaired mitochondrial ATP production. Impaired ATP production in FA patients likely accounts for the decreased coordination,progressive muscle weakness, exercise intolerance, and fatigue observed in these patients, as well as other disease manifestations. Patients with FAexperience progressive loss of coordination, muscle weakness, and fatigue, which commonly progresses to motor incapacitation and wheelchair reliance. FApatients may also experience visual impairment, hearing loss, diabetes, and cardiomyopathy. Childhood-onset FA can occur as early as age five, is more common than later-onset FA, and typically involves more rapid disease progression. MostFA patients have disease onset by approximately 13 to 15 years of age, and thereafter, have a mean duration until wheelchair use of 10 to 15 years. Themedian age of death is in the mid-30s. There are no currently approved therapies for the treatment of FA. Patients are usually given guidelines around certainlifestyle habits and are recommended to follow a diet that is low in iron and encouraged to take vitamins and supplements. Rationale for Omaveloxolone in Friedreich’s AtaxiaBecause impaired ATP production in FA patients likely accounts for the decreased coordination, progressive muscle weakness, exercise intolerance,and fatigue observed in these patients, as well as other disease manifestations, we believe that omaveloxolone may be effective in treating this indication. InFA patients, mitochondrial function is correlated with measures of neurologic function. Further, data demonstrate that Nrf2 signaling is significantlyimpaired in FA patients, resulting in impairment of antioxidant defense mechanisms, while silencing of frataxin gene expression has been linked to decreasesin expression of Nrf2. Additionally, omaveloxolone has been shown in vitro to restore mitochondrial activity in fibroblasts isolated from FApatients. Accordingly, we believe that Nrf2 activation through omaveloxolone may result in a clinical benefit to FA patients.Clinical Development for Omaveloxolone in FAWe are evaluating omaveloxolone in the MOXIe trial, a two-part international, multi-center, randomized, placebo-controlled, double-blind, dose-escalation, registrational Phase 2 trial to evaluate the safety and efficacy of omaveloxolone in patients with FA. All dose groups had small sample sizes andwere not powered to demonstrate statistical significance. Data from part 1 of the trial demonstrated that, the maximum effect on mFARS scores was observedat the 160 mg dose level, which was administered to a total of 12 patients, with a statistically significant improvement in mFARS scores of 3.8 points versusbaseline (p=0.0001) and of 2.3 points relative to placebo (approached statistical significance, p=0.06). We observed that omaveloxolone produced greaterimprovements in mFARS scores in patients that did not have a preexisting musculoskeletal foot deformity that causes high arched feet, called pes cavus, withthe maximum effect on mFARS scores at the 160 mg dose level, showing a statistically significant improvement at Week 12 of 6.0 points versus baseline(p<0.0001) and of 4.4 points relative to placebo (p=0.01). The observed improvement in mFARS scores at Week 12 for the 7 placebo patients without pescavus of 1.6 points was similar to that observed in all 17 placebo patients of 1.4 points. Data from the 160 mg dose are shown in the graph below. 14mFARS Improved with 160 mg DoseThe trial is being overseen by a data safety monitoring board (DSMB) that reviews all data, including SAE and AE data, on an unblinded basis toassess safety. No safety concerns were identified by the DSMB in part 1 of MOXIe and only two SAEs were reported, with both events occurring in placebo-treated patients. The most common AEs in excess to placebo in the omaveloxolone group were upper respiratory tract infections and nasopharyngitis, whichwere generally mild in severity. Omaveloxolone was reported to be well-tolerated with only a single discontinuation in a 40 mg patient who developed askin rash. One placebo patient discontinued prematurely due to withdrawal of consent.We are conducting part 2 of MOXIe, which will enroll approximately 100 FA patients randomized evenly to either 150 mg of omaveloxolone orplacebo. The primary endpoint of the trial is the change from baseline in mFARS score in patients treated with omaveloxolone compared to placebo at 48weeks. Additional endpoints will include the change from baseline in peak work during maximal exercise testing, Patient Global Impression of Change, andClinical Global Impression of Change. All patients who complete the treatment period are eligible to continue into an extension trial to evaluate theintermediate and long-term safety of omaveloxolone. Those patients who had been receiving placebo will be converted to omaveloxolone in the extensiontrial. The FDA has confirmed that mFARS is acceptable as the primary endpoint for part 2 of MOXIe and that it may consider either accelerated or fullapproval based on the overall results of the trial and strength of the data. We expect to complete MOXIe and have top-line data available in the second halfof 2019. We have received orphan drug designation from the FDA for omaveloxolone for the treatment of FA.We have observed no significant tolerability issues in MOXIe to date. The DSMB has not reported any safety concerns to date.Market Opportunity for Omaveloxolone in Friedreich’s AtaxiaFA is an ultra-orphan disease with a prevalence ranging from 0.7 to 5 per 100,000 in Caucasians globally. Based on literature and proprietary research,we believe there are approximately 22,000 people globally with FA, including 6,000 in the United States. Approximately 2,700 worldwide patients areidentified on the Friedreich’s Ataxia Research Alliance’s registry, including approximately 1,500 in the United States. Patients with FA are oftenundiagnosed or are misdiagnosed with a different cerebellar ataxia. However, we believe that if an effective treatment for FA is approved and marketed, morepatients will be genetically tested for and diagnosed with FA.15Omaveloxolone in Other Neuromuscular DiseasesIn addition to the MOXIe trial in FA, we recently conducted MOTOR, an exploratory, dose-escalation Phase 2 trial, evaluating the safety, efficacy,pharmacokinetics, and pharmacodynamics activity of omaveloxolone in patients with mitochondrial myopathies (MM), a multi-systemic group ofheterogenous myopathies that are caused by over 200 different genetic mutations. The sample size of six to ten patients randomized to omaveloxolone andtwo to three randomized to placebo at each dose level was based on a traditional dose-escalation design. The small number of patients at each dose was notexpected to fully characterize safety, efficacy, or pharmacodynamics, but rather to inform the DSMB and us of the appropriate dose to select for futurestudy. Omaveloxolone did not improve peak work or 6-minute walk distance versus placebo, which were the primary and secondary endpoints of thetrial. However, at the optimal dose of 160 mg, significant, placebo-corrected improvements were noted in Nrf2 biomarkers. Additionally, in the submaximalexercise test, which is a more sensitive assessment of mitochondrial function, a significant lowering of heart rate and blood lactate levels versus placebo wasobserved. At Week 12, patients treated with 160 mg of omaveloxolone demonstrated a placebo-corrected reduction in heart rate of 12.0 beats per minute(p=0.01) and blood lactate of 1.3 mM (p=0.04). The decrease in heart rate and lactate levels produced by omaveloxolone are indicative of improvedmitochondrial function and may be useful in determining the development path of omaveloxolone. The DSMB did not report any safety concerns in thetrial. We plan to continue evaluating data for omaveloxolone in our neuromuscular trials, as well as regulatory endpoints in the neuromuscular diseasespace, to determine our next steps in development. Bardoxolone Methyl for the Treatment of CTD-PAH and Other Pulmonary Hypertension DiseasesOur lead program in the pulmonary hypertension (PH) space is in CTD-PAH, which is currently in a Phase 3 trial called CATALYST. Mitochondrialdysfunction, inflammation, and proliferative signaling are common to the pathophysiology of many pulmonary hypertensive diseases. In addition, the anti-inflammatory and anti-fibrotic properties of bardoxolone methyl may be relevant to preventing remodeling of pulmonary vasculature and may lead to longerterm positive effects in the diseases. Pulmonary Arterial Hypertension Associated with Connective Tissue DiseasePAH results in a progressive increase in pulmonary vascular resistance, which ultimately leads to right ventricular heart failure and death. Female PAHpatients outnumber males by a factor of two to one, and the onset of PAH generally occurs between the ages of 40 and 60, with the average age of onset being53. CTD-PAH is a late and often fatal manifestation of many types of autoimmune disease, including systemic sclerosis (scleroderma), systemic lupuserythematosus, mixed connective tissue disease, and others. In comparison to patients with I-PAH, CTD-PAH patients are generally less responsive toexisting therapies, have a worse prognosis, and experience a higher occurrence of small vessel fibrosis and pulmonary veno-obstructive diseases. CTD-PAHrepresents approximately 30% of the overall PAH population and approximately 10-15% of patients with scleroderma or lupus erythematosus. In the UnitedStates, the five-year survival rate for CTD-PAH patients is approximately 44% compared to I-PAH patients, who have a 68% five-year survival rate, andscleroderma patients with CTD-PAH have a five-year survival rate of approximately 10%, compared to a five-year survival rate of 85% for sclerodermapatients without CTD-PAH.Three classes of drugs are currently used to treat all etiologies of PAH: ERAs, nitric oxide pathway modulators, and prostacyclins pathwayagonists. These agents are all systemic vasodilators that do not address the role of mitochondrial dysfunction and inflammation in PAH. Furthermore, theirsystemic hemodynamic effects can result in hypotension and syncope, or fainting, which generally limit their clinical effectiveness and can be exacerbatedby clinically significant drug-drug interactions when used in combination.Vasodilators approved for PAH also generally do not yield as significant functional improvements in CTD-PAH patients as I-PAH patients. A meta-analysis of 11 registrational trials comprised of more than 2,700 PAH patients published in the November 2015 issue of American Journal of Respiratory andCritical Care Medicine demonstrated that CTD-PAH patients benefit less from vasodilator therapies then I-PAH patients when measured by clinicalworsening and improvements in 6MWD, with a response in CTD-PAH patients (9.6 meters) of approximately one-third of the response in I-PAH patients (30meters).Clinical Development for Bardoxolone Methyl in Pulmonary Arterial Hypertension Associated with Connective Tissue DiseaseWe are conducting CATALYST, a multi-center, international, randomized, double-blind, placebo-controlled Phase 3 trial examining the safety andefficacy of bardoxolone methyl in patients with CTD-PAH when added to standard-of-care vasodilator therapy. Patients will be on up to two backgroundtherapies and will be randomized evenly to either bardoxolone methyl or placebo, and the study drug will be administered once daily for 24 weeks. Patientsrandomized to bardoxolone methyl will start at 5 mg and will dose-escalate to 10 mg at Week 4 unless contraindicated clinically. Based on discussion withthe FDA, the primary endpoint of the study is the change from baseline in 6MWD relative to placebo at Week 24. The trial will enroll between 130 and 200patients, and all patients who complete the treatment period are eligible to continue into an extension trial to evaluate the intermediate and long-term safetyof bardoxolone methyl. Those patients who had been receiving placebo will be converted to bardoxolone methyl in the extension trial. Data fromCATALYST are expected to be available during the second half of 2018. The final sample size will be determined by a pre-specified, blinded sample size re-calculation based on 6MWD variability and baseline characteristics. The timing of data release may change if the sample size increases. We have receivedorphan drug designation from the FDA for the treatment of PAH.16CATALYST was designed based on data from LARIAT. Based on findings in LARIAT, patients with moderate to severe anemia, which represent asmall percentage of the patient population, are being excluded from CATALYST because data demonstrated that treatment with iron supplementation orerythropoietin can affect 6MWD values independent of study drug effect. The primary endpoint in CATALYST, which will be analyzed using the mixed-model repeated measures (MMRM) statistical analysis method, is the placebo-corrected change in 6MWD from baseline to the end-of-treatment at 24weeks. As part of the planning to determine sample size for CATALYST, we performed an analysis applying the MMRM statistical analysis method forCATALYST to the available end-of-treatment change in 6MWD data from CTD-PAH patients in LARIAT. The summary of our analysis using the change atthe end of treatment period on all patients and patients without anemia is shown in the table below.End-of-Treatment 6MWD Changes for CTD-PAH Patients in LARIAT All Patients Patients Without Anemia TreatmentNChange from Baseline(m)Placebo-corrected (m)NChange fromBaseline (m)Placebo-corrected (m) Placebo79.8p=0.44—5-5.8p=0.68— Bardoxolone Methyl1538.2p<0.00128.4p=0.071442.7p<0.00148.5p=0.005CATALYST is designed to detect a minimum treatment effect of 12.5 meters versus placebo assuming a standard deviation of 50 meters. The observedtreatment effect in the LARIAT CTD-PAH subgroup analyses, both with and without the anemic patients included, is meaningfully larger than the minimallydetectable treatment effect in CATALYST.CATALYST is overseen by a DSMB that reviews all data, including SAE and AE data, on an unblinded basis to assess safety. The DSMB has notreported any safety concerns to date.Rationale for Bardoxolone Methyl in Pulmonary Arterial Hypertension Associated with Connective Tissue DiseaseBardoxolone methyl directly targets the bioenergetic and inflammatory components of PAH. PAH patients experience mitochondrial dysfunction,increased NF-kB activity, and related inflammatory pathways involved in ROS-mediated signaling, cellular proliferation, and fibrosis. Bardoxolone methyl,through the combined effect of Nrf2 activation and NF-kB suppression, has the potential to inhibit inflammatory and proliferative signaling, suppress ROSproduction and signaling, reduce the production of proteins related to fibrosis and tissue remodeling, and increase cellular respiration and ATPproduction. Bardoxolone methyl targets multiple cell types relevant to PAH, including endothelial cells, smooth muscle cells, andmacrophages. Additionally, unlike current therapies, bardoxolone methyl does not cause systemic hemodynamic effects or drug-drug interactions in PAHpatients. Therefore, by addressing a novel pathway in PAH, we believe that bardoxolone methyl may provide additional benefits beyond current PAHtherapies, including increased functional capacity, effects beyond functional improvements, broader applicability, and as a combination therapy.Market Opportunity for Bardoxolone Methyl in Pulmonary Arterial Hypertension Associated with Connective Tissue DiseaseWe believe there is significant opportunity for once-daily, orally administered bardoxolone methyl to address the PAH market currently served onlyby the existing vasodilator therapies. In 2015, global sales of approved PAH treatments were approximately $4.7 billion. In addition, recently approvedtreatments such as Opsumit® and Adempas® have shown rapid uptake in the PAH market and, based on industry reports, Opsumit® is projected to reachbetween $1 and $2 billion in annual sales within seven years from launch. Based on literature and proprietary research, we believe there are approximately12,000 CTD-PAH patients in the United States and 50,000 worldwide. Bardoxolone Methyl for the Treatment of Other Pulmonary Hypertension DiseasesIn addition to our Phase 3 trial in CTD-PAH, we are conducting LARIAT, an exploratory, dose-escalation Phase 2 trial evaluating the safety andefficacy of bardoxolone methyl in patients with PH due to interstitial lung disease (PH-ILD), including PH-ILD caused by sarcoidosis and idiopathicpulmonary fibrosis. PH-ILD is a set of serious progressive diseases that ultimately lead to right ventricular heart failure and death. There are no therapiescurrently approved for PH-ILD. While approved vasodilators are sometimes used off-label, given the degree of remodeling and fibrosis present in the lungtissue and vasculature of PH-ILD patients, they are minimally effective. Several current PAH therapies have been tested in PH-ILD patients and have resultedin little to no reproducible clinical improvement. 17The primary endpoint of LARIAT is the change in 6MWD during a 16 week treatment period. We have observed no significant tolerability issues inLARIAT to date. The trial utilizes a protocol safety review committee (PSRC) that reviews all data, including SAE and AE data, on an unblinded basis toassess safety. The PSRC has not reported any safety concerns to date, and top-line data are expected to be available in the first quarter of 2018.Other Clinical ProgramsIn addition to our three lead programs, we are currently exploring a battery of additional programs in diseases that may include meaningful expansionopportunities. Once we have received data on all of our earlier stage programs, we plan to evaluate all data to determine which indications to prioritize andmove forward.Omaveloxolone for the Treatment of MelanomaWe are evaluating omaveloxolone in the REVEAL trial, an open-label, multi-center, dose-escalation Phase 1b/2 trial to evaluate the safety,pharmacodynamics, and efficacy of omaveloxolone, in combination with existing immunotherapies in patients with unresectable or metastaticmelanoma. We completed enrollment of the trial and announced interim data from the Phase 1b portion of the trial, which showed an overall response rateobserved in REVEAL of 8/30 (27%, 6 partial responses and 2 complete responses). We have observed no significant tolerability issues in REVEAL to date.The REVEAL trial is being overseen by a PSRC that reviews all data, including SAE and AE data, to assess safety. The PSRC has not reported any safetyconcerns in the trial to date. We plan to complete our evaluation of data to determine next steps. RTA 901 for the Treatment of Orphan Neurological IndicationsWe have conducted a Phase 1 clinical trial to evaluate the safety, tolerability, and pharmacokinetic profile of RTA 901 in healthy adultvolunteers. The trial was designed in two parts, part 1 with single ascending doses and part 2 with multiple ascending doses. In part 1, 48 healthy subjectswere randomized in a 3:1 ratio to receive a single dose of RTA 901 or placebo, respectively. In part 2, 30 healthy subjects were randomized in a 4:1 ratio toreceive 14 daily doses of RTA 901 or placebo, respectively. We encountered no safety or tolerability issues, and observed an acceptable pharmacokineticprofile in the trial.Our Hsp90 modulators, including RTA 901, are highly potent and selective C-terminal modulators of Hsp90. Modulation of Hsp90 may induceexpression of Hsp70, a molecular chaperone that plays a critical role in the process through which a protein assumes its functional shape and that serves as acentral gatekeeper for mitochondrial protein import. Mitochondria rely on Hsp70-dependent protein import mechanisms for almost all of their activity,including the production of ATP. There are also indications that Hsp70 activation may play a profound role in neuroprotection since nerve cells are highconsumers of ATP and rely on Hsp70-dependent protein import for proper mitochondrial function. We have observed favorable activity of RTA 901 in arange of preclinical models of neurodegeneration and neuroprotection, including models of diabetic neuropathy, neural inflammation, and neuropathicpain. RTA 901, administered orally once-daily, has been observed to rescue existing nerve function, restore thermal and mechanical sensitivity, and improvenerve conductance velocity and mitochondrial function in rodent disease models.Preclinical ProgramsRORgT InhibitorsWe are pursuing preclinical development of novel, small-molecule, orally bioavailable RORgT inhibitors. RORgT is the master regulator of human THelper 17 (Th17), cellular differentiation, function, and cytokine production, and represents a compelling target for a variety of autoimmune andinflammatory conditions. Th17 cells produce cytokines, including IL-17, that play a critical role in driving immune-mediated inflammation and areimplicated in the pathogenesis of certain autoimmune diseases. The efficacy of suppressing IL-17 as a means of treating these conditions has beendemonstrated both in animal models and in humans. We have selected RTA 1701 to advance towards a Phase 1 clinical trial.Additional Nrf2 Activator IndicationsIf beneficial bioenergetic effects are demonstrated in our ongoing CKD caused by Alport syndrome, FA, and CTD-PAH trials, this could indicate thatour Nrf2 activator pharmacology may also provide therapeutic benefit for patients suffering from other diseases where mitochondrial dysfunction or chronicinflammation is implicated. In addition, if therapeutic benefits are demonstrated in CKD caused by Alport syndrome, the Nrf2 activator pharmacology mayalso provide therapeutic benefit in other kidney diseases. Some of these diseases may be treated by our current lead product candidates, bardoxolone methyland omaveloxolone.18Additional Hsp90 Modulator IndicationsIf beneficial neuroprotective and bioenergetic effects are demonstrated in our future Phase 2 trials, this could indicate that our Hsp90 modulatorpharmacology may also provide therapeutic benefit for patients suffering from other diseases where neurodegeneration and mitochondrial dysfunction areimplicated.CollaborationsKHK AgreementIn December 2009, we entered into an agreement with KHK, under which we provided KHK the right to develop and commercialize bardoxolonemethyl for renal, cardiovascular, diabetes, and certain related metabolic indications in Japan, China (including Hong Kong and Macao), South Korea,Taiwan, Thailand, Singapore, Philippines, Malaysia, Indonesia, Brunei, Vietnam, Laos, Myanmar, and Cambodia. These indications include, among others,CKD and PH.KHK is obligated to use commercially reasonable efforts to conduct all preclinical and clinical activities necessary for the commercialization oflicensed products in each country in the licensed territory. KHK is not participating in the development program for bardoxolone methyl in PH or other rarekidney diseases at this time but is reimbursing us the majority of the costs for our registrational trial in CKD caused by Alport syndrome in Japan. Under thisagreement, we are obligated to use commercially reasonable efforts to supply KHK with clinical supply of licensed product required for KHK’s developmentin the licensed territory, and we are obligated to negotiate and execute commercial supply agreements with KHK.Consideration under this agreement includes an upfront payment of $35 million, up to $97 million in development and regulatory milestonepayments, and up to $140 million in commercial milestone payments. Total consideration under this agreement could reach $272 million. The aggregateamount of such consideration received through December 31, 2017, totals $50 million. We expect to recognize $30 million in deferred revenue related to amilestone payment from KHK upon initiation of its Phase 3 trial in patients with type 2 diabetes and CKD in 2018. Additionally, KHK is required to pay usroyalties on net sales of licensed product sold by KHK, its affiliates, and sublicensees in its territory ranging from the low teens to the low 20 percent rangedepending on the country of sale and the amount of annual net sales.The KHK agreement will terminate automatically when the royalty term expires in all of KHK’s territory. A royalty term expires in a country on thelater of the expiration of all patents in such country and ten years after the first commercial sale in such country. Either party may terminate the agreementupon the other party’s bankruptcy or insolvency or uncured material breach. Additionally, KHK may terminate the agreement at will upon advance writtennotice. In the event of any termination of the agreement by us for KHK’s uncured breach, bankruptcy or insolvency or by KHK at will, KHK will transfer andassign to us the regulatory filings for bardoxolone methyl and will license to us the relevant trademarks used with the products in their respective territories.AbbVie License AgreementIn September 2010, we entered into a license agreement with AbbVie, under which we provided AbbVie, formerly known as Abbott PharmaceuticalsPR Ltd., the exclusive right to conduct all regulatory activities, including obtaining regulatory approval, and commercialization of bardoxolone methyl orother molecules for renal, metabolic, and cardiovascular indications, including CKD and PH, in all other countries outside the United States not previouslylicensed to KHK under the KHK agreement. Under this agreement we retain the right to commercialize bardoxolone methyl in the United States. Also, bothparties are obligated to use commercially reasonable efforts to develop bardoxolone methyl in accordance with agreed upon development plans.Under this agreement, AbbVie is required to pay us consideration in the form of an upfront payment and development and commercial milestonepayments. For each of the three licensed indications under this agreement, we are eligible to receive up to either $300 million or $350 million indevelopment, regulatory and commercial milestone payments depending on the licensed indication and the number of compounds to achieve suchmilestones, however, these payments may only be made once per molecule developed. The aggregate amount of such consideration received throughDecember 31, 2017 totaled $300 million, with a potential $50 million milestone related to commercial sales remaining. Additionally, AbbVie is required topay us, under the AbbVie license agreement, tiered royalties on net sales of licensed product sold by AbbVie, its affiliates and sublicensees in its territoryranging from 15 percent to the high 20 percent range depending on the amount of annual net sales.At present, AbbVie has exercised their opt-out right with regard to CTD-PAH and PH-ILD and has not opted in to the development program in CKDcaused by Alport syndrome or other rare kidney diseases, and therefore is not co-funding our development programs in these indications. AbbVie has theright to opt-in to these programs at any time during development. Upon opting-in, AbbVie would be required to pay an agreed upon amount of alldevelopment costs accumulated up to the point of exercising their opt-in right. All development costs incurred after AbbVie’s opt-in would be split equally.The AbbVie license agreement will terminate automatically when the royalty term expires in all countries in AbbVie’s territory. The royalty termexpires in a country on the later to occur of (i) the expiration of all patents and regulatory exclusivity, unless prior to such19expirations generic sales have exceeded a certain percentage of all sales in a quarter, and (ii) ten years after the first commercial sale. Either party mayterminate the agreement in its entirety for bankruptcy or insolvency of the other party and in its entirety or with respect to specific territories for an uncuredmaterial breach by the other party, and AbbVie may terminate the agreement in its entirety for specified reasons for cause and in its entirety or with respect tospecified territories at will upon advance written notice. In the event of any termination of the agreement by us for AbbVie’s breach or by AbbVie for causeor at will, AbbVie will license to us certain intellectual property rights to develop, manufacture and commercialize bardoxolone methyl, transfer and assign tous the regulatory filings for bardoxolone methyl and will assign or license us the relevant trademarks used with the products in their respectiveterritories. Under certain terminations under the AbbVie license agreement, we are also obligated to pay reverse royalties on net sales of bardoxolone methylin the terminated territory.AbbVie Collaboration AgreementIn December 2011, we entered into a collaboration agreement with AbbVie under which we provided AbbVie the right to jointly research, develop,and commercialize all second- and later-generation Nrf2 activators for all indications other than renal, cardiovascular, and metabolic indications. This is amulti-molecule, multi-product collaboration across all indications, other than renal, cardiovascular, and metabolic indications that are covered in ourbardoxolone methyl license agreement with AbbVie and our agreement with KHK. Pursuant to the AbbVie collaboration agreement, the parties have agreedto spend up to a certain amount in early development costs which include research, preclinical development and clinical development, with us paying 100%of a certain amount of such costs and the remaining costs being shared equally. For jointly developed products, all other worldwide costs are split equallyand worldwide profits are also split equally except for any product designated for an indication for which Humira®, a drug marketed and sold by AbbVie, hasreceived regulatory approval in the United States, the European Union, or Japan, in which case the costs and profits will be assumed 70% by AbbVie and30% by us. Multiple indications can be developed for a single molecule subject to certain limitations. Upon conclusion of a Phase 2 trial for a givenmolecule in a given indication, either party may nominate the molecule as a product candidate, as defined in the agreement specifying the lead indication toadvance for a given molecule.Jointly developed products are developed under agreed development plans and budgets and both parties are obligated to use commercially reasonableefforts to perform their respective obligations under such plans. With respect to omaveloxolone, we are the lead development party and the lead regulatoryparty globally. Manufacturing responsibilities during development are allocated between the parties pursuant to the agreed development plans. AbbVie willserve as the lead manufacturing party for commercial supply in all jointly developed omaveloxolone indications.With respect to joint development, commercialization territory rights are divided on a molecule-by-molecule basis. We have the primary right tocommercialize omaveloxolone in the United States, and AbbVie has the primary right to commercialize omaveloxolone in the rest of world, with exclusivecommercialization rights in Japan. For subsequent product candidates, we retain the rights to at least one major market, although the first choice alternatesbetween the collaboration parties as each new molecule is commercialized.Products may be unilaterally developed by a party with the other party being entitled to opt-out of, and back into, development cost sharing and profitsharing at various stages of development. The developer would serve as the lead development, regulatory, and manufacturing party. The developer has theright to commercialize in all territories and must pay a royalty to the nonparticipating party ranging from the low single digits to 20%, depending principallyon what stage of development, if any, was funded by the nonparticipating party. In September 2016, we and AbbVie mutually agreed that we would continueunilateral development of omaveloxolone. Therefore, AbbVie no longer co-funds the exploratory development costs of this program, but retains the right toopt back in at certain points in development. Depending upon what point, if any, AbbVie opts back into development, AbbVie may retain its right tocommercialize a product outside the United States, or we may be responsible for commercializing the product on a worldwide basis. Upon opting back in,AbbVie would be required to pay an agreed upon amount of all development costs accumulated up to the point of exercising their opt-in right, after whichdevelopment costs incurred and product revenue worldwide would be split equally.The AbbVie collaboration agreement will continue in effect until both parties mutually agree to terminate the agreement. Upon any uncured materialbreach under the AbbVie collaboration agreement with respect to a joint product, the non-breaching party will have the right to continue development ofsuch product at its own cost and maintain all profits from such product unless the breaching party opts-in to continue development and pays a specified opt-in payment.Payments to us under this agreement include a $400 million upfront payment that was received upon execution of the AbbVie collaborationagreement, $1.4 million in shared development costs prior to our continuing development of omaveloxolone unilaterally, and potential future paymentsincluding development cost reimbursement, profit share, and royalty payments.CompetitionBardoxolone Methyl in Chronic Kidney Disease Caused by Alport SyndromeIf bardoxolone methyl is approved for the treatment of patients with CKD caused by Alport syndrome, it will likely be the first treatment on the marketfor the indication. At least one therapy for the treatment of Alport syndrome is currently in clinical development with a Phase 2 injectable product candidate,RG-012, from Regulus Therapeutics.20Omaveloxolone in Friedreich’s AtaxiaIf omaveloxolone is approved for the treatment of FA, it has the potential to be the first treatment on the market for this indication, but it currentlyfaces pipeline competition. Pipeline competition for this orphan disease results in competition for patient recruitment as well as investigators’ time andresources. Several competitor product candidates are in Phase 1 or 2 clinical development for FA, including TAK831, epicatechin, RT001, and JOT101 fromTakeda Pharmaceutical Company Limited, Cardero Therapeutics Inc., Retrotope Inc., and Jupiter Orphan Therapeutics, Inc., respectively. Bardoxolone Methyl in Pulmonary Arterial Hypertension Associated with Connective Tissue DiseaseIf bardoxolone methyl is approved for the treatment of patients with PAH for use in conjunction with currently approved therapies, such as ERAs,prostacyclins, and phosphodiesterase type 5 (PDE5), inhibitors, it will face competition with those current treatments such as macitentan, marketed byActelion Pharmaceuticals US, Inc. (Actelion) as Opsumit®; riociguat, marketed by Bayer AG (Bayer) as Adempas®; oral treprostinil, marketed by UnitedTherapeutics Corporation as Orenitram™; ambrisentan, marketed by Gilead Sciences, Inc. (Gilead) as Letairis®; selexipag, marketed by Actelion as Uptravi®;and bosentan, marketed by Actelion as Tracleer®. Patients with PAH frequently use more than one therapy; however, we may face competition for patients’willingness and resources to add another clinical therapy.We may also face competition from potential new therapies in development. For example, Arena Pharmaceuticals, Inc., Gilead, Bial-Portela & Ca., SA,and Karos Pharmaceuticals, Inc. are actively developing compounds that are attempting to address a problem outside of vasodilation and are to be used orallow use in combination with existing treatments. Their products appear to be in early clinical development. We consider these our most direct competitors.Manufacture and SupplyWe have historically relied on multiple third-party manufacturers and on our collaborators for the manufacture of our product candidates forpreclinical and clinical testing, as well as for commercial manufacture if our product candidates receive marketing approval. Under unilateral development ofour product candidates, we are responsible for manufacturing, and we expect to continue to rely on multiple third-party manufacturers. We believe there aremultiple sources for all of the materials required for the manufacture of our product candidates. Our manufacturing strategy enables us to more efficientlydirect financial resources to the research, development, and commercialization of product candidates rather than diverting resources to internally developmanufacturing facilities. As our product candidates advance through development, we expect to enter into longer-term commercial supply agreements withkey suppliers and manufacturers to fulfill and secure the ongoing and planned preclinical, clinical, and, if our product candidates are approved for marketing,our commercial supply needs for ourselves and our collaborators.Sales and MarketingWe currently intend to build the commercial infrastructure in the United States necessary to effectively support the commercialization of all of ourproduct candidates if and when we believe regulatory approval of the first of such product candidates in the United States appears imminent. Commercialinfrastructure for orphan products typically consists of a targeted, specialty sales force that calls on a limited and focused group of physicians supported bysales management, medical liaisons, internal sales support, an internal marketing group, and distribution support. One challenge unique to commercializingtherapies for rare diseases is the difficulty in identifying eligible patients due to the very small and sometimes heterogeneous disease populations. Ourmanagement team is experienced in maximizing patient identification for both clinical development and commercialization purposes in rare diseases.Additional capabilities important to the orphan marketplace include the management of key accounts such as managed care organizations, group-purchasing organizations, specialty pharmacies, and government accounts. To develop the appropriate commercial infrastructure, we will have to investsignificant amounts of financial and management resources, some of which will be committed prior to any confirmation that any of our product candidateswill be approved.Outside of the United States, where appropriate and depending on the terms of our contractual arrangements, we plan, either alone, with our strategiccollaborators AbbVie and KHK, or with new collaboration partners, to assist in the commercialization of our products. In certain instances, we may considerbuilding our own commercial infrastructure.Government RegulationThe clinical testing, manufacturing, labeling, storage, distribution, record keeping, advertising, promotion, import, export, and marketing, among otherthings, of our product candidates are subject to extensive regulation by governmental authorities in the United States and other countries. The process ofobtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local, and foreign statutes and regulations require theexpenditure of substantial time and financial resources. Failure to comply with the applicable requirements at any time during the product developmentprocess, approval process, or after approval may subject an applicant and sponsor to a variety of administrative or judicial sanctions, including refusal by theapplicable regulatory authority to approve pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters andother types of letters, product recalls, product seizures, total or partial21suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement of profits, or civil or criminalinvestigations and penalties brought by the FDA and the Department of Justice or other governmental entities.United States Product Approval ProcessIn the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act. Pharmaceutical products are also subject to regulationby other governmental agencies, such as the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and HumanServices, the Consumer Product Safety Commission, the Environmental Protection Agency, and the Department of Justice. The steps required before a drugmay be approved for marketing in the United States generally include: •Preclinical laboratory tests and animal tests conducted under good laboratory practices (GLPs); •The submission to the FDA of an investigational new drug (IND) application for human clinical testing, which must become effective before anyhuman clinical trial commences; •Approval by an independent institutional review board (IRB), or ethics committee representing each clinical site before each clinical trial maybe initiated; •Adequate and well-controlled human clinical trials to establish the safety and efficacy of the product and conducted in accordance with GoodClinical Practices (GCPs); •The submission to the FDA of an NDA for the applicable small molecule drug product; •FDA acceptance, review, and approval of the NDA (including the product labeling and package insert); and •Satisfactory completion of an FDA inspection of the manufacturing facilities at which the product is made to assess compliance with currentGood Manufacturing Practices (CGMPs).The testing and approval process requires substantial time, effort, and financial resources, and the receipt and timing of any approval is uncertain.Preclinical studies include laboratory evaluations and animal studies to assess the potential safety and efficacy of the product candidate. Preclinicalstudies must be conducted in compliance with FDA regulations regarding GLPs. The results of the preclinical studies, together with manufacturinginformation and analytical data, are submitted to the FDA as part of the IND, which includes a protocol detailing, among other things, the objectives of theclinical trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated if the clinical trial lends itself to an efficacydetermination. The IND will become effective automatically 30 days after receipt by the FDA, unless the FDA raises concerns or questions about the conductof the studies as outlined in the IND prior to that time. In this case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trialscan proceed. The IND must become effective before clinical trials may be commenced.Clinical trials involve the administration of the product candidates to healthy human volunteers or patients with the disease to be treated under thesupervision of a qualified principal investigator. Clinical trials must be conducted under the supervision of one or more qualified principal investigators inaccordance with GCPs, which include the requirement that all research subjects provide their informed consent for their participation in any clinical trial, andin accordance with protocols detailing the objectives of the applicable phase of the trial, dosing procedures, research subject selection and exclusion criteria,and the safety and effectiveness criteria to be evaluated. Progress reports detailing the status of clinical trials must be submitted to the FDAannually. Sponsors must also report in a timely manner to the FDA SAEs and unexpected AEs, any clinically important increase in the rate of serioussuspected adverse events over that listed in the protocol or investigator’s brochure, or any findings from other studies or tests that suggest a significant risk inhumans exposed to the product candidate. Further, the protocol for each clinical trial must be reviewed and approved by an IRB, either centrally orindividually at each institution at which the clinical trial will be conducted. The IRB will consider, among other things, ethical factors, and the safety ofhuman subjects and the possible liability of the institution.Clinical trials are typically conducted in three sequential phases prior to approval, but the phases may overlap or be combined and different studiesmay be initiated with the same drug candidate within the same phase of development in similar or different patient populations. These phases generallyinclude the following:Phase 1. Phase 1 clinical trials represent the initial introduction of a product candidate into human subjects, frequently healthy volunteers. InPhase 1, the product candidate is usually tested for pharmacodynamics and pharmacokinetic properties such as safety (including adverse effects),dosage tolerability, absorption, distribution, metabolism, and excretion.Phase 2. Phase 2 clinical trials usually involve a limited patient population to (1) preliminarily evaluate the efficacy of the product candidatefor specific indications, (2) determine dosage tolerability and optimal dosage, and (3) identify possible adverse effects and safety risks.22Phase 3. If a product candidate is found to be potentially effective and to have an acceptable safety profile in Phase 2 trials, the clinical trialprogram may be expanded to Phase 3 clinical trials to further evaluate clinical efficacy, optimal dosage, and safety within an expanded patientpopulation at geographically dispersed clinical trial sites.Phase 4. Phase 4 clinical trials may be conducted after approval to gain additional experience from the treatment of patients in the intendedtherapeutic indication and to document a clinical benefit in the case of drugs approved under accelerated approval regulations, or when otherwiserequested by the FDA in the form of post-market requirements or commitments. Failure to promptly conduct any required Phase 4 clinical trials couldresult in withdrawal of approval.Pursuant to the 21st Century Cures Act, the manufacturer of an investigational drug in a Phase 2 or Phase 3 clinical trial for a serious or life-threateningdisease is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for expanded access.A pivotal trial is an adequate and well-controlled clinical trial that permits FDA to evaluate the overall benefit-risk relationship of the drug and toprovide adequate information for labeling of the drug. In most cases FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate theefficacy of the drug. A single Phase 3 trial with other confirmatory evidence may be sufficient in rare instances where the trial is a large multicenter trialdemonstrating internal consistency and a statistically very persuasive finding of a clinically meaningful effect on mortality, irreversible morbidity, orprevention of a disease with a potentially serious outcome and confirmation of the result in a second trial would be practically or ethically impossible. TheFDA may accept results from Phase 2 trials as pivotal if the trial design provides a well-controlled and reliable assessment of clinical benefit, particularly insituations where there is an unmet medical need and the results are sufficiently robust.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 theresearch subjects are being exposed to an unacceptable health risk. Additionally, some clinical trials are overseen by an independent group of qualifiedexperts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group determines whether or not a trial may moveforward at designated check points based on access to certain data from the trial. A clinical trial sponsor may also suspend or terminate a clinical trial basedon evolving business objectives or competitive climate.The clinical trial process can take three to ten years or more to complete, and there can be no assurance that the data collected will support FDAapproval or licensure of the product.The results of preclinical studies and clinical trials, together with detailed information on the manufacture, composition, and quality of the productcandidate, are submitted to the FDA in the form of an NDA requesting approval to market the product. The application must be accompanied by a significantuser fee payment, currently $2.4 million for fiscal year 2018. The FDA has substantial discretion in the approval process and may refuse to accept anyapplication or decide that the data are insufficient for approval and require additional preclinical, clinical, or other studies.Review of ApplicationOnce the NDA submission has been accepted for filing, which occurs, if at all, 60 days after submission, the FDA informs the applicant of the specificdate by which the FDA intends to complete its review. This is typically 12 months from the date of submission. The review process is often extended by theFDA as a result of submission of additional information, sometimes at the FDA’s request, during the review. The FDA reviews NDAs to determine, amongother things, whether the proposed product is safe and effective for its intended use and whether the product is being manufactured in accordance with CGMPto assure and preserve the product’s identity, strength, quality, and purity. Before approving an NDA, the FDA may inspect the facilities at which the productis manufactured and will not approve the product unless the manufacturing facility complies with CGMPs. The FDA will also inspect clinical trial sites forintegrity of data supporting safety and efficacy. During the approval process, the FDA also will determine whether a Risk Evaluation and Mitigation Strategy(REMS) is necessary to assure the safe use of the product. If the FDA concludes a REMS is needed, the sponsor of the application must submit a proposedREMS; the FDA will not approve the application without an approved REMS, if required. A REMS can substantially increase the costs of obtainingapproval. The FDA may also convene an advisory committee of external experts to provide input on certain review issues relating to risk, benefit, andinterpretation of clinical trial data. The FDA may delay approval of an NDA if applicable regulatory criteria are not satisfied or the FDA requires additionaltesting or information. The FDA may require post-marketing testing and surveillance to monitor safety or efficacy of a product. The FDA will issue either anapproval of the NDA or a Complete Response Letter detailing the deficiencies and information required for reconsideration of the application.Disclosure of Clinical Trial InformationSponsors of clinical trials of FDA regulated products are required to register and disclose certain clinical trial information. Information related to theproduct, patient population, phase of investigation, trial sites and investigators, and other aspects of the clinical trial is then made public as part of theregistration. Sponsors are also obligated to discuss the results of their clinical trials after completion. Disclosure of the results of these trials can be delayedin certain circumstances for up to two years after the date of completion of the trial. Competitors may use this publicly available information to gainknowledge regarding the progress of development programs.23The Orphan Drug ActUnder the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition—generally a disease orcondition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an NDA. After theFDA grants orphan drug designation, the generic identity of the drug and its potential orphan use are disclosed publicly by the FDA. Orphan drugdesignation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. The first NDA applicant to receiveFDA approval for a particular active ingredient to treat a particular disease with FDA orphan drug designation is entitled to a seven-year exclusive marketingperiod in the United States for that product, for that indication. During the seven-year exclusivity period, the FDA may not approve any other applications tomarket the same drug for the same disease, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drugexclusivity. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition, or the same drug for adifferent disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA applicationuser fee.Pediatric Exclusivity and Pediatric UseUnder the Best Pharmaceuticals for Children Act, certain drugs may obtain an additional six months of exclusivity in an indication, if the sponsorsubmits information requested in writing by the FDA in what is known as a Written Request, relating to the use of the active moiety of the drug inchildren. The FDA may not issue a Written Request for studies on unapproved or approved indications where it determines that information relating to theuse of a drug in a pediatric population, or part of the pediatric population, may not produce health benefits in that population.To receive the six-month pediatric market exclusivity, a sponsor would have to receive a Written Request from the FDA and conduct the requestedstudies in accordance with a written agreement with the FDA. If there is no written agreement, studies would be conducted in accordance with commonlyaccepted scientific principles, and reports submitted of those studies. A Written Request may include studies for indications that are not currently in thelabeling if the FDA determines that such information will benefit the public health. The FDA will accept the reports upon its determination that the studieswere conducted in accordance with and are responsive to the original Written Request, agreement, or commonly accepted scientific principles, as appropriate,and that the reports comply with the FDA’s filing requirements.In addition, the Pediatric Research Equity Act (PREA), requires a sponsor to conduct pediatric studies for most drugs, for a new active ingredient, newindication, new dosage form, new dosing regimen, or new route of administration. Under PREA, original NDAs and supplements thereto must contain apediatric assessment unless the sponsor has received a deferral or waiver. The required assessment must include the evaluation of the safety and effectivenessof the product for the claimed indications in all relevant pediatric subpopulations and support dosing and administration for each pediatric subpopulation forwhich the product is safe and effective. The FDA, on its own initiative or at the request of the sponsor, may defer pediatric trial requirements for some or all ofthe pediatric subpopulations. A deferral may be granted by the FDA if it believes that additional safety or effectiveness data in the adult population need tobe collected before the pediatric studies begin. The FDA must send a non-compliance letter to any sponsor that fails to submit the required assessment, keepa deferral current, or fails to submit a request for approval of a pediatric formulation.Breakthrough Therapy DesignationThe FDA is required to expedite the development and review of the application for approval of drugs that are intended to treat a serious or life-threatening disease or condition where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existingtherapies on one or more clinically significant endpoints. Under the breakthrough therapy program, the sponsor of a new drug candidate may request that theFDA designate the drug candidate for a specific indication as a breakthrough therapy concurrent with, or after, the filing of the IND for the drugcandidate. The FDA must determine if the drug candidate qualifies for breakthrough therapy designation within 60 days of receipt of the sponsor’s request.Expedited Review and Accelerated Approval ProgramsA sponsor may seek approval of its product candidate under programs designed to accelerate the FDA’s review and approval of NDAs. For example,Fast Track Designation may be granted to a drug intended for treatment of a serious or life-threatening disease or condition that has potential to addressunmet medical needs for the disease or condition. The key benefits of fast track designation are rolling review (submission of portions of an applicationbefore the complete marketing application is submitted), and accelerated approval or approval on the basis of a surrogate endpoint, if relevant criteria aremet.Under the accelerated approval program, the FDA may approve an NDA on the basis of either a surrogate endpoint that is reasonably likely to predictclinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect onirreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lackof alternative treatments. Post-marketing studies or completion of ongoing studies after marketing approval are generally required to verify the drug’sclinical benefit in relationship to the surrogate endpoint or ultimate outcome in relationship to the clinical benefit.24Based on results of the Phase 3 clinical trial(s) submitted in an NDA, upon the request of an applicant, the FDA may grant the NDA a priority reviewdesignation, which sets the target date for FDA action on the application at eight months after the NDA submission. Priority review is granted where there isevidence that the proposed product would be a significant improvement in the safety or effectiveness of the treatment, diagnosis, or prevention of a seriouscondition. If criteria are not met for priority review, the application is subject to the standard FDA review period of twelve months after NDAsubmission. Priority review designation does not change the scientific/medical standard for approval or the quality of evidence necessary to supportapproval.Post-Approval RequirementsEven after approval, drugs manufactured or distributed pursuant to FDA approvals are subject to continuous regulation by the FDA, including, amongother things, requirements relating to recordkeeping, periodic reporting, product distribution, advertising and promotion, and reporting of adverseexperiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject toprior FDA review and approval. There also are continuing annual user fee requirements for any marketed products and the establishments at which suchproducts are manufactured, as well as new application fees for supplemental applications with clinical data.The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness aftercommercialization.In addition, entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and stateagencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with CGMP requirements. Changes to themanufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation andcorrection of any deviations from CGMP and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that thesponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control tomaintain CGMP compliance.Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or ifproblems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including AEs of unanticipatedseverity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may also result in revisions to the approvedlabeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or otherrestrictions under a REMS program. Other potential consequences include, among other things: •Restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market, or voluntary productrecalls; •Fines, untitled and warning letters, or holds on post-approval clinical trials; •Refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product license approvals; •Product seizure or detention, or refusal to permit the import or export of products; and •Injunctions or the imposition of civil or criminal penalties.The FDA strictly regulates marketing, labeling, advertising, and promotion of drug products that are placed on the market. Drugs may be promotedonly for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws andregulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significantliability.Prescription Drug Marketing Act and Drug Supply Chain Security ActThe distribution of pharmaceutical products is subject to the Prescription Drug Marketing Act (PDMA), which regulates the distribution of drugs anddrug samples at the federal level and sets minimum standards for the registration and regulation of drug distributors at the state level. Under the PDMA andstate law, states require the registration of manufacturers and distributors who provide pharmaceuticals in that state, including in certain states manufacturersand distributors that ship pharmaceuticals into the state even if such manufacturers or distributors have no place of business within the state. The PDMA andstate laws impose requirements and limitations upon drug sampling to ensure accountability in the distribution of samples. The PDMA sets forth civil andcriminal penalties for violations of these and other provisions.The federal Drug Supply Chain Security Act (DSCSA), signed in to law on November 27, 2013, imposes new obligations on manufacturers ofpharmaceutical products, among others, related to product tracking and tracing, identification, verification, and other elements. Among the requirements ofthis federal legislation, manufacturers will be required to provide certain information regarding the drug25product to individuals and entities to which product ownership is transferred, label drug product with a product identifier (i.e., serialization) in order toestablish an electronic interoperable prescription product system to identify and trace certain prescription drugs distributed in the United States, and keepcertain records regarding the drug product. Further, under this legislation, manufacturers will have drug product investigation, quarantine, disposition, andnotification responsibilities related to counterfeit, diverted, stolen, and intentionally adulterated products, as well as products that are the subject offraudulent transactions or which are otherwise unfit for distribution such that they would be reasonably likely to result in serious health consequences ordeath. These requirements are being phased in over a ten-year period. The DSCSA replaced the prior drug “pedigree” requirements under the PDMA, andpreempts existing state drug pedigree laws and regulations. The DSCSA also establishes new requirements for the licensing of wholesale distributors andthird-party logistic providers. These licensing requirements preempt states from imposing licensing requirements that are inconsistent with, less stringentthan, directly related to, or otherwise encompassed by standards established by FDA pursuant to the DSCSA. Until FDA promulgates regulations to addressthe DSCSA’s new national licensing standard, current state licensing requirements typically remain in effect.Federal and State Fraud and Abuse and Data Privacy and Security and Transparency Laws and RegulationsIn addition to FDA restrictions on marketing of pharmaceutical products, federal and state healthcare laws and regulations restrict certain businesspractices in the biopharmaceutical industry. These laws include, but are not limited to, anti-kickback, false claims, data privacy and security, andtransparency statutes and regulations.The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration,directly or indirectly, to induce, or in return for, purchasing, leasing, ordering, or arranging for the purchase, lease, or order of any good, facility, item, orservice reimbursable under Medicare, Medicaid, or other federal healthcare programs. The term “remuneration” has been broadly interpreted to includeanything of value, including, for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers ofpayment, ownership interests, and providing anything at less than its fair market value. The federal Anti-Kickback Statute has been interpreted to apply tocertain arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on the other. Although thereare a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors aredrawn narrowly, and our practices may not in all cases meet all of the criteria for a statutory exception or safe harbor protection. Practices that involveremuneration that may be alleged to be intended to induce prescribing, purchases, or recommendations may be subject to scrutiny if they do not qualify foran exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make theconduct per se illegal under the federal Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on acumulative review of all of its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of anarrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The intent standard under thefederal Anti-Kickback Statute was amended by the Patient Protection and Affordable Care Act as amended by the Health Care and Education ReconciliationAct of 2010 (collectively, the PPACA) to a lower intent standard such that a person or entity no longer needs to have actual knowledge of this statute or thespecific intent to violate it to have committed a violation. In addition, the PPACA codified case law that a claim including items or services resulting from aviolation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act (discussed below). Further,civil monetary penalties statutes impose penalties against any person or entity who, among other things, is determined to have presented or caused to bepresented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false orfraudulent.The federal false claims laws, including the federal civil False Claims Act, prohibit, among other things, any person or entity from knowinglypresenting, or causing to be presented, a false or fraudulent claim for payment or approval to the federal government or knowingly making, using, or causingto be made or used a false record or statement material to a false or fraudulent claim to the federal government. As a result of a modification made by theFraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property presented to the U.S. government. Recently,several pharmaceutical and other healthcare companies have been prosecuted under these laws for, among other things, allegedly providing free product tocustomers with the expectation that the customers would bill federal healthcare programs for the product. Other pharmaceutical companies have beenprosecuted for causing false claims to be submitted because of the companies’ marketing of the product for unapproved, and thus non-reimbursable,uses. The federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), created additional federal criminal statutes that prohibit, amongother actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-partypayers and knowingly and willfully falsifying, concealing, or covering up a material fact, or making any materially false, fictitious, or fraudulent statement inconnection with the delivery of, or payment for, healthcare benefits, items, or services. Like the federal Anti-Kickback Statute, the PPACA amended theintent standard for certain healthcare fraud statutes under HIPAA such that a person or entity no longer needs to have actual knowledge of the statute orspecific intent to violate it in order to have committed a violation.In addition, we may be subject to data privacy and security regulation by both the federal government and the states in which we conduct ourbusiness. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH), and its implementing regulations,imposes certain requirements on certain types of entities relating to the privacy, security, and transmission of individually identifiable healthinformation. Among other things, HITECH made HIPAA’s security standards directly applicable to business associates—independent contractors or agentsof covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH alsocreated four new tiers of civil monetary penalties, amended HIPAA to make26civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages orinjunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition,state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and maynot have the same effect, thus complicating compliance efforts.Additionally, the federal Physician Payments Sunshine Act within the PPACA, and its implementing regulations, require that certain manufacturers ofdrugs, devices, biologicals, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program (withcertain exceptions) annually report information to the Centers for Medicare and Medicaid Services (CMS), related to certain payments or other transfers ofvalue made or distributed to physicians and teaching hospitals, or to entities or individuals at the request of, or designated on behalf of, the physicians andteaching hospitals and certain ownership and investment interests held by physicians and their immediate family members.Also, many states have similar healthcare statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs,or, in several states, apply regardless of the payer. Some states require the posting of information relating to clinical trials. Other states require the reportingof expenses relating to the marketing and promotion of drug products and the reporting of gifts and payments to individual healthcare practitioners in thesestates. Other states prohibit various marketing-related activities, such as the provision of certain kinds of gifts or meals. Still other states require the reportingof certain pricing information, including information pertaining to and justification of price increases, or prohibit prescription drug price gouging. Inaddition, states such as California, Connecticut, Nevada, and Massachusetts require pharmaceutical companies to implement compliance programs and/ormarketing codes. If our operations are found to be in violation of any of the health regulatory laws described above or any other laws that apply to us, we maybe subject to penalties, including potentially significant criminal, civil, and administrative penalties, damages, fines, disgorgement, individualimprisonment, exclusion of products from reimbursement under government programs, contractual damages, reputational harm, administrative burdens,diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate ourbusiness and our results of operations. To the extent that any of our products will be sold in a foreign country, we may be subject to similar foreign laws andregulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, andimplementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals.Pharmaceutical Coverage, Pricing, and ReimbursementIn both domestic and foreign markets, our sales of any approved products will depend in part on the availability of coverage and adequatereimbursement from third-party payers. Third-party payers include government health administrative authorities, managed care providers, private healthinsurers, and other organizations. Patients who are prescribed treatments for their conditions and providers performing the prescribed services generally relyon third-party payers to reimburse all or part of the associated healthcare costs.Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of ourproducts. Sales of our products will therefore depend substantially, both domestically and abroad, on the extent to which the costs of our products will bepaid by third-party payers. These third-party payers are increasingly focused on containing healthcare costs by challenging the price and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the coverage and reimbursement status of newly approvedhealthcare product candidates. The market for our products and product candidates for which we may receive regulatory approval will depend significantlyon access to third-party payers’ drug formularies, or lists of medications for which third-party payers provide coverage and reimbursement. The industrycompetition to be included in such formularies often leads to downward pricing pressures on pharmaceutical companies. Also, third-party payers may refuseto include a particular branded drug in their formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or otheralternative is available.Because each third-party payer individually approves coverage and reimbursement levels, obtaining coverage and adequate reimbursement is a time-consuming, costly, and sometimes unpredictable process. We may be required to provide scientific and clinical support for the use of any product to eachthird-party payer separately with no assurance that approval would be obtained, and we may need to conduct expensive pharmacoeconomic studies todemonstrate the cost-effectiveness of our products. This process could delay the market acceptance of any product and could have a negative effect on ourfuture revenue and operating results. We cannot be certain that our products and our product candidates will be considered cost-effective. Because coverageand reimbursement determinations are made on a payer-by-payer basis, obtaining acceptable coverage and reimbursement from one payer does not guaranteethat we will obtain similar acceptable coverage or reimbursement from another payer. If we are unable to obtain coverage of, and adequate reimbursementand payment levels for, our product candidates from third-party payers, physicians may limit how much or under what circumstances they will prescribe oradminister them and patients may decline to purchase them. This in turn could affect our ability to successfully commercialize our products and adverselyaffect our profitability, results of operations, financial condition, and future success.In addition, in many foreign countries, particularly the countries of the European Union and China, the pricing of prescription drugs is subject togovernment control. In some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirementsgoverning drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range ofmedicinal products for which their national health insurance systems provide reimbursement and to27control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt asystem of direct or indirect controls on the profitability of a company placing the medicinal product on the market. We may face competition for our productcandidates from lower-priced products in foreign countries that have placed price controls on pharmaceutical products. In addition, there may be importationof foreign products that compete with our own products, which could adversely affect our profitability.Healthcare ReformIn the United States and foreign jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changesto the healthcare system that could affect our future results of operations as we begin to commercialize our products. In particular, there have been andcontinue to be a number of initiatives at the U.S. federal and state level that seek to reduce healthcare costs.Furthermore, political, economic, and regulatory influences are subjecting the healthcare industry in the United States to fundamentalchange. Initiatives to reduce the federal budget and debt and to reform healthcare coverage are increasing cost-containment efforts. We anticipate thatCongress, state legislatures, and the private sector will continue to review and assess alternative healthcare benefits, controls on healthcare spending throughlimitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups,price controls on pharmaceuticals, and other fundamental changes to the healthcare delivery system. Any proposed or actual changes could limit oreliminate our spending on development projects and affect our ultimate profitability. For example, in March 2010, the PPACA was signed into law. Amongother cost containment measures, the PPACA established: an annual, nondeductible fee on any entity that manufactures or imports certain brandedprescription drugs and biologic agents; revised the methodology by which rebates owed by manufacturers to the state and federal government for coveredoutpatient drugs under the Medicaid Drug Rebate Program are calculated; increased the minimum Medicaid rebates owed by most manufacturers under theMedicaid Drug Rebate Program; and extended the Medicaid Drug Rebate program to utilization of prescriptions of individuals enrolled in Medicaidmanaged care organizations. The PPACA also expanded eligibility criteria for Medicaid programs, created a new Medicare Part D discount program,expanded the entities eligible for discounts under the Public Health Services Pharmaceutical pricing program, and created a new Patient-Centered OutcomesResearch Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research. In thefuture, there may continue to be additional proposals relating to the reform of the U.S. healthcare system, some of which could further limit the prices we areable to charge or the amounts of reimbursement available for our products, or which could otherwise affect our commercial operations and ability to beprofitable. If future legislation were to impose direct governmental price controls and access restrictions, it could have a significant adverse effect on ourbusiness. Managed care organizations, as well as Medicaid and other government agencies, continue to seek price discounts. Some states have implemented,and other states are considering, price controls or patient access constraints under the Medicaid program, and some states are considering price-controlregimes that would apply to broader segments of their populations that are not Medicaid-eligible. More recently, the Tax Cuts and Jobs Act of 2017 (the2017 Tax Act) was signed into law, which eliminated certain requirements of the ACA, including the individual mandate, and the current administration hasfurther suggested that it may seek repeal of all or portions of the PPACA. There is uncertainty with respect to the impact these changes, if any, may have, andany changes likely will take time to unfold.In addition, on August 2, 2011, the Budget Control Act of 2011 was enacted and created measures for spending reductions by Congress. A Joint SelectCommittee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the fiscal years 2012 through 2021, wasunable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. These reductions includedaggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect on April 1, 2013. These reductions have beenextended through 2027 unless additional Congressional action is taken. Also, in January 2013, the American Taxpayer Relief Act of 2012 was signed in tolaw, which, among other things, reduced Medicare payments to several types of health care providers.Due to the volatility in the current economic and market dynamics, we are unable to predict the effect of any unforeseen or unknown legislative,regulatory, payer, or policy actions, which may include cost containment and healthcare reform measures. Such policy actions could have a material adverseeffect on our profitability.New Legislation and RegulationsFrom time to time, legislation is drafted, introduced, and passed in Congress that could significantly change the statutory provisions governing thetesting, approval, manufacturing, and marketing of products regulated by the FDA. For example, the 21st Century Cures Act, which was enacted on December13, 2016, contains a number of provisions related to the development of drug and biological products, including provisions intended to encourage themodernization of clinical trial design and support broader use of tools like biomarkers and methods to collect patient experience data. While the 21stCentury Cures Act is intended to make drug and biological product development less time-consuming and less costly, it does not change thescientific/medical standard for approval or the quality or quantity of evidence necessary to support approval. In addition, the Food and Drug AdministrationAct of 2017 reauthorized and amended several drug provisions that were scheduled to sunset, such as the prescription drug user fee provisions, and madeother changes to the Federal Food, Drug, and Cosmetic Act, including provisions related to development of pediatric drugs and access to generic drugs. Inaddition to new legislation, FDA regulations and policies are often revised or interpreted by the agency in ways that may significantly affect our business andour products. It is impossible to28predict whether further legislative changes will be enacted or whether FDA regulations, guidance, policies, or interpretations changed or what the effect ofsuch changes, if any, may be.Foreign RegulationWe are planning on seeking approval for our product candidates in Europe, Japan, and other countries. To market any product outside of the UnitedStates, we would need to comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety, andefficacy that govern, among other things, clinical trials, manufacturing, marketing authorization, commercial sales, and distribution of our products. Whetheror not we obtain FDA approval for a product, we would need to obtain the necessary approvals by the comparable foreign regulatory authorities before wecan commence clinical trials or marketing of the product in foreign countries and jurisdictions. Although many of the issues discussed above with respect tothe United States apply similarly in the context of other countries in which we may seek approval, the approval process varies among countries andjurisdictions and can involve different amounts of product testing and additional administrative review periods. For example, in Europe, a sponsor mustsubmit a clinical trial application (CTA), much like an IND prior to the commencement of human clinical trials. A CTA must be submitted to each nationalhealth authority and an independent ethics committee.For other countries outside of the European Union, such as the countries in Eastern Europe, Latin America, or Asia, the requirements governing theconduct of clinical trials, product licensing, pricing, and reimbursement vary from country to country. The time required to obtain approval in othercountries and jurisdictions might differ from or be longer than that required to obtain FDA approval. Regulatory approval in one country or jurisdiction doesnot ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively affect theregulatory approval process in other countries.United States Patent Term Restoration and Regulatory Exclusivity for Approved ProductsThe Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman Act, permits a patent restorationterm of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. The patent term restorationperiod is generally one-half the time between the effective date of an initial IND and the submission date of an NDA, plus the time between the submissiondate of the NDA and the approval of that product candidate application. Patent term restoration cannot, however, extend the remaining term of a patentbeyond a total of 14 years from the product’s approval date. In addition, only one patent applicable to an approved product is eligible for the extension, andthe application for the extension must be submitted prior to the expiration of the patent. The U.S. Patent and Trademark Office (USPTO), in consultation withthe FDA, reviews and approves applications for any patent term extension or restoration. In the future, we expect to apply for restoration of patent term forpatents relating to each of our product candidates to add patent life beyond the current expiration date of such patents, depending on the length of theclinical trials and other factors involved in the filing of the relevant NDA.Market exclusivity provisions under the Federal Food, Drug, and Cosmetic Act can also delay the submission or the approval of certain applications ofcompanies seeking to reference another company’s NDA. For example, the Hatch-Waxman Act provides a five-year period of exclusivity to any approvedNDA for a product containing a new chemical entity (NCE), never previously approved by FDA either alone or in combination with another activemoiety. No application or abbreviated new drug application (ANDA), that references the NDA for the NCE may be submitted during the five-year exclusivityperiod, except that such applications may be submitted after four years if they contain a certification of patent invalidity or non-infringement of the patentslisted with the FDA for the innovator NDA.Foreign Country Data ExclusivityThe European Union also provides opportunities for additional market exclusivity. For example, in the European Union, upon receiving marketingauthorization, an NCE generally receives eight years of data exclusivity and an additional two years of market exclusivity. If granted, data exclusivityprevents regulatory authorities in the European Union from referencing the innovator’s data to assess a generic application. During the additional two-yearperiod of market exclusivity, a generic marketing authorization can be submitted, and the innovator’s data may be referenced, but no generic product can bemarketed until the expiration of the market exclusivity.Intellectual PropertyOur success depends in part upon our ability to obtain and maintain patent and other intellectual property protection for our product candidatesincluding patents claiming compositions of matter, therapeutic uses, distinct forms of specific compounds, formulations, manufacturing methods, and uses inspecific indications and patient populations. We are actively engaged in research to further develop and maintain our competitive position, and may rely inpart on trade secrets, proprietary know-how, and continuous technological innovation to support and enhance our competitive position.We seek to protect and strengthen our proprietary position by, among other methods, filing United States and foreign patent applications related to ourproprietary technologies, inventions, and any improvements that we consider important to the development and implementation of our business andstrategy. Our ability to maintain and solidify our proprietary position for our products and technologies will depend, in29part, on our success in obtaining and enforcing valid patent claims. Additionally, we may benefit from a variety of regulatory frameworks in the UnitedStates, Europe, Japan, China, and other territories that provide periods of non-patent-based exclusivity for qualifying drug products. See “Business—Government Regulation—United States Patent Term Restoration and Regulatory Exclusivity for Approved Products.”We cannot ensure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications thatmay be filed by us in the future, nor can we ensure that any of our existing or subsequently granted patents will be useful in protecting our drug candidates,technological innovations, or processes. Additionally, any existing or subsequently granted patents may be challenged, invalidated, circumvented, orinfringed. We cannot guarantee that our intellectual property rights or proprietary position will be sufficient to permit us to take advantage of current markettrends or otherwise to provide or protect competitive advantages. Furthermore, our competitors may be able to independently develop and commercializesimilar products, or may be able to duplicate our technologies, business model, or strategy, without infringing our patents or otherwise using our intellectualproperty.Our patent estate (patents and patent applications owned by or exclusively licensed to Reata and one family of patent applications owned by AbbVieand contractually available for Reata’s use), on a worldwide basis, encompasses more than 240 granted patents and more than 280 pending patentapplications, including more than 140 granted patents and more than 150 pending patent applications related to bardoxolone methyl, omaveloxolone, RTA901, and RTA 1701. More than 60 granted patents and more than 100 pending applications claim additional structural classes of Nrf2 activators, providingfurther protection for the franchise and a potential source of additional development candidates. One issued United States patent, one issued foreign patent, apending United States patent application, and eleven pending foreign patent applications contain composition of matter claims to RTA 901 and relatedcompounds. RTA 1701 is covered by more than 20 granted U.S. and foreign patents, and a number of pending applications.Our later-expiring granted patents with claims to compositions of matter for bardoxolone methyl, including patents claiming the commercial form,have an expiration date of 2029 in the United States and 2028 elsewhere. The patent that covers specific formulations of bardoxolone methyl, including thecommercial formulation, has an expiration date of 2030. Other granted patents and pending patent applications relating to specific uses of bardoxolonemethyl, including the treatment of PH, PAH, and CKD, have expiration dates ranging from 2029 to 2034. Fundamental composition of matter patents andapplications claiming omaveloxolone have an expiration date in 2033. These patents and applications also contain claims to therapeutic uses ofomaveloxolone. The fundamental United States composition of matter patent claiming RTA 901, and its foreign equivalents, have an expiration date in2033. Patents and pending applications covering RTA 1701, including composition of matter claims and method of use claims, have expiration datesranging from 2031 to 2037.The protection afforded by any particular patent depends upon many factors, including the type of patent, scope of coverage encompassed by thegranted claims, availability of extensions of patent term, availability of legal remedies in the particular territory in which the patent is granted, and success ofany challenges to the patent, if asserted. Changes in either patent laws or in the interpretation of patent laws in the United States and other countries coulddiminish our ability to protect our inventions and to enforce our intellectual property rights. Accordingly, we cannot predict with certainty the enforceabilityof any granted patent claims or of any claims that may be granted from our patent applications.The biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual propertyrights. Our ability to maintain and solidify our proprietary position for our products and core technologies will depend on our success in obtaining effectiveclaims and enforcing those claims once granted. We have in the past been involved in various administrative proceedings with respect to our patents andpatent applications and may, as a result of our extensive portfolio, be involved in such proceedings in the future. Additionally, in the future, we may claimthat a third party infringes our intellectual property or a third party may claim that we infringe its intellectual property or that our intellectual property isinvalid or unenforceable. In any of the administrative proceedings or in litigation, we may incur significant expenses, damages, attorneys’ fees, costs ofproceedings and experts’ fees, and management and employees may be required to spend significant time in connection with these actions.Because of the extensive time required for clinical development and regulatory review of a product candidate we may develop, it is possible that anypatent related to our product candidates may expire before any of our product candidates can be commercialized, or may remain in force for only a shortperiod of time following commercialization, thereby reducing the advantage afforded by any such patent.The patent positions for our most advanced programs are summarized below.Bardoxolone Methyl Patent PortfolioOur bardoxolone methyl patent portfolio includes five families of granted United States patents, some with related applications pending, and twoadditional families of pending United States patent applications. Granted and pending claims offer various forms of protection for bardoxolone methylincluding claims to compositions of matter, pharmaceutical compositions, specific forms (such as crystalline or non-crystalline forms), specific formulations,and methods for treating a variety of diseases, including PAH and CKD, using bardoxolone methyl or its analogs. These United States patents andapplications, and their foreign equivalents, are described in more detail below.30There are two families of composition of matter patents containing claims for bardoxolone methyl. The original patent family containing claims tobardoxolone methyl and related compounds was filed in 1999 and exclusively licensed to Reata in 2004 (see “Business—Intellectual Property—Licenses”). Exclusive of any patent term extension, one granted United States patent from this family containing claims covering bardoxolone methyl has anexpiration date in 2022. Corresponding patents granted in Canada, Europe (validated in multiple European Patent Convention member states), and Japanhave expiration dates in 2019. Exclusive of any patent term extension, the granted United States patents containing claims covering specific forms ofbardoxolone methyl, including the commercial form, are due to expire in 2028 or 2029. Two corresponding regional patents have been granted in Europeand each is validated in multiple European Patent Convention member states. Additional corresponding patents have been granted in Japan, China, Canada,and several other countries, and related applications provide broad international protection in additional territories worldwide. Exclusive of any patent termextension, these granted foreign patents and pending patent applications, if granted, are due to expire in 2028.In some cases, granted United States patents claiming bardoxolone methyl have a longer statutory term than the corresponding foreign patents. Thisresults from the USPTO’s practice of granting patent term adjustments for examination delays originating at the USPTO. Such adjustments are generally notavailable under foreign patent laws. If bardoxolone methyl is approved for marketing in the United States, under the Hatch-Waxman Act we may be eligiblefor up to five years patent term extension for a granted United States patent containing claims covering bardoxolone methyl. Similar term extensions may beavailable in Europe, Japan, Australia, and certain other foreign jurisdictions. The amount of any such term extension, and the identity of the patent to whichit would apply, are dependent upon several factors including the duration of the development program and the date of marketing approval. See “Business—Government Regulation—United States Patent Term Restoration and Regulatory Exclusivity for Approved Products.”We also own or exclusively license various United States and foreign granted patents and pending patent applications containing claims coveringformulations of bardoxolone methyl, including the planned commercial formulation, and methods of using bardoxolone methyl for the treatment of multiplediseases including PH, PAH, endothelial dysfunction (an essential component of many cardiovascular disorders including PAH), cardiovascular disease,CKD, metabolic disorders, and obesity.The most relevant granted United States patents with composition of matter or method of use claims covering bardoxolone methyl are listed below,along with their projected expiration dates exclusive of any patent term extension. PatentNumber Title Projected Expiration7,863,327 Therapeutic Compounds and Methods of Use April 15, 20228,034,955 Therapeutic Compounds and Methods of Use June 17, 20198,088,824 Forms of CDDO Methyl Ester October 19, 20298,309,601 Forms of CDDO Methyl Ester August 13, 20288,633,243 Forms of CDDO Methyl Ester August 13, 20288,129,429 Synthetic triterpenoids and methods of use in treatment of disease February 22, 20308,747,901 Delayed Release, Oral Dosage Compositions that Contain AmorphousCDDO-Me November 6, 2030 Omaveloxolone Patent PortfolioOmaveloxolone is protected by three families of patents. The first, filed in April 2009, contains composition of matter claims that encompassomaveloxolone and many related compounds. This family includes four issued United States patents and a number of granted patents in foreign jurisdictionsincluding China, Mexico, and Japan. Additional United States and foreign applications from this family are pending. The second family, filed in April 2013,is specifically focused on omaveloxolone and includes composition of matter claims and method of use claims. The initial United States patent from thisfamily was issued on March 31, 2015. The issued claims include composition of matter claims to omaveloxolone without regard to morphic form, claims toseveral distinct morphic forms of omaveloxolone including the form used in oral dosing formulations, and claims to various methods of therapeutic use. Afirst continuation application has also issued, and a second continuation application is pending. Foreign equivalents of the original U.S. application havebeen filed in Europe, Canada, Mexico, Japan, China, and more than 20 other territories. The European application has granted and has been validated inmultiple European Patent Convention member states. In addition, a divisional application has been filed in Europe. A third patent family, filed by AbbViein April 2014 and subject to the terms of the AbbVie collaboration agreement, claims additional morphic forms of omaveloxolone.31The most relevant granted United States patents with claims covering omaveloxolone are listed below, along with their projected expiration dates. Asdiscussed above for bardoxolone methyl, if omaveloxolone is approved for marketing in the United States, we may be eligible for term extension under theHatch-Waxman Act for a granted United States patent containing claims covering omaveloxolone. Similar term extensions may be available in Europe,Japan, and certain other foreign jurisdictions. The amount of any such term extension, and the identity of the patent to which it would apply, are dependentupon several factors including the duration of the development program and the date of marketing approval. See “Government Regulation—United StatesPatent Term Restoration and Regulatory Exclusivity for Approved Products.” PatentNumber Title Projected Expiration8,124,799 Antioxidant Inflammation Modulators: Oleanolic Acid Derivatives with Amino and OtherModifications at C-17 December 3, 20298,440,854 Antioxidant Inflammation Modulators: Oleanolic Acid Derivatives with Amino and OtherModifications at C-17 April 20, 20299,102,681 Antioxidant Inflammation Modulators: Oleanolic Acid Derivatives with Amino and OtherModifications at C-17 April 20, 20299,670,147 Antioxidant Inflammation Modulators: Oleanolic Acid Derivatives with Amino and OtherModifications at C-17 April 20, 20298,993,640 2,2-Difluoropropionamide Derivatives of Bardoxolone Methyl, Polymorphic Forms andMethods of Use Thereof April 24, 20339,701,709 2,2-Difluoropropionamide Derivatives of Bardoxolone Methyl, Polymorphic Forms andMethods of Use Thereof April 24, 20339,856,286 2,2-Difluoropropionamide Derivatives of Bardoxolone Methyl, Polymorphic Forms andMethods of Use Thereof April 24, 2034 RTA 901 Patent PortfolioRTA 901 is protected by a family of patents and applications based on a PCT application filed in 2013. Patents from this family have been granted inthe United States, Australia, China, Eurasia, Japan, and New Zealand. Applications are pending in Europe, Canada, Australia, Mexico, and several othercountries. In addition, a continuation application has been filed in the United States. Both issued and pending claims in this family include composition ofmatter claims that specifically cover RTA 901 regardless of form, and other claims that cover related compounds. Patents from this family will expire in 2033unless extended. Details of the issued United States patent are shown below. PatentNumber Title Projected Expiration9,422,320 C-Terminal Hsp90 Inhibitors February 8, 2033 Trade Secrets and Know-HowCertain aspects of our activities, such as our research and manufacturing efforts, rely in part on proprietary know-how or trade secrets. Because we mayemploy third-party contractors to conduct certain aspects of those activities and because we collaborate with various organizations and academic institutionson the advancement of our technology platform, we must at times share trade secrets with them. We seek to protect our proprietary technology in part byentering into confidentiality agreements and, if applicable, material transfer agreements, collaborative research agreements, consulting agreements, or othersimilar agreements with our collaborators, advisors, employees, and consultants prior to beginning research or disclosing proprietary information. Theseagreements typically limit the rights of the third parties to use or disclose our confidential information, such as trade secrets. Despite these contractualprovisions, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, areinadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position isbased, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair ourcompetitive position and may have a material adverse effect on our business. We also seek to preserve the integrity and confidentiality of our proprietarytechnology and processes by maintaining physical security of our premises and physical and electronic security of our information technology systems.Licenses2004 Dartmouth and MD Anderson LicenseIn 2004, we entered into an agreement with the Board of Regents of The University of Texas System in which we obtained from The Trustees ofDartmouth College (Dartmouth) and The University of Texas MD Anderson Cancer Center (MD Anderson), an exclusive, sublicenseable, worldwide licenseto compounds, including bardoxolone methyl, and claims in certain patents and patent applications, along with associated know-how, to manufacture, havemanufactured, use and sell defined licensed products for use within the field of human32therapeutic and diagnostic uses, research reagents and veterinary uses. Dartmouth and MD Anderson retain certain limited rights related to academic researchand educational use of these compounds, and the U.S. government retains certain limited rights.Under the terms of this license, we paid an initial licensing fee and sunk-in patent costs and are required to pay annual license maintenance fees. Inaddition, the license requires us to make certain development milestone payments depending on the licensed indication, a portion of sublicensing revenuereceived by us from sublicenses that we grant under the licensed technology at percentages between mid-teen digits and low-single digits, and royalties inthe low single digits on net sales of licensed products by us, our affiliates, and our sublicensees subject to specified annual minimums. To date, we havemade $25.2 million in development and sublicense payments under the license.We have a continuing obligation to use best efforts to commercialize the licensed technology. The license is effective until the last expiration of aclaim in a licensed patent that covers the licensed product or 20 years if no licensed patent covers the licensed product. The license can be terminated by thelicensors for our material breach subject to a specified notice and cure period based on the nature of the breach, if we become insolvent or enter bankruptcy orreceivership proceedings, if we fail to provide satisfactory evidence that we are exercising best efforts to commercialize a licensed invention, or if twopayments are late or unpaid within a twelve-month period. Upon any termination of the license, we grant licensors a non-exclusive, sublicenseable license toany improvements that we make to the licensed technology, including those that we license from third parties, subject to a mutually agreed royalty.2012 Amendment to the 2004 Dartmouth and MD Anderson LicenseIn July 2012, the parties executed an amendment to the 2004 license. This amendment provides, among other terms, that we will pay to the licensors acertain amount from the next one or more milestone payments received by us under the AbbVie license agreement and a low single-digit royalty on net salesof certain Nrf2 activator compounds under the AbbVie collaboration agreement, including omaveloxolone, that are claimed in certain patents and patentapplications that are wholly owned by or assigned to us as identified in the AbbVie collaboration agreement.2009 Dartmouth LicenseIn 2009, we entered into an agreement with Dartmouth, pursuant to which Dartmouth granted us an exclusive, worldwide, sublicenseable license toDartmouth’s rights in patents and patent applications jointly owned by us and Dartmouth claiming the use of bardoxolone methyl and related compounds inthe treatment of renal, cardiovascular, and certain metabolic diseases, along with associated know-how, to make, have made, use and sell defined licensedproducts in the licensed field. Dartmouth retains certain limited rights related to academic research and educational use of these compounds.Under the terms of this license, we paid to Dartmouth an initial licensing fee and we are required to pay annual maintenance fees and paymentsassociated with the achievement of certain development and aggregate sales milestones. In addition, Dartmouth is entitled to receive from us a portion of oursublicensing revenue from sublicenses that we grant under the licensed technology at a percentage in the low single digits, and royalties in the low singledigits on net sales of licensed products by us, our affiliates and our sublicensees. In July 2012, the parties executed an amendment to the license, whichprovides, among other terms, that we pay to Dartmouth a sublicensing fee in connection with a specified milestone under the AbbVie license agreement. Todate, we have made $10.2 million in development and sublicense payments under the license.We are obligated to exert commercially reasonable efforts to develop and commercialize and effectively manufacture and market licensed products,including, targeting certain development milestones specified in the agreement.The license is effective until the last valid claim of the licensed patents in the territory expires. Each party has the right to terminate the license for theother party’s material breach, subject to a specified notice and cure period. The license terminates automatically in the event that we become insolvent, makean assignment for the benefit of creditors, or file for bankruptcy.2014 University of Kansas LicensesIn September 2014, we entered into two exclusive, worldwide license agreements with KU Center for Technology Commercialization, Inc., themanager of intellectual property owned by University of Kansas and the University of Kansas Medical Center (the University of Kansas), to compoundsclaimed in certain patents and patent applications either owned exclusively by the University of Kansas or owned jointly by the University of Kansas and theNational Institutes of Health (the NIH), that act as small molecule modulators of heat shock protein activity and responses in all human and veterinarytherapeutic and diagnostic uses.Under the terms of these licenses, we paid the University of Kansas initial licensing fees and reimbursed University of Kansas for past patent expensesincurred. Under each agreement, we are required to pay annual license maintenance fees, are obligated to spend a specified threshold for sponsored researchto be performed by the University of Kansas, and are obligated to pay University of Kansas development and regulatory milestone payments for each of thefirst two products, and sales milestone payments only on the first product developed. Under each agreement the University of Kansas is entitled to receivefrom us a portion of any sublicensing revenue we receive from sublicenses that33we grant under the licensed technology at a percentage ranging from the low single digits to the low thirties depending on the stage of development at thetime the sublicense is granted. Under each agreement, the University of Kansas is entitled to receive royalties on net sales of licensed products sold by us, ouraffiliates, and our sublicensees at a percentage ranging in the low single digits depending on the type of licensed product, subject to minimum annualroyalties. To date, we have made $0.7 million in development and sublicense payments under these licenses. Under each license agreement we are obligatedto use commercially reasonable efforts to develop, manufacture, and market at least one licensed compound. Additionally, under each license agreement, theUniversity of Kansas retains limited rights related to research and educational use of these compounds, and the U.S. government also retains certain limitedrights related to these compounds arising from federal funding of the research that led to their discovery. Under one agreement, the NIH retains limited rightsrelated to research and educational use of compounds claimed in patents that name NIH as an assignee.Each license agreement is effective on a per-country basis until the later of: (i) the last expiration of a claim in a licensed patent that covers thelicensed product in such country; (ii) ten years from first commercial sale of a licensed product in such country; or (iii) the expiration of any period ofregulatory exclusivity for a licensed product that bars the entry of generic competitors in such country.Each license agreement can be terminated by the University of Kansas if we fail to make required payments or reports, fail to use commerciallyreasonable efforts to commercialize a licensed product, file for bankruptcy or become insolvent, enter into receivership or a composition with creditors, or failto perform certain other obligations including the achievement of certain developmental milestones within specified time limits, and we fail to cure any suchbreach within 30 days of receiving a notice of default from the licensors.Third-Party FilingsA number of United States and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which weare developing products. Because patent applications can take many years to issue, there may be currently pending applications unknown to us that, ifgranted, could pose an infringement risk with respect to our use of our product candidates or proprietary technologies.If a third party claims that we infringe its intellectual property rights, we may face a number of issues, including but not limited to litigation expenses,substantial damages, attorney fees, injunction, royalty payments, cross-licensing of our patents, redesign of our products, or processes and related fees andcosts.We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that ourproducts, product candidates, and proprietary technologies infringe their intellectual property rights. If one of these patents were to be found to cover ourproducts, product candidates, proprietary technologies, or their uses, we could be required to pay damages and could be restricted from commercializing ourproducts, product candidates, or using our proprietary technologies unless we obtain a license to the patent. A license may not be available to us onacceptable terms, if at all. In addition, during litigation, the patent holder might obtain a preliminary injunction or other equitable right, which couldprohibit us from making, using or selling our products, technologies, or methods.EmployeesAs of December 31, 2017, we had 93 full-time employees, 23 of whom held Ph.D. or M.D. degrees, 62 of whom were engaged in research anddevelopment, and 31 of whom were engaged in business development, finance, information systems, facilities, human resources, legal functions, oradministrative support. None of our employees is represented by a labor union, and none of our employees has entered into a collective agreement withus. We consider our employee relations to be good.Research and DevelopmentIn each of the last three fiscal years ended December 31, 2017, 2016, and 2015, we have spent $71.3 million, $39.5 million, and $35.1 million,respectively, on research and development.FacilitiesOur principal executive offices are located in Irving, Texas, where we lease approximately 34,890 square feet of office and laboratory space. Our leaseexpires in October 2020. We believe that our facilities are adequate for our current needs and that suitable additional or substitute space would be availableif needed.34Executive Officers and DirectorsThe following table sets forth certain information with respect to our executive officers and directors: Name PositionDawn C. Bir Vice President, Chief Commercial OfficerJ. Warren Huff Chief Executive Officer, President, and Chairman of the Board of DirectorsColin Meyer, M.D. Chief Medical Officer and Vice President, Product DevelopmentKeith W. Ward, Ph.D. Vice President, Chief Development OfficerJason D. Wilson Chief Financial Officer and Vice President, StrategyMichael D. Wortley Vice President, Chief Legal OfficerJames E. Bass (1)(2)(3) DirectorWilliam D. McClellan, Jr. (1)(2)(3) DirectorR. Kent McGaughy, Jr. (2)(3) DirectorJack B. Nielsen (1)(2)(3) DirectorWilliam E. Rose (1)(2) Director (1)Member of the audit committee.(2)Member of the compensation committee.(3)Member of the nominating and corporate governance committee.Executive OfficersDawn C. Bir joined Reata as Chief Commercial Officer in September 2016 to develop and oversee marketing, market access, sales, training, andcommercial operations. Prior to joining Reata, Ms. Bir most recently served as Vice President of Sales with Pharmacyclics, LLC. From February 2013 toSeptember 2016, she built and led their first hematology national sales organization of sales representatives, division managers, and regional sales directors,responsible for the launch of IMBRUVICA in the United States and Puerto Rico. From October 2011 to February 2013, Ms. Bir served as Vice President Sales& Marketing with McKesson US Pharmaceutical, SKY Pharmaceuticals, and RxPak. Prior thereto, she held positions of increasing responsibility withinMcKesson Corporation, Genentech, Inc., and Bristol-Myers Squibb Company. Ms. Bir holds a B.S. in Biology from Binghamton University.J. Warren Huff is the Chairman, Chief Executive Officer and President of Reata. He has served as our sole CEO, President, and as Chairman of theboard of directors since our founding in 2002. Prior to founding Reata, Mr. Huff served as CEO in a number of biotech and information technology start-upenterprises. Mr. Huff started his career as an attorney with Johnson & Gibbs, P.C., where he was a partner and Chairman of the Corporate SecuritiesPractice. Mr. Huff received a B.B.A. magna cum laude from the University of Texas at Austin and a J.D. from Southern Methodist University. Our board ofdirectors believes that Mr. Huff is qualified to serve on our board of directors due to his extensive experience investing and working in the pharmaceuticalsindustry.Colin Meyer, M.D. joined Reata as one of our first employees in 2003 and is Reata’s Chief Medical Officer. Dr. Meyer received a B.S. in chemistrywith specialization in biochemistry and a B.A. in biology from the University of Virginia. He received an M.D. from the University of Texas SouthwesternMedical School and an M.B.A. from Southern Methodist University Cox School of Business.Keith W. Ward, Ph.D. is Reata’s Chief Development Officer and oversees research and development, clinical operations, regulatory affairs,manufacturing, and project management. Dr. Ward joined Reata in July 2011. Prior to joining Reata, he developed ophthalmic pharmaceuticals and medicaldevices in positions of increasing responsibility for Bausch & Lomb Incorporated, including as Global Vice President of Pharmaceutical R&D, from May2005 to June 2011. Before that, Dr. Ward held positions of increasing responsibility within GlaxoSmithKline PLC and SmithKline BeechamPharmaceuticals. Dr. Ward earned a B.S. in Toxicology with a minor in Chemistry from Northeast Louisiana University and a Ph.D. in Toxicology from theUniversity of North Carolina at Chapel Hill.Jason D. Wilson is Reata’s Chief Financial Officer and oversees corporate strategy, finance, accounting and treasury, human resources, businessdevelopment, investor relations, and information technology. He joined Reata in 2006. Prior to joining Reata he held positions as Vice President, Finance &Corporate Controller at Caris Diagnostics and as a Senior Manager in the health-sciences group at Ernst & Young LLP. Mr. Wilson holds a B.B.A. inAccounting from Henderson University and an M.B.A. from the University of Central Arkansas.Michael D. Wortley joined Reata as Chief Legal Officer and Vice President in April 2015. Prior to joining Reata, Mr. Wortley was an attorney atVinson & Elkins LLP from 1995 to March 2015, serving in various capacities, including Chief Operating Partner of the firm and Managing Partner of theDallas office, and at Johnson & Wortley, P.C., serving as Chairman of the Board and President. He currently serves on the board of directors of PioneerNatural Resources Company. Mr. Wortley earned a B.A. in Political Science from Southern Methodist University, a Master’s degree in Regional Planningfrom the University of North Carolina at Chapel Hill, and a J.D. from Southern Methodist University Dedman School of Law.35Non-Employee DirectorsJames E. Bass has served as a member of the Board of Directors since July 2004. For the past five years, Mr. Bass has been managing family assets andinvestments as his primary business activity. Mr. Bass is a member of the Board of Snowbird Holdings, LLC and Trinity Summits, LLC. He previouslyserved as an executive director of FB Gemini Limited, an Asian regional investment bank based in Hong Kong, prior to which he was an associate attorneyand later partner at Gibson, Dunn & Crutcher LLP. Mr. Bass graduated with a B.A. from Yale University and obtained his J.D. from Stanford University. Ourboard of directors believes that Mr. Bass is qualified to serve on our board of directors due to his extensive experience investing and extensive service on theboards of directors and boards of managers of other enterprises.William D. McClellan, Jr. has served as a member of the Board of Directors since March 2017. Mr. McClellan, Jr. has served as the Chief FinancialOfficer at Aerin Medican Inc. since January 2018. Mr. McClellan, Jr. is a financial management consultant to healthcare and life sciences companies, servingas the managing member of Goodwater Consulting, LLC since March 2017. From June 2004 until June 2016, Mr. McClellan, Jr. was the Chief FinancialOfficer and Executive Vice President, Finance at On-X Life Technologies Holdings, Inc. Prior to June 2004, Mr. McClellan, Jr. held financial and accountingpositions at various healthcare and other companies and was a certified public accountant serving as an auditor with Price Waterhouse Coopers for nineyears. He currently serves on the board of directors of Apollo Endosurgery, Inc., a publicly-traded company, and chairs its audit committee. Mr. McClellan,Jr. received a B.B.A. in accounting from Abilene Christian University and is a certified public accountant. Our Board believes that Mr. McClellan, Jr. isqualified to serve on our Board due to his extensive experience in finance and accounting roles in the healthcare and life sciences industry and in serving as acertified public accountant at a large public accounting firm.R. Kent McGaughy, Jr. has served as a member of the Board of Directors since December 2004. Mr. McGaughy, Jr. has been a partner in CPMG, Inc.since 2006. Prior to joining CPMG’s predecessor, Cardinal Investment Company, Inc. in 1997, he worked in mergers and acquisitions at Simmons &Company International. He currently serves on the boards of Apollo Endosurgery, Inc., a publicly-traded company, and several private companies. Mr.McGaughy, Jr. received his B.A. from the University of Texas (summa cum laude and member of Phi Beta Kappa) and his M.B.A. from the Harvard BusinessSchool. Our board of directors believes that Mr. McGaughy, Jr. is qualified to serve on our board of directors due to his extensive experience investing andextensive service on the boards of directors of other companies.Jack B. Nielsen has served as a member of the Board of Directors since June 2006. Mr. Nielsen is a partner in Vivo Capital, LLC, a healthcare focusedinvestment firm. Prior to March 1, 2017, Mr. Nielsen worked within the Novo A/S organization and its venture activities since 2001 in several roles, mostrecently being employed as a Senior Partner based in Copenhagen, Denmark. From 2006 to 2012, Mr. Nielsen was employed as a Partner at Novo Ventures(US) Inc. in San Francisco, where he established the office which provides certain consultancy services to Novo A/S. Mr. Nielsen in the past served on theboard of directors of Akebia Therapeutics, Inc., Merus, N.V, and Apollo Endosurgery, Inc., each of which is a publicly-traded company. He is also currently amember of the board of directors of a number of private companies. Mr. Nielsen received a M.Sc. in Chemical Engineering from the Technical University ofDenmark, and a Masters in Management of Technology from the Center for Technology, Economics and Management; Technical University ofDenmark. Our board of directors believes that Mr. Nielsen is qualified to serve on our board due to his extensive industry experience, his experience withventure capital investments, and his board service for several companies in the biotechnology sector.William E. Rose has served as a member of the Board of Directors since February 2016. Mr. Rose is the President of Montrose Capital, Inc. Prior toMontrose, Mr. Rose was associated with HBK Capital Management from 1991 until 2012, serving in various capacities, including Co-Chief InvestmentOfficer. He currently serves as the Chairman of the Board of Trustees for Greenhill School and is also a member of the Investment Committee for the DallasMuseum of Art. Mr. Rose received a B.A. in Political Science from Duke University in 1989. Our board of directors believes that Mr. Rose is qualified toserve on our board due to his extensive experience investing, his experience with venture capital investments, and his board service for other enterprises.Corporate InformationWe were formed in Delaware in 2002 and maintain our principal corporate offices at 2801 Gateway Dr., Suite 150, Irving, Texas 75063. Our Class Acommon stock is listed on The NASDAQ Global Market and is traded under the symbol “RETA.” Our telephone number is 972-865-2219 and our internetwebsite address is www.reatapharma.com. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports onForm 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act assoon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition to the reports filed or furnished with theSEC, we publicly disclose information from time to time in our press releases, at annual meetings of stockholders, in publicly accessible conferences andinvestor presentations, and through our website (principally in our “Investors & News” page). References to our website in this Annual Report on Form 10-Kare provided as a convenience and do not constitute, and should not be deemed, an incorporation by reference of the information contained on, or availablethrough, the website, and such information should not be considered part of this Annual Report on Form 10-K.Item 1A. Risk Factors.Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the otherinformation in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes and Part36II, Item 7 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in any documents incorporated in thisAnnual Report on Form 10-K by reference, before deciding whether to invest in our Class A common stock. The occurrence of any of the events ordevelopments described below could harm our business, financial condition, results of operations, and growth prospects. In such an event, the market priceof our Class A common stock could decline, and you may lose all or part of your investment. Although we have discussed all known material risks, the risksdescribed below are not the only ones that we may face. Additional risks and uncertainties not currently known to us or that we currently deem immaterialmay also impair our business operations. Certain statements below are forward-looking statements. See also “Special Note Regarding Forward-LookingStatements” in this Annual Report on Form 10-K.Risks Related to Our Financial ConditionWe have incurred significant losses since our inception. We anticipate that we will continue to incur losses for the foreseeable future and may neverachieve or sustain profitability. We will require additional financings to fund our operations.We are a biopharmaceutical company with our lead product candidates, bardoxolone methyl and omaveloxolone, in clinicaldevelopment. Pharmaceutical product development is a highly risky undertaking. To date, we have focused our efforts and most of our resources ondeveloping our lead product candidates and on our earlier pipeline assets. We are not profitable and have only had net income in the year endedDecember 31, 2014, due to recognition of deferred collaboration revenue. Furthermore, other than in the years ended December 31, 2009, 2010, and 2012,due to cash received from our collaborations with AbbVie and KHK, we have had negative cash flows from operations in each year since our inception. Wehave not generated any revenue based on product sales to date. We continue to incur significant research and development and other expenses related to ourongoing operations. For the years ended December 31, 2017, 2016, and 2015, our net loss was $47.7 million, $6.2 million, and $1.5 million,respectively. As of December 31, 2017, we had an accumulated deficit of $337.1 million and capital resources consisting of cash and cash equivalents of$129.8 million. Despite cost coverage commitments from KHK and the potential to receive development cost sharing, milestone, and other payments fromour collaborators, we anticipate that, without taking into account deferred revenue, we will continue to incur losses for the foreseeable future, and weanticipate these losses will increase as we continue our development of, and seek regulatory approval for, our product candidates. If we do not successfullydevelop and obtain regulatory approval for our existing or any future product candidates and effectively manufacture, market, and sell any products that areapproved, we may never generate product sales, and even if we do generate product sales, we may never achieve or sustain profitability. 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. Our failure tobecome and remain profitable would depress the market price of our Class A common stock and could impair our ability to raise capital, expand our business,diversify our product offerings, or continue our operations.We believe that we will continue to expend substantial resources for the foreseeable future as we continue development and expand our clinicaldevelopment efforts of our product candidates, seek regulatory approval and prepare for the commercialization of our product candidates, and pursue thedevelopment of additional molecules and treatment of additional indications. These expenditures will include costs associated with research anddevelopment, conducting preclinical studies and clinical trials, seeking regulatory approvals in various jurisdictions, and manufacturing and supplyingproducts and product candidates for ourselves and our collaborators. The outcome of any clinical trial or regulatory approval process is highly uncertain, andwe are unable to fully estimate the actual costs necessary to successfully complete the development and regulatory approval process, or the likelihood ofsuccess, for our product candidates in development and any future product candidates. Our operating plans or third-party collaborations may change as aresult of many factors, which are discussed in more detail below, and other factors that may not currently be known to us, and we therefore may need to seekadditional funds sooner than planned through public or private offerings of securities, debt financings, or other sources, such as royalty monetization or otherstructured financings. Such financings may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictionsthat may adversely affect our business. We may seek additional capital due to favorable market conditions or strategic considerations even if we currentlybelieve that we have sufficient funds for our current or future operating plans.Our future funding requirements will depend on many factors, including, but not limited to: •the rate of progress in the development of and the conduct of clinical trials with respect to our product candidates; •the costs of development efforts, including the conduct of clinical trials with respect to our lead product candidates, including the degree ofparticipation by our collaborators; •the costs to initiate and continue research, preclinical, and clinical development efforts for any future product candidates; •the costs associated with identifying additional product candidates; •the costs necessary to obtain regulatory approvals, if any, for our product candidates in the United States and other jurisdictions, and the costs ofpost-marketing studies that could be required by regulatory authorities in jurisdictions where approval is obtained; •the continuation of our existing third-party collaborations and entry into new third-party collaborations; •the time and unreimbursed costs necessary to commercialize products in territories where our product candidates may be approved for sale;37 •the revenue, if any, from any future sales of our products, if approved, as well as revenue earned from profit share, royalties, and milestones; •the level of reimbursement or third-party payor pricing available to our products, if approved; •the costs of obtaining third-party suppliers of our product candidates and products, if any, manufactured in accordance with regulatoryrequirements; •the costs associated with being a public company; and •the costs we incur in the filing, prosecution, maintenance, and defense of our patent portfolio and other intellectual property rights.Additional funds may not be available when we require them or on terms that are acceptable to us. If adequate funds are not available to us on a timelybasis, we may be required to delay, limit, reduce, or terminate our research and development efforts or other operations or activities that may be necessary tocommercialize our product candidates.Substantially all of our recent revenue has been from collaboration arrangements for our product candidates under development.During the past three completed fiscal years, substantially all of our revenue was from our collaborators, including $45.1 million, $48.2 million, and$48.1 million under the AbbVie license and collaboration agreements and $1.5 million, $1.5 million, and $1.5 million under the KHK agreement,constituting 97%, 100%, and 99% of our revenue, for each of the years ended December 31, 2017, 2016, and 2015, respectively. Furthermore, this revenueconsists of the recognition of deferred revenue from upfront, nonrefundable payments that we received from AbbVie and KHK in prior years and not from newcollaboration payments.AbbVie is currently not participating in the development efforts for bardoxolone methyl or omaveloxolone. If AbbVie continues not to jointlydevelop and commercialize bardoxolone methyl or omaveloxolone, we could require significant additional capital to proceed with the commercialization ofour product candidates. If adequate funds are not available to us on a timely basis or on favorable terms, we may be required to delay, limit, reduce, orterminate our efforts or other operations.If we are unable to continue to advance our development efforts and achieve development milestones under our collaboration agreements due todisagreements, or, if our collaborations are reprioritized by us or our collaborators or are renegotiated, our revenue may decrease and our activitiesmay fail to lead to commercial products.Revenue from research and development collaborations depends upon continuation of the collaborations, reimbursement of development costs fromKHK, the achievement of milestones, and royalties and profits from our product sales, if any, derived from future products developed from ourresearch. Collaboration agreements are often complex relationships intended to last for a long term; as a result, we may have disagreements or ourcollaborations may be reprioritized by us or our collaborators or renegotiated from time to time to change economic and other terms. If we are unable tosuccessfully advance the development of our product candidates or achieve milestones, or, if our collaboration agreements are renegotiated, we may notreceive some or all of the revenue currently contemplated under our collaboration agreements. A significant portion of the milestone payments that couldoccur under our existing contractual arrangements arise from our KHK agreement.Payments under the instruments governing our indebtedness may reduce our working capital. In addition, a default under our Loan Agreement couldcause a material adverse effect on our financial position.In March 2017, we entered into the Loan Agreement, under which the Lenders agreed to lend us up to $35 million, issuable in two separate tranches of$20 million (Term A Loan) and $15 million (Term B Loan). On March 31, 2017, we borrowed the $20 million from the Term A Loan. In November 2017, theCompany amended the Loan Agreement to increase the Term B Loan amount to either $20 million or $25 million, which extends the interest only periodfrom six to twelve months if the Term B Loan is drawn. The Company may, at its sole discretion, borrow $20 million under Term B Loan by June 29,2018. We may borrow an additional $5 million under the Term B Loan, for a total of $25 million, upon the achievement of one of two milestones by theearlier of 90 days after the achievement of a milestone or June 29, 2018.Our obligations under the Loan Agreement are secured by a first priority security interest in substantially all of our current and future assets, other thanour intellectual property. We have also agreed not to encumber our intellectual property assets, except as permitted by the Loan Agreement. All outstandingTerm Loans will mature on March 1, 2022. We will make interest-only payments for 18 months through November 1, 2018; however, if we draw the Term BLoan, we will make interest-only payments for 30 months through October 1, 2019. The interest-only payment period will be followed by 41 equal monthlypayments, or 29 equal monthly payments if we draw the Term B Loan, of principal and interest payments. Payments under the Loan Agreement could resultin a significant reduction of our working capital.The Loan Agreement requires us, and any debt arrangements we may enter into in the future may require us, to comply with various covenants thatlimit our ability to, among other things: •incur indebtedness;38 •encumber assets; •dispose of assets; •complete mergers or acquisitions; •pay dividends or make other distributions to holders of our capital stock; •make specified investments; and •engage in transactions with our affiliates.These restrictions could inhibit our ability to pursue our business strategies. If we default under our obligations under the Loan Agreement, the lenderscould proceed against the collateral granted to them to secure our indebtedness or declare all obligation under the Loan Agreement to be due and payable. Incertain circumstances, procedures by the lenders could result in a loss by us of all of our equipment and inventory, which are included in the collateralgranted to the lenders. If any indebtedness under the Loan Agreement were to be accelerated, there can be no assurance that our assets would be sufficient torepay in full that indebtedness. In addition, upon any distribution of assets pursuant to any liquidation, insolvency, dissolution, reorganization, or similarproceeding, the holders of secured indebtedness will be entitled to receive payment in full from the proceeds of the collateral securing our securedindebtedness before the holders of other indebtedness or our common stock will be entitled to receive any distribution with respect thereto.Risks Related to the Development and Commercialization of Our Product CandidatesWe are substantially dependent on the success of our lead product candidates, bardoxolone methyl and omaveloxolone.To date, we have invested a substantial portion of our efforts and financial resources in the research and development of bardoxolone methyl andomaveloxolone, which are currently our lead product candidates. These are our lead product candidates that have advanced into registrational clinicaldevelopment, and it may be years before the trials required for their approval are completed, if ever. Our other clinical and preclinical programs are lessadvanced in development and may never enter into registrational clinical trials. Although we believe that Nrf2 activators have many potential clinicalapplications, we may fail to pursue successful indications and may miss opportunities for development in other indications as a result of limitedresources. We also may fail to focus our efforts by attempting to develop single product candidates in multiple indications and formulations without success.Our near-term prospects are dependent upon successful interactions with global regulatory authorities and on successful registrational developmentand commercialization of bardoxolone methyl and omaveloxolone. We may need to complete larger and more extensive controlled clinical trials to validatethe results observed in clinical trials to date to continue further development of these product candidates. In addition, although there may be manypotentially promising indications beyond those listed above, we are still exploring indications for which further development of, and investment for, our leadproduct candidates may be appropriate. Accordingly, the costs and time to complete development and the related risks are currently unknown.The clinical and commercial success of bardoxolone methyl and omaveloxolone will depend on a number of factors, many of which are beyond ourcontrol.The clinical and commercial success of bardoxolone methyl and omaveloxolone will depend on a number of factors, including the following, many ofwhich are beyond our control: •the timely initiation, continuation, and completion of our Phase 2 and Phase 3 clinical trials for bardoxolone methyl and omaveloxolone, whichwill depend substantially upon requirements for such trials imposed by the FDA, and other regulatory agencies and bodies; •our ability to demonstrate the safety and efficacy of our product candidates to the satisfaction of the relevant regulatory authorities; •whether we are required by the FDA or other regulatory authorities to conduct additional clinical trials, and the scope and nature of such clinicaltrials, prior to approval to market our products; •the timely receipt of necessary marketing approvals from the FDA and foreign regulatory authorities, including pricing and reimbursementdeterminations; •the ability to successfully commercialize our product candidates for marketing and sale, if approved by the FDA or foreign regulatoryauthorities, whether alone or in collaboration with others; •our ability and the ability of third-party manufacturers to manufacture the quantities of our product candidates with quality attributes necessaryto meet regulatory requirements and at a scale and yield sufficient to meet anticipated demand at a cost that allows us to achieve profitability; •our success in educating health care providers and patients about the benefits, risks, administration, and use of our product candidates, ifapproved;39 •acceptance of our product candidates, if approved, as safe and effective by patients and the healthcare community; •the achievement and maintenance of compliance with all regulatory requirements applicable to our product candidates, our third-partymanufacturers, and our internal operations; •the maintenance of an acceptable safety profile of our products, if any, following any approval; •the availability, perceived advantages, relative cost, relative safety, and relative efficacy of alternative and competitive treatments; •our ability to successfully enforce our intellectual property rights for our product candidates and against the products of potential competitors;and •our ability to avoid or succeed in third-party patent interference or patent infringement claims.We cannot assure you that we will ever be able to achieve profitability through the sale of, or royalties from, our product candidates. If we or ourcollaborators are not successful in obtaining approval for and commercializing our product candidates, or are delayed in completing those efforts, ourbusiness and operations would be adversely affected.If our product candidates receive regulatory approval, we will be subject to ongoing regulatory requirements and we may face future development,manufacturing, and regulatory difficulties.Our product candidates, if approved, will also be subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion,sampling, record-keeping, submission of safety and other post-market approval information, importation, and exportation. In addition, approved products,manufacturers, and manufacturers’ facilities are required to comply with extensive FDA, EMA, Japanese Pharmaceuticals and Medical Devices Agency(PMDA), and Australian Therapeutic Goods Administration (TGA), requirements and the requirements of other similar agencies, including ensuring thatquality control and manufacturing procedures conform to CGMP requirements. As such, we and our potential future contract manufacturers will be subject tocontinual review and periodic inspections to assess compliance with CGMPs. Accordingly, we and others with whom we work will be required to expendtime, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control. We will also be required to reportcertain adverse reactions and production problems, if any, to the FDA, EMA, PMDA, TGA, and other similar agencies and to comply with certainrequirements concerning advertising and promotion for our product candidates. Promotional communications with respect to prescription drugs also aresubject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. Accordingly, onceapproved, we may not promote our products, if any, for indications or uses for which they are not approved.If a regulatory agency discovers previously unknown problems with a product, such as AEs of unanticipated severity or frequency or problems with thefacility where the product is manufactured, or disagrees with the promotion, marketing, or labeling of a product, it may impose restrictions on that product orus, including requiring withdrawal of the product from the market. If our product candidates fail to comply with applicable regulatory requirements, aregulatory agency may: •issue warning letters or untitled letters; •request voluntary product recalls; •mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners; •require us or our potential future collaborators to enter into a consent decree or obtain a permanent injunction against us or our potential futurecollaborators, which can include shutdown of manufacturing facilities, imposition of fines, reimbursements for inspection costs, taking ofspecific actions by required due dates, and penalties for noncompliance; •impose other administrative or judicial civil or criminal penalties or pursue criminal prosecution; •withdraw regulatory approval; •refuse to approve pending applications or supplements to approved applications filed by us or by our collaborators or potential collaborators; •impose restrictions on operations, including costly new manufacturing requirements; or •seize or detain products.Success in earlier Phase 1 and 2 clinical trials for our product candidates, bardoxolone methyl and omaveloxolone, may not be indicative of the resultsthat may be obtained in larger registrational clinical trials, which may delay or prevent obtaining regulatory approval.Clinical development is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time duringthe clinical trial process. Success in preclinical studies and early clinical trials may not be predictive of results in larger clinical trials, and successful resultsfrom early or small clinical trials may not be replicated or show as favorable an outcome in larger clinical trials, even if successful. For example, we havepreviously endeavored to develop bardoxolone methyl for the treatment of CKD caused by type 240diabetes. While bardoxolone methyl appeared to be safe and effective throughout Phase 2 clinical development for kidney disease, we encountered heartfailure related to fluid overload during the pivotal Phase 3 trial, known as BEACON, that resulted in the termination of the CKD caused by type 2 diabetesprogram. Heart failure appeared to occur at a very low rate in only a particular type of patient studied during BEACON, which was not observed duringPhase 2. Our other clinical programs with bardoxolone methyl and omaveloxolone have involved a relatively small number of patients exposed for arelatively short period of time compared to the Phase 3 clinical trials that we may need to conduct. Accordingly, the Phase 2 clinical trials that we haveconducted may not have uncovered safety issues, even if they exist. The biochemical pathways that we believe are affected by bardoxolone methyl andomaveloxolone are implicated in a variety of biological processes and disease conditions, and it is possible that the use of our product candidates to treatlarger numbers of patients will demonstrate unanticipated adverse effects, including possible drug-drug interactions, which may negatively affect their safetyprofile.In addition, we cannot assure that any potential advantages that we believe bardoxolone methyl may have for our current clinical programs will besubstantiated by our registrational clinical trials or that we will be able to include a discussion of any advantages in our labeling should we obtainapproval. We cannot assure you that our previous data in our Phase 2 trial and our trials in CKD caused by type 2 diabetes may predict effects in ourregistrational trial in patients with CKD caused by Alport syndrome. In addition, based on the data from our ongoing Phase 2 clinical trial in PAH and PH-ILD, we believe that bardoxolone methyl, combined with current standard of care, may have benefits compared to treatment with current standard ofcare. However, our belief that bardoxolone methyl may offer those benefits is based on a limited amount of data from our Phase 2 trial and our understandingof the likely mechanisms of action for bardoxolone methyl, and such data may not be replicated in our Phase 3 trial. Additionally, while we have discussedthe PAH and CKD caused by Alport syndrome trial data with the FDA and the PMDA, we have not yet discussed these trial data with any other globalregulatory health authority, and these regulatory bodies may not concur that these benefits would translate to approvable trial endpoints or be reflected onour product label.In addition, we cannot assure that the potential advantages that we believe omaveloxolone may have will be substantiated by our registrationalclinical trials or that we will be able to include a discussion of such advantages in our labeling should we obtain approval. Additionally, while we havediscussed FA and melanoma trial data with the FDA, we have not yet discussed any trial with global regulatory health authorities, and these regulatory bodiesmay not concur that these benefits would translate to approvable trial endpoints or be reflected on our product label.Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achievingpositive results in early stage development, and we have had, and may face, similar setbacks. In addition, the patient populations under investigation withbardoxolone methyl and omaveloxolone have many co-morbidities that may cause severe illness or death, which may be attributed to bardoxolone methyland omaveloxolone in a manner that negatively affects the safety profile of our product candidate. If the results of our ongoing or future clinical trials forbardoxolone methyl and omaveloxolone are inconclusive with respect to efficacy, if we do not meet our clinical endpoints with statistical significance, or ifthere are unanticipated safety concerns or AEs that emerge during clinical trials, we may be prevented from or delayed in obtaining marketing approval, andeven if we obtain marketing approval, any sales may suffer.We may face delays in completing our ongoing or planned clinical trials with bardoxolone methyl and omaveloxolone due to a number of factors, orthese studies may not be completed at all.Clinical trials can be delayed, suspended, or terminated for a variety of reasons, including delay or failure to: •reach timely agreement on acceptable terms with prospective contract research organizations (CROs), and clinical trial sites; •manufacture sufficient quantities of product candidate with acceptable quality attributes for use in clinical trials; •obtain required regulatory or IRB approval, or guidance; •maintain clinical sites in compliance with clinical trial protocols and GCP; •initiate or add a sufficient number of clinical trial sites; •recruit, enroll, and retain patients through the completion of the trial; and •address any physician or patient safety concerns that arise during the course of the trial.In addition, we could encounter delays if a clinical trial is suspended or terminated by us, by the relevant IRBs at the sites at which such studies arebeing conducted, or by the FDA or other regulatory authorities. A suspension or termination of clinical trials, including imposition of a clinical hold, mayresult from any 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, unforeseen safety issues or adverse side effects, changes inlaws or regulations, or a principal investigator’s determination that an SAE could be related to our product candidates. Any delays in completing our clinicaltrials will increase the costs of the trial, delay or prevent the product candidate’s development and approval, and jeopardize our ability to commencemarketing and generate revenue. Any of these occurrences may materially and adversely harm our business and operations and prospects.41Our product candidates may cause or have attributed to them undesirable side effects or have other properties that delay or prevent their regulatoryapproval or limit their commercial potential.Undesirable side effects caused by our product candidates or that may be identified as related to our product candidates by investigators conductingour clinical trials or even related to competing products in development that utilize a similar mechanism of action or act through a similar biological diseasepathway could cause us or regulatory authorities to interrupt, delay, or halt clinical trials and could result in the delay or denial of regulatory approval by theFDA or other regulatory authorities and potential product liability claims. AEs and SAEs that emerge during treatment with our product candidates or othercompounds acting through similar biological pathways may be deemed to be related to our product candidate. This may require longer and more extensivePhase 3 clinical development, or regulatory authorities may increase the amount of data and information required to approve, market, or maintain our productcandidates and could result in negative labeling or a restrictive REMS. This may also result in an inability to obtain approval of our product candidates.The occurrence of any or all of these events may cause the development of our product candidates to be delayed or terminated, which could materiallyand adversely affect our business and prospects. Our product candidates have in the past and may in the future be deemed to cause adverse effects and SAEs.Clinical trials of our product candidates may not uncover all possible adverse effects that patients may experience.Clinical trials are conducted in representative samples of the potential patient population, which may have significant variability. By design, clinicaltrials are based on a limited number of subjects, and are of limited duration of exposure to the product, to determine whether the product candidatedemonstrates the substantial evidence of efficacy and safety necessary to obtain regulatory approval. As with the results of any statistical sampling, wecannot be sure that all side effects of our product candidates may be uncovered. It may be the case that only with a significantly larger number of patientsexposed to the product candidate for a longer duration may a more complete safety profile be identified. Further, even larger clinical trials may not identifyrare SAEs, and the duration of such studies may not be sufficient to identify when those events may occur. Other products have been approved by theregulatory authorities for which safety concerns have been uncovered following approval. Such safety concerns have led to labeling changes, restrictions ondistribution through use of a REMS, or withdrawal of products from the market, and any of our product candidates may be subject to similar risks.Although to date we have not seen evidence of significant safety concerns with our product candidates in the patient populations currentlyundergoing clinical trials with bardoxolone methyl or omaveloxolone beyond those seen in BEACON, patients treated with our products, if approved, mayexperience adverse reactions, and it is possible that the FDA or other regulatory authorities may ask for additional safety data as a condition of, or inconnection with, our efforts to obtain approval of our product candidates. If safety problems occur or are identified after our products, if any, reach themarket, we may make the decision or be required by regulatory authorities to amend the labeling of our products, recall our products, or even withdrawapproval for our products.We may fail to enroll a sufficient number of patients in our clinical trials in a timely manner, which could delay or prevent clinical trials of our productcandidates.Identifying and qualifying patients to participate in clinical trials of our product candidates is critical to our success. The timing of our clinical trialsdepends on the rate at which we can recruit and enroll patients in testing our product candidates. Patients may be unwilling to participate in clinical trials ofour product candidates for a variety of reasons, some of which may be beyond our control, including: •severity of the disease under investigation; •real or perceived availability of alternative treatments; •size and nature of the patient population; •eligibility criteria for and design of the trial in question; •perceived risks and benefits of the product candidate under study; •ongoing clinical trials of potentially competitive agents; •physicians’ and patients’ perceptions as to the potential advantages of our product candidates being studied in relation to available therapies orother products under development; •our CRO’s and our trial sites’ efforts to facilitate timely enrollment in clinical trials; •patient referral practices of physicians; and •the need to monitor patients and collect patient data adequately during and after treatment.42Patients may be unwilling to participate in our clinical trials for bardoxolone methyl due to the AEs we previously detected in a subset of patients withadvanced CKD caused by type 2 diabetes, and patients currently controlling their disease with standard of care may be reluctant to participate in a clinicaltrial with an investigational drug. Likewise, patients may be unwilling to participate in our clinical trials for bardoxolone methyl and omaveloxolone due tounforeseen factors beyond our control. Some of the conditions that we are studying are rare diseases and enrollment in clinical trials may be limited by thelack of suitable patients with these diseases. We may not be able to successfully initiate or continue clinical trials if we cannot rapidly enroll a sufficientnumber of eligible patients to participate in the clinical trials required by regulatory agencies. If we have difficulty enrolling a sufficient number of patientsto conduct our clinical trials as planned, we may need to delay, limit, or terminate on-going or planned clinical trials, any of which could have a materialadverse effect on our business and prospects.If we, our collaborators, or our third-party manufacturers cannot manufacture our product candidates or products at sufficient yields, we mayexperience delays in development, regulatory approval, and commercialization.Completion of our clinical trials and commercialization of our product candidates require access to, or development of, facilities to manufacture ourproduct candidates at sufficient yields and at commercial scale. We have limited direct experience in manufacturing, or managing third parties inmanufacturing, certain types of our product candidates in the volumes that are expected to be necessary to support commercialization. Our efforts toestablish these capabilities may not meet our requirements as to scale-up, timeliness, yield, cost, or quality in compliance with CGMP. Our clinical trialsmust be conducted with product candidates produced under applicable CGMP regulations. Failure to comply with these regulations may require us to repeatclinical trials, which would delay the regulatory approval process. Our collaborators or experienced third-party manufacturers may encounter difficulties inproduction, which may include but are not limited to: •costs and challenges associated with scale-up and attaining sufficient manufacturing yields; •supply chain issues, including the timely availability and shelf life requirements of raw materials and supplies and the lack of redundant andbackup suppliers; •quality control and assurance; •shortages of qualified personnel and capital required to manufacture large quantities of product; •competing capacity needs at contract manufacturing organizations (CMOs) supporting product development as quantities for supply increase; •establishment of commercial supply capacity through binding supply agreements; •compliance with regulatory requirements that vary in each country where a product might be sold; •capacity limitations and scheduling availability in contracted facilities; and •natural disasters, cyberattacks, or other force majeure events that affect facilities and possibly limit production or loss of product inventorymaintained in third party storage facilities.Even if we are able to obtain regulatory approval of our product candidates, we cannot predict the labeling we will obtain and it may be more narrowthan originally sought.Although we are conducting three registrational trials, specific labeling language has not yet been discussed with health regulatory authorities. Forboth bardoxolone methyl and omaveloxolone, regulatory approvals, if obtained at all, may include very narrowly-defined indications for which theseproducts may be marketed, since this limitation is a common outcome of health authority review and approval processes. Alternatively, the specific labelinglanguage could highlight real or potential perceived risks that could limit the use of the product candidates in the marketplace, or require a REMS. Theselabeling limitations may be driven by either preclinical or clinical outcomes, some of which may not yet have been observed in our early studies. Suchlimitations or warnings may affect our ability to successfully commercialize our products. Due to the rarity of the diseases for which our product candidatesare targeted, a narrower than expected indication or other restrictions in labeling could significantly affect our ability to generate revenue.We have never completed a Phase 3 clinical trial or submitted an NDA and may be unable to do so efficiently or at all for bardoxolone methyl,omaveloxolone, or any product candidate we are developing or may develop in the future.We have conducted, or are currently conducting, Phase 2 and Phase 3 or other registrational trials for bardoxolone methyl and omaveloxolone, and wemay need to conduct additional Phase 2 trials before initiating additional Phase 3 or other registrational clinical trials with bardoxolone methyl andomaveloxolone. The conduct of Phase 3 trials and the submission of an NDA is a complicated process. We have not previously completed a Phase 3 trial,have limited experience in preparing, submitting, and prosecuting regulatory filings, and have not previously submitted an NDA. Consequently, we may beunable to successfully and efficiently execute and complete necessary clinical trials and other requirements in a way that leads to NDA submission andapproval of any product candidate we are developing. We may require more time and incur greater costs than our competitors and may not succeed inobtaining regulatory approvals of product candidates that we develop.43If we are unable to establish sales, marketing, and distribution capabilities or enter into or maintain agreements with third parties to market and sellour product candidates, we may not be successful in commercializing our product candidates if and when they are approved.We do not have a sales or marketing infrastructure and have no experience in the sales, marketing, or distribution of pharmaceutical products in anycountry. To achieve commercial success for any product for which we obtain marketing approval, we will need to establish sales and marketing capabilitiesor make and maintain our existing arrangements with third parties to perform these services at a level sufficient to support our commercialization efforts.To the extent that we would undertake sales and marketing of any of our products directly, there are risks involved with establishing our own sales,marketing, and distribution capabilities. Factors that may inhibit our efforts to commercialize our products, if any, include: •our inability to recruit, train, and retain adequate numbers of effective sales and marketing personnel; •the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any future products; •our inability to effectively manage geographically dispersed sales and marketing teams; •the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companieswith more extensive product lines; and •unforeseen costs and expenses associated with creating an independent sales and marketing organization.With respect to bardoxolone methyl and omaveloxolone, we are currently dependent in part in certain territories on the commercialization capabilitiesof our collaborators, AbbVie and KHK. If our collaborators were to fail to devote the necessary resources and attention to sell and market our products, or inany way be unsuccessful in commercializing our products, if any, in their respective appropriate territories, our business and financial condition would suffer.If the market opportunities for our product candidates are smaller than we believe they are, our revenue may be adversely affected, and our businessmay suffer. Because the target patient populations of our product candidates are small, we must be able to successfully identify patients and acquire asignificant market share to achieve profitability and growth.We focus our research and product development on treatments for rare and ultra-rare diseases. Given the small number of patients who have thediseases that we are targeting, our profitability and growth depend on successfully identifying patients with these rare and ultra-rare diseases. Our projectionsof both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatmentwith our product candidates, are based on our beliefs and internal estimates. These estimates have been derived from a variety of sources, including scientificliterature, surveys of clinics, patient foundations, and market research, and may prove to be incorrect. Further, new studies may change the estimatedincidence or prevalence of these diseases, and, as a result, the number of patients with these diseases may turn out to be lower than expected. Our effort toidentify patients with diseases we seek to treat is in early stages, and we cannot accurately predict the number of patients for whom treatment might bepossible. Additionally, the potentially addressable patient population for each of our product candidates may be limited or may not be amenable totreatment with our product candidates, and new patients may become increasingly difficult to identify or gain access to, which would adversely affect ourresults of operations and our business. Finally, even if we obtain significant market share for our product candidates, because the potential target populationsare very small, we may never achieve profitability despite obtaining such significant market share.We face substantial competition. There is a possibility that our competitors may discover and develop drugs and obtain regulatory approval before wedo.The development and commercialization of new pharmaceutical products is highly competitive. Our future success depends on our ability to achieveand maintain a competitive advantage with respect to the development and commercialization of our product candidates. Our objective is to discover,develop, and commercialize new products with superior efficacy, convenience, tolerability, and safety in areas with unmet medical need. Our currentdevelopment programs are intended to either significantly complement existing therapies or serve disease states for which there are no satisfactory existingproducts. However, we expect that in some cases, the products that we commercialize, if any, may compete with existing or future products of companies thathave large, established commercial organizations. If bardoxolone methyl is approved and launched commercially for patients with CKD caused by Alport syndrome, it will likely be the first treatmenton the market for the indication. At least one therapy for the treatment of Alport syndrome is currently in clinical development with a Phase 2 injectableproduct candidate, RG-012, from Regulus Therapeutics.44If bardoxolone methyl is approved and launched commercially for patients with PAH, it would launch into a product landscape of numerous approvedtherapeutics, including Opsumit® (macitentan), Adempas® (riociguat), Orenitram™ (treprostinil), Letairis® (ambrisentan), Tracleer® (bosentan), Uptravi®(selexipag), and others. These agents, used alone or in combination, currently comprise the standard of care in the treatment of patients with PAH. While weexpect our anticipated product profile would be complementary to these therapies, and would add to, rather than attempt to displace, these products, it maybe difficult to encourage treatment providers and patients to add our product to their treatment paradigm. We may also face competition from potential newtherapies currently in clinical development. For example ralinepag, GS-4997, BIA-5-1058, and KAR5585 are purported to be in development by suchcompanies as Arena Pharmaceuticals, Inc., Gilead Sciences, Inc., Bial-Portela & Ca., SA, and Karos Pharmaceuticals, Inc., respectively. These productcandidates may be in competition with bardoxolone methyl for patient recruitment and enrollment for clinical trials and may be in competition withbardoxolone methyl if it is approved and launched commercially. Some of these product candidates may enter the market prior to bardoxolone methyl, andsome of these product candidates could limit the market or level of reimbursement available for bardoxolone methyl if it is commercialized.If bardoxolone methyl is approved and launched commercially for patients with ADPKD, IgA nephropathy, type 1 diabetic CKD, or focal segmentalglomerulosclerosis, it could face competition. Multiple other therapies are reported to be in clinical development for ADPKD such as tolvaptan, tesevatinib,venglustat, and lixivaptan by companies including Otsuka Pharmaceutical Co., Ltd., Kadmon Holdings, Inc., Sanofi Genzyme, and PalladioBiosciences. Clinical development for the treatment of IgA nephropathy includes OMS-721, nefecon, blisibimod, fostamatinib, LNP023, and atacicept byOmeros Corporation, Calliditas Therapeutics AB, Anthera Pharmaceuticals, Inc., Rigel Pharmaceuticals Inc., Novartis AG, and Merck KgaA. Genkyotex iscurrently involved in a clinical trial of GKT831 in type 1 diabetic CKD. Sparsentan, bleselumab, and abatacept are reported to be in clinical development forthe treatment of FSGS by Retrophin, Inc., Astellas Pharma Global Development, Inc., and Bristol-Myers Squibb Company. These product candidates may bein competition with bardoxolone methyl for patient recruitment and enrollment for clinical trials and may be in competition with bardoxolone methyl if it isapproved and launched commercially. Some of these product candidates may enter the market prior to bardoxolone methyl, and some of these productcandidates could limit the market or level of reimbursement available for bardoxolone methyl if it is commercialized.If bardoxolone methyl is approved and launched commercially for patients with PH-ILD, it could be the first therapy to serve this subsetpopulation. We may face competition from potential new therapies currently in clinical development or additional approvals of existing therapies. Forexample, Adempas®, Tracleer®, and Orenitram™ are purported to be in development by such companies as Bayer, Actelion, and United TherapeuticsCorporation, respectively. These product candidates may be in competition with bardoxolone methyl for patient recruitment and enrollment for clinicaltrials and may be in competition with bardoxolone methyl if it is approved and launched commercially. Some of these product candidates may enter themarket prior to bardoxolone methyl, and could limit the market or level of reimbursement available for bardoxolone methyl if it is commercialized.Omaveloxolone may face similar competitive risks as bardoxolone methyl. For our development program in mitochondrial disorders such as FA andMM, if omaveloxolone is approved and launched commercially it may face market competition. Although there are no currently approved therapies for theseconditions, there are several competitors who purport to be developing products in this space, including TAK-831, RT001, epicatechin, JOT101,Elamipretide®, idebenone, vatiquinone, and KH176. These candidates are being developed by such companies as Takeda Pharmaceutical Company Limited,Retrotope Inc., Cardero Therapeutics Inc., Jupiter Orphan Therapeutics, Inc., Stealth Biotherapeutics Inc., Santhera Pharmaceuticals Holding AG, BioElectronTechnology Corporation, and Khondrion, respectively. These product candidates may be in competition with omaveloxolone for patient recruitment andenrollment for clinical trials and may be in competition with omaveloxolone if it is approved and launched commercially. Some of these product candidatesmay enter the market prior to omaveloxolone, and some of these product candidates could limit the market or level of reimbursement available foromaveloxolone if it is commercialized.Omaveloxolone may face market competition if it is approved and launched commercially as part of our development program in immuno-oncology. Numerous therapies are in development for combination treatments in immuno-oncology, including Yervoy®, Opdivo®, Keytruda®, MPDL-3280A, entinostat, indoximod, epacadostat, IMO2125, relatlimab, SD101, CMP001, BTH1677, ImmunoPulse® IL-12, PLX3397, CB839, and others. Thesecandidates are being developed by such companies as Bristol-Myers Squibb Company, Merck & Co., Inc., Roche Holding AG, Syndax Pharmaceuticals, Inc.,NewLink Genetics Corporation, Incyte Corporation, Idera Pharmaceuticals, Inc., Bristol-Myers Squibb Company, Dynavax Technologies Corporation,Checkmate Pharmaceuticals, Biothera Pharmaceuticals Inc., OncoSec Medical Inc., Plexxikon Inc., and Calithera Biosciences Inc., respectively. Theseproduct candidates may be in competition with omaveloxolone for patient recruitment and enrollment for clinical trials and may be in competition withomaveloxolone if it is approved and launched commercially. Some of these product candidates may enter the market prior to omaveloxolone, and some ofthese product candidates could limit the market or level of reimbursement available for omaveloxolone if it is commercialized.RTA 901 may face similar competitive risks as bardoxolone methyl and omaveloxolone. Other HSP90 inhibitors are being developed for neurologicalindications, including arimoclomol and PUH-AD by such companies as Orphazyme AS and Samus Therapeutics Inc.45RTA 1701 may face similar competitive risks as bardoxolone methyl, omaveloxolone, and RTA 901. Other RORgT modulators are in various stagesof clinical development, including AGN-242428, BOS172767, JTE451, AZD0284, JNJ3534, and others. These candidates are being developed by suchcompanies as Allergan plc, Boston Pharmaceuticals, Japan Tobacco Inc., AstraZeneca PLC, and Phenex Pharmaceuticals AG, respectively.The success of any of these potential competitive products may negatively affect the development and potential for success of our productcandidates. In addition, any competitive products that are on the market or in development may compete with our product candidates for patient recruitmentand enrollment for clinical trials or may force us to add or change our clinical trial comparators, whether placebo or active, to compare our product candidatesagainst another drug, which may be the new standard of care.Moreover, many of our competitors have significantly greater resources than we do. Large pharmaceutical companies, in particular, have extensiveexperience in clinical testing, obtaining regulatory approvals, recruiting patients, manufacturing pharmaceutical products, and commercialization. Suchlarge and established companies compete aggressively to maintain their market shares. In particular, these companies have greater experience and expertisein securing reimbursement, government contracts, and relationships with key opinion leaders; conducting testing and clinical trials; obtaining andmaintaining regulatory approvals and distribution relationships to market products; and marketing approved products. These companies also havesignificantly greater research and marketing capabilities than we do and may also have products that have been approved or are in later stages ofdevelopment. If we and our collaborators are not able to compete effectively against existing and potential competitors, our business and financial conditionmay be materially and adversely affected.Our future commercial success depends upon attaining significant market acceptance of our product candidates, if approved, among physicians,patients, third-party payors, and others in the health care community.Even if we obtain marketing approval for our product candidates, these product candidates may not gain market acceptance among physicians, third-party payors, patients, and others in the health care community. Market acceptance of any approved product depends on a number of other factors,including: •the clinical indications for which the product is approved and the labeling required by regulatory authorities for use with the product, includingany warnings, testing, and other qualifying criteria for patient use, that may be required in the labeling; •acceptance by physicians and patients of the product as a safe and effective treatment and the willingness of physicians to prescribe newtherapies and of the target patient population to try new therapies; •the cost, safety, efficacy, and convenience of treatment in relation to alternative treatments; •the restrictions on the use of our products together with other medications, if any; •the availability of adequate coverage and adequate reimbursement or pricing by third-party payors and government authorities; and •the effectiveness of our sales and marketing efforts.We may not be successful in our efforts to identify, license, discover, develop, or commercialize additional product candidates.Although a substantial amount of our effort will focus on the continued clinical testing, potential approval, and commercialization of our existingproduct candidates, the success of our business also depends upon our ability to identify, license, discover, develop, or commercialize additional productcandidates. Research programs to identify new product candidates require substantial technical, financial, and human resources. We may focus our effortsand resources on potential programs or product candidates that ultimately prove to be unsuccessful. Our research programs or licensing efforts may fail toyield additional product candidates for clinical development and commercialization for a number of reasons, including but not limited to the following: •our research or business development methodology or search criteria and process may be unsuccessful in identifying potential productcandidates; •we may not be able or willing to assemble sufficient resources to acquire or discover additional product candidates; •our product candidates may not succeed in preclinical or clinical testing; •our potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the productsunmarketable or unlikely to receive marketing approval; •competitors may develop alternatives that render our product candidates obsolete or less attractive; •product candidates we develop may be covered by third parties’ patents or other exclusive rights; •the market for a product candidate may change during our program so that such a product may become unreasonable to continue to develop;46 •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 and effective by patients, the medical community, or third-party payors.If any of these events occur, we may be forced to abandon our development efforts for a program or programs, or we may not be able to identify,license, discover, develop, or commercialize additional product candidates, which would have a material adverse effect on our business and could potentiallycause us to cease operations.It is difficult to predict the reimbursement or insurance coverage of our products, if approved. Failure to obtain adequate coverage andreimbursement, or obtaining limited reimbursement, from third-party payors may render our products less attractive to patients and healthcareproviders.Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain regulatory approval. Marketacceptance and sales of any approved products will depend significantly on obtaining adequate coverage and sufficient reimbursement of our products bythird-party payors and may be affected by existing and future healthcare reform measures or the prices of related products for which third-party reimbursementapplies. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that useof a product is: •a covered benefit under its health plan; •safe, effective, and medically necessary; •appropriate for the specific patient; •cost-effective; and •neither experimental nor investigational.Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time-consuming and costly processthat could require us to provide supporting scientific, clinical, and cost-effectiveness data for the use of our products to the third-party payor, which we maynot be able to provide. Furthermore, the reimbursement policies of third-party payors may significantly change in a manner that renders our clinical datainsufficient for adequate reimbursement or otherwise limits the successful marketing of our products. Moreover, the process for determining whether a third-party payor will provide coverage for a drug product may be separate from the process for setting the price of a drug product or for establishing thereimbursement rate that such payor will pay for the drug product. Even if we obtain coverage for our product candidates, third-party payors may not establishadequate reimbursement amounts, which may reduce the demand for, or the price of, our products, if any. Further, one payor’s determination to providecoverage for a drug product does not assure that other payors will also provide coverage for the drug product. If coverage and reimbursement are notavailable or are available only to limited levels, we may not be able to commercialize certain of our products, if any. Payors may also add additionalrequirements, including genetic testing and requiring less expensive generic therapy first.In countries outside of the United States, price controls may limit the price at which products, if approved, are sold. For example, reference pricing isoften used by various European Union member states. Parallel distribution, or arbitrage between low-priced and high-priced member states, can furtherreduce prices. In some countries, we or our collaborators may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of ourproduct candidates to other available products to obtain or maintain reimbursement or pricing approval. Publication of discounts by third-party payors orauthorities may lead to further pressure on the prices or reimbursement levels within the country of publication and other countries. If reimbursement of ourproducts, if any, is unavailable or limited in scope or amount, or if pricing is set at unacceptable levels, we or our collaborators may elect not tocommercialize our products, if any, in such countries, and our business and financial condition could be adversely affected.The continuing efforts of the government, insurance companies, managed care organizations, and other payors of healthcare services to contain orreduce costs of healthcare may adversely affect: •the demand for any products that may be approved for sale; •the price and profitability of our products; •coverage and reimbursement applicable to our products; •the ability to successfully position and market any approved product; and •the taxes applicable to our pharmaceutical product revenue.47If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our productcandidates.We face an inherent risk of product liability as a result of the clinical testing, manufacturing, and commercialization of our product candidates. Anysuch product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in a product,negligence, strict liability, or breach of warranty. Claims could also be asserted under state consumer protection acts. If we are unable to obtain insurancecoverage at levels that are appropriate to maintain our business and operations, or if we are unable to successfully defend ourselves against product liabilityclaims, we may incur substantial liabilities or otherwise cease operations. Product liability claims may result in: •termination of further development of unapproved product candidates or significantly reduced demand for any approved products; •material costs and expenses to defend the related litigation; •a diversion of time and resources across the entire organization, including our executive management; •voluntary product recalls, withdrawals, or labeling restrictions; •termination of our collaboration relationships or disputes with our collaborators; and •reputational damage negatively affecting our other product candidates in development.We maintain product liability insurance in a customary amount for the stage of development of our product candidates. We currently carry$15 million of clinical trial insurance. The amount of such insurance coverage may not be adequate, we may be unable to maintain such insurance, or wemay not be able to obtain additional or replacement insurance at a reasonable cost, if at all. Although we believe that we have sufficient coverage based onthe advice of our third-party advisors, there can be no assurance that such levels will be sufficient for our needs. Moreover, our insurance policies havevarious exclusions, and we may be in a dispute with our carrier as to the extent and nature of our coverage, including whether we are covered under theapplicable product liability policy. If we are not able to ensure coverage or are required to pay substantial amounts to settle or otherwise contest the claimsfor product liability, our business and operations would be negatively affected.Risks Related to Our Reliance on Third PartiesIf our collaborators do not participate in the development and commercialization of our product candidates or prioritize other initiatives over theircollaborations with us, our ability to successfully develop and commercialize our product candidates could suffer.We have entered into an agreement with KHK with respect to the development and commercialization of bardoxolone methyl for renal, cardiovascular,diabetes, and certain related metabolic indications in certain territories in Asia. We have also entered into a license agreement with respect to thedevelopment and commercialization of bardoxolone methyl for renal, metabolic, and cardiovascular indications with AbbVie in certain territories outside theUnited States that are not covered by the KHK agreement. However, AbbVie is not currently participating in the development of bardoxolone methyl in CKDcaused by Alport syndrome, CTD-PAH, PH-ILD, or other rare kidney diseases, and KHK is not participating in the development of bardoxolone methyl inCTD-PAH, PH-ILD, or other rare kidney diseases but is reimbursing us the majority of the costs for our registrational trial in CKD caused by Alport syndromein Japan. Additionally, we have entered into a collaboration agreement with AbbVie with respect to the development and commercialization ofomaveloxolone and other Nrf2 activator product candidates globally, and currently AbbVie is not participating in the development ofomaveloxolone. These agreements contain various provisions related to cost-sharing of product development in certain instances and also provide forcommercialization and revenue recognition terms for certain products throughout the major territories of the world.Our agreements with AbbVie and KHK provide them with certain rights and responsibilities related to participation in product development andcommercial product supply of given products in specific territories. If AbbVie or KHK were to continue to elect not to participate in the development andcommercialization of our product candidates or to determine that their collaborations with us are no longer a strategic priority, were unable to perform theirobligations under the collaboration agreements, or if a successor were to reduce their level of commitment to their collaborations with us, our ability todevelop and commercialize our product candidates could suffer. In addition, some of our collaborations are exclusive and preclude us from entering intoadditional collaboration agreements with other parties in the area or field of exclusivity. AbbVie and KHK have allowed us to make regulatory filings andconduct clinical trials in their exclusive territories in order to generate clinical trial data that we may use in connection with seeking approval of our productcandidates in the United States. There can be no assurance that one or more of these authorizations will not be withdrawn.If we fail to establish and maintain strategic collaborations related to our product candidates, we could bear all of the risk and costs related to thedevelopment and commercialization of any such product candidate, and we may need to seek additional financing, hire additional employees, and otherwisedevelop expertise at our cost. This in turn may negatively affect the development of our other product candidates as we direct resources to our mostadvanced product candidates.48Conflicts with our collaborators could jeopardize our collaboration agreements and our ability to develop and commercialize our product candidates.Our collaborator AbbVie has certain rights to control decisions and activity regarding the development or commercialization of various productcandidates with respect to certain territories. If we have any disagreements with AbbVie with respect to those matters, our plans for obtaining approval maybe revised and negatively affect the anticipated timing and potential for success of our product candidates. We have the right under our collaborationagreement with AbbVie to designate omaveloxolone as a product candidate for one indication and two related indications, and pursue further developmentof omaveloxolone in such indications, without AbbVie’s consent. However, we are required to obtain AbbVie’s consent to pursue the development ofadditional indications for omaveloxolone, once it is designated as a product candidate, which may not be obtainable. Even if omaveloxolone or anotherproduct candidate is approved, we may remain substantially dependent outside the United States on the commercialization strategy and efforts of ourcollaborator outside the United States, and our collaborator may not have experience in the areas we elect to pursue.With respect to the AbbVie collaboration agreement, additional complexities exist. For example, if AbbVie were to opt back in to development ofomaveloxolone, we and AbbVie must reach a consensus on our registrational development program with respect to jointly developed productcandidates. Alternately, depending upon what point, if any, AbbVie opts back in, we could be responsible for commercializing omaveloxoloneglobally. Similarly, our collaboration with KHK for bardoxolone methyl requires cooperation between the parties, and failure to do so can negatively affectthe development and commercialization of certain of our product candidates or result in termination of the KHK agreement. Multi-party decision-making iscomplex and involves significant time and effort. There can be no assurance that the parties will cooperate or reach consensus, or that one or both of ourcollaborators will not ask to proceed independently in some or all of their respective territories or functional areas of responsibility in which the applicablecollaborator would otherwise be obligated to cooperate with us. Any disputes or lack of cooperation with AbbVie or KHK may negatively affect the timingor success of our planned clinical trials or commercialization plans.Certain of our collaborators could also become our competitors in the future. If our collaborators develop competing products, or if we fail to obtainnecessary regulatory approvals, or fail to devote sufficient resources to the development and commercialization of our product candidates, the developmentand commercialization of our product candidates and products could be delayed.We are also conducting proprietary research programs with molecules and programs that are not covered by our collaboration agreements. Our pursuitof such opportunities could result in conflicts with our collaborators in the event that they take the position that our internal activities overlap with thoseareas that are exclusive to our collaboration agreements, and we should be precluded from such internal activities. Moreover, disagreements with ourcollaborators could develop over rights to our intellectual property. In addition, our collaboration agreements may have provisions that give rise to disputesregarding the rights and obligations of the parties. Any conflict with our collaborators could delay collaborative activities, reduce our ability to renewagreements or obtain future collaboration agreements, result in termination of agreements, or result in litigation or arbitration and would negatively affect ourrelationship with existing collaborators.We rely on third parties for the conduct of most of our preclinical studies and clinical trials for our product candidates, and if our third-partycontractors do not properly and successfully perform their obligations under our agreements with them, we may not be able to obtain or may be delayedin receiving regulatory approvals for our product candidates.We rely heavily on universities, hospitals, and other institutions and third parties, including the principal investigators and their staff, to carry out ourpreclinical studies and clinical trials in accordance with our protocols and designs. We also rely on a number of third-party CROs to assist in undertaking,managing, monitoring, and executing our ongoing clinical trials. We expect to continue to rely on CROs, clinical data management organizations, medicalinstitutions, and clinical investigators to conduct our development efforts in the future, including our Phase 3 development programs. We compete withmany other companies for the resources of these third parties, and large pharmaceutical companies often have significantly more extensive agreements andrelationships with such third-party providers, and such providers may prioritize the requirements of such large pharmaceutical companies over ours. Thethird parties upon whom we rely may terminate their engagements with us at any time, which may cause delay in the development and commercialization ofour product candidates. If any such third party terminates its engagement with us or fails to perform as agreed, we may be required to enter into alternativearrangements, which would result in significant cost and delay to our product development program. Moreover, our agreements with such third partiesgenerally do not provide assurances regarding employee turnover and availability, which may cause interruptions in the research on our product candidatesby such third parties.While our reliance on these third parties for certain development and management activities will reduce our control over these activities, it will notrelieve us of our responsibilities. For example, the FDA and foreign regulatory authorities require compliance with regulations and standards, including GCPrequirements, for designing, conducting, monitoring, recording, analyzing, and reporting the results of clinical trials to ensure that the data and results fromstudies are credible and accurate and that the rights, integrity, and confidentiality of trial participants are protected. Although we rely on third parties toconduct our clinical trials, we are responsible for ensuring that each of these clinical trials is conducted in accordance with its general investigational planand protocol under legal and regulatory requirements. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors,principal investigators, and trial sites. If we or any of our CROs fail to comply with applicable GCP requirements, the clinical data generated in our clinicaltrials may be deemed unreliable and the FDA or other regulatory authorities may require us to perform additional clinical trials prior to any marketingapproval, if granted.49We cannot assure that, upon inspection by a regulatory authority, such regulatory authority will determine that any of our clinical trials complies withGCP requirements. Similarly, we rely on certain CROs that conduct nonclinical studies, some of which must be conducted in compliance with GLPrequirements for designing, conducting, monitoring, recording, analyzing, and reporting the results of such studies. If we or any of the CROs that performnonclinical studies for us fail to comply with applicable GLP requirements, the data generated in those studies may be deemed unreliable and the FDA orother regulatory authorities may require us to repeat or to perform additional studies before an IND application becomes effective or prior to any marketingapproval, if granted.If CROs and other third parties do not successfully carry out their duties under their agreements with us, if the quality or accuracy of the data theyobtain is compromised due to their failure to adhere to trial protocols or to regulatory requirements, or if they otherwise fail to comply with regulations andtrial protocols or meet expected standards or deadlines, the studies of our product candidates may not meet regulatory requirements. If studies do not meetregulatory requirements or if these third parties need to be replaced, the development of our product candidates may be delayed, suspended, or terminated, orthe results may not be acceptable. If any of these events occur, we may not be able to obtain regulatory approval of our product candidates on a timely basis,at a reasonable cost, or at all.We currently rely, and expect to continue to rely, on third parties to conduct many aspects of our product candidate manufacturing activities and weintend to rely on third parties for potential commercial product manufacturing. Our business could be harmed if those third parties fail to provide uswith sufficient quantities of product or fail to do so at acceptable quality levels or prices.We do not own any facility that may be used to conduct clinical-scale manufacturing and processing, and we must rely on collaborators and outsidevendors to manufacture supplies and process our product candidates. We have not yet caused our product candidates to be manufactured or processed on acommercial scale and may not be able to do so for any of our product candidates. In addition, our anticipated reliance on a limited number of third-partymanufacturers exposes us to certain risks.If a replacement contractor is needed, we may be unable to identify manufacturers, especially with acceptable terms, because the number of potentialmanufacturers is limited. Additionally, the FDA or an equivalent foreign regulatory agency must evaluate any replacement contractor added after initialapproval and we must demonstrate comparability of product produced at any new manufacturer added after completion of Phase 3 clinical trials or initialproduct approval. This process would require additional development work, testing, and compliance inspections. A new manufacturer would also have to beeducated in, or develop substantially equivalent processes for, production of our product candidates and products, if any.Our third-party manufacturers might be unable to timely formulate and manufacture our product candidates or produce the quantity and qualityrequired to meet our clinical and commercial needs, if any. Contract manufacturers may not be able to execute our manufacturing procedures and otherlogistical support requirements appropriately. Our contract manufacturers may not perform as agreed, may not devote sufficient resources to our productcandidates, or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store, anddistribute our products.Manufacturers are subject to ongoing periodic unannounced inspection by the FDA or corresponding agencies in other geographic locations, to ensurestrict compliance with CGMP and other government regulations and corresponding foreign standards. Although we do not have control over third-partymanufacturers’ compliance with these regulations and standards, we are ultimately responsible for ensuring that our product candidates are manufactured inaccordance with CGMP.Failure of any third-party manufacturer to maintain compliance with applicable laws and regulations could result in sanctions by the FDA, includingrequest for a voluntary recall, warning letter, seizure of products, injunctions prohibiting some or all further sales and/or recalling product on the market,possible consent decree imposing substantial fines, preclusion of government contracts, import alerts, and criminal liability. In addition, failure of a third-party manufacturer for a product undergoing review by the FDA to maintain an acceptable CGMP compliance status could result in a decision by the FDAnot to approve a pending NDA.We may not own, or may have to share, the intellectual property rights to any improvements made by our third-party manufacturers in themanufacturing process for our product candidates and products, if any. Our third-party manufacturers could misappropriate our proprietary technology,including our trade secrets and know-how.Our third-party manufacturers could breach or terminate their agreements with us in a manner or at a time that may negatively affect our planneddevelopment and commercialization activities or the timelines for the achievement of development and commercialization activities.50Raw materials and components used in the manufacturing process, particularly those for which we have no other source or supplier, may not beavailable or may not be suitable or acceptable for use due to material or component defects. Our contract manufacturers and critical reagent suppliers may besubject to inclement weather, as well as natural or man-made disasters. Disruptions to the operations of our third-party manufacturers or suppliers unrelated toour product candidates could occur, including the bankruptcy of a manufacturer or supplier or a catastrophic event or another type of force majeure eventaffecting a manufacturer or supplier.Each of the risks discussed could delay our clinical trials, the approval of any of our product candidates by the FDA, or the commercialization of ourproduct candidates, and could result in higher costs or deprive us of potential product revenue. In addition, we will rely on third parties to perform releasetests on our product candidates prior to delivery to patients. If these tests are not appropriately done and test data are not reliable, patients could be put atrisk of serious harm and the FDA could place significant restrictions on our company until deficiencies are remedied to the FDA’s satisfaction.Our product candidates and certain of the components of our product candidates are currently acquired from single-source suppliers and have beenpurchased without long-term supply agreements. The loss of any of these suppliers, or their failure to supply us with supplies of sufficient quantity andquality to obtain and complete manufacture of drug substance or finished drug product of acceptable quality at an acceptable price, would materiallyand adversely affect our business.We do not have agreements with alternative or secondary suppliers of drug substance, a drug product intermediate, or final drug productcandidates. Additionally, we do not have agreements with alternative suppliers of certain components of our product candidates. To date, we have usedpurchase orders for the supply of key materials that we use in our product candidates. We may be unable to enter into long-term commercial supplyarrangements with our vendors or to do so on commercially reasonable terms, which could have a material adverse effect upon our business. In addition, werely on our contract manufacturers to purchase from third-party suppliers some of the materials necessary to produce our product candidates. In certaininstances, we do not have direct control over the acquisition of those materials by our contract manufacturers. Moreover, we do not have any agreements forthe commercial production of those materials. If a key supplier became unable to supply a key intermediate, the drug substance, or a key component, the leadtime required to reinitiate supply source from the alternative suppliers presents risk of delay and potential shortages of supply of our product candidates. Thelogistics of our product candidate supply chains, which includes shipment of non-FDA regulated materials and intermediates from countries such as China,India, Japan, and Spain, adds additional time and risk to the manufacture of our product candidates.Risks Related to Our Intellectual PropertyWe rely on adequate protection of our proprietary technologies to compete effectively in our market.We rely upon a combination of intellectual property rights, patents, trademarks, and trade secrets, and contractual arrangements to protect theintellectual property related to our technologies. We will only be able to protect our products and proprietary information and technology by preventingunauthorized use by third parties to the extent that our patents, trademarks, trade secrets, and contractual position allow us to do so. Any disclosure to ormisappropriation by third parties of our trade secrets or confidential information could compromise our competitive position. Moreover, we may in the futurebe involved in legal or administrative proceedings involving our intellectual property that are initiated by us or by third parties. As our product candidatescontinue in development, third parties may infringe or misappropriate, or attempt to challenge the validity and enforceability of, our patents, trademarks,trade secrets, and proprietary information and technologies. In addition, third parties may accuse our product candidates of infringement of third partyintellectual property. Any of these proceedings can result in significant costs and commitment of management time and attention.We also may in the future be involved in initiating legal or administrative proceedings involving our intellectual property and the product candidatesof our competitors. These proceedings can result in significant costs and commitment of management time and attention, and there can be no assurance thatour efforts would be successful in preventing or limiting the ability of our competitors to market competing products.Composition-of-matter patents relating to the active pharmaceutical ingredient are generally considered to be the strongest form of patent protectionfor pharmaceutical products, as such patents provide protection not limited to a particular method of use or formulation. Method-of-use patents protect theuse of a product for the specified purpose(s) or indication(s), and do not prevent a competitor from making and marketing a product that is identical to ourproduct for an indication that is outside the scope of the patented method. Bardoxolone methyl, omaveloxolone, and RTA 901 are protected by grantedUnited States and foreign patents claiming compositions of matter and methods of use. RTA 1701 is protected by granted United States and foreign patentsclaiming compositions of matter. Each compound is the subject of pending U.S. and foreign patent applications claiming compositions of matter or methodsof use. We rely on a combination of these and other types of patents to protect our product candidates, and there can be no assurance that our intellectualproperty will create and sustain the competitive position of our product candidates. We may choose not to file patent applications to protect certaintechnologies, and may also choose to allow certain patents or patent applications to lapse or expire based on cost-benefit considerations.51Pharmaceutical product patents involve highly complex legal and scientific questions and can be uncertain. Patent laws vary from country to country,and may change over time. In addition, the interpretation of patent law by the court systems in a country may change over time. This variability addsuncertainty with respect to the validity and enforceability of our patents and the likelihood that our patent applications will result in grantedpatents. Pending patent applications that we own or license, and new applications filed by us or our licensors, may fail to result in issued patents. Thirdparties may challenge the validity or enforceability of our issued patents or patents resulting from our pending or future applications, which may result insuch patents being narrowed, invalidated, or held unenforceable. Even if our patents and patent applications are not challenged by third parties, thosepatents and patent applications may not prevent others from designing around our claims and may not otherwise adequately protect our productcandidates. If the breadth or strength of protection provided by the patents and patent applications we hold with respect to our product candidates isthreatened, competitors with significantly greater resources could threaten our ability to commercialize our product candidates. Discoveries are generallypublished in the scientific literature well after their actual development. Patent applications in the United States and other countries are typically notpublished until 18 months after filing and in some cases are never published. Therefore, we cannot be certain that we or our licensors were the first to makethe inventions claimed in our owned and licensed patents or patent applications, or that we or our licensors were the first to file for patent protection coveringsuch inventions. Subject to meeting other requirements for patentability, for U.S. patent applications filed prior to March 16, 2013, the first to invent theclaimed invention is entitled to receive patent protection for that invention while, outside the United States, the first to file a patent applicationencompassing the invention is entitled to patent protection for the invention. The United States moved to a “first inventor to file” system under the Leahy-Smith America Invents Act (AIA), effective March 16, 2013. Effects of this change and other elements of the AIA are evolving, as the USPTO, is stillimplementing associated regulations, and the applicability of the AIA and associated regulations to our patents and patent applications have not been fullydetermined. Creating further uncertainty, provisions under the AIA also include procedures for challenging issued patents and pending patentapplications. We may become involved in opposition, inter partes review, or interference proceedings challenging our patents and patent applications or thepatents and patent applications of others, and the outcome of any such proceedings are highly uncertain. An unfavorable outcome in any such proceedingscould reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology and compete directly with us, or result in ourinability to manufacture, develop, or commercialize our product candidates without infringing the patent rights of others.In addition to the protection afforded by patents, we seek to rely on trade secret protection and confidentiality agreements to protect proprietary know-how, information, or technology that is not covered by our patents. Although our agreements require all of our employees to assign their inventions to us,and we require all of our employees, consultants, advisors, and any third parties who have access to our trade secrets, proprietary know-how, and otherconfidential information and technology to enter into appropriate confidentiality agreements, we cannot be certain that our trade secrets, proprietary know-how, and other confidential information and technology will not be subject to unauthorized disclosure or that our competitors will not otherwise gain accessto or independently develop substantially equivalent trade secrets, proprietary know-how, and other information and technology. Furthermore, the laws ofsome 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 mayencounter significant problems in protecting and defending our intellectual property globally. If we are unable to prevent unauthorized disclosure of ourintellectual property related to our product candidates and technology to third parties, we may not be able to establish or maintain a competitive advantagein our market, which could materially adversely affect our business and operations.We may be involved in intellectual property disputes with third parties and competitors that could be costly and time consuming and negatively affectour competitive position.Our commercial success may depend on our avoiding infringement of the patents and other proprietary rights of third parties as well as on enforcingour patents and other proprietary rights against third parties. Pharmaceutical and biotechnology intellectual property disputes are characterized by complex,lengthy, and expensive litigation over patents and other intellectual property rights. We may initiate, become a party to, or be threatened with, futurelitigation or other proceedings regarding intellectual property rights with respect to our product candidates and competing products.As our product candidates advance toward commercialization, we or our collaborators may be subject to intellectual property infringement ormisappropriation claims from third parties. We attempt to ensure that our product candidates do not infringe third-party patents and other proprietaryrights. However, the patent landscape in competitive product areas is highly complex, and there may be patents of third parties of which we are unaware thatmay result in claims of infringement. Accordingly, there can be no assurance that our product candidates do not infringe proprietary rights of third parties,and parties making claims against us may seek and obtain injunctive or other equitable relief, which could potentially block further efforts to develop andcommercialize our product candidates. Any litigation involving defense against claims of infringement, regardless of the merit of such claims, would involvesubstantial litigation expense and would be a substantial diversion of management time.If we succeed in commercializing one or more of our product candidates under U.S. law, the approved product would likely be considered a NCE and,if so, would benefit from a period of data exclusivity in which no competitor could receive marketing approval for a product containing the same activepharmaceutical ingredient. Similar laws provide various periods of data exclusivity for new chemical entities in Europe and certain other foreignjurisdictions. Once the applicable period of regulatory exclusivity has expired, competitors may seek to market generic versions of our products even thoughissued patents protecting those products are still in force. In the event that a generic competitor seeks such approval, it may be necessary for us to take legalaction to enforce our patents. In addition, the generic52competitor may seek to invalidate our patents or to obtain a ruling of non-infringement in a court proceeding or by challenging our patents throughinterference, reexamination, inter partes review, and post-grant review proceedings before the USPTO or through other comparable proceedings, such asoppositions or invalidation proceedings, before foreign patent offices. Any such resulting litigation or administrative proceedings would involve substantialexpense, would be a substantial diversion of management time, and could create uncertainty regarding future sales of our products. Findings of invalidity ornon-infringement with respect to our patents could have a material adverse effect on our business. Moreover, third parties, including generic competitors orothers, may initiate judicial or administrative proceedings in the United States and foreign jurisdictions to challenge our patents from time to time, whichcould have a material adverse effect on our business.We may consider initiating administrative proceedings and other means for challenging third-party patents and patent applications. Third parties mayalso challenge our patents and patent applications, through interference, reexamination, inter partes review, and post-grant review proceedings before theUSPTO, or through other comparable proceedings, such as oppositions or invalidation proceedings, before foreign patent offices. An unfavorable outcome inany such challenge could result in loss of patent protection for our technology or require us to cease using the related technology and to attempt to licenserights to it from the prevailing third party, which may not be available on commercially reasonable terms, if at all, in which case our business could beharmed. Even if we are successful, participation in administrative proceedings before the USPTO or a foreign patent office may result in substantial costs andtime on the part of our management and other employees.Furthermore, there is a risk that any public announcements concerning the existence, status, or outcomes of intellectual property litigation oradministrative proceedings may adversely affect the price of our stock. If securities analysts or our investors interpret such existence, status, or outcomes asnegative or otherwise creating uncertainty, our Class A common stock price may be adversely affected.Our reliance on third parties and our agreements with collaborators require us to share our trade secrets. Confidentiality agreements may not preventa competitor from discovering, misappropriating, or disclosing them.Our reliance on third-party contractors to develop and manufacture our product candidates is based upon agreements that limit the rights of the thirdparties to use or disclose our confidential information, including our trade secrets and know-how. Despite the contractual provisions, the need to share tradesecrets and other confidential information increases the risk that such trade secrets and information are disclosed or used, even if unintentionally, in violationof these agreements. In the highly competitive markets in which our product candidates are expected to compete, protecting our trade secrets, including ourstrategies for addressing competing products, is imperative, and any unauthorized use or disclosure could impair our competitive position and may have amaterial adverse effect on our business and operations.In addition, our collaborators are larger, more complex organizations than ours, and the risk of inadvertent disclosure of our proprietary informationmay be increased despite their internal procedures and the contractual obligations in place with our collaborators. Despite our efforts to protect our tradesecrets and other confidential information, a competitor’s discovery of such trade secrets and information could impair our competitive position and have anadverse effect on our business.We may be subject to claims asserting that our employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of theircurrent or former employers or claims asserting ownership of what we regard as our own intellectual property.Although we try to ensure that our employees, consultants, and advisors do not use the proprietary information or know-how of others in their work forus, we may be subject to claims that these individuals or we have used or disclosed intellectual property, including trade secrets or other proprietaryinformation, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending anysuch claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defendingagainst such claims, litigation could result in substantial costs and be a distraction to our business.In addition, while we require our employees or contractors who may be involved in the conception or development of intellectual property to executeagreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives ordevelops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing or the assignmentagreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine theownership of what we regard as our intellectual property.53We have an extensive worldwide patent portfolio. The cost of maintaining our patent protection is high and requires continuous review andcompliance. We may not be able to effectively maintain our intellectual property position throughout the major markets of the world.The USPTO and foreign patent authorities require maintenance fees and payments as well as continued compliance with a number of procedural anddocumentary requirements. Non-compliance may result in abandonment or lapse of the subject patent or patent application, resulting in partial or completeloss of patent rights in the relevant jurisdiction. Noncompliance may result in reduced royalty payments for lack of patent coverage in a particularjurisdiction from our collaborators or may result in increased competition, either of which could have a material adverse effect on our business.We have made, and will continue to make, certain strategic decisions in balancing costs and the potential protection afforded by the patent laws ofcertain countries. As a result, we may not be able to prevent third parties from practicing our inventions in all countries throughout the world, or from sellingor importing products made using our inventions in and into the United States or other countries. Third parties may use our technologies in territories inwhich we have not obtained patent protection to develop their own products and, further, may infringe our patents in territories which provide ineffective orinadequate enforcement mechanisms, even if we have patent protection. Such third-party products may compete with our product candidates, and our patentsor other intellectual property rights may not be effective or sufficient to prevent them from competing.The laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States, and we may encountersignificant problems in securing and defending our intellectual property rights outside the United States.Many companies have encountered significant problems in protecting and defending intellectual property rights in certain countries. The legalsystems of certain countries, particularly certain developing countries, do not always favor the enforcement of patents, trade secrets, and other intellectualproperty rights, particularly those relating to pharmaceutical products, which could make it difficult for us to stop infringement of our patents,misappropriation of our trade secrets, or marketing of competing products in violation of our proprietary rights. Proceedings to enforce our intellectualproperty rights in foreign countries could result in substantial costs, divert our efforts and attention from other aspects of our business, and put our patents inthese territories at risk of being invalidated or interpreted narrowly, or our patent applications at risk of not being granted, and could provoke third parties toassert claims against us. We may not prevail in all legal or other proceedings that we may initiate and, if we were to prevail, the damages or other remediesawarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may beinadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.Intellectual property rights do not prevent all potential threats to competitive advantages we may have.The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, andintellectual property rights may not adequately protect our business or permit us to maintain our competitive advantage.The following examples are illustrative: •Others may be able to make compounds that are the same as or similar to our current or future product candidates but that are not covered by theclaims of the patents that we own or have exclusively licensed; •We or any of our licensors or collaborators might not have been the first to make the inventions covered by the issued patent or pending patentapplication that we own or have exclusively licensed; •We or any of our licensors or collaborators might not have been the first to file patent applications covering certain of our inventions; •Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectualproperty rights; •The prosecution of our pending patent applications may not result in granted patents; •Granted patents that we own or have licensed may not cover our products or may be held not infringed, invalid, or unenforceable, as a result oflegal challenges by our competitors; •With respect to granted patents that we own or have licensed, especially patents that we either acquire or in-license, if certain information waswithheld from or misrepresented to the patent examiner, such patents might be held to be unenforceable; •Patent protection on our product candidates may expire before we are able to develop and commercialize the product, or before we are able torecover our investment in the product;54 •Our competitors might conduct research and development activities in the United States and other countries that provide a safe harbor frompatent infringement claims for such activities, as well as in countries in which we do not have patent rights, and may then use the informationlearned from such activities to develop competitive products for sale in markets where we intend to market our product candidates; •We may not develop additional proprietary technologies that are patentable; •The patents of others may have an adverse effect on our business; and •We may choose not to file a patent application for certain technologies, trade secrets, or know-how, and a third party may subsequently file apatent covering such intellectual property.Additionally, competitors could enter the market with generic versions of our product candidates, which may adversely affect sales of our productcandidates, if approved. Under the Drug Price Competition and Patent Term Restoration Action of 1984, also referred to as the Hatch-Waxman Act, apharmaceutical manufacturer may file an ANDA seeking approval of a generic copy of an approved innovator product. A manufacturer may also submit anNDA under Section 505(b)(2) of the U.S. Federal Food, Drug, and Cosmetic Act that references the FDA’s finding of safety and effectiveness of a previouslyapproved drug. An NDA product submitted under Section 505(b)(2) (a 505(b)(2) NDA) may be a new or improved version of the original innovatorproduct. Innovative small molecule drugs may be eligible for certain periods of regulatory exclusivity (e.g., five years for new chemical entities, three yearsfor changes to an approved drug requiring a new clinical trial, and seven years for orphan drugs), which precludes FDA approval of, or in some circumstances,the FDA filing and review of, an ANDA or 505(b)(2) NDA relying on the FDA’s finding of safety and effectiveness for the innovative drug. In addition to thebenefits of regulatory exclusivity, an innovator NDA holder may have patents claiming the active ingredient, product formulation, or an approved use of thedrug, which would be listed with the product in the FDA publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” also known asthe Orange Book. If there are patents listed in the Orange Book, a generic applicant that seeks to market its product before expiration of the patents listed inthe Orange Book must include in the ANDA or 505(b)(2) NDA what is known as a “Paragraph IV certification,” challenging the validity or enforceability of,or claiming non-infringement of, the listed patent or patents. Notice of the certification must also be given to the innovator and, if within 45 days ofreceiving notice the innovator sues to protect its patents, approval of the ANDA will be stayed for 30 months or a longer or shorter period determined by thecourt.Accordingly, if our product candidates are approved, competitors could file ANDAs for generic versions of our product candidates that reference ourproduct candidates. If there are patents listed for our product candidates in the Orange Book, those ANDAs and 505(b)(2) NDAs would be required to includea certification as to each listed patent indicating whether the ANDA applicant does or does not intend to challenge the patent. We cannot predict whetherany patents issuing from our pending patent applications will be eligible for listing in the Orange Book, how any generic competitor would address suchpatents, whether we would sue on any such patents, or the outcome of any such suit.We may not be successful in securing or maintaining proprietary patent protection for products and technologies we develop or license. Moreover, ifany patents that are granted and listed in the Orange Book are successfully challenged by way of a Paragraph IV certification and subsequent litigation, theaffected product could more immediately face generic competition and its sales would likely decline materially. Should sales decline, we may have to writeoff a portion or all of the intangible assets associated with the affected product and our results of operations and cash flows could be materially and adverselyaffected.We will need to obtain approval of any proposed product names, and any failure or delay associated with such approval may adversely affect ourbusiness.Any proprietary name or trademark we intend to use for our product candidates will require approval from the FDA, and similar health authoritiesoutside the United States, regardless of whether we have secured a formal trademark registration from the USPTO. The FDA typically conducts a review ofproposed product names, including an evaluation of the potential for confusion with other product names. The FDA may also object to a product name if itbelieves the name inappropriately implies certain medical claims or contributes to an overstatement of efficacy. If the FDA objects to any product names wepropose, we may be required to adopt an alternative name for our product candidates. If we adopt an alternative name, we would lose the benefit of ourexisting trademark applications for such product candidate and may be required to expend significant additional resources in an effort to identify a suitableproduct name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. We may beunable to build a successful brand identity for a new trademark in a timely manner or at all, which would limit our ability to commercialize our productcandidates.If we do not obtain additional protection under the Hatch-Waxman Act and similar foreign legislation extending the terms of our patents andobtaining data exclusivity for our product candidates, our business may be materially harmed.Depending upon the timing, duration, and specifics of FDA regulatory approval for our product candidates, one or more of our U.S. patents may beeligible for limited patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent term extension of up to five years ascompensation for patent term lost during product development and the FDA regulatory review process. Patent term extension, however, is limited to amaximum of five years and cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval by the FDA.55The application for patent term extension is subject to approval by the USPTO, in conjunction with the FDA. It takes at least six months to obtainapproval of the application for patent term extension. We may not be granted an extension because of, for example, failing to apply within applicabledeadlines, failing to apply prior to expiration of relevant patents, or otherwise failing to satisfy applicable requirements. Moreover, the applicable timeperiod or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term ofany such extension is less than we request, the period during which we will have the right to exclusively market our product will be shortened, ourcompetitors may obtain earlier approval of competing products, and our ability to generate revenue could be materially adversely affected.If we fail to comply with our obligations in the agreements under which we license intellectual property and other rights from third parties or otherwiseexperience disruptions to our business relationships with our licensors, we could lose license rights that are important to our business. We are a party to a number of intellectual property license agreements that are important to our business and expect to enter into additional licenseagreements in the future. Our existing license agreements impose, and we expect that future license agreements will impose, various diligence, milestonepayment, royalty, and other obligations on us. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, we may berequired to make certain payments to the licensor, we may lose the exclusivity of our license, or the licensor may have the right to terminate the license, inwhich event we would not be able to develop or market products covered by the license. Additionally, the milestone and other payments associated withthese licenses will make it less profitable for us to develop our drug candidates. See “Business—Intellectual Property- Licenses” for a description of ourlicense agreements with Dartmouth, M.D. Anderson, and the University of Kansas, which include descriptions of the termination provisions of theseagreements. Disputes may arise regarding intellectual property subject to a licensing agreement, including but not limited to: •the scope of rights granted under the license agreement and other interpretation-related issues; •the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement; •the sublicensing of patent and other rights; •our diligence obligations under the license agreement and what activities satisfy those diligence obligations; •the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and ourcollaborators; and •the priority of invention of patented technology.If disputes over intellectual property and other rights that we have licensed prevent or impair our ability to maintain our current licensingarrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.Risks Related to Government RegulationThe regulatory approval process is highly uncertain, and we may not obtain regulatory approval for the commercialization of our product candidates.The time required to obtain approval, if any, by the FDA and comparable foreign regulatory authorities is unpredictable, but typically takes manyyears following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the substantial discretion of theregulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during thecourse of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any productcandidate, and it is possible that none of our current or future product candidates we may discover, in-license, or acquire and seek to develop in the futurewill ever obtain regulatory approval.Our product candidates could fail to receive regulatory approval from the FDA or other regulatory authorities for many reasons, including: •inadequate design or implementation of our clinical trials; •failure to demonstrate to the satisfaction of regulatory authorities that a product candidate is safe and effective for its proposed indication; •failure of clinical trials to meet the level of statistical or clinical significance required for approval; •failure to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks; •FDA refusal to accept efficacy results from clinical trial sites outside the United States where the standard of care is potentially different fromthat in the United States;56 •the insufficiency of data collected from preclinical studies and clinical trials of our present or future product candidates to support thesubmission and filing of an NDA or other submission or to obtain regulatory approval; •inadequate manufacturing processes or facilities of third-party manufacturers with whom we contract for clinical and commercial supplies; •changes in the approval policies or regulations that render our preclinical and clinical data insufficient for approval; •the CROs that conduct clinical trials on our behalf may take actions outside of our control that materially adversely affect our clinical trials; •collaborators may not perform or complete their activities contributing to our development programs in a timely manner or at all; or •one or more SAEs may be related or possibly related to one of our product candidates, and any such determination may adversely affect ourability to obtain regulatory approval, whether or not the determination is correct.The FDA or other regulatory authorities may require more information, including additional preclinical or clinical data to support approval, whichmay delay or prevent approval and our commercialization plans, or we may decide to abandon the development program altogether. Even if we do obtainregulatory approval, our product candidates may be approved for fewer or more limited indications than we request, approval may be contingent on theperformance of costly post-marketing clinical trials, or approval may require labeling that does not include the labeling claims necessary or desirable for thesuccessful commercialization of that product candidate. In addition, if our product candidates produce undesirable side effects or safety issues, the FDA mayrequire the establishment of a REMS, or other regulatory authorities may require the establishment of a similar strategy, that may restrict distribution of ourapproved products, if any, and impose burdensome implementation requirements on us. Any of the foregoing scenarios could materially harm thecommercial prospects for our product candidates.Even if we believe our current or planned clinical trials are successful, regulatory authorities may not agree that our completed clinical trials provideadequate data on safety or efficacy. Approval by one regulatory authority does not ensure approval by any other regulatory authority. However, a failure ordelay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. We may not be able to file forregulatory approvals, and even if we file we may not receive the necessary approvals to commercialize our product candidates in any market.We may be unable to obtain orphan drug designations for some of our product candidates or to maintain the benefits associated with orphan drugdesignation status, including market exclusivity, which may cause our revenue, if any, to be reduced.Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations asorphan drugs. Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, defined as adisease or condition with a patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the United Stateswhen there is no reasonable expectation that the cost of developing and making available the drug in the United States will be recovered from sales in theUnited States for that drug. Orphan drug designation must be requested before submitting an NDA. In the United States, orphan drug designation entitles aparty to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages, and user-fee waivers. After the FDA grantsorphan drug designation, the generic identity of the drug and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does notconvey any advantage in, or shorten the duration of, the regulatory review and approval process. In the European Union, the EMA’s Committee for OrphanMedicinal Products may grant orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatmentof a life-threatening or chronically debilitating condition affecting not more than 5 in 10,000 persons in the European Union Community. Additionally,designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chroniccondition and when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary investment indeveloping the drug or biological product. In the European Union, orphan drug designation provides a range of potential incentives for medicines that havebeen granted an orphan designation by the European Commission, including protocol assistance, access to the centralized authorization procedure, 10 yearsof market exclusivity, and fee reductions. If a product that has orphan drug designation subsequently receives the first FDA approval for a particular active ingredient for the disease for which ithas such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including anNDA, to market the same drug for the same indication for seven years, except in limited circumstances such as a showing of clinical superiority to the productwith orphan product exclusivity or if the FDA finds that the holder of the orphan product exclusivity has not shown that it can assure the availability ofsufficient quantities of the orphan drug to meet the needs of patients with the disease or condition for which the drug was designated. A product may obtainorphan drug exclusivity for each indication that has been designated upon approval of the indication, subject to the qualifications above. Any orphan drugexclusivity granted for second or subsequent indications applies only to those subsequent indications and does not block approval of a product for the firstindication once the initial period of exclusivity has expired. Moreover, even if one of our drug candidates receives orphan product exclusivity, the FDA canstill approve other drugs that have a different active ingredient for use in treating the same indication or disease.57We have received orphan drug designation by the FDA for bardoxolone methyl for the treatment of CKD caused by Alport syndrome and for thetreatment of PAH. We have also received orphan drug designation by the FDA for omaveloxolone for the treatment of FA and malignant melanoma. We mayrequest orphan drug designation for these and future indications in Europe. We may seek orphan drug designation in the United States for some of our otherproduct candidates in specific orphan indications in which there is a medically plausible basis for the use of these products, including other rare kidneydiseases and MM. In the future, exclusive marketing rights in the United States, if granted, may be limited if we seek approval for an indication broader thanthe orphan drug designated indication and may be lost if the FDA later determines that the request for the orphan drug designation was materially defectiveor if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition. In addition,although we have sought or intend to seek orphan drug designation, we may never receive approval for such designations.We may fail to obtain breakthrough therapy designation from the FDA or comparable accelerated development pathways from foreign regulatoryauthorities for some or all of our product candidates. In 2012, the U.S. Congress established a breakthrough therapy designation which is intended to expedite the development and review of products thattreat serious or life-threatening diseases when “preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existingtherapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.” The designation of aproduct candidate as a breakthrough therapy provides potential benefits that include more frequent meetings with the FDA to discuss the development planfor the product candidate and help to ensure collection of appropriate data needed to support approval, more frequent written correspondence from the FDAabout such things as the design of the proposed clinical trials and use of biomarkers, intensive guidance on an efficient drug development program,beginning as early as Phase 1, organizational commitment involving senior managers, and eligibility for rolling review and priority review.Breakthrough therapy designation does not change the standards for product approval. There can be no assurance that we will receive breakthroughtherapy designation for any indication.If our product candidates obtain marketing approval, we will be subject to more extensive healthcare laws, regulation, and enforcement, and ourfailure to comply with those laws could have a material adverse effect on our results of operations and financial condition.If we obtain approval for any of our product candidates, the regulatory requirements applicable to our operations, in particular our sales and marketingefforts, will increase significantly with respect to our operations. Also, the potential for civil and criminal enforcement by the federal government and thestates and foreign governments will increase with respect to the conduct of our business. The laws that may affect our operations in the United States,currently and in the future, include, without limitation: •the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving,offering, or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or servicereimbursable under a federal healthcare program, such as the Medicare and Medicaid programs; •federal civil and criminal false claims laws and civil monetary penalty laws, including the civil False Claims Act, which prohibit, among otherthings, individuals or entities from knowingly presenting, or causing to be presented, claims that are false or fraudulent to the federalgovernment; •HIPAA, which created additional federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program andmaking false statements relating to healthcare matters; •HIPAA, as amended by HITECH, and its implementing regulations, which imposes certain requirements, including mandatory contractual terms,on certain types of entities, relating to the privacy, security, and transmission of individually identifiable health information; •the federal legislation commonly referred to as the Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices,biologics, and medical supplies to report annually to the CMS information related to payments and other transfers of value to physicians,teaching hospitals, and ownership and investment interests held by physicians and their immediate family members;58 •federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harmconsumers; and •state law equivalents of each of the above federal laws, such as the federal Anti-Kickback Statute and false claims laws, that may apply to itemsor services reimbursed by any third-party payor, including commercial insurers; state laws that require pharmaceutical companies to complywith the pharmaceutical industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federalgovernment, or which otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws thatrequire drug manufacturers to report information relating to drug price increases; state laws that require drug manufacturers to report informationrelated to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state lawsgoverning the privacy and security of health information in certain circumstances, many of which differ from each other and from HIPAA insignificant ways, thus complicating compliance efforts.The scope of these laws and our lack of experience in establishing the compliance programs necessary to comply with this complex and evolvingregulatory environment increase the risks that we may violate the applicable laws and regulations. If our operations are found to be in violation of any ofsuch laws or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, thecurtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs, disgorgement, contractual damages,reputational harm, diminished profits and future earnings, and imprisonment, any of which could materially adversely affect our ability to operate ourbusiness and our financial results.The full effect of recent U.S. healthcare reform and other changes in the healthcare industry and in healthcare spending is currently unknown, and thereform and other changes may adversely affect our business model.The commercial potential for our approved products, if any, could be affected by changes in healthcare spending and policy in the United States andabroad. We operate in a highly regulated industry. New laws, regulations, or judicial decisions or new interpretations of existing laws, regulations, ordecisions, related to healthcare availability, the method of delivery, or payment for healthcare products and services could adversely affect our business,operations, and financial condition.For example, the PPACA was enacted in 2010 with a goal, among others, of reducing the cost of healthcare and substantially changing the wayhealthcare is financed by both government and private insurers. The PPACA, among other things, increased the minimum Medicaid rebates owed bymanufacturers under the Medicaid Drug Rebate Program, extended the rebate program to individuals enrolled in Medicaid managed care organizations, andestablished annual fees and taxes on manufacturers of certain branded prescription drugs. The PPACA also created a new Medicare Part D coverage gapdiscount program in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligiblebeneficiaries during their coverage gap period as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D. The BipartisanBudget Act of 2018 increased the manufacturer’s subsidy under this program from 50% to 70% of the negotiated price, beginning in 2019. The PPACA alsoexpanded eligibility criteria for Medicaid programs and created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, andconduct comparative clinical effectiveness research, along with funding for such research. In addition, other legislative changes have been proposed andadopted in the United States since the PPACA was enacted. On August 2, 2011, the Budget Control Act of 2011 created measures for spending reductions byCongress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the fiscal years2012 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. Thisincludes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect on April 1, 2013. These reductions havebeen extended through 2025 unless additional Congressional action is taken. Additionally, in January 2013, the American Taxpayer Relief Act of 2012 wassigned in to law, which, among other things, reduced Medicare payments to several types of health care providers.It is likely that federal and state legislatures within the United States and foreign governments will continue to consider changes to existing healthcarelegislation. For example, the PPACA has faced ongoing legal challenges, including litigation seeking to invalidate some of or all of the law or the manner inwhich it has been implemented. More recently, the 2017 Tax Act was signed into law, which eliminated certain requirements of the PPACA, including theindividual mandate, and the current administration has further suggested that it may seek repeal of all or portions of the ACA. We cannot predict the reforminitiatives that may be adopted in the future or whether initiatives that have been adopted will be repealed or modified. The continuing efforts of thegovernment, insurance companies, managed care organizations, and other payors of healthcare services to contain or reduce costs of healthcare mayadversely affect: •the demand for any products that may be approved for sale; •the price and profitability of our products; •coverage and reimbursement applicable to our products;59 •the ability to successfully position and market any approved product; and •the taxes applicable to our pharmaceutical product revenue.We are subject to U.S. and certain foreign export and import controls, sanctions, embargoes, anti-corruption laws, and anti-money laundering laws andregulations. Compliance with these legal standards could impair our ability to compete in domestic and international markets. We can face criminalliability and other serious consequences for violations, which can harm our business.We are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations,various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls, the U.S. Foreign CorruptPractices Act of 1977, as amended (FCPA), the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, andother state and national anti-bribery and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption laws are interpretedbroadly and prohibit companies and their employees, agents, contractors, and other collaborators from authorizing, promising, offering, or providing, directlyor indirectly, improper payments or anything else of value to recipients in the public or private sector. We may engage third parties for clinical trials outsideof the United States, to sell our products abroad once we enter a commercialization phase, and/or to obtain necessary permits, licenses, patent registrations,and other regulatory approvals. We have direct or indirect interactions with officials and employees of government agencies or government-affiliatedhospitals, universities, and other organizations. We can be held liable for the corrupt or other illegal activities of our employees, agents, contractors, andother collaborators, even if we do not explicitly authorize or have actual knowledge of such activities. Any violations of the laws and regulations describedabove may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments,breach of contract and fraud litigation, reputational harm, and other consequences.Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, whichcould result in significant liability for us and harm our reputation.We are exposed to the risk of employee fraud or other misconduct, including intentional failures to comply with FDA regulations or similar regulationsof comparable foreign regulatory authorities, provide accurate information to the FDA or comparable foreign regulatory authorities, comply withmanufacturing standards we have established, comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulationsestablished and enforced by comparable foreign regulatory authorities, comply with the FCPA and other anti-bribery laws, report financial information ordata accurately, or disclose unauthorized activities to us. Employee misconduct could also involve the improper use of information obtained in the course ofclinical trials, which could result in regulatory sanctions, delays in clinical trials, or serious harm to our reputation. We have adopted a code of conduct forour directors, officers and employees, or the Code of Ethics and Business Conduct, but it is not always possible to identify and deter employeemisconduct. The precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or inprotecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If anysuch actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could harm our business, results ofoperations, financial condition, and cash flows, including through the imposition of significant fines or other sanctions.If we fail to comply with laws and regulations, we could become subject to fines or penalties or incur costs that could harm our business.We are subject to numerous environmental, health, and safety laws and regulations, including those governing laboratory procedures and thehandling, use, storage, treatment, and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials,including chemicals and biological materials, and also produce hazardous waste products. We contract with third parties for the disposal of these materialsand wastes, but we cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use ofhazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costsassociated with civil or criminal fines and penalties for failure to comply with such laws and regulations. We do not maintain insurance for environmentalliability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous, or radioactive materials.In addition, we may incur substantial costs to comply with current or future environmental, health, and safety laws and regulations applicable to ouroperations in the United States and foreign countries. These current or future laws and regulations may impair our research, development or manufacturingefforts. We are also subject to regulation by various federal, state, and local laws, including employment and labor laws, tax laws, and other regulations. Ourfailure to comply with these laws and regulations also may result in substantial fines, penalties, or other sanctions.60Risks Related to Our International OperationsA variety of risks associated with operating our business internationally could materially adversely affect our business.We plan to seek regulatory approval of our product candidates outside of the United States and, accordingly, we expect that we and any potentialcollaborators in those jurisdictions will be subject to additional risks related to operating in foreign countries, including: •different regulatory requirements for drug approvals in foreign countries; •different standards of care in various countries that could complicate the evaluation of our product candidates; •different United States and foreign drug import and export rules; •reduced protection for intellectual property rights in certain countries; •unexpected changes in tariffs, trade barriers, and regulatory requirements; •different reimbursement systems and different competitive drugs indicated to treat the indications for which our product candidates are beingdeveloped; •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; •compliance with the FCPA and other anti-corruption and anti-bribery laws; •foreign taxes, including withholding of payroll taxes; •foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doingbusiness in another country; •workforce uncertainty in countries where labor unrest is more common than in the United States; •production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; •potential liability resulting from development work conducted by foreign distributors; •business interruptions resulting from natural disasters or geopolitical actions, including war and terrorism, or systems failure includingcybersecurity breaches; and •compliance with evolving and expansive international data privacy laws, such as the European Union General Data Protection Regulation.Risks Related to the Operation of Our BusinessWe may encounter difficulties in managing our growth and expanding our operations successfully.As we seek to advance our product candidates through clinical trials and, if approved, through commercialization, we will likely need to expand ourdevelopment, regulatory, quality assurance, manufacturing, commercialization, and administration capabilities or contract with third parties to provide thesecapabilities for us. As our operations expand and we undertake the efforts and expense to operate as a public reporting company, we expect that we will needto increase the responsibilities on members of management and manage any future growth effectively. Our failure to effectively manage our growth in thisregard could prevent us from successfully implementing our strategy and maintaining the confidence of investors in our company.If we fail to attract and keep senior management and key personnel, in particular our Chief Executive Officer, Chief Medical Officer, and ChiefDevelopment Officer, we may be unable to successfully develop our product candidates, conduct our clinical trials, and commercialize our productcandidates.We are highly dependent on our Chief Executive Officer, Warren Huff, our Chief Medical Officer, Colin Meyer, and our Chief Development Officer,Keith Ward. The loss of the services of Mr. Huff, Dr. Meyer, or Dr. Ward could significantly negatively affect the development and commercialization of ourproduct candidates, our existing collaborative relationships, and our ability to successfully implement our business strategy.Recruiting and retaining qualified commercial, development, scientific, clinical, and manufacturing personnel is and will continue to be critical to oursuccess. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limitednumber of individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of, andcommercialize product candidates. We may be unable to hire, train, retain, or motivate these key personnel on acceptable terms given the intensecompetition among numerous companies for similar personnel. This may be particularly the case in the Dallas area, which does not possess as large a talentbase of pharmaceutical professionals as that found in some other areas of the country.61If we are unable to continue to attract and retain personnel with the quality and experience applicable to our product candidates, our ability to pursueour strategy will be limited and our business and operations would be adversely affected.Our business and operations may be materially adversely affected in the event of computer system failures or security breaches.Despite the implementation of security measures, our internal computer systems, and those of our CROs and other third parties on which we rely, arevulnerable to damage from computer viruses, unauthorized access, cyber-attacks, natural disasters, fire, terrorism, war, and telecommunication and electricalfailures. If such an event were to occur and interrupt our operations, it could result in a material disruption of our drug development programs. For example,the loss of clinical trial data from ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase ourcosts to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications, loss oftrade secrets or inappropriate disclosure of confidential or proprietary information, including protected health information or personal data of employees orformer employees, access to our clinical data, or disruption of the manufacturing process, we could incur liability and the further development of our drugcandidates could be delayed. We may also be vulnerable to cyber-attacks by hackers or other malfeasance. This type of breach of our cybersecurity maycompromise our confidential information and/or our financial information and adversely affect our business or result in legal proceedings. Further, thesecybersecurity breaches may inflict reputational harm upon us that may result in decreased market value and erode public trust.The occurrence of natural disasters, including a tornado, an earthquake, fire, or any other catastrophic event, could disrupt our operations or theoperations of third parties who provide vital support functions to us, which could have a material adverse effect on our business, results of operations,and financial condition.We and the third-party service providers on which we depend for various support functions, such as data storage, are vulnerable to damage fromcatastrophic events, such as power loss, natural disasters, terrorism, and similar unforeseen events beyond our control. Our corporate headquarters and otherfacilities are located in the Dallas area, which in the past has experienced damaging storms including tornadoes. Natural disasters could severely disrupt ouroperations 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, damagedcritical infrastructure such as our data storage facilities, financial systems or manufacturing resource planning and quality systems, or that otherwise disruptedoperations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery andbusiness 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 mayincur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which could have a material adverse effecton our business.Furthermore, parties in our supply chain may be operating from single sites, increasing their vulnerability to natural disasters or other sudden,unforeseen, and severe adverse events. If such an event were to affect our supply chain, it could have a material adverse effect on our business.Risks Related to Our Class A Common StockThe market price of our Class A common stock may be highly volatile, which may affect the value of your investment in our Class A common stock.Our initial public offering (IPO) occurred in May 2016. Therefore, there has only been a public market for our Class A common stock for a short periodof time. Although our Class A common stock is listed on The NASDAQ Global Market, an active trading market for our Class A common stock may notdevelop or be sustained, and you may not be able to sell your shares quickly. Shares of our Class A common stock were sold in our IPO at $11.00 per share.In August 2017, we closed a follow-on underwritten public offering of 3,737,500 shares of our Class A common stock at $31.00 per share. InNovember 2017, we entered into an at-the-market equity offering sales agreement with Stifel, Nicolaus & Company, Incorporated, that established a programpursuant to which we may offer and sell up to $50 million of our Class A common stock from time to time in at-the-market transactions. No shares have beensold under this program. Since our IPO in May 2016, our closing stock price has reached a high of $41.60 and a low of $11.03 through February 28, 2018. In general, pharmaceutical, biotechnology, and other life sciences company stocks have been highly volatile in the current market. The volatility ofpharmaceutical, biotechnology, and other life sciences company stocks is sometimes unrelated to the operating performance of particular companies, andstocks often respond to trends and perceptions rather than financial performance. In particular, the market price of shares of our Class A common stock couldbe subject to wide fluctuations in response to the following factors: •results of clinical trials of our product candidates; •the timing of the release of results of and regulatory updates regarding our clinical trials;62 •the level of expenses related to any of our product candidates or clinical development programs; •results of clinical trials of our competitors’ products; •safety issues with respect to our product candidates or our competitors’ products; •regulatory actions with respect to our product candidates and any approved products or our competitors’ products; •fluctuations in our financial condition and operating results; •adverse developments concerning our third-party collaborations and our manufacturers; •the termination of a third-party collaboration, significant difficulties with an established collaboration, or the inability to establish additionalcollaborations; •the publication of research reports by securities analysts about us or our competitors or our industry or negative recommendations or withdrawalof research coverage by securities analysts; •the inability to obtain adequate product supply for any approved drug product or inability to do so at acceptable prices; •disputes or other developments relating to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection forour technologies; •the ineffectiveness of our internal controls; •our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market; •additions and departures of key personnel; •announced strategic decisions by us or our competitors; •changes in legislation or other regulatory developments affecting our product candidates or our industry; •fluctuations in the valuation of the pharmaceutical industry and particular companies perceived by investors to be comparable to us; •sales of our Class A common stock or Class B common stock by us, our insiders, or our other stockholders; •speculation in the press or investment community; •announcement or expectation of additional financing efforts; •announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us; •changes in accounting principles; •terrorist acts, acts of war, or periods of widespread civil unrest; •natural disasters such as earthquakes and other calamities; •changes in market conditions for pharmaceutical stocks; •changes in general market and economic conditions; and •the other factors described in this “Risk Factors” section.As a result of fluctuations caused by these and other factors, comparisons of our operating results across different periods may not be accurateindicators of our future performance. Any variances that we report in the future may differ from the expectations of market analysts and investors, whichcould cause the price of our Class A common stock to fluctuate significantly. Moreover, securities class action litigation has often been initiated againstcompanies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attentionand resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.63If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stockadversely, our stock price and trading volume could decline.The trading market for our Class A common stock is influenced by the research and reports that industry or securities analysts publish about us or ourbusiness. If one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts ceasecoverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock priceor trading volume to decline.The dual class structure of our common stock and the existing ownership of capital stock by our executive officers and directors, together with theirrespective affiliates, have the effect of concentrating the voting power of our common stock and will limit your control over matters subject tostockholder approval.Each share of Class A common stock is entitled to one vote per share, and each share of Class B common stock is entitled to three votes per share. Asof February 28, 2018, our executive officers and directors, together with their respective affiliates, collectively owned shares representing approximately89.1% of our total Class B common stock, including shares subject to outstanding options that are exercisable within 60 days of such date, andapproximately 22.0% of our total Class A common stock. Because of the greater number of votes per share attributed to our Class B common stock, ourexecutive officers and directors, together with their respective affiliates, collectively own shares representing approximately 55.9% of the voting power of ouroutstanding capital stock.Accordingly, these stockholders will be able to exert control over our management and affairs and over matters requiring stockholder approval,including the election of our board of directors and approval of significant corporate transactions. The interests of those stockholders may differ from thoseof other stockholders, and they may vote their shares in a way that is contrary to the way other stockholders vote their shares. This concentration ofownership could have the effect of entrenching our management or the board of directors, delaying or preventing a change in our control, or otherwisediscouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material and adverse effect on the market value of ourClass A common stock. Future transfers by holders of Class B common stock will generally result in those shares converting on a 1 for 1 basis to Class Acommon stock, which will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their sharesin the long-term, which may include our executive officers, directors, and affiliates.We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the JOBS Act), and the reduced disclosure requirementsapplicable to emerging growth companies may make our Class A common stock less attractive to investors.We are an “emerging growth company,” as defined in the JOBS Act, and for so long as we continue to be an emerging growth company, we may takeadvantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growthcompanies. Specifically, the JOBS Act: •eliminates the requirement to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting; •removes the requirement to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board; •reduces disclosure obligations regarding executive compensation; and •exempts us from the requirements of holding a non-binding stockholder advisory vote on executive compensation and stockholder approval ofany golden parachute payments not previously approved.This Annual Report on Form 10-K is based upon the reduced reporting burdens under the JOBS Act, and we expect to continue reporting at thesereduced levels for so long as we are permitted under the JOBS Act. Specifically, we could be an emerging growth company until December 31, 2021,although circumstances could cause us to lose that status earlier, including any of the following: if the market value of our Class A common stock held bynon-affiliates exceeds $700 million as of June 30 in any calendar year before that time or if we have total annual gross revenue of $1 billion or more duringany fiscal year before that time, in which cases we would no longer be an emerging growth company as of the end of such year or, if we issue more than$1 billion in non-convertible debt during any three-year period before that time, we would cease to be an emerging growth company immediately. If anyinvestors find our Class A common stock less attractive as a result, there may be a less active market for our Class A common stock and our stock price may bemore volatile.64A significant portion of our total outstanding shares may be sold, which could cause the market price of our Class A common stock to dropsignificantly and impede our ability to raise future capital, even if our business is doing well.As of February 28, 2018, we have 6,164,269 shares of Class B common stock outstanding representing 23.6% of our outstanding shares of commonstock, all of which are currently restricted as a result of securities laws, but may be converted into shares of Class A common stock and sold, subject to anyapplicable volume limitations under federal securities laws with respect to affiliate sales, in the near future. Additionally, our Seventh Amended and Restated Registration Rights Agreement dated as of November 10, 2010, entered into with certain of ourinvestors in connection with our Series A through H preferred stock financings, provides certain registration rights for 4,873,347 shares of Class B commonstock and 1,305,793 shares of Class A common stock as of February 28, 2018. Once we register these shares, they can be freely sold in the public market.In addition, as of February 28, 2018, there are approximately 3,274,294 shares subject to outstanding options to purchase Class B common stock thatwill become eligible for sale in the public market to the extent permitted by any applicable vesting requirements and Rule 144 under the Securities Act. Wehave registered all shares of Class A common stock or Class B common stock that we issue under our employee benefit plans, including our Amended andRestated 2007 Long Term Incentive Plan. Once they are issued in accordance with the terms of the plans, they can be freely sold in the public market uponissuance, subject to the restrictions imposed on our affiliates under Rule 144 and, in the case of Class B common stock, conversion to Class A commonstock. Sales of a substantial number of shares of our Class A common stock in the public market, or the market perception that the holders of a large numberof shares intend to sell shares, could reduce the market price of our Class A common stock. If the market price of our Class A common stock is low, we maynot be able to raise additional equity in amounts sufficient to fund our business plans or we may issue significant additional shares to raise funds, resulting insignificant dilution to our stockholders.We incur significant costs as a result of operating as a public company, and we devote substantial resources to public company compliance programs.As a public company, and particularly after we cease to be an emerging growth company, we incur significant legal, insurance, accounting, and otherexpenses. The Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listingrequirements of The NASDAQ Global Market, and other applicable securities rules and regulations impose various requirements on public companies,including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. We have invested, and willcontinue to invest, in resources to comply with laws, regulations, and standards, and this investment will result in increased general and administrativeexpenses and may divert management’s time and attention from product development activities. If our efforts to comply with new laws, regulations, andstandards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and ourbusiness may be harmed. As a public company, it is more expensive for us to obtain director and officer liability insurance, and we may be required to acceptreduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualifiedmembers of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers. We arecurrently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incuror the timing of such costs.Specifically, to comply with the requirements of being a public company, we are undertaking various actions, including implementing new internalcontrols and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls andprocedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that aredesigned to ensure that information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission (the SEC), isrecorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed inreports under the Securities Exchange Act of 1934 (the Exchange Act), is accumulated and communicated to our principal executive and financialofficers. Any failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations. In the event that we arenot able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate, or that we areunable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our Class A common stockcould decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on The NASDAQ Global Market andcould be subject to fines, sanctions, and other regulatory action, and potentially civil litigation.The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually anddisclosure controls and procedures quarterly. In particular, we must perform system and process evaluation and testing of our internal control over financialreporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. This assessment includes the disclosure of any material weaknesses in our internal control over financial reporting identified by our managementor our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we continue to dedicateinternal resources and utilize outside consultants and continue to execute a detailed work plan to assess and document the adequacy of internal control overfinancial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented, andimplement a continuous reporting and65improvement process for internal control over financial reporting. If material weaknesses are identified in the future or we are not able to comply with therequirements of Section 404 in a timely manner, our reported financial results could be materially misstated, we could receive an adverse opinion regardingour internal controls over financial reporting from our accounting firm, if and when required, and we could be subject to investigations or sanctions byregulatory authorities, which would require additional financial and management resources, which could result in an adverse reaction in the financial marketsdue to a loss of confidence in the reliability of our financial statements. We cannot assure you that there will not be material weaknesses or significantdeficiencies in our disclosure controls or our internal controls over financial reporting in the future. For so long as we remain as an emerging growthcompany, our accounting firm will not be required to provide an opinion regarding our internal controls over financial reporting.We may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders, and harm our business, results of operations,financial condition, and cash flows and future prospects.While we have no specific plans to acquire any other businesses, we may, in the future, make acquisitions of, or investments in, companies that webelieve have products or capabilities that are a strategic or commercial fit with our present or future product candidates and business or otherwise offeropportunities for our company. In connection with these acquisitions or investments, we may: •issue stock that would dilute our existing stockholders’ percentage of ownership; •incur debt and assume liabilities; and •incur amortization expenses related to intangible assets or incur large and immediate write-offs.We may not be able to complete acquisitions on favorable terms, if at all. If we do complete an acquisition, we cannot assure you that it will ultimatelystrengthen our competitive position or that it will be viewed positively by customers, financial markets, or investors. Furthermore, future acquisitions couldpose numerous additional risks to our operations, including: •problems integrating the purchased business, products or technologies, or employees or other assets of the acquisition target; •increases to our expenses; •disclosed or undisclosed liabilities of the acquired asset or company; •diversion of management’s attention from their day-to-day responsibilities; •reprioritization of our development programs and even cessation of development and commercialization of our current product candidates; •harm to our operating results or financial condition; •entrance into markets in which we have limited or no prior experience; and •potential loss of key employees, particularly those of the acquired entity.We may not be able to complete any acquisitions or effectively integrate the operations, products, or personnel gained through any such acquisition.Provisions in our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if anacquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current directors ormanagement.Provisions in our amended and restated certificate of incorporation and second amended and restated bylaws contain provisions that may have theeffect of discouraging, delaying, or preventing a change in control or changes in our management. These provisions could also limit the price that investorsmight be willing to pay in the future for shares of our Class A common stock, thereby depressing its market price. In addition, because our board of directorsis responsible for appointing the members of our executive management team, these provisions may frustrate or prevent any attempts by our stockholders toreplace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things,these provisions: •provide for a dual class common stock structure, as a result of which our current Class B common stock holders, who also own a substantialnumber of shares of Class A common stock, will have control over matters requiring stockholder approval, including significant corporatetransactions such as a merger; •authorize “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting,liquidation, dividend, and other rights superior to our common stock; •create a classified board of directors whose members serve staggered three-year terms; •specify that special meetings of our stockholders can be called only by our board of directors pursuant to a resolution adopted by a majority ofthe total number of directors;66 •prohibit stockholder action by written consent; •establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, includingproposed nominations of persons for election to our board of directors; •provide that our directors may be removed prior to the end of their term only for cause; •provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; •require a supermajority vote of the holders of our common stock or the majority vote of our board of directors to amend our bylaws; and •require a supermajority vote of the holders of our common stock to amend the classification of our board of directors into three classes and toamend certain other provisions of our amended and restated certificate of incorporation.These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management by making it moredifficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.Moreover, because we are incorporated in Delaware, we are governed by certain anti-takeover provisions under Delaware law which may discourage,delay, or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders. We are subject to theprovisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who acquires in excess of 15% of our outstanding votingpower without the prior approval of our board of directors from merging or combining with us for a period of three years after the date of the transaction inwhich the person acquired in excess of 15% of our outstanding voting power, unless the merger or combination is approved in a prescribed manner.Any provision of our amended and restated certificate of incorporation, our second amended and restated bylaws, or Delaware law that has the effect ofdelaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock,and could also affect the price that some investors are willing to pay for our Class A common stock.Because we do not intend to declare cash dividends on our shares of common stock in the foreseeable future, stockholders must rely on appreciation ofthe value of our common stock for any return on their investment.We currently anticipate that we will retain future earnings for the development, operation, and expansion of our business and do not anticipatedeclaring or paying any cash dividends in the foreseeable future. In addition, the terms of our Loan Agreement preclude, and any future debt agreements maypreclude, us from paying dividends. As a result, we expect that only appreciation of the price of our Class A common stock, if any, will provide a return toholders of our Class A common stock for the foreseeable future.Our ability to use net operating losses and research and development credits to offset future taxable income may be subject to certain limitations.In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownershipchange” is subject to limitations on its ability to utilize its pre-change net operating losses or tax credits (NOLs or credits), to offset future taxable income ortaxes. For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholderswho owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within aspecified testing period. Our existing NOLs or credits may be subject to substantial limitations arising from previous ownership changes, and if we undergoan ownership change, our ability to utilize NOLs or credits could be further limited by Sections 382 and 383 of the Code. In addition, future changes in ourstock ownership, many of which are outside of our control, could result in an ownership change under Sections 382 and 383 of the Code. Our NOLs or creditsmay also be impaired under state law. Accordingly, we may not be able to utilize a material portion of our NOLs or credits. Furthermore, our ability to utilizeour NOLs or credits is conditioned upon our attaining profitability and generating U.S. federal and state taxable income. As described above under “RiskFactors—Risks Related to our Financial Condition,” we have incurred significant net losses since our inception and anticipate that we will continue to incursignificant losses for the foreseeable future; and therefore, we do not know whether or when we will generate the U.S. federal or state taxable incomenecessary to utilize our NOL or credit carryforwards that are subject to limitation by Sections 382 and 383 of the Code.Our amended and restated certificate of incorporation designates the state or federal courts located in the State of Delaware as the sole and exclusiveforum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain afavorable judicial forum for disputes with us or our directors, officers or employees.Our amended and restated certificate of incorporation provides that, subject to limited exceptions, the state and federal courts located in the State ofDelaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach ofa fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim against us arisingpursuant to any provision of the Delaware General Corporation Law or as to which the Delaware67General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware, or (4) any other action asserting a claim against us that isgoverned by the internal affairs doctrine including any action to interpret, apply, or enforce our amended and restated certificate of incorporation or ouramended and restated bylaws. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to havenotice of and to have consented to the provisions of our amended and restated certificate of incorporation described above. This choice of forum provisionmay limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees,which may discourage such lawsuits against us and our directors, officers, and employees. Alternatively, if a court were to find these provisions of ouramended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings,we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financialcondition.Item 1B. Unresolved Staff Comments.None.Item 2. Properties.Our corporate headquarters are located in Irving, Texas, where we lease approximately 34,890 square feet of office and laboratory space. Our leaseexpires in October 2020. We believe that our facilities are adequate for our current needs and that suitable additional or substitute space would be availableif needed.Item 3. Legal Proceedings.We are not currently a party to any legal proceedings, and we are not aware of any claims or actions pending or threatened against us; however, fromtime to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of business. Regardless of the outcome,litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.Item 4. Mine Safety Disclosures.Not applicable. 68PART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Market InformationOur Class A common stock has been traded on The NASDAQ Global Market since May 26, 2016 under the symbol “RETA”. Prior to such time, therewas no public market for our common stock. As a result, we have not set forth quarterly information with respect to the high and low prices for our Class Acommon stock for the two most recent fiscal years. The following tables set forth the intraday high and low prices of our Class A common stock as reportedby NASDAQ from May 26, 2016, our first day of trading on NASDAQ, to December 31, 2017. On February 28, 2018, the closing price of our Class Acommon stock on the NASDAQ Global Market was $24.09 per share. For the Year Ended December 31, 2016 High Low Second Quarter (May 26, 2016 through June 30, 2016) $26.90 $11.03 Third Quarter $32.22 $15.17 Fourth Quarter $41.60 $18.51 For the Year Ended December 31, 2017 High Low First Quarter $29.71 $21.41 Second Quarter $32.53 $19.48 Third Quarter $40.88 $25.69 Fourth Quarter $33.92 $22.27 Our Class B common stock is not publicly traded. Our Class B common stock is convertible into Class A common stock on a one-for-one basis at theholder’s election at any time. The conversion right of the Class B common stock has no expiration date.StockholdersAs of February 28, 2018, there were 340 and 176 stockholders of record of our Class A and Class B common stock, respectively. In the case of ourClass A common stock, the actual number of holders is greater than this number of record holders, and includes stockholders who are beneficial owners, butwhose shares are held in street name by brokers or held by other nominees. The number of holders of record of Class A common stock also does not includestockholders whose shares may be held in trust by other entities.69Performance GraphThe following graph illustrates a comparison of the total cumulative stockholder return for our Class A common stock since May 26, 2016, which isthe date our shares began trading, through December 31, 2017, to two indices: the NASDAQ Composite Index and the NASDAQ Biotechnology Index. Thegraph assumes an initial investment of $100 on May 26, 2016, in our Class A common stock, the stocks comprising the NASDAQ Composite Index, and thestocks comprising the NASDAQ Biotechnology Index. The comparisons in the table are required by the SEC and are not intended to forecast or be indicativeof possible future performance of our Class A common stock. This graph shall not be deemed “soliciting material” or be deemed “filed” for purposes ofSection 18 of the Exchange Act, or otherwise subject to the liabilities under that section, and shall not be deemed to be incorporated by reference into any ofour filings under the Securities Act of 1933, as amended, or the Securities Act, whether made before or after the date hereof and irrespective of any generalincorporation language in any such filing. $100 investment in stock or index Ticker May 26, 2016 December 31,2016 December 31,2017 Reata Pharmaceuticals, Inc. RETA $100.00 $197.38 $256.06 NASDAQ Composite Index ^IXIC $100.00 $109.97 $141.03 NASDAQ Biotechnology Index ^NBI $100.00 $96.37 $116.67 Dividend PolicyWe have not paid any dividends on our capital stock within the past two fiscal years. We do not anticipate declaring or paying in the foreseeablefuture any dividends on our capital stock. We intend to retain all available funds and any future earnings to support operations and to finance the growth anddevelopment of our business. Any future determination to pay dividends will be made at the discretion of our board of directors, subject to applicable laws,and will depend upon our results of operations, financial condition, contractual restrictions, capital requirements, and other factors. Our future ability to paydividends on our capital stock may be limited by the terms of any future debt that we may incur or any preferred securities that we may issue in the future.70Equity Compensation PlansInformation regarding our equity compensation plans is incorporated by reference to Item 12, “Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters—Equity Compensation Plan Information” of Part III of this Annual Report on Form 10-K.Issuer’s Purchases of Equity SecuritiesNone.Use of Proceeds from Registered SecuritiesOn May 25, 2016, our registration statement on Form S-1 (File No. 333-208843) relating to our IPO of our Class A common stock was declaredeffective by the SEC. The shares began trading on The NASDAQ Global Market on May 26, 2016. The public offering price of the shares sold in the offeringwas $11.00 per share. The IPO closed on June 1, 2016 and included 6,325,000 shares of Class A common stock, which included 825,000 shares of Class Acommon stock issued pursuant to the overallotment option granted to the underwriters, for gross proceeds of approximately $69.6 million before deductingunderwriters’ discounts and commissions and offering-related expenses. Net proceeds, after deducting underwriting discounts and commissions of $4.9million and offering expenses of approximately $3.8 million, were $60.9 million. Citigroup Global Markets Inc., Cowen and Company, LLC, and PiperJaffray & Co. acted as joint book-running managers of this offering.There has been no material change in the planned use of proceeds from our IPO as described in our prospectus dated May 25, 2016, filed with the SECpursuant to Rule 424(b)(4) of the Securities Act. We invested the funds received in highly liquid money market funds. All of the net proceeds from the IPOhave been applied to fund the advancement of our bardoxolone methyl, omaveloxolone, and other clinical trials and preclinical studies, and to provide fundsfor working capital and other general purposes. None of the offering proceeds were paid directly or indirectly to any of our directors or officers (or theirassociates) or persons owning 10.0% or more of any class of our equity securities or to any other affiliates.71Item 6. Selected Financial Data.The selected consolidated financial data set forth below are derived from our audited consolidated financial statements and may not be indicative offuture operating results. The following selected consolidated financial data should be read in conjunction with Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included elsewhere in thisAnnual Report. The consolidated selected financial data in this section are not intended to replace our consolidated financial statements and the relatednotes included elsewhere in this Annual Report. Our historical results are not necessarily indicative of our future results. Years Ended December 31 2017 2016 2015 2014 2013 (in thousands, except share and per share data) Collaboration revenue License and milestone $47,103 $49,730 $50,295 $51,368 $51,030 Other revenue 955 126 24 586 170 Total collaboration revenue 48,058 49,856 50,319 51,954 51,200 Expenses Research and development (1) 71,273 39,453 35,141 34,305 45,252 General and administrative (1) 23,260 16,603 13,693 11,512 13,403 Depreciation and amortization 437 682 1,819 2,512 2,927 Total expenses 94,970 56,738 50,653 48,329 61,582 Other income (expense) Investment income 701 214 32 43 36 Interest expense (1,454) — — — — Other income (expense) (3) — — — — Total other income (expense) (756) 214 32 43 36 (Loss) income before taxes on income (47,668) (6,668) (302) 3,668 (10,346)Provision (benefit) for taxes on income 3 (441) 1,148 2,979 24,759 Net (loss) income $(47,671) $(6,227) $(1,450) $689 $(35,105)Preferred stock dividends — — — — (460)Net (loss) income attributable to common stockholders $(47,671) $(6,227) $(1,450) $689 $(35,565)Net (loss) income per share—basic (2) $(1.99) $(0.31) $(0.09) $0.04 $(0.35)Net (loss) income per share—diluted (2) $(1.99) $(0.31) $(0.09) $0.04 $(0.35)Weighted-average number of common shares used in net (loss) income per share basic (2) 23,933,309 19,816,635 15,974,974 15,950,023 15,851,838 Weighted-average number of common shares used in net (loss) income per share diluted (2) 23,933,309 19,816,635 15,974,974 15,979,768 15,851,838 (1)Stock-based compensation expense is included in our results of operations as follows: Years Ended December 31 2017 2016 2015 2014 2013 (in thousands) Research and development $2,409 $1,121 $671 $787 $992 General and administrative 4,121 1,246 1,404 736 1,369 $6,530 $2,367 $2,075 $1,523 $2,361 72 (2)See Note 2 of the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a description of the method used tocalculate basic and diluted net (loss) income per share of common stock. As of December 31, 2017 2016 2015 2014 2013 (in thousands) Condensed Consolidated Balance Sheet Data Cash and cash equivalents $129,780 $84,732 $42,008 $87,758 $176,527 Federal income tax receivable — — 31,926 15,243 10,905 Working capital 85,492 27,652 16,439 48,603 77,249 Total assets 135,337 89,093 78,954 125,604 229,462 Term loan 19,614 — — — — Deferred revenue (including current portion) 244,438 291,041 340,771 390,366 441,058 Accumulated deficit (337,143) (289,354) (283,127) (281,677) (282,366)Total stockholders’ deficit $(146,973) $(215,048) $(273,156) $(274,246) $(277,056) 73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 together with our consolidated financialstatements and related notes and other financial information appearing in this Annual Report. Some of the information contained in this discussion andanalysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, operations, and productcandidates, includes forward-looking statements that involve risks and uncertainties. You should review the sections of this Annual Report on Form 10-Kcaptioned “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for a discussion of important factors that could cause our actualresults to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.OverviewWe are a clinical stage biopharmaceutical company focused on identifying, developing, and commercializing therapeutics to address serious and life-threatening diseases with few or no approved therapies by targeting molecular pathways that regulate cellular metabolism and inflammation. We arecurrently conducting three registrational trials with our lead product candidates, bardoxolone methyl and omaveloxolone, which activate the transcriptionfactor Nrf2 to restore mitochondrial function, reduce oxidative stress, and resolve inflammation. Our lead registrational programs are evaluating our productcandidates for the treatment of a rare form of CKD caused by Alport syndrome, a rare form of degenerative neuromuscular disease called FA, and a rare andsevere form of CTD-PAH. We are developing bardoxolone methyl for the treatment of patients with CKD caused by Alport syndrome and four additional rare forms of CKD that,in the aggregate, affect more than a half million patients in the United States. CKD is characterized by a progressive worsening in the rate at which thekidney filters waste products from the blood, called the GFR. When GFR gets too low, patients develop ESRD and require dialysis or a kidney transplant tosurvive. In 11 clinical trials, bardoxolone methyl has been shown to consistently improve kidney function, as assessed by eGFR in patients with a variety ofdiseases that result in decreased kidney function. We believe that bardoxolone methyl treatment has the potential to delay or prevent the GFR declines thatcause the need for dialysis or a transplant in patients with Alport syndrome and other rare forms of CKD. We are conducting the Phase 3 portion ofCARDINAL in patients with CKD caused by Alport syndrome, which will enroll approximately 150 patients randomized evenly to either bardoxolonemethyl or placebo. The FDA has provided us with guidance that, in patients with CKD caused by Alport syndrome, retained eGFR demonstrating animprovement versus placebo after one year of bardoxolone methyl treatment may support accelerated approval, and retained eGFR demonstrating animprovement versus placebo after two years of treatment may support full approval. We expect to have one year top-line results from the Phase 3 portion ofCARDINAL available in the second half of 2019. If successful, we believe the results from the Phase 3 portion of CARDINAL, together with other data fromour development program, will be sufficient to form the basis of an NDA submission to the FDA seeking approval for bardoxolone methyl in the UnitedStates.We are developing omaveloxolone for the treatment of patients with FA, an inherited, debilitating, and degenerative neuromuscular disorder, causedby mutations in the gene for frataxin, a mitochondrial protein. Patients with FA are typically dependent on wheelchair use 10 to 15 years after disease onset,and their median age of death is in the mid-30s. There are no currently approved therapies for the treatment of FA. Omaveloxolone is being studied in theregistrational part 2 of our MOXIe trial. In part 1 of MOXIe, at the optimal dose level, omaveloxolone demonstrated a statistically significant improvementin mFARS scores of 3.8 points (p=0.0001) versus baseline and a placebo-corrected improvement in mFARS scores of 2.3 points (p=0.06). We expect to havetop-line data from the MOXIe trial in the second half of 2019. If successful, we believe the results from the MOXIe clinical trial, together with other data fromthe omaveloxolone program, will be sufficient to form the basis of an NDA submission to the FDA seeking approval for omaveloxolone in the United States.We are studying bardoxolone methyl in CTD-PAH, which is a serious and progressive disease that leads to heart failure and death. CTD-PAH patientsare less responsive to existing vasodilator therapies than I-PAH patients and have a worse prognosis. Bardoxolone methyl is being studied for the treatmentof CTD-PAH in the Phase 3 CATALYST trial. We initiated CATALYST following review of data from our Phase 2 clinical trial, LARIAT, whichdemonstrated a statistically significant, mean time averaged increase in 6MWD at 16 weeks in CTD-PAH patients compared to baseline. We currently expectto have top-line data from the CATALYST trial in the second half of 2018. However, the trial is designed to enroll between 130 and 200 patients, and thefinal sample size will be determined by a pre-specified, blinded sample size re-calculation based on 6MWD variability and baseline characteristics. Thetiming of data availability may change if the sample size is increased due to the sample size re-calculation. If successful, we believe the results from theCATALYST trial, together with other data from the bardoxolone methyl development program, will be sufficient to form the basis of an NDA submission tothe FDA seeking approval for bardoxolone methyl in the United States.In addition to our three registrational programs, we are currently conducting a battery of additional clinical and preclinical programs in serious andlife-threatening diseases that may provide expansion opportunities for our drug candidates. We plan to evaluate data from these earlier stage programs todetermine which indications to advance into later stage trials. 74To date, we have focused most of our efforts and resources on developing our product candidates and conducting preclinical studies and clinicaltrials. We have historically financed our operations primarily through revenue generated from our collaborations with AbbVie and KHK, from sales of oursecurities, and secured loans. We have not received any payments or revenue from collaborations other than nonrefundable upfront, milestone, and costsharing payments from our collaborations with AbbVie and KHK and reimbursements of expenses under the terms of our agreement with KHK. We haveincurred losses in each year since our inception, other than in 2014. As of December 31, 2017, we had $129.8 million of cash and cash equivalents and anaccumulated deficit of $337.1 million. We continue to incur significant research and development and other expenses related to our ongoingoperations. Despite contractual product development commitments and the potential to receive future payments from our collaborators, we anticipate that wewill continue to incur losses for the foreseeable future, and we anticipate that our losses will increase as we continue our development of, and seek regulatoryapproval for, our product candidates. If we do not successfully develop and obtain regulatory approval of our existing product candidates or any futureproduct candidates and effectively manufacture, market, and sell any products that are approved, we may never generate revenue from productsales. Furthermore, even if we do generate revenue from product sales, we may never again achieve or sustain profitability on a quarterly or annual basis. Ourprior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and workingcapital. Our failure to become and remain profitable could depress the market price of our Class A common stock and could impair our ability to raise capital,expand our business, diversify our product offerings, or continue our operations.On August 1, 2017, we closed a follow-on underwritten public offering of 3,737,500 shares of our Class A common stock, which included 487,500shares of Class A common stock issued pursuant to an option granted to the underwriters, for gross proceeds of $115.9 million. The Company received totalproceeds from the offering of $108.5 million, after deducting underwriting discounts and commissions and offering expenses. We intend to use the netproceeds for working capital and general corporate purposes, which include, but are not limited to, advancing the development of bardoxolone methylthrough a Phase 2/3 program in CKD caused by Alport syndrome, Phase 2 programs in additional kidney indications, and Phase 2 programs in PH-ILD andthe development of omaveloxolone in FA.The probability of success for each of our product candidates and clinical programs and our ability to generate product revenue and become profitabledepend upon a variety of factors, including the quality of the product candidate, clinical results, investment in the program, competition, manufacturingcapability, commercial viability, and our collaborators’ ability to successfully execute our development and commercialization plans. We will also requireadditional capital through equity or debt financings in order to fund our operations and execute on our business plans, and there is no assurance that suchfinancing will be available to us on commercially reasonable terms or at all. For a description of the numerous risks and uncertainties associated with productdevelopment and raising additional capital, see “Risk Factors” included in this Annual Report.Financial Operations OverviewRevenueOur revenue to date has been generated primarily from licensing fees received under our collaborative license agreements and reimbursements forexpenses. We currently have no approved products and have not generated any revenue from the sale of products to date. In the future, we may generaterevenue from product sales, royalties on product sales, reimbursements for collaboration services under our current collaboration agreements, or license fees,milestones, or other upfront payments if we enter into any new collaborations or license agreements. We expect that our future revenue will fluctuate fromquarter to quarter for many reasons, including the uncertain timing and amount of any such payments and sales.Our license and milestone revenue has been generated primarily from our license agreement with KHK, our license agreement with AbbVie, and ourcollaboration agreement with AbbVie and consists of upfront payments and milestone payments. License revenue recorded with respect to the KHK licenseagreement, the AbbVie license agreement, and the AbbVie collaboration agreement consists solely of the recognition of deferred revenue. Under our revenuerecognition policy, license revenue associated with upfront, non-refundable license payments received under the license and collaboration agreements withAbbVie and KHK are deferred and recognized ratably over the expected term of the performance obligations under the agreements, which extend through2017, 2021, and 2026 for the AbbVie license agreement, the KHK license agreement, and the AbbVie collaboration agreement, respectively. As of November2017, the deferred revenue related to the AbbVie license agreement has been fully recognized, which will result in a decrease in license revenue recognizedin 2018.We expect to recognize $30 million in deferred revenue related to a milestone from KHK during 2018, which we will ratably recognize in revenue overour estimated performance obligation period ending December 2021. We would also recognize approximately $3.6 million in related license and other feeswhen the milestone payment is received.We also have other license revenue, which consists of milestone payments from a disease advocacy organization in 2017 and 2015, and other revenue,which consists of reimbursements from KHK for expenses incurred to obtain drug supplies.75Research and Development ExpensesThe largest component of our total operating expenses has historically been our investment in research and development activities, including theclinical development of our product candidates. From our inception through December 31, 2017, we have incurred a total of $549.5 million in research anddevelopment expense, a majority of which relates to the development of bardoxolone methyl and omaveloxolone. We expect our research and developmentexpense to continue to increase in the future as we advance our product candidates through clinical trials and expand our product candidate portfolio. Theprocess of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and we consider the active managementand development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each product candidate and preclinicalprogram may be affected by a variety of factors, including the safety and efficacy data for product candidates, investment in the program, competition,manufacturing capability, and commercial viability.Research and development expenses include: •expenses incurred under agreements with clinical trial sites that conduct research and development activities on our behalf; •expenses incurred under contract research agreements and other agreements with third parties; •employee and consultant-related expenses, which include salaries, benefits, travel, and stock-based compensation; •laboratory and vendor expenses related to the execution of preclinical and non-clinical studies and clinical trials; •the cost of acquiring, developing, manufacturing, and distributing clinical trial materials; and •facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, andother supply costs.Research and development costs are expensed as incurred. Costs for certain development activities such as clinical trials are recognized based on anevaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.We base our expense accruals related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts withmultiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements vary from contract tocontract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patientsand the completion of clinical trial milestones. In accruing costs, we estimate the time period over which services will be performed and the level of effort tobe expended in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed orthe costs of these services, our actual expenses could differ from our estimates.To date, we have not experienced significant changes in our estimates of accrued research and development expenses after a reportingperiod. However, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware ofadditional information about the status or conduct of our clinical trials and other research activities.Currently, AbbVie is not participating in the development of bardoxolone methyl for the treatment of CKD caused by Alport syndrome, CTD-PAH,PH-ILD, or other rare kidney diseases, and we are therefore incurring all costs for this program. AbbVie has the right to opt-in to these programs at any timeduring development. Upon opting-in, AbbVie would be required to pay an agreed upon amount of all development costs accumulated up to the point ofexercising their opt-in right. All development costs incurred after AbbVie’s opt-in would be split equally.With respect to our omaveloxolone programs and our collaboration agreement with AbbVie, we were responsible for a certain initial amount in earlydevelopment costs before AbbVie began sharing development costs equally. In April 2016, we had incurred all of these initial costs, after which paymentsfrom AbbVie with respect to research and development costs incurred by us were recorded as a reduction in research and development expenses. Ourexpenses were reduced by $1.4 million for AbbVie’s share of research and development costs for the year ended December 31, 2016.In September 2016, we and AbbVie mutually agreed that we would continue unilateral development of omaveloxolone. Therefore, AbbVie no longerco-funds the exploratory development costs of this program, but retains the right to opt back in at certain points in development. Depending upon whatpoint, if any, AbbVie opts back into development, AbbVie may retain its right to commercialize a product outside the United States, or we may beresponsible for commercializing the product on a worldwide basis. Upon opting back in, AbbVie would be required to pay an agreed upon amount of alldevelopment costs accumulated up to the point of exercising their opt-in right, after which development costs incurred and product revenue worldwidewould be split equally.76Currently, KHK is not participating in the development of bardoxolone methyl in CTD-PAH, PH-ILD, or other rare kidney diseases but is reimbursingus the majority of the costs for our registrational trial in CKD caused by Alport syndrome in Japan. The Company’s expenses were reduced by $0.5 millionfor KHK’s share of the study costs for the year ended December 31, 2017.The following table summarizes our research and development expenses incurred during the years ended December 31: 2017 2016 2015 (in thousands) Bardoxolone methyl $35,999 $17,188 $5,259 Omaveloxolone $10,123 5,011 11,465 RTA 901 1,927 2,187 6,339 Other research and development expenses 23,224 15,067 12,078 Total research and development expenses $71,273 $39,453 $35,141 The program-specific expenses summarized in the table above include costs that we directly allocate to our product candidates. Our other research anddevelopment expenses include research and development salaries, benefits, stock-based compensation and preclinical, research, and discovery costs, whichwe do not allocate on a program-specific basis.General and Administrative ExpensesGeneral and administrative expenses consist primarily of employee-related expenses for executive, operational, finance, legal, compliance, and humanresource functions. Other general and administrative expenses include personnel expense, facility-related costs, professional fees, accounting and legalservices, depreciation expense, other external services, and expenses associated with obtaining and maintaining our intellectual property rights.We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued researchand development and potential commercialization of our product candidates. We have also incurred, and anticipate incurring, in the future increasedexpenses associated with being a public company, including exchange listing and SEC requirements, director and officer insurance premium, legal, audit andtax fees, compliance with the Sarbanes-Oxley Act of 2002, regulatory compliance programs, and investor relations costs. Additionally, if and when webelieve the first regulatory approval of one of our product candidates appears likely, we anticipate an increase in payroll and related expenses as a result ofour preparation for commercial operations, especially for the sales and marketing of our product candidates.Other IncomeOther income represents interest and gains earned on our cash and cash equivalents, which include money market funds.Provision for Taxes on IncomeProvision for taxes on income consists of net loss, taxed at federal tax rates and adjusted for certain permanent differences. We maintain a fullvaluation allowance against our net deferred tax assets. Changes in this valuation allowance also affect the tax provision. 77Results of OperationsComparison of the Years Ended December 31, 2017, 2016, and 2015The following table sets forth our results of operations for the years ended December 31: 2017 Change 2016 Change 2015 (in thousands, except percentage data) Consolidated Statements of Operations Data Collaboration revenue License and milestone $47,103 (5)% $49,730 (1)% $50,295 Other revenue 955 658% 126 425% 24 Total collaboration revenue 48,058 (4)% 49,856 (1)% 50,319 Expenses Research and development 71,273 81% 39,453 12% 35,141 General and administrative 23,260 40% 16,603 21% 13,693 Depreciation and amortization 437 (36)% 682 (63)% 1,819 Total expenses 94,970 67% 56,738 12% 50,653 Other income (expense) Investment income 701 228% 214 569% 32 Interest expense (1,454) (100)% — — — Other income (expense) (3) (100)% — — — Total other income (expense) (756) (453)% 214 569% 32 Loss before taxes on income (47,668) (615)% (6,668) (2108)% (302)Provision (benefit) for taxes on income 3 101% (441) (138)% 1,148 Net loss $(47,671) (666)% $(6,227) (329)% $(1,450) RevenueLicense and milestone revenue represented approximately 98%, 100%, and 100% of total revenue for the years ended December 31, 2017, 2016, and2015, respectively, and consisted primarily of the recognition of deferred revenue. License and milestone revenue decreased by 5% during 2017 compared to2016. The decrease was primarily due to full recognition of deferred revenue for the AbbVie license agreement in November 2017 after which total revenueexpected to be recognized from deferred revenue for the AbbVie collaboration agreement in 2018 will be $26,647,000, compared to total revenue from theAbbVie license and collaboration agreements of $45,067,000 in 2017. License and milestone revenue decreased by 1% during 2016 compared to 2015. The decrease was primarily due to a milestone payment of $0.7million received from a research collaboration with a disease advocacy organization in 2015.Other revenue increased by 658% during 2017 compared to 2016 and by 425% during 2016 compared to 2015, primarily due to revenue recognizedfor reimbursements of expenses from KHK for expenses incurred. The following table summarizes the sources of our revenue for the years ended December 31: 2017 2016 2015 (in thousands) License and milestone AbbVie license agreement $18,420 $21,470 $21,412 AbbVie collaboration agreement 26,647 26,720 26,647 KHK agreement 1,536 1,540 1,536 Other 500 — 700 Total license and milestone $47,103 $49,730 $50,295 Other revenue 955 126 24 Total collaboration revenue $48,058 $49,856 $50,319 78Research and Development ExpensesResearch and development expenses increased by 81% during 2017 compared to 2016. The increase was primarily due to $23.9 million in expandedclinical and manufacturing activities, primarily for CARDINAL, CATALYST, the extension trial for CATALYST and LARIAT patients, part 2 of MOXIe, part1 of MOTOR, REVEAL, and PHOENIX, $2.9 million in increased preclinical and manufacturing activities in our RORgT program, $2.7 million in personnelexpense to support growth in our development activities, $1.3 million in equity compensation expense, and $0.8 million in increased medical affairsactivities.Research and development expenses increased by 12% during 2016 compared to 2015. The increase was primarily due to increases of $11.9 millionprimarily related to expanded clinical activities for bardoxolone methyl in PAH and PH-ILD, $1.8 million in personnel expense to support growth in ourdevelopment activities, $0.5 in equity compensation expense, and $0.5 in sponsorship conferences related to PAH, FA, and MM, and a net decrease of $6.5million related to the completion of clinical activities on our topical programs and the upfront startup costs related to the launch of clinical activities foromaveloxolone in FA and MM, and $4.2 million related to delay in preclinical and clinical activities for RTA 901.Research and development expenses, as a percentage of total expenses, was 75%, 70%, and 69%, for 2017, 2016, and 2015, respectively. The increaseof 5% during 2017 compared to 2016 was primarily due to increased clinical and manufacturing activity related to our registrational trials.General and Administrative ExpensesGeneral and administrative expenses increased by 40% during 2017 compared to 2016. The increase was primarily due to $1.8 million in personneland consulting expense to support growth in our development activities, $2.9 million in equity compensation expense related to award issuances inDecember 2017 and additional issuances to new employees, $0.9 million in commercial research activities, and $0.6 million in intellectual property costsdue to additional validation of patents, new applications, national stage filings, and license fees.General and administrative expenses increased by 21% during 2016 compared to 2015. The increase was primarily due to $1.4 million in personneland consulting expense to support growth in our development activities, $0.7 million in insurance coverage in connection with being a public company andin product liability for additional clinical trial activities, and $0.6 million in commercial research consulting activities.General and administrative expenses, as a percentage of total expenses, was 24%, 29%, and 27%, for 2017, 2016, and 2015, respectively. The decreaseof 5% during 2017 compared to 2016 was primarily due to the increase in research and development expenses for clinical and manufacturing activity relatedto our registrational trials.Investment IncomeThe year-over-year increases in investment income during 2017, 2016, and 2015 were due to investment and interest income earned on cashequivalents.Interest ExpenseInterest expense increased by $1.5 million, or 100%, during 2017 compared to 2016. The increase was attributable to interest charges associated withborrowings under our Loan Agreement entered in March 2017.Provision (Benefit) for Taxes on Income (Loss)The year-over-year changes in provision (benefit) for taxes on income (loss) during 2017, 2016, and 2015 were due to differences in income generatedand changes in the valuation allowance. Liquidity and Capital ResourcesSince our inception, we have funded our operations primarily through collaboration and license agreements, the sale of preferred and common stock,and secured loans. To date, we have raised gross cash proceeds of $476.6 million through the sale of convertible preferred stock and $750.0 million frompayments under license and collaboration agreements. We also obtained $169.8 million in net proceeds from our IPO and follow-on offering of our Class Acommon stock and $19.7 million in net proceeds from our Loan Agreement. We have not generated any revenue from the sale of any products. As ofDecember 31, 2017, we had available cash and cash equivalents of approximately $129.8 million. Our cash and cash equivalents are invested in accordancewith our investment policy, primarily with a view to liquidity and capital preservation.79Cash FlowsThe following table sets forth the primary sources and uses of cash for the years ended December 31: 2017 2016 2015 (in thousands) Net cash (used in) provided by: Operating activities $(83,256) $(19,259) $(44,620)Investing activities (343) (339) (260)Financing activities 128,647 62,322 (870)Net change in cash and cash equivalents $45,048 $42,724 $(45,750) Operating ActivitiesNet cash used in operating activities was $83.3 million for the year ended December 31, 2017, consisting primarily of net loss of $47.7 millionadjusted for non-cash items including stock-based compensation expense of $6.5 million, depreciation and amortization expense of $0.6 million, and a netdecrease in operating assets and liabilities of $42.7 million. The significant items in the change in operating assets and liabilities include an increase ofprepaid expenses and other current assets of $1.3 million due to prepayments on trial and other operating expenses and reimbursements due from KHK, anincrease in accrued direct research and other current liabilities of $7.0 million due to clinical trial activities, a decrease in accounts payable of $1.8 milliondue to timing of vendor payment, and a decrease in deferred revenue of $46.6 million. The decrease in deferred revenue relates to the timing of upfrontpayments and ratable recognition of revenue over the expected term of the performance obligations under our collaboration agreements with AbbVie andKHK, resulting in recognition of $46.6 million of license and milestone revenue.Net cash used in operating activities was $19.3 million for the year ended December 31, 2016, consisting primarily of net loss of $6.2 million adjustedfor non-cash items including stock-based compensation expense of $2.4 million, depreciation expense of $0.7 million, and a net decrease in operating assetsand liabilities of $16.2 million. The significant items in the change in operating assets and liabilities include an increase of prepaid expenses and othercurrent assets of $1.7 million due to prepayments on trial and other operating expenses and reimbursements due from KHK, an increase in accrued directresearch and other current liabilities of $3.1 million due to clinical trial activities, a decrease in income tax receivable of $31.9 million due to tax refundsreceived, and a decrease in deferred revenue of $49.7 million. The decrease in deferred revenue relates to the timing of upfront payments and ratablerecognition of revenue over the expected term of the performance obligations under our collaboration agreements with AbbVie and KHK, resulting inrecognition of $49.7 million of license and milestone revenue.Net cash used in operating activities was $44.6 million for the year ended December 31, 2015, consisting primarily of net loss of $1.5 million adjustedfor non-cash items including provision of deferred taxes on income of $17.8 million, stock-based compensation of $2.1 million, depreciation expense of $1.8million, and a net decrease in operating assets and liabilities of $64.8 million. The significant items in the change in operating assets and liabilities includean increase in tax income tax receivable of $17.9 million due to carrying back 2015 losses to realize tax benefits, an increase in accounts payable of $2.8million due to timing of vendor payments, and a decrease in deferred revenue of $49.6 million. The decrease in deferred revenue related to the timing ofupfront payments and ratable recognition of revenue over the expected term of the performance obligations under our collaboration agreements with AbbVieand KHK, resulting in recognition of $49.6 million.Investing ActivitiesNet cash used in investing activities consisted of purchases and sales of property and equipment. Net cash used in investing activities for the yearsended December 31, 2017, 2016, and 2015 were $0.3 million, $0.3 million and $0.3 million, respectively.Financing ActivitiesNet cash provided by financing activities for the year ended December 31, 2017, primarily due to net proceeds of $108.5 million from our follow-onpublic offering and $19.5 million from our Loan Agreement.Net cash provided by financing activities for the year ended December 31, 2016, primarily consisted of $64.7 million from proceeds of our IPO, offsetby $2.6 million in payments on deferred offering costs.Net cash used in financing activities for the year ended December 31, 2015, primarily consisted of payments on deferred offering costs of $0.9 million.80Operating Capital RequirementsTo date, we have not generated any revenue from product sales. We do not know when or whether we will generate any revenue from productsales. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize one or moreof our current or future product candidates. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses toincrease as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approvedproducts. We are subject to all the risks related to the development and commercialization of novel therapeutics, and we may encounter unforeseen expenses,difficulties, complications, delays, and other unknown factors that may adversely affect our business. We continue to incur additional costs associated withoperating as a public company. We anticipate that we will need substantial additional funding in connection with our continuing operations.On July 10, 2017, we filed a universal shelf registration statement on Form S-3, which was declared effective by the SEC on July 14, 2017, on whichwe registered for sale up to $250 million of any combination of our common stock, preferred stock, warrants, rights, purchase contracts and/or units from timeto time and at prices and on terms that we may determine. After the closing of our follow-on underwritten public offering on August 1, 2017, approximately$134.1 million of securities remains available for issuance under this shelf registration. This shelf registration statement will remain in effect for up to threeyears from the date it was declared effective.On November 3, 2017, we amended the Loan Agreement to increase the Term B Loan amount to either $20 million or $25 million. We may, at oursole discretion, borrow $20 million under Term B Loan. An additional $5 million will be available under the Term B Loan, for a total of $25 million, uponthe achievement of one of two milestones. If we borrow the Term B Loan, we expect to incur additional related interest expense.On November 9, 2017, we entered into an at-the-market equity offering sales agreement with Stifel, Nicolaus & Company, Incorporated, thatestablished a program pursuant to which we may offer and sell up to $50 million of our Class A common stock from time to time in at-the-market transactionsunder our existing shelf registration statement. As of the filing date of this Form 10-K, no shares have been sold under this program.Our longer term liquidity requirements will require us to raise additional capital, such as through additional equity or debt financings. Our futurecapital requirements will depend on many factors, including the receipt of milestones under our current collaboration agreements and the timing of ourexpenditures related to clinical trials. We expect to have top-line data from the CATALYST trial in the second half of 2018, assuming the re-calculation ofthe final sample size does not impact the timing of data release, and one year top-line results from the Phase 3 portion of CARDINAL and top-line data fromthe MOXIe trial in the second half of 2019. Assuming we meet these current timing expectations from our lead programs, we believe our existing cash andcash equivalents, in combination with anticipated borrowing of $20 million under the Term B Loan and receipt of a milestone payment from KHK of $30million during 2018, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through the second half of2019. However, we anticipate opportunistically raising additional capital before that time through equity offerings, collaboration or license agreements, oradditional debt in order to maintain adequate capital reserves. In addition, we may choose to raise additional capital at any time for the further developmentof our existing product candidates and may also need to raise additional funds sooner to pursue other development activities related to additional productcandidates. Decisions about the timing or nature of any financing will be based on, among other things, our perception of our liquidity and of the marketopportunity to raise equity or debt. Additional securities may include common stock, preferred stock, or debt securities.Until we can generate a sufficient amount of revenue from our product candidates, if ever, we expect to finance future cash needs through public orprivate equity or debt offerings, commercial loans, and collaboration transactions. Additional capital may not be available on reasonable terms, if at all. Ifwe are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back, or discontinue thedevelopment or commercialization of one or more of our product candidates. If we raise additional funds through the issuance of additional equity or debtsecurities, it could result in dilution to our existing stockholders or increased fixed payment obligations, and any such securities may have rights senior tothose of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair ourcompetitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell, or license intellectual property rights,and other operating restrictions that could adversely affect our ability to conduct our business, and any such debt could be secured by some or all of ourassets. Any of these events could significantly harm our business, financial condition, and prospects.Our forecast of the period through which our financial resources will be adequate to support our operations is a forward-looking statement andinvolves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may proveto be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements, both near- and long-term,will depend on many factors, including, but not limited to: •the scope, rate of progress, results and cost of our clinical trials, preclinical testing, and other activities related to the development of ourproduct candidates; •the number and characteristics of product candidates that we pursue; •the costs of development efforts for our product candidates that are not subject to reimbursement from our collaborators;81 •the costs necessary to obtain regulatory approvals, if any, for our product candidates in the United States and other jurisdictions, and the costs ofpost-marketing studies that could be required by regulatory authorities in jurisdictions where approval is obtained; •the continuation of our existing collaborations and entry into new collaborations and the receipt of any collaboration payments; •the time and unreimbursed costs necessary to commercialize products in territories in which our product candidates are approved for sale; •the revenue from any future sales of our products for which we are entitled to a profit share, royalties, and milestones; •the level of reimbursement or third-party payor pricing available to our products; •the costs of obtaining third-party commercial supplies of our products, if any, manufactured in accordance with regulatory requirements; •the costs associated with being a public company; and •the costs we incur in the filing, prosecution, maintenance, and defense of our extensive patent portfolio and other intellectual property rights.If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financialcondition, and results of operations could be materially adversely affected.Contractual Obligations and CommitmentsContractual ObligationsAs of December 31, 2017, our contractual obligations were as follows: Payments due by period Less than1 year 1 to 3years 4 to 5years Total (unaudited) (in thousands) Operating lease obligations $561 $1,221 $— $1,782 Outstanding term loan 976 11,707 7,317 20,000 Total contractual obligations $1,537 $12,928 $7,317 $21,782 Clinical TrialsAs of December 31, 2017, we have several on-going clinical trials in various stages. Under agreements with various CROs and clinical trial sites, weincur expenses related to clinical trials of our product candidates and potential other clinical candidates. The timing and amounts of these disbursements arecontingent upon the achievement of certain milestones, patient enrollment, and services rendered or as expenses are incurred by the CROs or clinical trialsites. Therefore, we cannot estimate the potential timing and amount of these payments and they have been excluded from the table above.Critical Accounting Policies and Significant Judgments and EstimatesOur management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements,which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in ourfinancial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued research anddevelopment expenses, income taxes, and stock-based compensation. We base our estimates on historical experience, known trends and events, and variousother factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.While our significant accounting policies are described in more detail in Note 2 of Notes to Consolidated Financial Statements appearing elsewhere inthis Annual Report, we believe the following accounting policies to be most critical to understanding the judgments and estimates used by management inthe preparation of our financial statements.82Revenue RecognitionWe currently recognize revenue generated through our license and collaboration agreements with KHK and AbbVie. The KHK agreement and theAbbVie license agreement provide for exclusive licenses to develop and commercialize bardoxolone methyl in certain territories and participation onrespective joint steering committees. The terms of the agreements include payments to us of nonrefundable, up-front license fees; milestone payments; androyalties on product sales. The AbbVie collaboration agreement provides for exclusive licenses to collaborate in the research, development, and worldwidecommercialization of targeted Nrf2 activators and to participate on respective joint steering committees. The terms of the agreement include anonrefundable, up-front payment.We recognize revenue of nonrefundable, up-front license fees and other payments when persuasive evidence that an arrangement exists, services havebeen rendered or delivery has occurred, the price is fixed and determinable, collection is reasonably assured, and there are no further performance obligationsunder the agreement. All three of the agreements are multiple-element arrangements. Multiple-element arrangements are analyzed to determine whether thevarious performance obligations, or elements, can be separated or whether they must be accounted for as a single unit of accounting.For arrangements entered into prior to January 1, 2011, the following criteria were required to be met in order to separate the elements of thearrangement into different units of accounting: 1.The delivered item or items have value to the customer on a stand-alone basis. 2.There is objective and reliable evidence of fair value of the undelivered item or items. 3.If the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items isconsidered probable and substantially in the control of the vendor.Both the KHK agreement and the AbbVie license agreement were executed prior to January 1, 2011, and contained both delivered and undeliveredelements in the arrangements. We view the key elements of these arrangements as being the exclusive licenses to KHK and AbbVie and participation on jointsteering committees. Our involvement in the joint steering committees established under each of these agreements was assessed to determine whether theinvolvement is an obligation or a right to participate. Based on this assessment, we concluded that involvement in the joint steering committees was asubstantive deliverable of the arrangement. We concluded that objective and reliable evidence of the fair value of the undelivered element of thesearrangements (participation on joint steering committees) did not exist; therefore, we are accounting for these arrangements as a single unit of accounting.We are recognizing revenue associated with the nonrefundable, up-front license fees received under the KHK agreement and the AbbVie licenseagreement ratably over the expected term of the joint steering committee performance obligations, which we estimate will be delivered through December2021 and November 2017 for the KHK agreement and the AbbVie license agreement, respectively. We continue to participate in regular meetings for thejoint steering committee established under the KHK agreement. At this time, we believe our participation in this committee continues to be a substantiveperformance obligation of the agreement and have concluded that no changes in the estimated revenue recognition period is warranted. Deferred revenuearises from the excess of cash received over cumulative revenue recognized over the terms of our continuing obligations.Both the KHK agreement and the AbbVie license agreement contain certain clinical development, regulatory, and sales milestones. We evaluatedeach of these milestones at inception of the respective arrangements and concluded that they were substantive milestones, and accordingly, we will recognizepayments related to the achievement of such milestones, if any, when milestones or net sales levels are achieved and collection is reasonably assured. Factorsconsidered in this determination included scientific and regulatory risks that must be overcome to achieve each milestone, the level of effort and investmentrequired to achieve each milestone, and the monetary value attributed to each milestone.In October 2009, the Financial Accounting Standards Board, issued Accounting Standards Update No. 2009-13, Multiple-Deliverable RevenueArrangements, which amended Accounting Standards Codification (ASC) 605-25, Revenue Recognition, to eliminate the requirement to obtain vendor-specific objective evidence of the fair value of undelivered elements in order to separate the deliverables into different units of accounting. We adopted thisrevised guidance as of January 1, 2011, and applied this guidance to the collaboration agreement with AbbVie executed in December 2011. This guidance isalso required to be applied to any material modifications that may be made to the existing KHK agreement or AbbVie license agreement, of which there werenone in 2016 or 2015. We identified the following deliverables within the collaboration agreement with AbbVie: •The various exclusive, co-exclusive, and non-exclusive license grants to AbbVie by us related to our molecules and to jointly discovered newmolecules and to us by AbbVie related to jointly discovered new molecules; •The substantive participation in the joint research and development incubator committee established by the agreement; and •The collaboration agreement to jointly develop and commercialize second-generation Nrf2 activators, including participation in the jointexecutive committee, joint development committees, and joint marketing committees established by the agreement.83We evaluated the deliverables within the collaboration agreement with AbbVie and concluded that the only delivered element of the arrangement, thelicense grants, does not have value to AbbVie on a stand-alone basis. Accordingly, we concluded that the various elements of the arrangement cannot beseparated into different units of accounting. Therefore, we are recognizing revenue associated with the nonrefundable, up-front payment over the estimated15-year term necessary to execute the joint research, development, and commercialization terms under the agreement.In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers,which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The new standard is effective for interim and annual periodsbeginning after December 15, 2017, with early application for interim and annual periods beginning after December 15, 2016, permitted. We plan to adoptthe new standard effective January 1, 2018, and expect to recognize a decrease of approximately $2.6 million to retained earnings related to theadoption. Additionally, under this standard, variable consideration must be included in the transaction price when it is determined that it is probable that asignificant reversal in the revenue recognized will not occur.Research and Development CostsAll research and development costs are expensed as incurred, including costs for drug supplies used in research and development or clinical trials,property and equipment acquired specifically for a finite research and development project, and nonrefundable deposits incurred at the initiation of researchand development activities. Research and development costs consist principally of costs related to clinical trials managed directly by us and throughcontract research organizations, manufacture of clinical drug products for clinical trials, preclinical study costs, discovery research expenses, facilities costs,salaries, and related expenses.As part of the process of recording research and development costs, we are required to estimate and accrue expenses, the largest of which are researchand development expenses. This process involves the following: •communicating with appropriate internal personnel to identify services that have been performed on our behalf and estimating the level ofservice performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost; •estimating and accruing expenses in our consolidated financial statements as of each balance sheet date based on facts and circumstancesknown to us at the time; and •periodically confirming the accuracy of our estimates with service providers and making adjustments, if necessary.Examples of estimated research and development expenses that we accrue include: •payments to CROs in connection with preclinical and toxicology studies and clinical trials; •payments to investigative sites in connection with clinical trials; •payments to CMOs in connection with the production of clinical trial materials; and •professional service fees for consulting and related services.We base our expense accruals related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts withmultiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements vary from contract tocontract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patientsand the completion of clinical trial milestones. In accruing costs, we estimate the time period over which services will be performed and the level of effort tobe expended in each period. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed orthe costs of these services, our actual expenses could differ from our estimates.To date, we have not experienced significant changes in our estimates of accrued research and development expenses after a reportingperiod. However, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware ofadditional information about the status or conduct of our clinical trials and other research activities.Income TaxesWe account for income taxes and the related accounts under the liability method. Deferred tax assets and liabilities are determined based ondifferences between the financial statement and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected tobe in effect when the differences are expected to reverse. The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if it ismore likely than not that some portion or all of the deferred tax asset will not be realized.84Realization of deferred tax assets is generally dependent upon future earnings, if any, the timing and amount of which are uncertain. However, withtaxable income reported in 2013 and our continued taxable losses in 2014 and 2015, we were able to carry back losses from 2014 and 2015. As of December31, 2016, based on known factors, we cannot conclude that it is more likely than not that the remaining deferred tax assets will be utilized and has recorded avaluation allowance to fully offset its deferred tax assets.We account for uncertain tax positions in accordance with the provisions of ASC 740, Income Taxes. We recognize a tax benefit for uncertain taxpositions if we believe it is more likely than not that the position will be upheld on audit based solely on the technical merits of the tax position. Weevaluate uncertain tax positions after consideration of all available information.The 2017 Tax Act, which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income taxsystem. These changes include a federal statutory rate reduction from 35% to 21% and the elimination or reduction in the deductibility of certain credits andlimitations, such as tax credits related to designated orphan drugs, net operating losses, interest expense, and executive compensation. The federal statutoryrate reduction takes effect on January 1, 2018. As a result of the reduction of federal corporate income tax rates, we have estimated a material reduction of$53.1 million to our deferred tax assets. However, consistent with 2016, our deferred tax assets have been fully offset by a valuation allowance in 2017 as wecannot currently conclude that it is more likely than not that the remaining deferred tax assets will be utilized. Consequently, although the future potentialbenefit from our deferred tax assets has been materially reduced by the reduction of federal corporate income tax rates, there was no effect on our 2017Consolidated Statement of Operations. On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S.GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detailto complete the accounting for certain income tax effects of the 2017 Tax Act. In accordance with SAB 118, we continue to evaluate the impact of the 2017Tax Act, which may affect our current conclusions. Any subsequent adjustment to those amounts will be recorded to current tax expense in the third quarterof 2018 when the analysis is complete.Stock-Based CompensationWe measure and recognize compensation expense for all stock options and restricted stock awards based on the estimated fair value of the award onthe grant date. We use the Black-Scholes option pricing model to estimate the fair value of stock option awards. The fair value is recognized as expense,over the requisite service period, which is generally the vesting period of the respective award, on a straight-line basis when the only condition to vesting iscontinued service. If vesting is subject to a market or performance condition, recognition is based on the derived service period of the award. Expense forawards with performance conditions is estimated and adjusted on a quarterly basis based upon the assessment of the probability that the performancecondition will be met. Use of the Black-Scholes option-pricing model requires management to apply judgment under highly subjective assumptions. Theseassumptions include: •Expected term —The expected term represents the period that the stock-based awards are expected to be outstanding and is based on theaverage period the stock options are expected to be outstanding and was based on our historical information of the options exercise patterns andpost-vesting termination behavior. •Expected volatility —Since we do not have sufficient trading history to estimate the volatility of our common stock, the expected volatility wasestimated based on our own historical volatility since our IPO and the average volatility for comparable publicly traded biopharmaceuticalcompanies. When selecting comparable publicly traded biopharmaceutical companies on which we based our expected stock price volatility,we selected companies with comparable characteristics to us, including enterprise value, risk profiles, position within the industry, andhistorical share price information sufficient to meet the expected life of the stock-based awards. •Risk-free interest rate —The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periodscorresponding with the expected term of option. •Expected dividend —We have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.We will continue to use judgment in evaluating the expected volatility, and expected terms utilized for our stock-based compensation calculations ona prospective basis. We account for forfeitures of share-based awards when they occur.The weighted-average assumptions used in the Black-Scholes option pricing model were as follows: Years Ended December 31 2017 2016 2015 Dividend yield —% —% —%Volatility 75.14% 72.77% 74.93%Risk-free interest rate 2.19% 1.76% 1.71%Expected term of options (in years) 6.37 6.74 7.28 85Common Stock ValuationHistorically, for all periods prior to our IPO, the exercise price of options to purchase shares of our common stock was the estimated fair market value ofour common stock as determined by our board of directors. In order to determine the fair market value of our common stock underlying option grants, weconsidered several objective and subjective factors, including the progress of our research and development efforts, our financial condition, the valuation ofother publicly-traded companies in the life sciences and biotechnology sectors at comparable stages of development, equity market conditions, the lack ofmarketability of our common stock, the economy generally, and timely valuations of our common stock prepared by unrelated third-party valuation firms inaccordance with the guidance provided by the American Institute of Certified Public Accountants 2004 Practice Aid, Valuation of Privately-Held-CompanyEquity Securities Issued as Compensation.Information regarding our stock option grants, along with the estimated fair value per share of the underlying common stock, for stock options grantedsince January 1, 2015, is summarized in the table below: Grant date Numberof common sharesunderlying optionsgranted Exerciseprice percommonshare Estimatedfair valueper share ofcommon stock March 3, 2015 234 17.43 17.43 April 1, 2015 39,184 17.43 17.43 April 28, 2015 940 17.43 17.43 September 1, 2015 15,085 25.52 25.52 The estimated fair value per share of the common stock in the table above represents the determination of the fair value of our common stock as of thedate of the grant.Common Stock Valuation MethodologyWe determined the valuation of our common stock based on a number of factors. In addition, we obtained third-party valuations of our common stockto assist with the determination of the exercise price of our stock options and the fair value of the common stock underlying such options, as of May 31,2015. The third party valuations utilized the probability-weighted expected return method (the PWERM), in determining the value of the commonstock. The PWERM considers various potential liquidity outcomes, including in our case an IPO, the sale of our company, and dissolution and assignsprobabilities to each outcome to arrive at a weighted equity value. In determining liquidity outcomes and probabilities, we considered a range of objectiveand subjective factors and assumptions in each of the PWERM scenarios, including: •progress of our research and development efforts; •our financial condition, including our levels of available capital resources; •the valuation of publicly-traded companies in the life sciences and biotechnology sectors at comparable stages of development, as well asrecently completed IPOs and mergers and acquisitions of similar companies; and •equity market conditions.In the May 31, 2015 valuation, we considered four scenarios, two IPO scenarios, and two sale or merger scenarios. The first IPO scenario was estimatedto occur eight months from the time of the valuation with a probability of 35%, and the second IPO scenario was estimated to occur five months from the timeof the valuation a probability of 45%. The first merger or sale scenario was estimated to occur thirteen months from the time of the valuation with aprobability of 10%, and the second merger or sale scenario was estimated to occur twenty-seven months from the time of the valuation with a probability of10%. The risk adjusted discount rate was 25% for each scenario.Off-Balance Sheet ArrangementsSince our inception, we have not had any relationships with unconsolidated organizations or financial partnerships, such as structured finance orspecial purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements, and we have not engaged in anyother off-balance sheet arrangements, as defined in the rules and regulations of the SEC.Recent Accounting PronouncementsFor a discussion of recent accounting pronouncements, please see Note 2 of Notes to Consolidated Financial Statements contained in this AnnualReport on Form 10-K. 86Item 7A. Quantitative and Qualitative Disclosures About Market Risk.We are exposed to market risks in the ordinary course of our business. These market risks are principally limited to interest rate fluctuations. We hadcash and cash equivalents of $129.8 million at December 31, 2017, consisting primarily of funds in operating cash accounts. The primary objective of ourinvestment activities is to preserve principal and liquidity while maximizing income without significantly increasing risk. We do not enter into investmentsfor trading or speculative purposes. Due to the short-term nature of our investment portfolio, we do not believe an immediate increase of 100 basis points ininterest rates would have a material effect on the fair market value of our portfolio, and accordingly we do not expect a sudden change in market interest ratesto affect materially our operating results or cash flows.We contract with research, development, and manufacturing organizations and investigational sites globally. Generally, these contracts aredenominated in U.S. dollars. However, we may be subject to fluctuations in foreign currency rates in connection with agreements not denominated in U.S.dollars. We do not hedge our foreign currency exchange rate risk.Item 8. Financial Statements and Supplementary Data.The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report. An index of those financial statements isfound in Item 15.Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.None.Item 9A. Controls and Procedures.Evaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosurecontrols and procedures as of December 31, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in thereports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities andExchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to thecompany’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding requireddisclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance ofachieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls andprocedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2017, our Chief Executive Officer and Chief FinancialOfficer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.Management’s Annual Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule13a-15(f) under the Securities Exchange Act of 1934, as amended. Our management conducted an evaluation of the effectiveness of our internal control overfinancial reporting based on the 2013 framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on its evaluation under the framework in Internal Control—Integrated Framework, our management concluded that theCompany maintained effective internal control over financial reporting at a reasonable assurance level as of December 31, 2017, based on those criteria. Attestation Report of the Registered Public Accounting FirmThis Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to a transitionperiod established by the JOBS Act for emerging growth companies.87Changes in Internal Control Over Financial ReportingThere have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgatedunder the Securities Exchange Act of 1934, during the three months ended December 31, 2017, that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.Item 9B. Other Information.None. 88PART IIIItem 10. Directors, Executive Officers and Corporate Governance.The information required by this Item is incorporated herein by reference to the information that is contained in Part I, Item 1 of this Form 10-K andthat will be contained in our proxy statement related to the 2018 Annual Meeting of Stockholders, which we intend to file with the Securities and ExchangeCommission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.Item 11. Executive Compensation.The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the2018 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal yearpursuant to General Instruction G(3) of Form 10-K.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the2018 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal yearpursuant to General Instruction G(3) of Form 10-K.Item 13. Certain Relationships and Related Transactions, and Director Independence.The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the2018 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal yearpursuant to General Instruction G(3) of Form 10-K.Item 14. Principal Accounting Fees and Services.The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the2018 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal yearpursuant to General Instruction G(3) of Form 10-K. 89PART IVItem 15. Exhibits, Financial Statement Schedules. (a)The following documents are filed as a part of the report: (1)Financial StatementsReport of Independent Registered Public Accounting FirmConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Stockholders’ DeficitConsolidated Statements of Cash FlowsNotes to Consolidated Financial Statements (2)Schedules have been omitted as all required information has been disclosed in the financial statements and related footnotes. (3)The exhibits filed as part of this Annual Report on Form 10-K are set forth on the Exhibit Index immediately following our consolidatedfinancial statements. The Exhibit Index is incorporated herein by reference.Item 16. Form 10-K SummaryNone. 90Exhibit Index Exhibit Incorporated by Reference FiledNumber Exhibit Description Form File No. Exhibit Filing Date Herewith 1.1 At-the-Market Equity Offering Sales Agreement, datedNovember 9, 2017, between Reata Pharmaceuticals, Inc.,and Stifel, Nicolaus & Company, Incorporated. 10-Q 001-37785 1.1 11/13/2017 3.1 Thirteenth Amended and Restated Certificate ofIncorporation. S-1 333-208843 3.7 05/16/2016 3.2 Second Amended and Restated Bylaws. 8-K 001-37785 3.1 12/07/2016 4.1 Form of Class A Common Stock Certificate of theRegistrant. S-1 333-208843 4.1 02/08/2016 4.2 Seventh Amended and Restated Registration RightsAgreement by and among the Registrant and certain of itsstockholders, dated as of November 10, 2010. S-1 333-208843 4.3 01/04/2016 10.1+ Indemnification Agreement by and between the Registrantand Dawn C. Bir dated September 6, 2016. 10-Q 001-37785 10.1 11/14/2016 10.2+ Indemnification Agreement by and between the Registrantand J. Warren Huff, together with a schedule identifyingother substantially identical agreements between theRegistrant and the persons identified on the schedule andidentifying the material differences between each of theagreements and the filed Indemnification Agreement. S-1 333-208843 10.1 05/20/2016 10.3+ Indemnification Agreement by and between the Registrantand William D. McClellan dated March 1, 2017. 8-K 001-37785 10.1 03/02/2017 10.4+ Reata Pharmaceuticals, Inc. Amended and Restated 2007Long Term Incentive Plan and forms of award agreementsand grant notices. S-1 333-208843 10.2 03/22/2016 10.5+ Amended and Restated Employment Agreement, by andbetween the Registrant and J. Warren Huff, dated as ofJune 14, 2017. S-3 001-37785 10.2 06/23/2017 10.6+ Amended and Restated Employment Agreement, by andbetween the Registrant and Dawn C. Bir, dated as of June14, 2017, 2017. S-3 001-37785 10.3 06/23/2017 10.7+ Amended and Restated Employment Agreement, by andbetween the Registrant and Colin Meyer, dated as of June14, 2017, 2017. S-3 001-37785 10.4 06/23/2017 10.8+ Amended and Restated Employment Agreement, by andbetween the Registrant and Keith Ward, dated as ofJune 14, 2017, 2017. S-3 001-37785 10.5 06/23/2017 10.9+ Amended and Restated Employment Agreement, by andbetween the Registrant and Jason Wilson, dated as ofJune 14, 2017, 2017. S-3 001-37785 10.6 06/23/2017 10.10+ Amended and Restated Employment Agreement, by andbetween the Registrant and Michael D. Wortley, dated asof June 14, 2017, 2017. S-3 001-37785 10.7 06/23/2017 91Exhibit Incorporated by Reference FiledNumber Exhibit Description Form File No. Exhibit Filing Date Herewith 10.11 Lease by and between the Registrant and SDCO GatewayCommerce I & II, Inc., dated as of May 25,2006, as amended. S-1 333-208843 10.6 01/04/2016 10.12 Lease Amendment No. 11, effective as of November 9,2017, between Reata Pharmaceuticals, Inc. and SDCOGateway Commerce I & II, Inc. 10-Q 001-37785 10.1 11/14/2017 10.13# Exclusive Patent License Agreement among the Board ofRegents of The University of Texas System, TheUniversity of Texas M.D. Anderson Cancer Center, andthe Trustees of Dartmouth College and the Registrant,dated as of July 15, 2004, as amended. S-1 333-208843 10.7 01/04/2016 10.14# Exclusive License Agreement between the Trustees ofDartmouth College and the Registrant, dated as ofDecember 16, 2009, as amended. S-1 333-208843 10.8 01/04/2016 10.15# Exclusive License Agreement between the KU Center forTechnology Commercialization, Inc. and the Registrant,dated as of September 26, 2014. S-1 333-208843 10.9 01/04/2016 10.16# Exclusive License Agreement between the KU Center forTechnology Commercialization, Inc. and the Registrant,dated as of September 26, 2014. S-1 333-208843 10.10 01/04/2016 10.17# Exclusive License and Supply Agreement between theRegistrant and Kyowa Hakko Kirin Co. Ltd., dated as ofDecember 24, 2009. S-1 333-208843 10.11 01/04/2016 10.18 Supplement to Exclusive License and Supply Agreementbetween the Registrant and Kyowa Hakko Kirin Co., Ltd.,dated as of March 4, 2016. S-1 333-208843 10.14 03/22/2016 10.19 Second Supplement to Exclusive License and SupplyAgreement, by and between the Registrant and KyowaHakko Kirin Co., Ltd., dated as of March 21, 2017. S-3 333-218915 10.1 06/23/2017 10.20# Third Supplement to Exclusive License and SupplyAgreement, dated as of December 6, 2017, between ReataPharmaceuticals, Inc. and Kyowa Hakko Kirin Co., Ltd. 8-K 001-37785 10.1 12/07/2017 10.21# Fourth Supplement to Exclusive License and SupplyAgreement, dated as of December 6, 2017, between ReataPharmaceuticals, Inc. and Kyowa Hakko Kirin Co., Ltd. 8-K 001-37785 10.2 12/07/2017 10.22# License Agreement between the Registrant and AbbottPharmaceuticals PR Ltd., dated as of September 21, 2010. S-1 333-208843 10.12 02/08/2016 10.23# Collaboration Agreement between the Registrant andAbbott Pharmaceuticals PR Ltd., dated as of December 9,2011. S-1 333-208843 10.13 02/08/2016 10.24+ Non-Employee Director Compensation Policy 10-K 001-37785 10.19 03/03/2017 10.25+ Amended and Restated Non-Employee DirectorCompensation Policy dated as of December 6, 2017. X 92Exhibit Incorporated by Reference FiledNumber Exhibit Description Form File No. Exhibit Filing Date Herewith 10.26 Loan and Security Agreement, dated as of March 31,2017, by and among Reata Pharmaceuticals, Inc., asborrower, Oxford Finance LLC, as the collateral agent anda lender, and Silicon Valley Bank, as alender. 8-K 001-37785 10.1 04/03/2017 10.27 First Amendment to Loan and Security Agreement, datedas of November 3, 2017, by and among ReataPharmaceuticals, Inc., as borrower, Oxford Finance LLC,as the collateral agent and a lender, and Silicon ValleyBank, as a lender. 8-K 001-37785 10.1 11/07/2017 21.1 List of Subsidiaries. S-1 333-208843 21.1 01/04/2016 23.1 Consent of Ernst & Young LLP, an IndependentRegistered Public Accounting Firm. X 31.1 Certification of Principal Executive Officer Pursuant toRules 13a-14(a) and 15d-14(a) under the SecuritiesExchange Act of 1934, as Adopted Pursuant to Section302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of Principal Financial Officer Pursuant toRules 13a-14(a) and 15d-14(a) under the SecuritiesExchange Act of 1934, as Adopted Pursuant to Section302 of the Sarbanes-Oxley Act of 2002. X 32.1 Certification of Principal Executive Officer Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002. * 32.2 Certification of Principal Financial Officer Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002 * 101.INS XBRL Instance Document. X 101.SCH XBRL Taxonomy Extension Schema Document. X 101.CAL XBRL Taxonomy Calculation Linkbase Document. X 101.DEF XBRL Taxonomy Extension Definition LinkbaseDocument. X 101.LAB XBRL Taxonomy Extension Label Linkbase Document. X 101.PRE Taxonomy Extension Presentation Linkbase Document. X +Indicates management contract or compensatory plan.#Confidential information has been omitted from this Exhibit and has been filed separately with the SEC pursuant to a confidential treatment requestunder Rule 406 of the Securities Act of 1933 and Rule 24b-2 of the Securities Exchange Act of 1934.*Furnished herewith. 93SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report tobe signed on its behalf by the undersigned, thereunto duly authorized. REATA PHARMACEUTICALS, INC. Date: March 2, 2018 By:/s/ J. Warren Huff J. Warren Huff President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons onbehalf of the Registrant in the capacities and on the dates indicated. Name Title Date /s/ J. Warren Huff President, Chief Executive Officer and Chairman of the Board March 2, 2018J. Warren Huff of Directors (Principal Executive Officer) /s/ Jason D. Wilson Chief Financial Officer (Principal Financial Officer) March 2, 2018Jason D. Wilson /s/ Elaine Castellanos Vice President, Finance and Accounting (Principal March 2, 2018Elaine Castellanos Accounting Officer) /s/ James E. Bass Member of the Board of Directors March 2, 2018James E. Bass /s/ William D. McClellan, Jr. Member of the Board of Directors March 2, 2018William D. McClellan, Jr. /s/ R. Kent McGaughy, Jr. Member of the Board of Directors March 2, 2018R. Kent McGaughy, Jr. /s/ Jack B. Nielsen Member of the Board of Directors March 2, 2018Jack B. Nielsen /s/ William E. Rose Member of the Board of Directors March 2, 2018William E. Rose 94 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting FirmF-2Consolidated Balance SheetsF-3Consolidated Statements of OperationsF-4Consolidated Statements of Stockholders’ DeficitF-5Consolidated Statements of Cash FlowsF-6Notes to Consolidated Financial StatementsF-7 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and the Board of Directors of Reata Pharmaceuticals, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Reata Pharmaceuticals, Inc. (the Company) as of December 31, 2017 and 2016, and therelated consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended December 31, 2017, and therelated notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in allmaterial respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of thethree years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.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 financialstatements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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 ofthe 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 reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding ofinternal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financialreporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures inthe financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well asevaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ Ernst & Young LLPWe have served as the Company‘s auditor since 2002. Dallas, TexasMarch 2, 2018 F-2 Reata Pharmaceuticals, Inc.Consolidated Balance Sheets(in thousands, except share data) December 31, 2017 2016 Assets Cash and cash equivalents $129,780 $84,732 Prepaid expenses and other current assets 3,329 2,551 Total current assets 133,109 87,283 Property and equipment, net 718 819 Other assets 1,510 991 Total assets $135,337 $89,093 Liabilities and stockholders’ deficit Accounts payable $2,067 $3,830 Accrued direct research liabilities 12,627 6,151 Other current liabilities 3,511 3,047 Current portion of term loan 1,229 — Current portion of deferred revenue 28,183 46,603 Total current liabilities 47,617 59,631 Other long-term liabilities 53 72 Term loan, net of current portion and debt issuance costs 18,385 — Deferred revenue, net of current portion 216,255 244,438 Total noncurrent liabilities 234,693 244,510 Commitments and contingencies Stockholders’ deficit: Common stock A, $0.001 par value: 500,000,000 shares authorized; issued and outstanding – 19,975,340 and 11,687,974 at December 31, 2017 and December 31, 2016, respectively 20 12 Common stock B, $0.001 par value: 150,000,000 shares authorized; issued and outstanding – 6,166,166 and 10,656,920 shares at December 31, 2017 and December 31, 2016, respectively 7 11 Additional paid-in capital 190,145 74,298 Shareholder notes receivable (2) (15)Accumulated deficit (337,143) (289,354)Total stockholders’ deficit (146,973) (215,048)Total liabilities and stockholders’ deficit $135,337 $89,093 See accompanying notes. F-3 Reata Pharmaceuticals, Inc.Consolidated Statements of Operations(in thousands, except share and per share data) Years Ended December 31 2017 2016 2015 Collaboration revenue License and milestone $47,103 $49,730 $50,295 Other revenue 955 126 24 Total collaboration revenue 48,058 49,856 50,319 Expenses Research and development 71,273 39,453 35,141 General and administrative 23,260 16,603 13,693 Depreciation and amortization 437 682 1,819 Total expenses 94,970 56,738 50,653 Other income (expense) Investment income 701 214 32 Interest expense (1,454) — — Other income (expense) (3) — — Total other income (expense) (756) 214 32 Loss before taxes on income (47,668) (6,668) (302)Provision (benefit) for taxes on income 3 (441) 1,148 Net loss $(47,671) $(6,227) $(1,450)Net loss per share—basic and diluted $(1.99) $(0.31) $(0.09)Weighted-average number of common shares used in net loss per share basic and diluted 23,933,309 19,816,635 15,974,974 See accompanying notes. F-4 Reata Pharmaceuticals, Inc.Consolidated Statements of Stockholders’ Deficit(in thousands, except share and per share data) Common Stock A Common Stock B AdditionalPaid-In ShareholderNotes TotalAccumulated TotalStockholders’ Shares Amount Shares Amount Capital Receivable Deficit (Deficit) Equity Balance at January 1, 2015 — $— 15,994,959 $16 $7,722 $(307) $(281,677) $(274,246)Compensation expense related to stock option and restricted stock — — — — 1,331 — — 1,331 Cancelation and modification of shareholder notes receivable — — — — 480 226 — 706 Exercise of options — — 3,147 — 39 — — 39 Vesting of prepaid restricted stock — — — — 464 — — 464 Net loss — — — — — — (1,450) (1,450)Balance at December 31, 2015 — — 15,998,106 16 10,036 (81) (283,127) (273,156)Compensation expense related to stock option and restricted stock — — — — 2,367 — — 2,367 Exercise of options — — 21,788 1 4 — — 5 Vesting of prepaid restricted stock — — — — 464 — — 464 Proceeds from payments of shareholder promissory notes — — — — 199 66 — 265 Initial public offering of common stock, net of offering costs 6,325,000 6 — — 61,228 — — 61,234 Conversion of common stock Class B to Class A 5,362,974 6 (5,362,974) (6) — — — — Net loss — — — — — — (6,227) (6,227)Balance at December 31, 2016 11,687,974 12 10,656,920 11 74,298 (15) (289,354) (215,048)Compensation expense related to stock option and restricted stock — — — — 6,648 — (118) 6,530 Exercise of options — — 59,112 1 659 — — 660 Proceeds from payments of shareholder promissory notes — — — 37 13 — 50 Public offering of common stock, net of offering costs 3,737,500 3 — — 108,503 — — 108,506 Conversion of common stock Class B to Class A 4,549,866 5 (4,549,866) (5) — — — — Net loss — — — — — — (47,671) (47,671)Balance at December 31, 2017 19,975,340 $20 6,166,166 $7 $190,145 $(2) $(337,143) $(146,973) See accompanying notes. F-5 Reata Pharmaceuticals, Inc.Consolidated Statements of Cash Flows(in thousands) Years Ended December 31 2017 2016 2015 Operating activities Net loss $(47,671) $(6,227) $(1,450)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 437 682 1,819 Amortization of debt issuance costs 138 — — Stock-based compensation expense 6,530 2,367 2,075 Provision for deferred taxes on income — — 17,802 Loss on disposal of property and equipment — — 2 Changes in operating assets and liabilities: Prepaid expenses and other current assets (778) (1,218) 81 Other assets (519) (438) 281 Accounts payable (1,763) 299 2,754 Accrued direct research and other current liabilities 6,973 3,080 (486)Federal income tax receivable/payable — 31,926 (17,903)Deferred revenue (46,603) (49,730) (49,595)Net cash used in operating activities (83,256) (19,259) (44,620)Investing activities Sales/disposals of fixed assets 1 1 12 Purchases of property and equipment (344) (340) (272)Net cash used in investing activities (343) (339) (260)Financing activities Proceeds from IPO and Follow-On Offering 108,910 64,705 — Payments on deferred offering costs (404) (2,607) (864)Proceeds from long-term debt 20,000 — — Payments on deferred issuance costs (524) — — Exercise of options 660 4 39 Proceeds from payments of shareholder promissory notes 50 265 — Payment of capital lease obligation (45) (45) (45)Net cash provided by (used in) financing activities 128,647 62,322 (870)Net increase (decrease) in cash and cash equivalents 45,048 42,724 (45,750)Cash and cash equivalents at beginning of year 84,732 42,008 87,758 Cash and cash equivalents at end of period $129,780 $84,732 $42,008 Supplemental disclosures Cash paid for interest $1,164 $— $— Income taxes paid $— $— $1,249 Purchases of equipment in accounts payable and other current liabilities $13 $20 $187 Accrued deferred offering costs $— $— $1,129 See accompanying notes. F-6 Reata Pharmaceuticals, Inc.Notes to Consolidated Financial StatementsDecember 31, 2017 1. Description of BusinessReata Pharmaceuticals, Inc. (the Company) is a clinical stage biopharmaceutical company focused on identifying, developing, and commercializingtherapeutics to address serious and life-threatening diseases with few or no approved therapies by targeting molecular pathways that regulate cellularmetabolism and inflammation. The Company is currently conducting three registrational trials with our lead product candidates, bardoxolone methyl andomaveloxolone, which activate the transcription factor Nrf2 to restore mitochondrial function, reduce oxidative stress, and resolve inflammation. TheCompany’s lead registrational programs are evaluating its product candidates for the treatment of a rare form of chronic kidney disease (CKD) caused byAlport syndrome, a rare form of degenerative neuromuscular disease called Friedreich’s ataxia (FA), and a rare and severe form of pulmonary arterialhypertension associated with connective tissue disease (CTD-PAH).The Company is developing bardoxolone methyl for the treatment of patients with CKD caused by Alport syndrome and four additional rare forms ofCKD. CKD is characterized by a progressive worsening in the rate at which the kidney filters waste products from the blood, called the glomerular filtrationrate (GFR). When GFR gets too low, patients develop end stage renal disease (ESRD) and require dialysis or a kidney transplant to survive. In eleven clinicaltrials, bardoxolone methyl has been shown to consistently improve kidney, as assessed by the estimated glomerular filtration rate (eGFR) in patients with avariety of diseases that result in decreased kidney function. The Company believes that bardoxolone methyl treatment has the potential to delay or preventthe GFR declines that cause the need for dialysis or a transplant in patients with Alport syndrome and other rare forms of CKD. The Company is conductingthe Phase 3 portion of CARDINAL in patients with CKD caused by Alport syndrome, which will enroll approximately 150 patients randomized evenly toeither bardoxolone methyl or placebo. The FDA has provided the Company guidance that, in patients with CKD caused by Alport syndrome, retained eGFRdemonstrating an improvement versus placebo after one year of bardoxolone methyl treatment may support accelerated approval, and retained eGFRdemonstrating an improvement versus placebo after two years of treatment may support full approval. The Company expects to have one year top-line resultsfrom the Phase 3 portion of CARDINAL available in the second half of 2019. If successful, the Company believes the results from the Phase 3 portion ofCARDINAL, together with other data from its development program, will be sufficient to form the basis of an NDA submission to the FDA seeking approvalfor bardoxolone methyl in the United States.The Company is developing omaveloxolone for the treatment of patients with FA, an inherited, debilitating, and degenerative neuromuscular disorder,caused by mutations in the gene for frataxin, a mitochondrial protein. Patients with FA are typically dependent on wheelchair use 10 to 15 years after diseaseonset, and their median age of death is in the mid-30s. There are no currently approved therapies for the treatment of FA. Omaveloxolone is being studied inthe registrational part 2 of its MOXIe trial. In part 1 of MOXIe, at the optimal dose level, omaveloxolone demonstrated a statistically significantimprovement in modified Friedreich’s Ataxia Rating Scale (mFARS) scores of 3.8 points (p=0.0001) versus baseline and a placebo-corrected improvement inmFARS scores of 2.3 points (p=0.06). The Company expects to have top-line data from the MOXIe trial in the second half of 2019. If successful, theCompany believes the results from the MOXIe clinical trial, together with other data from the omaveloxolone program, will be sufficient to form the basis ofan NDA submission to the FDA seeking approval for omaveloxolone in the United States.The Company is studying bardoxolone methyl in CTD-PAH, which is a serious and progressive disease that leads to heart failure and death. CTD-PAHpatients are less responsive to existing vasodilator therapies than I-PAH patients and have a worse prognosis. Bardoxolone methyl is being studied for thetreatment of CTD-PAH in the Phase 3 CATALYST trial. The Company initiated CATALYST following review of data from its Phase 2 clinical trial, LARIAT,which demonstrated a statistically significant, mean time averaged increase in 6MWD at 16 weeks in CTD-PAH patients compared to baseline. The Companycurrently expects to have top-line data from the CATALYST trial in the second half of 2018. However, the trial is designed to enroll between 130 and 200patients, and the final sample size will be determined by a pre-specified, blinded sample size re-calculation based on 6MWD variability and baselinecharacteristics. The timing of data availability may change if the sample size is increased due to the sample size re-calculation. If successful, the Companybelieves the results from the CATALYST trial, together with other data from the bardoxolone methyl development program, will be sufficient to form thebasis of an NDA submission to the FDA seeking approval for bardoxolone methyl in the United States.In addition to its three registrational programs, the Company is currently conducting a battery of additional clinical and preclinical programs in serious andlife-threatening diseases that may provide expansion opportunities for our drug candidates. The Company plans to evaluate data from these earlier stageprograms to determine which indications to advance into later stage trials.The Company’s consolidated financial statements include the accounts of all majority-owned subsidiaries. Accordingly, the Company’s share of netearnings and losses from these subsidiaries is included in the consolidated statements of operations. Intercompany profits, transactions, and balances havebeen eliminated in consolidation.F-7 On May 25, 2016, the Company’s registration statement on Form S-1 (File No. 333-208843) relating to its initial public offering (IPO), of its common stockwas declared effective by the U.S. Securities and Exchange Commission (SEC). The shares began trading on The NASDAQ Global Market on May 26,2016. The public offering price of the shares sold in the offering was $11.00 per share. The IPO closed on June 1, 2016 for 6,325,000 shares of its Class Acommon stock, which included 825,000 shares of its Class A common stock issued pursuant to the over-allotment option granted to the underwriters. TheCompany received total proceeds from the offering of $60.9 million, net of underwriting discounts and commissions and offering expenses.On August 1, 2017, the Company closed a follow-on underwritten public offering of 3,737,500 shares of its Class A common stock, which included 487,500shares of its Class A common stock issued pursuant to an option granted to the underwriters, for gross proceeds of $115.9 million. The Company receivedtotal proceeds from the offering of $108.5 million, after deducting underwriting discounts and commissions and offering expenses.On November 9, 2017, the Company entered into an at-the-market equity offering sales agreement with Stifel, Nicolaus & Company, Incorporated, thatestablished a program pursuant to which it may offer and sell up to $50,000,000 of its Class A common stock from time to time in at-the-markettransactions. As of the filing date of this Form 10-Q, no shares have been sold under this program. 2. Summary of Significant Accounting Policies Revenue RecognitionThe Company has license agreements with AbbVie Inc. (AbbVie) (the AbbVie License Agreement) and Kyowa Hakko Kirin Co., Ltd. (KHK) (the KHKAgreement), under which AbbVie and KHK were granted exclusive licenses to develop and commercialize bardoxolone methyl in the Territory (as defined inthe KHK Agreement) and the Licensed Territory (as defined in the AbbVie License Agreement). The terms of the agreements include payments to theCompany of nonrefundable, up-front license fees; milestone payments; and royalties on product sales.The Company has a collaboration agreement with AbbVie (the AbbVie Collaboration Agreement) that provides for exclusive licenses to collaborate in theresearch, development, and worldwide commercialization of targeted Nrf2 activators and to participate on respective joint steering committees. The terms ofthe agreements include a nonrefundable, up-front payment.The Company recognizes revenue of nonrefundable, up-front license fees and other payments when persuasive evidence that an arrangement exists, serviceshave been rendered or delivery has occurred, the price is fixed and determinable, collection is reasonably assured, and there are no further performanceobligations under the agreement.The AbbVie License Agreement, the AbbVie Collaboration Agreement, and the KHK Agreement are all multiple-element arrangements. Multiple-elementarrangements are analyzed to determine whether the various performance obligations, or elements, can be separated or whether they must be accounted for asa single unit of accounting.For arrangements entered into prior to January 1, 2011, the following criteria were required to be met in order to separate the elements of the arrangement intodifferent units of accounting: 1.The delivered item or items have value to the customer on a stand-alone basis. 2.There is objective and reliable evidence of fair value of the undelivered item or items. 3.If the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items isconsidered probable and substantially in the control of the vendor.Both the AbbVie License Agreement and the KHK Agreement were executed prior to January 1, 2011, and contained both delivered and undeliveredelements in the arrangements. The Company views the key elements of these arrangements as being the exclusive licenses to AbbVie and KHK andparticipation on joint steering committees. The Company’s involvement in the joint steering committees established under each of these agreements wasassessed to determine whether the involvement is an obligation or a right to participate. Based on this assessment, the Company concluded that involvementin the joint steering committees was a substantive deliverable of the arrangement. The Company concluded that objective and reliable evidence of the fairvalue of the undelivered element of these arrangements (participation on joint steering committees) did not exist; therefore, the Company is accounting forthese arrangements as a single unit of accounting.The Company is recognizing revenue associated with the nonrefundable, up-front license fees received under the AbbVie License Agreement and the KHKAgreement ratably over the expected term of the joint steering committee performance obligations, which the Company estimates will be delivered throughDecember 2021 and November 2017 for the KHK Agreement and the AbbVie License Agreement, respectively. The Company continues to participate inregular meetings for the joint steering committee established under the KHK Agreement. At this time, the Company believes its participation in thiscommittee continues to be a substantive performance obligation of the agreements and has concluded that no changes in the estimated revenue recognitionperiods are warranted. Deferred revenue arises from the excess of cash received over cumulative revenue recognized over the terms of the Company’scontinuing obligations.F-8 Both the AbbVie License Agreement and the KHK Agreement contain certain clinical development, regulatory, and sales milestones. The Companyevaluated each of these milestones at inception of the respective arrangements and concluded that they were substantive milestones, and accordingly, theCompany will recognize payments related to the achievement of such milestones, if any, when milestones or net sales levels are achieved and collection isreasonably assured. Factors considered in this determination included scientific and regulatory risks that must be overcome to achieve each milestone, thelevel of effort and investment required to achieve each milestone, and the monetary value attributed to each milestone.In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable RevenueArrangements, which amended Accounting Standards Codification (ASC) 605-25, Revenue Recognition , to eliminate the requirement to obtain vendor-specific objective evidence of the fair value of undelivered elements in order to separate the deliverables into different units of accounting. The Companyadopted this revised guidance as of January 1, 2011, and applied this guidance to the AbbVie Collaboration Agreement executed in December 2011. Thisguidance is also required to be applied to any material modifications that may be made to the existing AbbVie License Agreement or KHK Agreement, ofwhich there were none in 2016, 2015, and 2014. The Company identified the following deliverables within the AbbVie Collaboration Agreement: •The License Grants, including various exclusive, co-exclusive, and non-exclusive license grants to AbbVie by the Company related to theCompany’s molecules and to jointly discovered new molecules and to the Company by AbbVie related to jointly discovered new molecules; •The Research and Exploratory Development Collaboration, including substantive participation in the Joint Research and DevelopmentIncubator Committee established by the agreement; and •The Collaboration Agreement to jointly develop and commercialize second-generation Nrf2 activators, including participation in the JointExecutive Committee, Joint Development Committees, and Joint Marketing Committees established by the agreement.The Company evaluated the deliverables within the AbbVie Collaboration Agreement and concluded that the only delivered element of the arrangement, theLicense Grants, does not have value to AbbVie on a stand-alone basis. Accordingly, the Company concluded that the various elements of the arrangementcannot be separated into different units of accounting. Therefore, the Company is recognizing revenue associated with the nonrefundable, up-front paymentover the estimated 15-year term necessary to execute the joint research, development, and commercialization terms under the agreement.The Company follows ASC 605-28, Revenue Recognition—Milestone Method to evaluate whether each milestone under a license agreement issubstantive. This evaluation includes an assessment of whether (i) the consideration is commensurate with either (a) the entity's performance to achieve themilestone, or (b) the enhancement of the value of the delivered item as a result of a specific outcome resulting from the entity's performance to achieve themilestone, (ii) the consideration relates solely to past performance, and (iii) the consideration is reasonable relative to all of the deliverables and paymentterms within the arrangement. The Company evaluates factors such as the preclinical, clinical, regulatory, commercial, and other risks that must be overcometo achieve the respective milestone, the level of effort and investment required, and whether the milestone consideration is reasonable relative to alldeliverables and payment terms in the arrangement in making this assessment. If a substantive milestone is achieved, the Company would recognize revenuerelated to the milestone in its entirety in the period in which the milestone was achieved, assuming all other revenue recognition criteria weremet. Commercial milestones would be accounted for as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenuerecognition criteria were met.In June 2013, the Company entered into a research collaboration with a disease advocacy organization. Under the agreement, the Company may be providedmilestone payments to fund research and development activities estimated over a two-year period. The Company recorded collaboration revenue totaling$500,000, $0 and $700,000 related to milestone payments during the years ended December 31, 2017, 2016, and 2015, respectively.Cash and Cash EquivalentsThe Company considers all investments in highly liquid financial instruments with a maturity of three months or less when purchased to be cashequivalents. Investments qualifying as cash equivalents primarily consist of money market funds. The carrying amount of cash equivalents approximatesfair value. Investment income consists primarily of interest income on our cash and cash equivalents, which include money market funds.Research and Development CostsAll research and development costs are expensed as incurred, including costs for drug supplies used in research and development or clinical studies, propertyand equipment acquired specifically for a finite research and development project, and nonrefundable deposits incurred at the initiation of research anddevelopment activities. Research and development costs consist principally of costs related to clinical studies managed directly by the Company andthrough contract research organizations, manufacture of clinical drug products for clinical studies, preclinical study costs, discovery research expenses,facilities costs, salaries, and related expenses.F-9 AbbVie is not currently participating in the development of bardoxolone methyl for the treatment of CKD caused by Alport syndrome, CTD-PAH, PH-ILD, orother rare kidney diseases, and the Company is therefore incurring all costs for this program. AbbVie has the right to opt-in to these programs at any timeduring development. Upon opting-in, AbbVie would be required to pay an agreed upon amount of all development costs accumulated up to the point ofexercising their opt-in right. All development costs incurred after AbbVie’s opt-in would be split equally.With respect to its omaveloxolone programs and its collaboration agreement with AbbVie, the Company was responsible for a certain initial amount in earlydevelopment costs before AbbVie began sharing development costs equally. As of April 2016, the Company had incurred all of these initial costs, afterwhich payments from AbbVie with respect to research and development costs incurred by the Company were recorded as a reduction in research anddevelopment expenses. The Company’s expenses were reduced $1,434,000 for AbbVie’s share of research and development costs for the twelve monthsended December 31, 2016. In September 2016, the Company and AbbVie mutually agreed that the Company would continue unilateral development of omaveloxolone. Therefore,AbbVie no longer co-funds the exploratory development costs of this program, but retains the right to opt back in at certain points indevelopment. Depending upon what point, if any, AbbVie opts back into development, AbbVie may retain its right to commercialize a product outside theU.S. or the Company may be responsible for commercializing the product on a worldwide basis. Upon opting back in, AbbVie would be required to pay anagreed upon amount of all development costs accumulated up to the point of exercising their opt-in right, after which development costs incurred andproduct revenue worldwide would be split equally. In December 2017, the Company and KHK entered into the Third Supplement to the KHK Agreement, which allows the Company to begin a portion of theCARDINAL registrational trial in Japan, for which KHK will reimburse costs incurred up to $3,000,000. The Company deemed that this was not a materialmodification to the KHK Agreement because no payment terms or deliverables were changed. The Company’s expenses were reduced by $515,000 forKHK’s share of the study costs for twelve months ended December 31, 2017. The Company bases its expense accruals related to clinical trials on its estimates of the services received and efforts expended pursuant to contracts withmultiple research institutions and contract research organizations that conduct and manage clinical trials on its behalf. The financial terms of theseagreements vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as thesuccessful enrollment of patients and the completion of clinical trial milestones. In accruing costs, the Company estimates the time period over whichservices will be performed and the level of effort to be expended in each period. If the Company does not identify costs that it has begun to incur or if theCompany underestimates or overestimates the level of services performed or the costs of these services, its actual expenses could differ from its estimates. To date, the Company has not experienced significant changes in its estimates of accrued research and development expenses after a reportingperiod. However, due to the nature of estimates, the Company cannot assure that it will not make changes to its estimates in the future as the Companybecomes aware of additional information about the status or conduct of its clinical trials and other research activities.Property and EquipmentProperty and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over thefollowing estimated useful lives: Computer equipment 2–5 yearsSoftware 3 yearsLaboratory equipment 5–7 yearsOffice furniture 5 yearsOffice equipment 5 years Leasehold improvements are amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the equipment orimprovement. Such amortization is included in depreciation and amortization expense in the consolidated statements of operations.F-10 Impairment of Long-Lived AssetsThe Company periodically evaluates its long-lived assets for potential impairment in accordance with ASC Topic 360, Property, Plant andEquipment. Potential impairment is assessed when there is evidence that events or changes in circumstances indicate that the carrying amount of an assetmay not be recovered. Recoverability of these assets is assessed based on undiscounted expected future cash flows from the assets, considering a number offactors, including past operating results, budgets and economic projections, market trends, and product development cycles. If impairments are identified,assets are written down to their estimated fair value. The Company has not recognized any impairment charges in 2017, 2016, and 2015.Licenses and PatentsLicense and sublicense costs are expensed as incurred and are classified as research and development expenses. Costs associated with filing, prosecuting,enforcing, and maintaining patent rights are expensed as incurred and are classified as general and administrative expenses.Income TaxesThe Company accounts for income taxes and the related accounts under the liability method. Deferred tax assets and liabilities are determined based ondifferences between the financial statement and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected tobe in effect when the differences are expected to reverse. The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if it ismore likely than not that some portion or all of the deferred tax asset will not be realized.The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740, Income Taxes. The Company recognizes a tax benefit foruncertain tax positions if the Company believes it is more likely than not that the position will be upheld on audit based solely on the technical merits of thetax position. The Company evaluates uncertain tax positions after consideration of all available information.Stock-Based CompensationThe Company accounts for its stock-based compensation in accordance with ASC 718 Compensation—Stock Compensation (ASC 718). ASC 718 requirescompanies to measure and recognize compensation expense for all stock options and restricted stock awards based on the estimated fair value of the award onthe grant date. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option awards. The fair value is recognized asexpense, over the requisite service period, which is generally the vesting period of the respective award, on a straight-line basis when the only condition tovesting is continued service. If vesting is subject to a market or performance condition, recognition is based on the derived service period of theaward. Expense for awards with performance conditions is estimated and adjusted on a quarterly basis based upon the assessment of the probability that theperformance condition will be met. Use of the Black-Scholes option-pricing model requires management to apply judgment under highly subjectiveassumptions. These assumptions include: •Expected term—The expected term represents the period that the stock-based awards are expected to be outstanding and is based on the averageperiod the stock options are expected to be outstanding and was based on our historical information of the options exercise patterns and post-vesting termination behavior. •Expected volatility—Since the Company does not have sufficient trading history to estimate the volatility of its common stock, the expectedvolatility was estimated based on its own historical volatility since its IPO and the average volatility for comparable publicly tradedbiopharmaceutical companies. When selecting comparable publicly traded biopharmaceutical companies on which the Company based itsexpected stock price volatility, the Company selected companies with comparable characteristics to the Company, including enterprise value,risk profiles, position within the industry, and historical share price information sufficient to meet the expected life of the stock-based awards. •Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periodscorresponding with the expected term of option. •Expected dividend—The Company has no plans to pay dividends on its common stock. Therefore, the company used an expected dividendyield of zero.In addition to the assumptions used in the Black-Scholes option-pricing model, the Company will continue to use judgment in evaluating the expectedvolatility, and expected terms utilized for its stock-based compensation calculations on a prospective basis. The Company accounts for forfeitures of share-based awards when they occur.Options to purchase shares of the Company’s common stock, and restricted common stock with certain repurchase rights, have been granted or sold tononemployees at fair value, in connection with research and consulting services provided to the Company, and to employees at fair value, in connection withStock Purchase and Restriction Agreements. Equity awards generally vest over terms of four or five years. For awards to employees, stock-basedcompensation expense is recorded ratably through the vesting period for each option award or tranche of restricted stock.F-11 Risks and UncertaintiesThe Company has experienced losses and negative operating cash flows for many years since inception and has no marketed drug or other products. TheCompany’s ability to generate future revenue depends upon the results of its development programs, whose success cannot be guaranteed. The Companymay need to raise additional equity capital in the future in order to fund its operations.Use of EstimatesThe preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires managementto make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results coulddiffer from those estimates.Deferred Offering CostsDeferred offering costs, consisting of legal, accounting, and filing fees relate to the follow-on offering and IPO, are capitalized. Deferred offering coststotaling $404,000 and $3,471,000 were offset against proceeds from the follow-on offering and IPO, respectively. The Company had $0 in capitalizeddeferred offering costs as of December 31, 2017 and 2016.Debt Issuance CostsThe Company defers costs related to debt issuance and amortizes these costs to interest expense over the term of the debt, using the effective interestmethod. Debt issuance costs are presented in the balance sheet as a deduction from the carrying amount of the debt liability.Net Income (Loss) per ShareBasic and diluted net income (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weightedaverage number of common shares outstanding during the period, without consideration for common stock equivalents. The Company’s potentially dilutiveshares, which include unvested restricted stock, and options to purchase common stock, are considered to be common stock equivalents and are onlyincluded in the calculation of diluted net loss per share when their effect is dilutive. For periods in which the Company reports a net loss attributable tocommon stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to commonstockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.Fair Value of Financial InstrumentsAssets and liabilities that are carried at fair value are to be classified and disclosed in one of the following three categories:Level 1: Observable quoted market prices in active markets for identical assets or liabilities;Level 2: Observable inputs other than Level 1, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical orsimilar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and.Level 3: Unobservable inputs for the asset or liability that are significant to the fair value of the assets or liabilities.At December 31, 2017 and 2016, the Company had no assets or liabilities that are required to be carried at fair value. The book values of the Company’s cashand cash equivalents and other working capital financial assets and liabilities approximate their fair values due to their short term nature. The fair values ofthe Company’s shareholder notes receivable were immaterial.Comprehensive Income (Loss)Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions, and other events andcircumstances from non-owner sources and includes all components of net income (loss) and other comprehensive income (loss). The other comprehensiveincome (loss) for the years ended December 31, 2017, 2016, and 2015 were immaterial.F-12 Recent Accounting PronouncementsThe Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (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 asthose standards apply to private companies. The Company has irrevocably elected not to avail itself of this exemption from new or revised accountingstandards, and, therefore, will be subject to the same new or revised accounting standards as public companies that are not emerging growth companies.In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes the revenuerecognition requirements in ASC 605, Revenue Recognition. The FASB has subsequently issued a number of amendments to ASU 2014-09. The newstandard, as amended, provides a single comprehensive model based on the principle that revenue is recognized to depict the transfer of goods or services tocustomers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve thisprinciple, ASU 2014-09 defines a five-step process, which may include more judgment and estimates than are required under existing U.S. generally acceptedaccounting principles (U.S. GAAP), including identifying performance obligations in a contract, estimating the amount of variable consideration to includein the transaction price, and allocating the transaction price to each performance obligation.The new standard is effective for interim and annual periods beginning after December 15, 2017, with early application for interim and annual periodsbeginning after December 15, 2016, permitted, and allows two methods of adoption: the full retrospective method, which requires the standard to be appliedto each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment toopening retained earnings in the period of adoption. The Company is finalizing its assessment of the impact of this guidance on its consolidated results of operations and financial position and disclosures. TheCompany will apply the modified retrospective method upon adoption of this standard effective January 1, 2018 and expects to recognize a decrease ofapproximately $2,634,000 to retained earnings.In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which supersedes the leases in ASC 840, Leases. ASU 2016-02requires the recognition of lease assets and lease liabilities by lessees for those leases previously classified as operating leases. The standard is effective forpublic companies for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. TheCompany will apply the guidance and disclosure provisions of the new standard upon adoption. The Company is currently evaluating this standard and hasnot yet determined what, if any, effect ASU 2016-02 will have on its consolidated operations or financial position but anticipates the recognition ofadditional assets and corresponding liabilities related to leases on its balance sheet. In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting(Topic 718) (ASU 2016-09) which modifies U.S. GAAP by requiring the following, among others: (1) all excess tax benefits and tax deficiencies are to berecognized as income tax expense or benefit on the income statement (excess tax benefits are recognized regardless of whether the benefit reduces taxespayable in the current period); (2) excess tax benefits are to be classified along with other income tax cash flows as an operating activity in the statement ofcash flows; (3) in the area of forfeitures, an entity can still follow the current U.S. GAAP practice of making an entity-wide accounting policy election toestimate the number of awards that are expected to vest or may instead account for forfeitures when they occur; and (4) classification as a financing activity inthe statement of cash flows of cash paid by an employer to the taxing authorities when directly withholding shares for tax withholding purposes. ASU 2016-09 is effective for annual periods beginning after December 15, 2016. The Company adopted ASU 2016-09 as of January 1, 2017, which resulted in anadjustment to retained earnings of $118,000 related to the cumulative effect of the accounting policy election to account for forfeitures of share-based awardswhen they occur, and an adjustment of $115,000 to recognize excess tax benefits as a component of the provision for income taxes on a prospectivebasis. For the year ended December 31, 2017, the effect on the provision for income taxes included in the consolidated statement of operations was notsignificant.In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230)(ASU 2016-15). This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The ASU is effectivefor public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluatingthis standard and has not yet determined what, if any, effect ASU 2016-15 will have on its consolidated results of operations or financial position.In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and JointVentures (Topic 323) (ASU 2017-03). This ASU amends the disclosure requirements for ASU No. 2014-09, Revenue from Contracts with Customers (Topic606), ASU No. 2016-02, Leases (Topic 842) and ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses onFinancial Instruments. This ASU states that if a registrant does not know or cannot reasonably estimate the impact that the adoption of the above ASUs isexpected to have on the financial statements, then in addition to making a statementF-13 to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of theimpact that the standard will have on the financial statements of the registrant when adopted. ASU 2017-03 was effective upon issuance. The adoption didnot have a material impact on the Company’s financial statements.In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718) (ASU 2017-09). This ASU provides guidance aboutwhich changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 iseffective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. We have adopted the standard as of June 30,2017. The adoption did not have a material impact on the Company’s financial statements. 3. Collaboration AgreementsAbbVieIn December 2011, the Company entered into the AbbVie Collaboration Agreement to jointly research, develop, and commercialize the Company’s portfolioof second and later generation oral Nrf2 activators. The terms of the agreement include payment to the Company of a nonrefundable, up-front payment of$400,000,000. The Company is also participating with AbbVie on joint steering committees.The up-front payment and the Company’s collaboration on research, development, and commercialization are accounted for as a single unit ofaccounting. Revenue is being recognized ratably through December 2026, which is the estimated minimum period that is needed to complete thedeliverables under the terms of the AbbVie Collaboration Agreement. The Company began recognizing revenue related to the up-front payment uponexecution of the agreement and, accordingly, recognized approximately $26,647,000, $26,720,000, and $26,647,000 as collaboration revenue during theyears ended December 31, 2017, 2016, and 2015, respectively. As of December 31, 2017 and 2016, the Company recorded deferred revenue totalingapproximately $238,292,000 and $264,939,000, respectively, of which approximately $26,647,000 and $26,647,000, respectively, is reflected as the currentportion of deferred revenue.In September 2010, the Company entered into the AbbVie License Agreement for an exclusive license to develop and commercialize bardoxolone methyl inthe Licensee Territory (as defined in the AbbVie License Agreement). The terms of the agreement include payment to the Company of a nonrefundable, up-front license fee of $150,000,000 and additional development and commercial milestone payments. As of December 31, 2017, the Company has received$150,000,000 related to clinical development milestone payments from AbbVie and has the potential in the future to achieve another $50,000,000 from oneremaining non-substantive commercial milestone. The AbbVie License Agreement includes additional potential milestones for new compounds other thanbardoxolone methyl in cardiovascular and metabolic programs, none of which is planned at this time. The Company also has the potential to achieve tieredroyalties ranging from 15 percent to the high 20 percent range, depending on the amount of annual net sales, on net sales by AbbVie in the LicenseeTerritory. Under certain terminations, the Company may be obligated to pay reverse royalties on net sales in the terminated territory.The up-front license fee and the Company’s participation on joint steering committees were accounted for as a single unit of accounting, and accordingly,revenue was recognized ratably through November 2017, which was the term of the joint steering committees. The Company began recognizing revenuerelated to the up-front license fee upon transfer of the license of bardoxolone methyl to AbbVie, which occurred in November 2010 and, accordingly,recognized approximately $18,420,000, $21,470,000, and $21,412,000 in collaboration revenue during the years ended December 31, 2017, 2016, and2015, respectively. As of December 31, 2017 and 2016, the Company recorded deferred revenue totaling approximately $0 and $18,420,000 respectively, ofwhich approximately $0 and $18,420,000, respectively, is reflected as the current portion of deferred revenue.KHKIn December 2009, the Company entered into the KHK Agreement for an exclusive license to develop and commercialize bardoxolone methyl in the KHKLicensed Territory. The terms of the agreement include payment to the Company of a nonrefundable, up-front license fee of $35,000,000 and additionaldevelopment and commercial milestone payments. As of December 31, 2017, the Company received $5,000,000 related to regulatory developmentmilestone payments and $10,000,000 related to clinical development milestone payments from KHK and has the potential in the future to achieve another$82,000,000 from eight non-substantive regulatory milestones and $140,000,000 from four non-substantive commercial milestones. The Company also hasthe potential to achieve tiered royalties ranging from the low teens to the low 20 percent range, depending on the country of sale and the amount of annualnet sales, on net sales by KHK in the KHK Licensee Territory. The Company is participating on a joint steering committee with KHK to oversee thedevelopment and commercialization activities related to bardoxolone methyl. Any future milestones and royalties received are subject to mid to lower singledigit percent declining tiered commissions to certain consultants as compensation for negotiations of the KHK Agreement.The up-front license fee and the Company’s participation on the joint steering committee are accounted for as a single unit of accounting, and accordingly,revenue was initially being recognized ratably through March 2014, which was the Company’s estimate of its substantive performance obligation periodrelated to the joint steering committee. During 2014, the Company agreed to a change to KHK’s timeline toF-14 develop and commercialize bardoxolone methyl, which modified the Company’s estimate of its substantive performance obligation period related to thejoint steering committee to December 2021. The Company deemed that this was not a material modification to the KHK Agreement because no paymentterms or deliverables were changed and has adjusted its revenue recognition prospectively as of October 2014.The Company began recognizing revenue related to the up-front payment upon transfer of the license and technical knowledge of bardoxolone methyl toKHK, which occurred in December 2009, and, accordingly, recognized approximately $1,536,000, $1,540,000, and $1,536,000 as collaboration revenueduring the years ended December 31, 2017, 2016, and 2015, respectively. As of December 31, 2017 and 2016, the Company recorded deferred revenuetotaling approximately $6,146,000 and $7,682,000, respectively, of which approximately $1,536,000 and $1,536,000 respectively, is reflected as the currentportion of deferred revenue.Under ASU 2014-09, variable consideration must be included in the transaction price when it is determined that it is probable that a significant reversal in therevenue recognized will not occur. We expect to recognize $30,000,000 in deferred revenue related to a milestone from KHK during 2018, which we willratably recognize in revenue over our estimated performance obligation period ending December 2021.Under the KHK Agreement, the Company will provide KHK with a sufficient supply of bardoxolone methyl to support its development andcommercialization efforts. Products provided during development will be charged to KHK at the Company’s direct cost without markup for profit.The Company will report amounts received from these product transactions, net of direct costs incurred, as a component of collaboration revenue. TheCompany expects the net profit or loss on these product transactions will not be material. Products during commercialization will be charged to KHK with amarkup and will be reported as product sales revenue. 4. Term LoanOn March 31, 2017, the Company entered into a loan and security agreement (Loan Agreement) with Oxford Finance LLC and Silicon Valley Bank(collectively, the Lenders), under which the Lenders agreed to lend the Company up to $35,000,000, issuable in two separate term loans of $20,000,000(Term A Loan) and $15,000,000 (Term B Loan). On March 31, 2017, the Company borrowed $20,000,000 from the Term A Loan.On November 3, 2017, the Company amended the Loan Agreement (Amended Loan Agreement) to increase the Term B Loan amount to either $20,000,000or $25,000,000, which extends the interest only period from six to twelve months if the Term B Loan is drawn. The Company may, at its sole discretion,borrow $20,000,000 under Term B Loan by June 29, 2018. The Company may borrow an additional $5,000,000 under the Term B Loan, for a total of$25,000,000, upon the achievement of one of two milestones by the earlier of 90 days after the achievement of a milestone or June 29, 2018.The Company paid an amendment fee of $250,000 on November 8, 2017, upon the execution of the Amended Loan Agreement. If the Company does notdraw the Term B Loan by June 29, 2018, the Company would pay an unused line fee of $1,000,000.All outstanding Term Loans will mature on March 1, 2022. Under the Term A Loan, the Company will make interest-only payments for 18 months throughOctober 1, 2018; however, if the Company draws the Term B Loan, the Company will make interest-only payments for 30 months through October 1,2019. The interest-only payment period will be followed by 41 equal monthly payments, or 29 equal monthly payments if the Company draws the Term BLoan, of principal and interest payments. The Term Loans will bear interest at a floating per annum rate calculated as 7.40% plus the greater of the 30-dayU.S. Dollar LIBOR rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interestwill accrue or 0.75%, with a minimum rate of 8.15% and maximum rate of 10.15%.The Company has the option to prepay all, but not less than all, of the borrowed amounts, provided that the Company will be obligated to pay a prepaymentfee equal to (a) 3.0% of the outstanding principal balance of the applicable Term Loan if prepayment is made prior to the first anniversary of the applicablefunding date of the Term Loan, (b) 2.0% of the outstanding principal balance of the applicable Term Loan if prepayment is made by the second anniversaryof the applicable funding date of the Term Loan, or (c) 1.0% of the outstanding principal balance of the applicable Term Loan if prepayment is made after thesecond anniversary of the applicable funding date of the Term Loan. The Company will also be required to make a final exit fee payment of 2.95% of theprincipal balance of all Term Loans outstanding, payable on the earliest of the prepayment of the Term Loans, acceleration of any Term Loan, or at maturityof the Term Loans.The Company may use the proceeds from the Term Loans for working capital and to fund its general business requirements. The Company’s obligationsunder the Loan Agreement are secured by a first priority security interest in substantially all of its current and future assets, other than its owned intellectualproperty. The Company has also agreed not to encumber its intellectual property assets, except as permitted by the Loan Agreement.F-15 As of December 31, 2017, the Company had $20,000,000 outstanding under the Term A Loan, which was recorded at its initial carrying value of$20,000,000, less discount and debt issuance costs totaling approximately $524,000. In connection with the Term A Loan, the discount and debt issuancecosts were recorded as a reduction to debt on its balance sheet and are being accreted to interest expense over the life of the Term A Loan. Additionally, thefinal exit fee of approximately $590,000 is being accrued over the life of the Term A Loan through interest expense. The Term A Loan has a current effectiveinterest rate of 11.1%. The Company is in compliance with all covenants under the Loan Agreement as of December 31, 2017.The future principal payments for the Company’s Term A Loan as of December 31, 2017 are as follows (in thousands): 2018$975 2019$5,854 2020$5,854 2021$5,854 2022$1,463 $20,000 5. Property and EquipmentProperty and equipment consisted of the following as of December 31(in thousands): 2017 2016 Computer equipment and software $1,831 $2,928 Laboratory equipment 4,654 4,530 Office furniture 1,282 1,273 Office and other equipment 286 273 Leasehold improvements 4,959 4,976 13,012 13,980 Less accumulated depreciation and amortization (12,294) (13,161)Property and equipment, net $718 $819 6. Income Taxes The provision for taxes on income consists of the following at December 31 (in thousands): 2017 2016 2015 Current $3 $(441) $(16,654)Deferred — — 17,802 Total provision for taxes on income $3 $(441) $1,148 The following table reconciles the Company’s effective income tax rate from continuing operations to the federal statutory tax rate of 35%: 2017 2016 2015 U.S. federal income taxes 35% 35% 35%Stock-based compensation — (2) (80)Change in valuation allowance 48 (25) (310)2017 Tax Act (111) — — Federal tax credits 28 — — Other — (1) (25)Recorded federal income tax benefit (provision) 0% 7% (380)% The Tax Cuts and Jobs Act of 2017 (the 2017 Tax Act), which was signed into law on December 22, 2017, has resulted in significant changes to the U.S.corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21% and the elimination or reduction in the deductibilityof certain credits and limitations, such as tax credits related to designated orphan drugs, net operating losses, interest expense, and executivecompensation. The federal statutory rate reduction takes effect on January 1, 2018. As a result of the reduction of federal corporate income tax rates, theCompany has estimated a material reduction of $53,113,000 to its deferred tax assets. However, consistent with 2016, its deferred tax assets continue to befully offset by a valuation allowance in 2017 as the Company cannot currentlyF-16 conclude that it is more likely than not that the remaining deferred tax assets will be utilized. Consequently, although the future potential benefit from itsdeferred tax assets has been materially reduced by the reduction of federal corporate income tax rates, there was no effect on its 2017 Consolidated Statementof Operations. On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP in situations when aregistrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accountingfor certain income tax effects of the 2017 Tax Act. In accordance with SAB 118, the Company continues to evaluate the impact of the 2017 Tax Act, whichmay impact its current conclusions. Any subsequent adjustment to those amounts will be recorded to current tax expense in the third quarter of 2018 whenthe analysis is complete. Deferred tax assets and liabilities reflect the net effects of net operating loss and tax credit carryovers and temporary differences between the carrying amountsof assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s netdeferred tax assets as of December 31 are as follows (in thousands): 2017 2016 Deferred tax assets: Deferred revenue $51,332 $101,864 Net operating loss 25,601 19,159 Federal tax credits 20,928 — Stock-based compensation 2,118 1,362 Depreciation 318 608 Other 301 392 Subtotal 100,598 123,385 Less: Valuation allowance (100,598) (123,385)Net deferred tax asset $— $— Deferred tax assets are regularly reviewed for recoverability and valuation allowances are established based on historical and projected future taxable lossesand the expected timing of the reversals of existing temporary differences. Additionally, as a result of the 2017 Tax Act, the Company’s net deferred taxassets have been re-measured at the reduced federal statutory rate as of December 31, 2017. The Company cannot currently conclude that it is more likelythan not that the remaining deferred tax assets will be utilized. Therefore, the Company’s deferred tax assets have been fully offset by a valuation allowancein 2017. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including reversals of deferred taxliabilities) during the periods in which those temporary differences will become deductible. The valuation allowance decreased by $22,788,000 in 2017 andincreased by $1,685,000 in 2016.As of December 31, 2017, the Company had accumulated net operating losses of approximately $121,911,000 of which $315,000 are subject to an annuallimitation under Section 382 of the Internal Revenue Code of 1986, as amended (Section 382). Approximately $434,000 of the net operating losscarryforwards expire between fiscal years 2023 and 2024, with the remaining $121,477,000 expiring in fiscal year 2037.As of December 31, 2017, the Company has federal orphan drug tax credit and research and development tax credit carryforwards of $20,805,000 and$123,000, respectively. These credits expire beginning in 2024.As of December 31, 2017, there were no unrecognized tax benefits that, if recognized, would have an impact on the Company’s effective tax rate. TheCompany currently has a full valuation allowance against its deferred tax assets. The Company does not anticipate that the amount of existing unrecognizedtax benefits will significantly increase or decrease within the next 12 months. The Internal Revenue Service (IRS) completed an examination of theCompany’s U.S. income tax returns for 2009, 2011, and 2012, with no significant adjustments, and has commenced an examination of the Company’s U.S.income tax returns for 2013, 2014, and 2015. As of February 28, 2018, the Company has not been notified of any significant proposed adjustments by theIRS. All other tax years remain open to federal tax examination. The Company will classify interest and penalties related to unrecognized tax benefits as partof the income tax provision. 7. PatentsBusiness intellectual property protection is critical to the Company’s ability to successfully commercialize its product innovations. The potential forlitigation regarding the Company’s intellectual property rights always exists and may be initiated by third parties attempting to abridge the Company’srights, as well as by the Company in protecting its rights. There were no patent matters outstanding at December 31, 2017, 2016, or 2015. F-17 8. LicensesThe proprietary rights and technical information covered by various patent and patent applications, which are discussed in more detail below, have beenlicensed by the Company from third parties, including stockholders. These licenses will continue for the life of the respective patent or until terminated byeither party. Certain agreements call for the payment of royalties on product sales over the life of the patents. The term of all agreements is through theuseful lives of the licensed patents or for a period of 15 to 20 years for technology rights, for which there are no applicable patent rights.Bardoxolone Methyl and Nrf2 ActivatorsIn July 2004, the Company entered into an exclusive technology and patent license agreement (the 2004 CDDO License Agreement) with two academicinstitutions for certain patents and patent applications, known as the CDDO Patents. The Company has the right to sublicense these patents. In the event of asublicense, the terms of the contract require the Company to pay the licensors sublicense fees based on a percentage of total compensation received thatvaries depending on the phase of development of a drug candidate as of the time of the sublicense. The Company agreed to pay a royalty on net sales of anyproducts developed as a result of the license, an annual license fee, and various milestone fees, and issued shares of its common stock as consideration for thelicense.In January 2009, the Company filed a patent application claiming the use of bardoxolone methyl and related compounds in treating CKD, endothelialdysfunction, cardiovascular disease, and related disorders. Several of the original inventors of these compounds at an academic institution were named as co-inventors on this application, along with several company employees. Consequently, the Company and the academic institution are co-owners of this patentapplication. In December 2009, the Company entered into an agreement with the academic institution (the 2009 Method of Use License Agreement) thatprovides the Company with an exclusive worldwide license to the academic institution’s rights in these applications and any resulting patents. TheCompany agreed to pay a limited super-royalty on product sales that occur during the effective term of the original patents (as discussed above), a royalty onproduct sales that occur after the effective term of the original patents, a sublicense fee, an annual license fee, and various milestone fees.Other TechnologiesIn September 2014, the Company entered into two exclusive technology and patent license agreements with the University of Kansas for certain patents andpatent applications related to small molecule modulators of heat shock proteins. The Company has the right to sublicense these patents. In the event of asublicense, the terms of the contract require the Company to pay the licensors sublicense fees based on a percentage of total compensation received thatvaries depending on the phase of development of a drug candidate as of the time of the sublicense. The Company paid non-refundable license issue fees andagreed to pay royalties on net sales of any products developed as a result of the licenses, annual license fees, various milestone fees, including reimbursementof sunk-in patent expenses, and fees for sponsored research performed by the University of Kansas as consideration for the licenses. 9. Common StockThe Company records all issued shares of common stock at fair value on the dates of issuance.Reserved SharesAt December 31, 2017, common stock reserved for issuance is as follows: Outstanding common stock options under the 2007 Long Term Incentive Plan 3,220,350 Outstanding common stock options under standalone option agreements 31,346 Common stock available for future grant under the 2007 Long Term Incentive Plan 107,322 Total common shares reserved for future issuance 3,359,018 10. Convertible Preferred StockAs of December 31, 2017 and 2016, there were no shares of convertible preferred stock issued and outstanding.On January 4, 2016, the Company filed its Tenth Amended and Restated Certificate of Incorporation, which removed all previous designations andauthorized 100,000,000 undesignated shares of convertible preferred stock. F-18 11. Stock-Based CompensationThe 2007 Long Term Incentive Plan (the 2007 LTIP) provides for awards of restricted stock, both nonstatutory stock options and incentive stock optionswithin the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and other incentive awards and rights to purchase shares of theCompany’s common stock. A total of 107,322 shares of common stock have been reserved for issuance under the 2007.As of December 31, 2017, no shares of restricted stock are outstanding under the 2007 LTIP, and options to purchase 3,251,696 shares have been granted andare outstanding under the 2007 LTIP. These options vest over the stated periods through 2022. Additional detail on stock compensation costs can be foundbelow.Stock OptionsStock options are granted to employees at exercise prices equal to the estimated fair market value of the Company’s stock at the dates of grant. Stock optionsunder the 2007 LTIP generally vest over four or five years and have a term of ten years. Compensation cost is recognized over the vesting period of theoptions using the straight-line attribution method. The Company accounts for forfeitures when they occur.The following table summarizes stock-based compensation expense reflected in the consolidated statements of operations (in thousands): Years Ended December 31 2017 2016 2015 Research and development $2,409 $1,121 $671 General and administrative 4,121 1,246 1,404 $6,530 $2,367 $2,075 The following table summarizes stock option activity as of December 31, 2017, and changes during the years ended December 31, 2017 under the 2007 LTIPand standalone option agreements: Number ofOptions Weighted-AverageExercisePrice Outstanding at January 1, 2017 2,311,146 17.18 Granted 1,044,848 25.00 Exercised (59,112) 11.14 Forfeited (45,120) 14.68 Expired (66) 25.21 Outstanding at December 31, 2017 3,251,696 19.83 Exercisable at December 31, 2017 939,137 17.12 At December 31, 2017, 3,251,696 stock options are fully vested or are expected to vest and have a weighted-average outstanding term of 8.56 years and aweighted-average exercise price of $19.83. Exercisable stock options have a weighted-average outstanding term of 7.08 years.Restricted StockRestricted and unvested stock has occasionally, in the past, been sold or granted to employees of the Company under the 2007 LTIP and the Amended andRestated 2002 Stock Option and Incentive Plan (the 2002 Plan), which was the predecessor equity incentive plan to the 2007 LTIP. The fair value ofrestricted stock is determined based on the estimated fair value of the Company’s common stock at the date of grant. Restricted stock generally vestsstraight-line over a period of four or five years, provided the employee remains in the service of the Company. Compensation cost is recognized on astraight-line basis over the vesting period. Shares of restricted and unvested stock purchased by employees are released from their restriction at each vestingdate; however, these shares remain pledged to the Company and are nontransferable until the related shareholder note receivable has been paid. Theshareholder notes receivable related to the restricted stock sold to employees are usually due in full one year after the final release date of the stock. AtDecember 31, 2017 and 2016, a total of 1,193,780 shares of restricted stock had been issued through the 2007 LTIP and the 2002 Plan.At December 31, 2017 and 2016, no shares of restricted stock are outstanding. The fair value of restricted stock vested in fiscal 2017 and 2016 was $0 and$356,000, respectively.F-19 Fair Value EstimatesThe Company’s determination of the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model is affectedby many factors, including the stock price and a number of highly complex and subjective variables. These variables include, but are not limited to, theCompany’s stock price volatility over the expected term of the awards, and estimates of the expected option term.The weighted-average assumptions used in the Black-Scholes option pricing model were as follows: Years Ended December 31 2017 2016 2015 Dividend yield —% —% —%Volatility 75.14% 72.77% 74.93%Risk-free interest rate 2.19% 1.76% 1.71%Expected term of options (in years) 6.37 6.74 7.28 Expected volatility is based on the Company’s own historical volatility since its IPO and benchmarked public companies during fiscal years 2017, 2016 and2015. The risk-free interest rate, ranging from 1.82% to 2.21% during the year ended December 31, 2017, is based on the U.S. Treasury yield curve in effectat the time of grant for periods corresponding with the expected life of the options. The expected term of options represents the weighted-average period oftime that options granted are expected to be outstanding based on historical data.The total intrinsic value (the difference between market value and exercise prices of in-the-money options) of all outstanding options at December 31, 2017,2016, and 2015, was $28,613,000, $12,951,000 and $6,360,000, respectively. The total intrinsic value of exercisable options at December 31, 2017, 2016,and 2015, was $11,469,000, $3,841,000 and $3,586,000, respectively. In 2017, 2016 and 2015, 59,112, 35,207 and 3,147 options were exercised,respectively. As of December 31, 2017, total unrecognized compensation expense of $31,579,000 related to equity awards is expected to be recognized overa weighted average of 3.63 years. 12. Commitments and ContingenciesLease CommitmentsThe Company leases certain office and laboratory space under a non-cancelable operating lease. On November 9, 2017, the Company amended the leaseagreement to extend its lease term by 24 months for an expiration date of October 2020. Rent is expensed on a straight-line basis, and an accrued rentliability of approximately $72,000 and $120,000 is recorded in other accrued liabilities on the accompanying consolidated balance sheets at December 31,2017 and 2016, respectively.Future minimum lease payments under non-cancelable operating leases are as follows at December 31, 2017 (in thousands): 2018$613 2019 631 2020 538 Thereafter — $1,782 For the years ended December 31, 2017, 2016, and 2015, the Company recorded total rent expense of approximately $512,000, $463,000 and $523,000,respectively.IndemnificationsASC 460, Guarantees, requires that, upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumesunder that guarantee.As permitted under Delaware law and in accordance with the Company’s bylaws, officers and directors are indemnified for certain events or occurrences,subject to certain limits, while the officer or director is or was serving in such capacity. The maximum amount of potential future indemnification isunlimited; however, the Company has obtained director and officer insurance that limits its exposure and may enable recoverability of a portion of any futureamounts paid. The Company believes the fair value for these indemnification obligations is minimal. Accordingly, the Company has not recognized anyliabilities relating to these obligations as of December 31, 2017.F-20 The Company has certain agreements with licensors, licensees, and collaborators that contain indemnification provisions. In such provisions, the Companytypically agrees to indemnify the licensor, licensee, and collaborator against certain types of third-party claims. The Company accrues for knownindemnification issues when a loss is probable and can be reasonably estimated. There were no accruals for expenses related to indemnification issues for anyperiod presented. 13. Related-Party TransactionsThe Company paid approximately $0, $306,000, and $806,000, to certain stockholders and primarily academic institutions, for sponsored research in 2017,2016, and 2015, respectively. These amounts are recorded in research and development expense in the accompanying consolidated statements of operations.On September 23, 2015, the Company’s Board of Directors resolved to forgive a board director’s promissory note principal and accrued interest, totaling$1,056,000, effective October 19, 2015. The value of the 25% recourse portion of the note and related accumulated interest was $264,000. The value of the75% nonrecourse portion of the note required calculation based on the incremental value of the stock award prior to the forgiveness compared to subsequentto the forgiveness. The fair value of the Company’s stock, as determined by the board of directors, at this time was $25.52, and this value was utilized incalculating the value of the nonrecourse portion of the note which totaled $272,000. The total of $536,000 was charged to stock-based compensationexpense as of December 31, 2015. 14. Net (Loss) Income per ShareThe computation of basic and diluted net (loss) income per share attributable to common stockholders the Company for the years ended December 31 issummarized in the following table: 2017 2016 2015 Numerator Net loss (in thousands) $(47,671) $(6,227) $(1,450)Denominator Weighted-average number of common shares used in net loss per share – basic 23,933,309 19,816,635 15,974,974 Dilutive potential common shares — — — Weighted-average number of common shares used in net loss per share – diluted 23,933,309 19,816,635 15,974,974 Net loss per share – basic (1.99) (0.31) (0.09)Net loss per share – diluted (1.99) (0.31) (0.09) The number of weighted average options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutiverepresented 3,251,696, 2,311,146, and 550,675 shares for the years ended 2017, 2016, and 2015, respectively. 15. Selected Quarterly Financial DataThe following table contains quarterly financial information for 2017 and 2016. The Company believes that the following information reflects all normalrecurring adjustments necessary for a fair statement of the information for the periods presented. The operating results for any quarter are not necessarilyindicative of results for any future period (in thousands except per share data). 2017 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Total collaboration revenue $12,732 $12,806 $12,557 $9,963 Total expenses 19,906 24,000 24,575 26,489 Total other income (expense) 76 (395) (289) (148)Provision for taxes on income - 2 1 - Net loss (7,098) (11,591) (12,308) (16,674)Net loss per share – basic and diluted (0.32) (0.52) (0.50) (0.64)F-21 2016 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Total collaboration revenue $12,438 $12,366 $12,551 $12,501 Total expenses 12,701 13,791 13,509 16,737 Total other income 23 28 62 101 (Benefit) provision for taxes on income 18 (461) 1 1 Net loss (258) (936) (897) (4,136)Net loss per share – basic and diluted (0.02) (0.05) (0.04) (0.19) 16. Subsequent EventsThe Company has evaluated events and transactions occurring subsequent to December 31, 2017, but prior to the issuance of the consolidated financialstatements, for recognition or disclosure in its consolidated financial statements. During this period, there were no subsequent events requiring eitherrecognition in the consolidated financial statements or nonrecognized subsequent events requiring disclosure. F-22 Exhibit 10.25REATA PHARMACEUTICALS, INC.AMENDED AND RESTATED NON-EMPLOYEE DIRECTOR COMPENSATION POLICY Each member of the Board of Directors (the “Board”) who is not also serving as an employee of or consultant to ReataPharmaceuticals, Inc. (“Reata”) or any of its subsidiaries (each such member, an “Eligible Director”) will receive the compensationdescribed in this Amended and Restated Non-Employee Director Compensation Policy (the “Policy”) for his or her Board service orservice on a committee of the Board (“Committee”). This Policy is effective as of December 7, 2016 (the “Effective Date”) and maybe amended at any time in the sole discretion of the Board or the Compensation Committee of the Board. Annual Cash Compensation The annual cash compensation amount set forth below is payable in equal quarterly installments, payable after each regular quarterlyBoard meeting, beginning with the Board meeting currently scheduled to be held on March 1, 2017 (collectively, the “Annual CashFees”). All Annual Cash Fees are vested upon payment. 1.Annual Board Service Retainer: a.All Eligible Directors: $37,250 b.Lead Independent Director Service Retainer (in addition to Annual Board Service Retainer): $20,000 2.Annual Committee Member Service Retainer: a.Member of the Audit Committee: $7,500 b.Member of the Compensation Committee: $6,375 c.Member of the Nominating and Corporate Governance Committee: $4,500 3.Annual Committee Chair Service Retainer (in addition to Annual Committee Member Service Retainer): a.Chairman of the Audit Committee: $25,000 b.Chairman of the Compensation Committee: $5,875 c.Chairman of the Nominating and Corporate Governance Committee: $3,000Beginning with the second regular Board meeting held after the 2018 annual stockholder meeting, the Annual Cash Fees shall be asfollows: 1. Annual Board Service Retainer:a. All Eligible Directors: $38,000  b. Lead Independent Director Service Retainer (in addition to Annual Board Service Retainer): $20,0002. Annual Committee Member Service Retainer: a.Member of the Audit Committee: $7,500 b.Member of the Compensation Committee: $6,375 c.Member of the Nominating and Corporate Governance Committee: $4,5003. Annual Committee Chair Service Retainer (in addition to Annual Committee Member Service Retainer): d.Chairman of the Audit Committee: $25,000 e.Chairman of the Compensation Committee: $7,125 f.Chairman of the Nominating and Corporate Governance Committee: $3,500 Equity Compensation The equity compensation set forth below will be granted under the Reata’s Amended and Restated 2007 Long Term Incentive Plan(the “Plan”). All stock options granted under this Policy will be nonstatutory stock options to purchase shares of Class B commonstock of Reata (“Common Stock”), with (a) an exercise price per share equal to 100% of the Fair Market Value (as defined in the Plan)of the underlying Common Stock on the date of grant, which shall be the closing price on the date of grant (or, if not a business day,the first business day thereafter) of a share of Reata’s Class A common stock on the Nasdaq Global Market, and (b) a term of ten yearsfrom the date of grant. The other terms and provisions of the stock options, including vesting on termination of service, Disability (asdefined in the form stock option agreement), death and Change in Control (as defined in the Plan) will be in conformity with the Planand the form of stock option agreement and notice of grant previously approved by the Board for members of the Board, as the Plan orany such form may be amended from time to time. The terms and provisions of the stock options as set forth in this paragraph arereferred to herein as the “Terms”. 1.Initial Grant: On the date of the Eligible Director’s initial election or appointment to the Board (or, if such date is not amarket trading day, the first market trading day thereafter), the Eligible Director will automatically, and without further actionby the Board or Compensation Committee of the Board, be granted a stock option to purchase 16,000 shares of CommonStock (the “Initial Grant”). The stock option constituting each Initial Grant will vest in equal annual installments over athree-year period so that the Initial Grant will become fully vested on the third anniversary of the date of grant, subject to theTerms. 2.Annual Grant: On the date of the first regular Board meeting held after each Reata annual stockholder meeting, for eachEligible Director who continues to serve as a non-employee member of the Board (or who is first elected to the Board atsuch annual  stockholder meeting), the Eligible Director will automatically, and without further action by the Board or CompensationCommittee of the Board, be granted a stock option to purchase 6,000 shares of Common Stock or, beginning with the firstregular Board meeting held after Reata’s 2018 annual stockholder meeting, 8,000 shares of Common Stock (the “AnnualGrant”). In addition, each Eligible Director who is first elected or appointed to the Board other than at the first regular Boardmeeting held after a Reata annual stockholder meeting will automatically, and without further action by the Board orCompensation Committee of the Board, be granted an Annual Grant on the date of the Eligible Director’s initial election orappointment to the Board, prorated by multiplying 6,000 or 8,000, as applicable, by a fraction (1) the numerator of which isthe number of subsequent regular Board meetings remaining until (and including) the first regular Board meeting held afterReata’s next annual stockholder meeting and (2) the denominator of which is four. Subject to the Terms, the stock optionsconstituting the Annual Grant will vest in the number of equal quarterly installments that is the number of regular quarterlyBoard meetings scheduled to be held following the date of grant to and including Reata’s regular Board meeting scheduledto be held after Reata’s next annual stockholder meeting following the date of grant. An example of the above prorationprocedures follows: if an Eligible Director is appointed to the Board on January, 5, 2017, then the Eligible Director wouldreceive an Annual Grant of 3,000 shares on January 5, 2017, which Annual Grant would vest 50% on April 5, 2017, and50% on July 5, 2017, subject to the Terms; the new Eligible Director and all other Eligible Directors would receive anAnnual Grant of 6,000 shares on the date of the June regular Board meeting (held after the June annual stockholder meeting)following the January date of grant, which would vest in four equal quarterly installments, subject to the Terms. 3. Interim Grants: On the Effective Date, each Eligible Director will automatically, and without further action by the Board orCompensation Committee of the Board, be granted a stock option to purchase 6,000 shares of Common Stock (the “InterimAnnual Grant”). The shares subject to the Interim Annual Grant will vest 50% on March 7, 2017, and 50% on June 7,2017, subject to the Terms. Election to Receive Stock Options in Lieu of Cash Compensation An Eligible Director may elect to receive a grant of stock options pursuant to the Equity Compensation provisions of this Policy in lieuof receiving future cash compensation payments, or any portion thereof, of the Annual Board Service Retainer, the Lead IndependentDirector Service Retainer, the Annual Committee Member Service Retainer, and/or the Annual Committee Chair Service Retainer (the“Election Grant”). This election to receive an Election Grant may be made by an Eligible Director on the date of Reata’s first regularBoard meeting held after an annual stockholder meeting by submitting an executed election form (the “Election Form”) to Reata’schief legal counsel in the form and pursuant to procedures established by the Company. The stock options granted pursuant to anElection Grant will be granted on the day of Reata’s first regular Board meeting held after each annual stockholder meeting, will havea Black-Scholes value equal to the annual amount of the applicable Retainer, and will otherwise be subject to the Terms. In addition,each Eligible Director serving as of the Effective Date, and each Eligible Director who is first elected or appointed to the Boardfollowing the Effective Date  and not at an annual stockholder meeting, may execute an Election Form on a date other than the date of Reata’s first regular Boardmeeting held after an annual stockholder meeting, in which case, in addition to receiving a grant of stock options pursuant to anElection Grant on the day of Reata’s first regular Board meeting held after each annual stockholder meeting, such Eligible Director willalso be granted on the date of execution of the Election Form a prorated Election Grant with a Black-Scholes value equal to the Black-Scholes value of the applicable Retainer multiplied by a fraction (1) the numerator of which is the number of subsequent regular Boardmeetings that will be held after the date of grant to, and including, the first regular Board meeting held after Reata’s next annualstockholder meeting, and (2) the denominator of which is 4, and will otherwise be subject to the Terms. The stock options constitutingElection Grants will vest in the number of equal quarterly installments that is the number of regular quarterly Board meetings scheduledto be held following the date of grant to and including Reata’s regular Board meeting scheduled to be held after Reata’s next annualstockholder meeting following the date of grant, subject to the Terms. Any election to receive an Election Grant will be irrevocableuntil the third anniversary of such election. Once an Election Form has been executed and delivered to Reata, no additional ElectionForm is required to be executed, unless (1) an Eligible Director has revoked an election to receive an Election Grant and thereafterdetermines to again receive an Election Grant or (2) an Eligible Director becomes entitled to receive a Retainer which the EligibleDirector was not entitled to receive at the time of the execution of an Election Form. If the amount of any Retainer is changed, noadditional Election Form is required to be executed if it included an election as to that type of Retainer. Fractions Stock options granted pursuant to an Election Grant shall be for a number of whole shares of Common Stock. Any fractional share ofCommon Stock shall be rounded down to the nearest whole share of Common Stock. Fractions of shares of Common Stock subject toa stock option shall not vest on a vesting date of an Initial Grant, an Annual Grant, an Interim Annual Grant, or an Election Grant, andthe shares of Common Stock that do vest on a vesting date shall be rounded down to the nearest whole share of Common Stock;provided, however, that such fractions of shares of Common Stock shall be added to the number of shares of Common Stock that veston the final vesting date or that otherwise vest due to the vesting acceleration (with any resulting fraction of a share of Common Stockbeing rounded down to the nearest whole share of Common Stock). Waiver An Eligible Director may, at any time and from time to time, waive receipt of any or all cash or equity compensation payable to suchEligible Director pursuant to the Policy (a “Waiver”). After a Waiver, the Eligible Director may, at any time and from time to time,withdraw the Waiver and begin receiving future cash and equity compensation pursuant to the Policy. Any Waiver or withdrawal of aWaiver shall be made by providing written notice to an officer of Reata. KHK Supplements (2) and CNS Pharmaceuticals, Inc.Purchase Agreement.  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 (Form S-3 No. 333-218915) and related prospectus,(2)Registration Statement (Form S-8 No. 333-211682) pertaining to the Reata Pharmaceuticals, Inc. Amended and Restated 2007 Long TermIncentive Plan, and(3)Registration Statement (Form S-8 No. 333-216412) pertaining to the Reata Pharmaceuticals, Inc. Amended and Restated 2007 Long TermIncentive Plan;of our report dated March 2, 2018, with respect to the consolidated financial statements of Reata Pharmaceuticals, Inc., included in this Annual Report (Form10-K) for the year ended December 31, 2017./s/ Ernst & Young LLP Dallas, TexasMarch 2, 2018  Exhibit 31.1CERTIFICATIONSI, J. Warren Huff, certify that:1.I have reviewed this Annual Report on Form 10-K of Reata Pharmaceuticals, Inc.;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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange 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 issuer and have: (a)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 withinthose entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting. Date: March 2, 2018 By:/s/ J. Warren Huff J. Warren Huff Chief Executive Officer (Principal Executive Officer)  Exhibit 31.2CERTIFICATIONSI, Jason D. Wilson, certify that:1.I have reviewed this Annual Report on Form 10-K of Reata Pharmaceuticals, Inc.;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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange 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 issuer and have: (a)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 withinthose entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting. Date: March 2, 2018 By:/s/ Jason D. Wilson Jason D. Wilson Chief Financial Officer (Principal Financial Officer)  Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Reata Pharmaceuticals, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2017 asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Warren Huff, as Chief Executive Officer of the Company, certify,pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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 theCompany. Date: March 2, 2018 By:/s/ J. Warren Huff J. Warren Huff Chief Executive Officer (Principal Executive Officer)  Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Reata Pharmaceuticals, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2017 asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), I Jason D. Wilson, certify, pursuant to 18 U.S.C. § 1350, as adoptedpursuant to § 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 theCompany. Date: March 2, 2018 By:/s/ Jason D. Wilson Jason D. Wilson Chief Financial Officer (Principal Financial Officer) 

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