SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission File Number 001-36352
AKEBIA THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of|
incorporation or organization)
| ||(I.R.S. Employer|
| || || |
245 First Street , Cambridge, MA
|(Address of principal executive offices)|| ||(Zip Code)|
Registrant’s telephone number, including area code: (617) 871-2098
(Former name, former address and formal fiscal year, if changed since last report)
|Securities registered pursuant to Section 12(b) of the Act:|
|Title of each class||Trading symbol(s)||Name of each exchange on which registered|
|Common Stock, par value $0.00001 per share||AKBA||The Nasdaq Global Market|
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||¨||Accelerated filer|
| || || || |
|Non-accelerated filer||¨||Smaller reporting company||☐|
| || || || |
| || ||Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
|Outstanding at October 30, 2020|
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that are being made pursuant to the provisions of the U.S. Private Securities Litigation Reform Act of 1995 with the intention of obtaining the benefits of the “safe harbor” provisions of that Act. All statements contained in this Quarterly Report on Form 10‑Q other than statements of historical fact are forward-looking statements. These forward-looking statements may be accompanied by words such as “anticipate,” “believe,” “build,” “can,” “contemplate,” “continue,” “could,” “should,” “designed,” “estimate,” “project,” “expect,” “forecast,” “future,” “goal,” “intend,” “likely,” “may,” “plan,” “possible,” “potential,” “predict,” “strategy,” “seek,” “target,” “will,” “would,” and other words and terms of similar meaning, but the absence of these words does not necessarily mean that a statement is not forward-looking. These forward-looking statements include, but are not limited to, statements about:
•the potential direct or indirect impact of the coronavirus 2 (SARS-CoV-2) pandemic on our business, operations, and the markets and communities in which we and our partners, collaborators, vendors and customers operate;
•the potential therapeutic benefits, safety profile, and effectiveness of our product candidates, including vadadustat;
•the timing, investment and associated activities involved in continued commercialization of Auryxia® (ferric citrate);
•the potential indications, demand and market potential and acceptance of our product and product candidates, including our estimates regarding the potential market opportunity for Auryxia, vadadustat or any other product candidates and the size of eligible patient populations;
•the timing of or likelihood of regulatory filings and approvals, including labeling or other restrictions, such as the anticipated timing of filing a New Drug Application for vadadustat, the potential approval of vadadustat and our outlook related thereto, and potential indications for vadadustat;
•the potential therapeutic applications of the hypoxia inducible factor pathway;
•our pipeline, including its potential, and our research and development activities;
•our competitive position, including estimates, developments and projections relating to our competitors and their products and product candidates, and our industry;
•our expectations with respect to (i) the anticipated financial impact and potential benefits to us related to our merger with Keryx Biopharmaceuticals, Inc. that was completed on December 12, 2018, (ii) integration of the businesses subsequent to the merger, and (iii) other matters related to the merger;
•our expectations, projections and estimates regarding our capital requirements, need for additional capital, financing our future cash needs, costs, expenses, revenues, capital resources, cash flows, financial performance, profitability, tax obligations, liquidity, growth, contractual obligations, the period of time our cash resources and collaboration funding will fund our current operating plan, internal control over financial reporting and remediation of any deficiencies, and disclosure controls and procedures;
•estimates, beliefs and judgments related to the valuation of intangible assets, goodwill, contingent consideration, debt and other assets and liabilities, including our impairment analysis and our methodology and assumptions regarding fair value measurements;
•the timing of the availability and disclosure of clinical trial data and results;
•our and our collaborators’ strategy, plans and expectations with respect to the development, manufacturing, commercialization, launch, marketing and sale of our product candidates, and the associated timing thereof;
•the designs of our studies, and the type of information and data expected from our studies and the expected benefits thereof;
•our ability to maintain any marketing authorizations we currently hold or will obtain, including our marketing authorizations for Auryxia and our ability to complete post-marketing requirements with respect thereto;
•our ability to negotiate, secure and maintain adequate pricing, coverage and reimbursement terms and processes on a timely basis, or at all, with third-party payors for Auryxia or any other product candidate that may be approved;
•the targeted timing of enrollment of our clinical trials;
•the timing of initiation of our clinical trials and plans to conduct preclinical and clinical studies in the future;
•the timing and amounts of payments from or to our collaborators and licensees, and the anticipated arrangements and benefits under our collaboration and license agreements, including with respect to milestones and royalties;
•our intellectual property position, including obtaining and maintaining patents, and the timing, outcome and impact of administrative, regulatory, legal and other proceedings relating to our patents and other proprietary and intellectual property rights, as well as Abbreviated New Drug Applications filed by generic drug manufacturers and potential U.S. Food and Drug Administration approval thereof, and associated patent infringement suits that we have filed or may file, or other actions that we may take against such companies, and the timing and resolution thereof;
•expected reliance on third parties, including with respect to the development, manufacturing, supply and commercialization of our product and product candidates;
•accounting standards and estimates, their impact, and their expected timing of completion;
•estimated periods of performance of key contracts;
•our facilities, lease commitments, and future availability of facilities;
•our employees, including our management team, employee compensation, employee relations, and our ability to attract and retain high quality employees;
•the implementation of our business model, current operating plan, and strategic plans for our business, product candidates and technology, and business development opportunities including potential collaborations, alliances, mergers, acquisitions or licensing of assets; and
•the timing, outcome and impact of current and any future legal proceedings.
Any or all of these forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. These forward-looking statements involve risks and uncertainties, including those that are described in Part II, Item 1A. Risk Factors included in this Quarterly Report on Form 10-Q and elsewhere in this Quarterly Report on Form 10-Q, that could cause our actual results, financial condition, performance or achievements to be materially different from those indicated in these forward-looking statements. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to publicly update or revise these forward-looking statements for any reason. Unless otherwise stated, our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
This Quarterly Report on Form 10-Q also contains estimates and other information concerning our industry and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Unless otherwise expressly stated, we obtained this industry, 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.
In this Quarterly Report on Form 10-Q, unless otherwise stated or the context otherwise requires, references to “Akebia,” “we,” “us,” “our,” “the Company,” and similar references refer to Akebia Therapeutics, Inc. and, where appropriate, its subsidiaries, including Keryx.
AURYXIA®, AKEBIA® Therapeutics, VAFSEOTM and their associated logos are trademarks of Akebia and/or its affiliates. All other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. All website addresses given in this Quarterly Report on Form 10-Q are for information only and are not intended to be an active link or to incorporate any website information into this document.
Akebia Therapeutics, Inc.
Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
AKEBIA THERAPEUTICS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
|Cash and cash equivalents||$||169,286 ||$||147,449 |
|Available for sale securities||99,969 ||245 |
|Inventory||88,242 ||116,349 |
|Accounts receivable, net||24,466 ||38,864 |
|Prepaid expenses and other current assets||9,037 ||6,626 |
|Total current assets||391,000 ||309,533 |
|Property and equipment, net||8,821 ||10,380 |
|Operating lease assets||25,721 ||29,038 |
|Goodwill||55,053 ||55,053 |
|Other intangible assets, net||151,378 ||291,212 |
|Other assets||44,170 ||75,985 |
|Total assets||$||676,143 ||$||771,201 |
|Liabilities and stockholders' equity|
|Accounts payable||$||40,403 ||$||39,217 |
|Accrued expenses and other current liabilities||123,021 ||129,071 |
|Short-term deferred revenue||18,034 ||39,830 |
|Total current liabilities||181,458 ||208,118 |
|Deferred revenue, net of current portion||33,660 ||33,120 |
|Operating lease liabilities, net of current portion||23,494 ||27,528 |
|Derivative liability||1,990 ||1,650 |
|Long-term debt, net||76,608 ||75,805 |
|Other non-current liabilities||40,971 ||30,223 |
|Total liabilities||358,181 ||376,444 |
|Commitments and contingencies (Note 14)|
Preferred stock $0.00001 par value, 25,000,000 shares authorized; 0 shares issued and
outstanding at September 30, 2020 and December 31, 2019
|— ||— |
Common stock $0.00001 par value; 350,000,000 and 175,000,000 shares authorized at September 30, 2020 and December 31, 2019, respectively; 143,328,652 and 121,674,568 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
|1 ||1 |
|Additional paid-in capital||1,408,466 ||1,188,810 |
|Accumulated other comprehensive loss||6 ||— |
|Total stockholders' equity||317,962 ||394,757 |
|Total liabilities and stockholders' equity||$||676,143 ||$||771,201 |
See accompanying notes to unaudited condensed consolidated financial statements.
AKEBIA THERAPEUTICS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
|Three Months Ended|
|Nine Months Ended|
|Product revenue, net||$||34,392 ||$||30,004 ||$||94,297 ||$||82,204 |
|License, collaboration and other revenue||25,596 ||61,973 ||144,311 ||183,242 |
|Total revenues||59,988 ||91,977 ||238,608 ||265,446 |
|Cost of goods sold:|
|Product||24,239 ||29,162 ||92,840 ||79,888 |
|Amortization of intangibles||6,106 ||9,101 ||24,307 ||27,301 |
|Impairment of intangible asset||— ||— ||115,527 ||— |
|Total cost of goods sold||30,345 ||38,263 ||232,674 ||107,189 |
|Research and development||46,857 ||74,512 ||180,907 ||242,557 |
|Selling, general and administrative||40,171 ||34,178 ||113,636 ||104,537 |
|License expense||710 ||929 ||2,430 ||2,560 |
|Total operating expenses||87,738 ||109,619 ||296,973 ||349,654 |
|Other income (expense):|
|Interest income (expense)||(2,274)||228 ||(6,554)||1,582 |
|Other income (expense)||410 ||(185)||1,136 ||(240)|
|Net loss before income taxes||(59,959)||(55,862)||(296,457)||(190,055)|
|Benefit from income taxes||— ||(1,277)||— ||(4,879)|
|Net loss per share - basic and diluted||$||(0.42)||$||(0.46)||$||(2.18)||$||(1.57)|
|Weighted-average number of common shares - basic and diluted||143,314,729 ||118,863,063 ||136,230,889 ||118,071,674 |
|Other comprehensive gain (loss) - unrealized gain (loss) on debt securities||15 ||(17)||6 ||267 |
|Total comprehensive loss||$||(59,944)||$||(54,602)||$||(296,451)||$||(184,909)|
See accompanying notes to unaudited condensed consolidated financial statements.
AKEBIA THERAPEUTICS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
| ||Common Stock|| || |
| ||Number of|
|Balance at December 31, 2018||116,887,518 ||$||1 ||$||1,150,583 ||$||(261)||$||(514,395)||$||635,928 |
|Proceeds from sale of stock under|
employee stock purchase plan
|39,977 ||— ||188 ||— ||— ||188 |
|Exercise of options||62,204 ||— ||365 ||— ||— ||365 |
|Share-based compensation expense||— ||— ||2,094 ||— ||— ||2,094 |
|Restricted stock unit vesting||132,563 ||— ||— ||— ||— ||— |
|Unrealized gain||— ||— ||— ||225 ||— ||225 |
|Net loss||— ||— ||— ||— ||(72,421)||(72,421)|
|Balance at March 31, 2019||117,122,262 ||$||1 ||$||1,153,230 ||$||(36)||$||(586,816)||$||566,379 |
|Issuance of common stock, net of|
|1,384,520 ||— ||9,035 ||— ||— ||9,035 |
|Exercise of options||300,592 ||— ||195 ||— ||— ||195 |
|Retired shares||(55,324)||— ||(426)||— ||— ||(426)|
|Share-based compensation expense||— ||— ||2,284 ||— ||— ||2,284 |
|Restricted stock unit vesting||35,251 ||— ||— ||— ||— ||— |
|Unrealized gain||— ||— ||— ||59 ||— ||59 |
|Net loss||— ||— ||— ||— ||(58,170)||(58,170)|
|Balance at June 30, 2019||118,787,301 ||$||1 ||$||1,164,318 ||$||23 ||$||(644,986)||$||519,356 |
|Proceeds from sale of stock under|
employee stock purchase plan
|47,553 ||— ||195 ||— ||— ||195 |
|Share-based compensation expense||— ||— ||2,613 ||— ||— ||2,613 |
|Restricted stock unit vesting||28,881 ||— ||— ||— ||— ||— |
|Unrealized loss||— ||— ||— ||(17)||— ||(17)|
|Net loss||— ||— ||— ||— ||(54,585)||(54,585)|
|Balance at September 30, 2019||118,863,735 ||$||1 ||$||1,167,126 ||$||6 ||$||(699,571)||$||467,562 |
|Balance at December 31, 2019||121,674,568 ||$||1 ||$||1,188,810 ||—||$||(794,054)||$||394,757 |
|Issuance of common stock, net of|
|7,973,967 ||— ||56,575 ||— ||— ||56,575 |
|Proceeds from sale of stock under|
employee stock purchase plan
|115,024 ||— ||451 ||— ||— ||451 |
|Share-based compensation expense||— ||— ||4,916 ||— ||— ||4,916 |
|Exercise of options||64,126 ||— ||412 ||— ||— ||412 |
|Restricted stock unit vesting||423,755 ||— ||— ||— ||— ||— |
|Net loss||— ||— ||— ||— ||(60,747)||(60,747)|
|Balance at March 31, 2020||130,251,440 ||$||1 ||$||1,251,164 ||$||— ||$||(854,801)||$||396,364 |
|Issuance of common stock, net of|
|12,650,000 ||$||— ||$||142,383 ||$||— ||$||— ||$||142,383 |
|Share-based compensation expense||— ||$||— ||$||6,864 ||$||— ||$||— ||$||6,864 |
|Exercise of options||48,103 ||$||— ||$||409 ||$||— ||$||— ||$||409 |
|Restricted stock unit vesting||179,866 ||$||— ||$||— ||$||— ||$||— ||$||— |
|Unrealized loss||— ||$||— ||$||— ||$||(9)||$||— ||$||(9)|
|Net loss||— ||$||— ||$||— ||$||— ||$||(175,751)||$||(175,751)|
|Balance at June 30, 2020||143,129,409 ||$||1 ||$||1,400,820 ||$||(9)||$||(1,030,552)||$||370,260 |
|Proceeds from sale of stock under|
employee stock purchase plan
|120,634 ||— ||649 ||— ||— ||649 |
|Share-based compensation expense||— ||— ||6,592 ||— ||— ||6,592 |
|Exercise of options||54,404 ||— ||405 ||— ||— ||405 |
|Restricted stock unit vesting||24,205 ||— ||— ||— ||— ||— |
|Unrealized gain||— ||— ||— ||15 ||— ||15 |
|Net loss||— ||— ||— ||— ||(59,959)||(59,959)|
|Balance at September 30, 2020||143,328,652 ||$||1 ||$||1,408,466 ||$||6 ||$||(1,090,511)||$||317,962 |
See accompanying notes to unaudited condensed consolidated financial statements
AKEBIA THERAPEUTICS, INC.
Condensed Consolidated Statements of Cash Flows
| ||Nine Months Ended|
| ||September 30, 2020||September 30, 2019|
|Adjustments to reconcile net loss to net cash used in operating activities:|
|Depreciation and amortization||1,559 ||1,659 |
|Amortization of intangibles||24,307 ||27,301 |
|Intangible asset impairment charge||115,527 ||— |
|Amortization of premium/discount on investments||(31)||(795)|
|Non-cash interest expense||1,255 ||508 |
|Non-cash operating lease expense||(1,660)||(1,673)|
|Fair value step-up of inventory sold or written off||39,522 ||51,604 |
|Write-down of inventory||18,608 ||5,968 |
|Change in excess inventory purchase commitments||10,304 ||— |
|Stock-based compensation||18,372 ||6,991 |
|Deferred income taxes||— ||(4,879)|
|Change in fair value of derivative liability||340 ||— |
|Changes in operating assets and liabilities:|
|Accounts receivable||14,398 ||(12,988)|
|Prepaid expenses and other current assets||(2,279)||9,415 |
|Other long-term assets||(6,518)||3,145 |
|Accounts payable||3,028 ||26,438 |
|Operating lease liabilities||1,032 ||1,577 |
|Net cash used in operating activities||(79,606)||(165,306)|
|Purchase of equipment||— ||(6,435)|
|Purchase of available for sale securities||(99,932)||— |
|Proceeds from the maturities of available for sale securities||245 ||130,610 |
|Proceeds from sales of available for sale securities||— ||64,721 |
|Net cash provided by (used in) investing activities||(99,687)||188,896 |
|Proceeds from the issuance of common stock, net of issuance costs||198,883 ||9,035 |
|Proceeds from the sale of stock under employee stock purchase plan||1,100 ||383 |
|Proceeds from the exercise of stock options||1,226 ||560 |
|Retirement of treasury stock||— ||(426)|
|Payments on debt||— ||(15,000)|
|Net cash provided by (used in) financing activities||201,209 ||(5,448)|
|Increase in cash, cash equivalents, and restricted cash||21,916 ||18,142 |
|Cash, cash equivalents, and restricted cash at beginning of the period||149,804 ||107,099 |
|Cash, cash equivalents, and restricted cash at end of the period||$||171,720 ||$||125,241 |
|Non-cash financing activities|
|Unpaid offering costs||$||75 ||$||— |
See accompanying notes to unaudited condensed consolidated financial statements
Akebia Therapeutics, Inc.
Notes to Condensed Consolidated Financial Statements
1.Nature of Organization and Operations
Akebia Therapeutics, Inc., referred to as Akebia or the Company, was incorporated in the State of Delaware in 2007. Akebia is a biopharmaceutical company with the purpose of bettering the lives of people living with kidney disease. Akebia’s lead investigational product candidate, vadadustat, is an oral therapy in Phase 3 development for the treatment of anemia due to chronic kidney disease, or CKD. Vadadustat is an oral hypoxia-inducible factor prolyl hydroxylase inhibitor, or HIF-PHI, designed to mimic the physiologic effect of altitude on oxygen availability. At higher altitudes, the body responds to lower oxygen availability with stabilization of hypoxia-inducible factor, or HIF, which can lead to red blood cell, or RBC, production and improved oxygen delivery to tissues.Vadadustat is approved and marketed in Japan as a treatment for anemia due to CKD in both dialysis-dependent and non-dialysis dependent adult patients under the trade name VAFSEO. In addition, the Company has a commercial product, Auryxia® (ferric citrate), which is currently approved by the U.S. Food and Drug Administration, or FDA, and marketed for two indications in the United States: the control of serum phosphorus levels in adult patients with CKD on dialysis, or DD-CKD, and the treatment of iron deficiency anemia, or IDA, in adult patients with CKD not on dialysis, or NDD-CKD. Ferric citrate is also approved and marketed in Japan as an oral treatment for the improvement of hyperphosphatemia in patients with DD-CKD and NDD-CKD under the trade name Riona® (ferric citrate hydrate).
Since inception, the Company has devoted most of its resources to research and development, including its preclinical and clinical development activities, and providing general and administrative support for these operations. The Company began recording revenue from the U.S. sales of Auryxia and revenue from sublicensing rights to Auryxia in Japan to the Company’s Japanese partners Japan Tobacco, Inc. and its subsidiary Torii Pharmaceutical Co., Ltd., collectively, JT and Torii, on December 12, 2018 following the consummation of a merger with Keryx Biopharmaceuticals, Inc., or Keryx, or the Merger. Additionally, following regulatory approval of vadadustat in Japan, the Company began recognizing royalty revenues from Mitsubishi Tanabe Pharma Corporation, or MTPC, from the sale of VAFSEO since August 2020. The Company has not generated a profit to date and may never generate profits from product sales. The Company’s product candidates are subject to long development cycles, and the Company may be unsuccessful in its efforts to develop, obtain marketing approval for or market its product candidates. If the Company does not successfully commercialize any of its products or product candidates, it may be unable to achieve profitability.
The Company’s management completed its going concern assessment in accordance with ASC 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, or ASC 205-40. The Company believes that its cash resources will be sufficient to allow the Company to fund its current operating plan beyond the next twelve months from the filing of this Quarterly Report on Form 10-Q, as required by ASC 205-40. There can be no assurance, however, that the current operating plan will be achieved in the time frame anticipated by the Company, or that its cash resources will fund the Company’s operating plan for the period anticipated by the Company or that additional funding will be available on terms acceptable to the Company, or at all. The Company will require additional capital to pursue development and commercial activities related to expanded indications for current products and any additional products and product candidates. The Company expects to finance future cash needs through product revenue, public or private equity or debt transactions, payments from its collaborators, royalty transactions, strategic transactions, or a combination of these approaches. However, adequate additional financing may not be available to the Company on acceptable terms, or at all. If the Company is unable to raise capital in sufficient amounts when needed or on attractive terms, it may not be able to pursue development and commercial activities related to expanded indications for current products and any additional products and product candidates.
2.Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S., or GAAP, for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S. GAAP as found in the Accounting Standards Codification, or ASC, and Accounting Standards Update, or ASU, of the Financial Accounting Standards Board, or FASB.
In the opinion of management, all adjustments, consisting of normal recurring accruals and revisions of estimates, considered necessary for a fair presentation of the unaudited condensed consolidated financial statements have been included. Interim results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020 or any other future period.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Management has determined that the Company operates in one segment, which is the business of developing and commercializing novel therapeutics for people with kidney disease. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission on March 12, 2020, or the 2019 Annual Report on Form 10-K.
The significant accounting policies used in preparation of these unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2020 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s 2019 Annual Report on Form 10-K and are updated below as necessary.
New Accounting Pronouncements – Recently Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. Previously, U.S. GAAP delayed recognition of the full amount of credit losses until the loss was probable of occurring. Under this ASU, the income statement will reflect an entity’s current estimate of all expected credit losses. The Company adopted this new standard on January 1, 2020 using the modified retrospective approach, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. The cumulative-effect adjustment recorded on January 1, 2020, is not material. Please see the description of the Company’s “Credit Losses” accounting policy in the “Significant Accounting Policies” section below.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements. The Company adopted this new standard on January 1, 2020 using the prospective approach for amendments applicable to the Company. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangible-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This standard clarifies the accounting for implementation costs in cloud computing arrangements. This standard became effective for us on January 1, 2020, and was adopted on a prospective basis. The adoption of this standard did not have a material impact to the Company’s unaudited condensed consolidated financial statements and disclosures.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This standard makes targeted improvements for collaborative arrangements as follows:
•Clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606, Revenue from Contracts with Customers, when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in ASC 606 should be applied, including recognition, measurement, presentation and disclosure requirements;
•Adds unit-of-account guidance to ASC 808, Collaborative Arrangements, to align with the guidance in ASC 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of ASC 606; and
•Precludes a company from presenting transactions with collaborative arrangement participants that are not directly related to sales to third parties with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer.
This standard became effective for the Company on January 1, 2020, and did not have a material impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.
New Accounting Pronouncements – Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods therein, and is applicable to the Company in fiscal year 2021. Early adoption is permitted. ASU 2019-12 requires certain amendments to be applied using a modified retrospective approach, which requires a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption, while other amendments should be applied on a prospective basis. The Company does not expect that the adoption of this standard will have a material impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.
Derivative Financial Instruments
The Company accounts for warrants and other derivative financial instruments as either equity or liabilities in accordance with ASC Topic 815, Derivatives and Hedging, or ASC 815, based upon the characteristics and provisions of each instrument. Warrants classified as equity are recorded at fair value as of the date of issuance on the Company’s unaudited condensed consolidated balance sheets and no further adjustments to their valuation are made. Warrants classified as derivative liabilities and other derivative financial instruments that require separate accounting as liabilities are recorded on the Company’s unaudited condensed consolidated balance sheets at their fair value on the date of issuance and will be revalued on each subsequent balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting periods recorded as other income or expense. The warrant issued by the Company in connection with the Janssen Pharmaceutica NV Research and License Agreement, the Janssen Agreement, is classified as equity in the Company’s unaudited condensed consolidated balance sheet. (See Note 12). The derivative liability recorded in connection with the Company’s Loan Agreement with Pharmakon is classified as a liability in the Company’s unaudited condensed consolidated balance sheet. (See Note 11).
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates. Estimates are used in the following areas, among others: prepaid and accrued research and development expense, operating lease assets and liabilities, derivative liabilities, other non-current liabilities, stock-based compensation expense, product and collaboration revenues including various rebates and reserves related to product sales, inventories, income taxes, intangible assets and goodwill. The Company has made estimates of the impact of COVID-19 within the unaudited condensed consolidated financial statements and there may be changes to those estimates in future periods including changes to sales, payer mix, reserves and allowances, intangible assets and goodwill. While the COVID-19 pandemic has not had a material adverse impact on the Company’s financial condition, the future impacts of the pandemic and any resulting economic impact is largely unknown and rapidly evolving.
Available for sale debt securities. Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company classifies all securities as available for sale and includes them in current assets as they are intended to fund current operations. The Company's investment portfolio at any point in time contains investments in money market mutual funds, U.S. government debt securities, certificates of deposit and corporate debt securities. The Company segments its portfolio based on the underlying risk profiles of the securities and have a zero loss expectation for money market mutual funds, U.S. government debt securities and certificates of deposit. The Company regularly reviews the securities in an unrealized loss position and evaluates the current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. Factors considered also include whether a decline in fair value below the amortized cost basis is due to credit-related factors or noncredit-related factors, the financial condition and near-term prospects of the issuer, and our intent and ability to hold the investment to allow for an anticipated recovery in fair value. Any unrealized loss that is not credit related is recognized in other comprehensive (loss) income in the unaudited condensed consolidated statements of operations. A credit-related unrealized loss is recognized as an allowance on the unaudited condensed consolidated balance sheets with a corresponding adjustment to earnings in the unaudited condensed consolidated statements of operations.
Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents consist of all cash on hand, deposits and funds invested in available for sale securities with original maturities of three months or less at the time of purchase. Cash equivalents are reported at fair value. At September 30, 2020, the Company’s cash is primarily in money market funds. The Company may maintain balances with its banks in excess of federally insured limits.
Restricted cash represents amounts required for security deposits under the Company’s office and lab space lease agreements. Restricted cash is included in “prepaid expenses and other current assets” and “other assets” in the unaudited condensed consolidated balance sheets.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the unaudited condensed consolidated balance sheet that sum to the total of the amounts reported in the unaudited condensed consolidated statement of cash flows (in thousands):
| ||September 30, 2020||September 30, 2019|
|Cash and cash equivalents||$||169,286 ||$||122,886 |
|Prepaid expenses and other current assets||395 ||263 |
|Other assets||2,039 ||2,092 |
|Total cash, cash equivalents, and restricted cash shown in the statement of cash flows||$||171,720 ||$||125,241 |
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation. Assets under capital lease are included in property and equipment. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets, generally three years to seven years. Such costs are periodically reviewed for recoverability when impairment indicators are present. Such indicators include, among other factors, operating losses, unused capacity, market value declines and technological obsolescence. Recorded values of asset groups of equipment that are not expected to be recovered through undiscounted future net cash flows are written down to current fair value, which generally is determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale).
The following is the summary of property and equipment and related accumulated depreciation as of September 30, 2020 and December 31, 2019.
| ||Useful Life||September 30, 2020||December 31, 2019|
| || ||(in thousands)|
|Computer equipment and software||3||$||1,010 ||$||1,010 |
|Furniture and fixtures||5||-||7||2,086 ||2,086 |
|Equipment||7||2,451 ||2,451 |
Shorter of the useful life or remaining lease term (10 years)
|8,497 ||8,497 |
| || ||14,044 ||14,044 |
|Less accumulated depreciation|| ||(5,223)||(3,664)|
|Net property and equipment|| ||$||8,821 ||$||10,380 |
Depreciation expense was approximately $0.5 million and $0.6 million for the three months ended September 30, 2020 and 2019, respectively, and approximately $1.6 million and $1.7 million for each of the nine months ended September 30, 2020 and 2019, respectively.
The Company values its inventories at the lower-of-cost or net realizable value. The Company determines the cost of its inventories, which includes amounts related to materials and manufacturing overhead, on a first-in, first-out basis. The
Company classifies its inventory costs as long-term, in other assets in its unaudited condensed consolidated balance sheets, when it expects to utilize the inventory beyond their normal operating cycle.
Prior to the regulatory approval of its product candidates, the Company incurs expenses for the manufacture of material that could potentially be available to support the commercial launch of its products. Until the first reporting period when regulatory approval has been received or is otherwise considered probable and the future economic benefit is expected to be realized, the Company records all such costs as research and development expense. Inventory used in clinical trials is also expensed as research and development expense, when selected for such use. Inventory that can be used in either the production of clinical or commercial products is expensed as research and development costs when identified for use in a clinical manufacturing campaign.
The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and writes down any excess and obsolete inventory to its net realizable value in the period in which the impairment is first identified. Such impairment charges, should they occur, are recorded as a component of cost of product sales in the unaudited condensed consolidated statements of operations and comprehensive loss. The determination of whether inventory costs will be realizable requires the use of estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required. Additionally, the Company’s product is subject to strict quality control and monitoring that it performs throughout the manufacturing process. The Company will record a charge, in the event that certain batches or units of product do not meet quality specifications, to cost of product sales to write-down any unmarketable inventory to its estimated net realizable value. In all cases, product inventory is carried at the lower of cost or its estimated net realizable value.
The Company performs an assessment of all embedded features of a debt instrument to determine if (1) such features should be bifurcated and separately accounted for, and (2) if bifurcation requirements are met, whether such features should be classified and accounted for as equity or liability instruments. If the embedded feature meets the requirements to be bifurcated and accounted for as a liability, the fair value of the embedded feature is measured initially, included as a liability on the unaudited condensed consolidated balance sheet, and re-measured to fair value at each reporting period. Any changes in fair value are recorded in the unaudited condensed consolidated statement of operations. The Company monitors, on an ongoing basis, whether events or circumstances could give rise to a change in the classification of embedded features.
The Company generates revenues primarily from sales of Auryxia, see Note 3, and from its collaborations with MTPC and Otsuka, see Note 4. The Company recognizes revenue in accordance with ASC 606, which applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, it performs the following five steps:
(i)identify the contract(s) with a customer;
(ii)identify the performance obligations in the contract;
(iii)determine the transaction price;
(iv)allocate the transaction price to the performance obligations in the contract; and
(v)recognize revenue when (or as) the entity satisfies a performance obligation.
The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company does not include a financing component to its estimated transaction price at contract inception unless it estimates that certain performance obligations will not be satisfied within one year. Additionally, the Company recognizes the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the Company otherwise would have recognized is one year or less.
Product Revenue, Net
The Company sells Auryxia in the United States, or U.S., primarily to wholesale distributors as well as certain specialty pharmacy providers, collectively, Customers. These Customers resell the Company’s product to health care providers and patients. In addition to distribution agreements with Customers, the Company enters into arrangements with health care providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s product.
The Company recognizes revenue on product sales when the Customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the Customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less.
Reserves for Variable Consideration
Revenue from product sales is recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, chargebacks, rebates, co-pay assistance and other allowances that are offered within contracts between the Company and its Customers, health care providers, payors and other indirect customers relating to the Company’s sales of its products. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount will be credited to the Customer) or as a current liability (if the amount is payable to a Customer or a party other than a Customer). When appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in ASC 606 for relevant factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.
The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Trade Discounts and Allowances: The Company generally provides Customers with discounts that include incentive fees that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, the Company compensates (through trade discounts and allowances) its Customers for sales order management, data, and distribution services. However, the Company has determined such services received to date are not distinct from the Company’s sale of products to the Customer and, therefore, these payments have been recorded as a reduction of revenue within the unaudited condensed consolidated statement of operations and comprehensive loss through September 30, 2020. The Company records a corresponding reduction of accounts receivable (if the trade discount and/or allowance will be credited to the Customer) or an increase in accrued expense (if the trade discount and/or allowance is payable to a Customer) on the unaudited condensed consolidated balance sheets.
Product Returns: Consistent with industry practice, the Company generally offers Customers a limited right of return which allows for the product to be returned when the product expiry is within an allowable window, when the quantity delivered is different than quantity ordered, the product is damaged in transit prior to receipt by the customer, or is subject to a recall. This right of return generally lapses once the product is provided to a patient. The Company estimates the amount of its product sales that may be returned for credit by its Customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return reserve using available industry data and its own historical sales information, including its visibility into the inventory remaining in the distribution channel.
Provider Chargebacks and Discounts: Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by Customers, and the Company generally issues credits for such amounts within a few weeks of the Customer’s resale of the product. Reserves for chargebacks consist of credits that the Company expects to issue for units that remain in the distribution
channel at each reporting period end that the Company expects will be sold to qualified healthcare providers, and chargebacks that Customers have claimed but for which the Company has not yet issued a credit.
Commercial and Medicare Part D Rebates: The Company contracts with various commercial payor organizations, primarily health insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of its products. The Company estimates the rebates for commercial and Medicare Part D payors based upon (i) its contracts with the payors and (ii) information obtained from its Customers and other third parties regarding the payor mix for Auryxia. The Company estimates these rebates and records such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.
Other Government Rebates: The Company is subject to discount obligations under state Medicaid programs and other government programs. The Company estimates its Medicaid and other government programs rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheets. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel at the end of each reporting period.
Other Incentives: Other incentives that the Company offers include voluntary patient assistance programs such as the Company’s co-pay assistance program, which are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on actual claims processed during a given period, as well as historical utilization data to estimate the amount the Company expects to receive associated with product that has been recognized as revenue, but remains in in the distribution channel at the end of each reporting period.
The Company enters into out-license and collaboration agreements which are within the scope of ASC 606, under which it licenses certain rights to its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory, and commercial milestone payments; payments for manufacturing supply services the Company provides through its contract manufacturers; and royalties on net sales of licensed products. Each of these payments may result in license, collaboration and other revenue, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues.
In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, the Company implements the five-step model noted above. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine whether the individual promises should be accounted for as separate performance obligations or as a combined performance obligation, and to determine the stand-alone selling price for each performance obligation identified in the contract. A deliverable represents a separate performance obligation if both of the following criteria are met: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (ii) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates, and probabilities of technical and regulatory success. With regard to the MTPC and Otsuka collaboration agreements, the Company recognizes revenue related to amounts allocated to the identified performance obligation on a proportional performance basis as the underlying services are performed.
Licenses of Intellectual Property
If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in an out-license and collaboration arrangement, the Company recognizes revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to assess the milestone as probable of being achieved. There is considerable judgment involved in determining whether a milestone is probable of being reached at each specific reporting period. Milestone payments that are not within the control of the Company or the customer, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenues as, or when, the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenue in the period of adjustment.
Manufacturing Supply Services
Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments when the licensee exercises these options, any additional payments are recorded in license, collaboration and other revenues when the licensee obtains control of the goods, which is upon delivery.
The Company will recognize sales-based royalties, including milestone payments based on the level of sales, at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). The Company receives royalty payments from JT and Torii, based on net sales of Riona in Japan, and MTPC, based on net sales of VAFSEO in Japan.
The Company records the elements of its collaboration agreements that represent joint operating activities in accordance with ASC Topic 808, Collaborative Arrangements (ASC 808). Accordingly, the elements of the collaboration agreements that represent activities in which both parties are active participants and to which both parties are exposed to the significant risks and rewards that are dependent on the commercial success of the activities are recorded as collaborative arrangements. The Company considers the guidance in ASC 606-10-15, Revenue from Contracts with Customers – Scope and Scope Exceptions, in determining the appropriate treatment for the transactions between the Company and its collaborative partner and the transactions between the Company and third parties. Generally, the classification of transactions under the collaborative arrangements is determined based on the nature and contractual terms of the arrangement along with the nature of the operations of the participants. Therefore, the Company recognizes its allocation of the shared costs incurred with respect to the jointly conducted medical affairs and commercialization and non-promotional activities under the Otsuka U.S. Agreement, as defined below in Note 4, as a component of the related expense in the period incurred. During the three months ended September 30, 2020 and 2019, the Company incurred approximately $1.2 million and $0.5 million, respectively, of costs related to the cost-sharing provisions of the Otsuka U.S. Agreement, of which approximately $0.5 million and $0.2 million are reimbursable by Otsuka and recorded as a reduction to research and development expense during the three months ended September 30, 2020 and 2019, respectively. During the three months ended September 30, 2020 and 2019, Otsuka incurred approximately $0.5 million and $0.3 million, respectively, of costs related to the cost-sharing provisions of the Otsuka U.S. Agreement, of which approximately $0.3 million and $0.2 million are reimbursable by the Company and recorded as an increase to research and development expense during the three months ended September 30, 2020 and 2019, respectively. To the extent product revenue is generated from the collaboration, the Company recognizes its share of the net sales on a gross basis if it is deemed to be the principal in the transactions with customers, or on a net basis if it is instead deemed to be the agent in the transactions with customers, consistent with the guidance in ASC 606.
The Company maintains a definite-lived intangible asset related to developed product rights for Auryxia, which was acquired on December 12, 2018 as part of the Merger.
Intangible assets are initially recorded at fair value and stated net of accumulated amortization and impairments. The Company amortizes its intangible assets that have finite lives using either the straight-line method, or if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be utilized. Amortization for the Company’s intangible asset is recorded over its estimated useful life, which as of September 30, 2020 is estimated to be seven years.
The Company reviews intangible assets subject to amortization to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If an impairment indicator exists, the Company performs a recoverability test by comparing the sum of the estimated undiscounted cash flows of the intangible asset group to its carrying value on the unaudited condensed consolidated balance sheet. If the carrying value of the intangible asset group exceeds the undiscounted cash flows used in the recoverability test, the Company will write the carrying value of the intangible asset group down to the fair value in the period identified. The Company calculates the fair value of the intangible asset group as the present value of estimated future cash flows expected to be generated from the intangible asset group using a risk-adjusted discount rate. In determining estimated future cash flows associated with its intangible asset group, the Company uses market participant assumptions pursuant to ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820). During the second quarter of 2020, the Company identified indicators of impairment related to the developed product rights for Auryxia and recorded an impairment charge of $115.5 million (see Note 9 for additional information).
The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired in a business combination to goodwill. Goodwill is evaluated for impairment on an annual basis as of October 1, and more frequently if indicators are present or changes in circumstances suggest that impairment may exist.
The Company compares the fair value of its reporting unit to its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of its reporting unit, the Company would record an impairment loss equal to the difference. As described above, the Company operates in one operating segment which the Company considers to be the only reporting unit.
Fair Value of Financial Instruments
The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. ASC 820 establishes a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available.
Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments, and is not a measure of the investment credit quality. The three levels of the fair value hierarchy are described below:
•Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
•Level 2 – Valuations based on quoted prices for similar assets or liabilities in markets that are not active, or for which all significant inputs are observable, either directly or indirectly.
•Level 3 – Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Items measured at fair value on a recurring basis include available for sale securities and derivative liabilities (see Note 7). The carrying amounts of prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values due to their short-term maturities.
Items measured at fair value on a nonrecurring basis include property and equipment, intangible assets and goodwill. The Company remeasures the fair value of these assets upon the occurrence of certain events. There were no such remeasurements
to property and equipment during either of the three and nine months ended September 30, 2020 and 2019. During the three months ended June 30, 2020, the Company identified indicators of impairment related to the developed product rights for Auryxia, an intangible asset measured using Level 3 inputs, and recorded an impairment charge of $115.5 million (see Note 9 for additional information). There were no impairments to assets measured using Level 3 inputs during the three months ended September 30, 2020, and no other impairments to assets measured using Level 3 inputs during the nine months ended September 30, 2020, other than as described in the previous sentence. There were no impairments to assets measured using Level 3 inputs during either of the three and nine months ended September 30, 2019.
The Company’s other financial instruments mainly consists of debt (see Note 11).
Net Loss per Share
Basic net loss per share is calculated by dividing net loss by the weighted-average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by adjusting weighted-average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of the diluted net loss per share calculation, preferred stock, stock options, warrants, restricted stock and RSUs are considered to be common stock equivalents, but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive for all periods presented. Therefore, basic and diluted net loss per share were the same for all periods presented. Diluted net income per share is calculated by dividing the net income by the weighted-average common shares outstanding for the period, including any dilutive effect from outstanding options, warrants, restricted stock and RSUs using the treasury stock method.
3.Product Revenue and Reserves for Variable Consideration
To date, the Company’s only source of product revenue has been product revenue from the U.S. sales of Auryxia, which it began recording on December 12, 2018 following the consummation of the Merger. Total net product revenue was $34.4 million and $30.0 million for the three months ended September 30, 2020 and 2019, respectively, and $94.3 million and $82.2 million for the nine months ended September 30, 2020 and 2019, respectively. The following table summarizes activity in each of the product revenue allowance and reserve categories for the nine months ended September 30, 2020 and 2019 (in thousands):
|Balance at December 31, 2019||$||738 ||$||30,552 ||$||253 ||$||31,543 |
|Current provisions related to sales in current year||7,833 ||107,421 ||4,184 ||119,438 |
|Adjustments related to prior year sales||(85)||703 ||2,328 ||2,946 |
|Balance at September 30, 2020||$||785 ||$||41,869 ||$||774 ||$||43,428 |
|Balance at December 31, 2018||$||516 ||$||22,861 ||$||360 ||$||23,737 |
|Current provisions related to sales in current year||5,617 ||73,424 ||1,835 ||80,876 |
|Adjustments related to prior year sales||13 ||1,507 ||— ||1,520 |
|Balance at September 30, 2019||$||665 ||$||29,902 ||$||288 ||$||30,855 |
Chargebacks, discounts and returns are recorded as a direct reduction of revenue on the unaudited condensed consolidated statement of operations with a corresponding reduction to accounts receivable on the unaudited condensed consolidated balance sheets. Rebates, distribution-related fees, and other sales-related deductions are recorded as a reduction in revenue on the unaudited condensed consolidated statement of operations with a corresponding increase to accrued liabilities or accounts payable on the unaudited condensed consolidated balance sheets.
Accounts receivable, net related to product sales was approximately $21.7 million and $23.0 million as of September 30, 2020 and December 31, 2019, respectively.
4.License, Collaboration and Other Significant Agreements
During the three and nine months ended September 30, 2020 and 2019, the Company recognized the following revenues from its license, collaboration and other significant agreements and had the following deferred revenue balances as of September 30, 2020:
| ||Three Months Ended September 30,||Nine Months Ended September 30,|
|License, Collaboration and Other Revenue:||(in thousands)||(in thousands)|
|MTPC Agreement||$||373 ||$||— ||$||15,373 ||$||10,000 |
|Otsuka U.S. Agreement||16,256 ||39,718 ||$||80,721 ||$|