REATA PHARMACEUTICALS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information appearing in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, operations, and product candidates, includes forward-looking statements that involve risks and uncertainties. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under the heading "Risk Factors" and discussed elsewhere in this Quarterly Report on Form 10-Q. Overview We are a clinical-stage biopharmaceutical company focused on identifying, developing, and commercializing innovative therapies that change patients' lives for the better. We concentrate on small-molecule therapeutics with novel mechanisms of action for the treatment of severe, life-threatening diseases with few or no approved therapies. Our lead programs are in rare forms of chronic kidney disease (CKD) and a rare neurological disease. We have announced positive topline data from registrational studies for both of our lead product candidates, bardoxolone methyl (bardoxolone) in patients with CKD caused by Alport syndrome and omaveloxolone in patients with a neurological disorder called Friedreich's ataxia (FA). Both bardoxolone and omaveloxolone activate the transcription factor Nrf2 to normalize mitochondrial function, restore redox balance, and resolve inflammation. Because mitochondrial dysfunction, oxidative stress, and inflammation are features of many diseases, we believe bardoxolone and omaveloxolone have many potential clinical applications. We possess exclusive, worldwide rights to develop, manufacture, and commercialize bardoxolone, omaveloxolone, and our next-generation Nrf2 activators, excluding certain Asian markets for bardoxolone in certain indications, which are licensed to KKC.
First Quarter 2020 Key Developments
COVID-19 Risk Mitigation
In the first quarter of 2020, coronavirus disease (COVID-19) emerged as a pandemic with serious public health implications and the potential to disrupt business operations worldwide. As this risk became evident on a global scale, we undertook a series of measures to protect the health and safety of patients and health care workers involved in ongoing clinical studies of our investigational medicines, as well as our employees and collaborators. We conduct clinical studies in many countries around the world that are being impacted by the COVID-19 pandemic. Regulatory agencies, governments, and health care providers have implemented restrictive measures designed to reduce potential exposure to the virus, particularly for patients at increased risk of severe illness. For each clinical development program, we are working with health care providers to implement changes that mitigate risk to patients; comply with regulatory, institutional, and government guidance; and maintain the integrity of our ongoing clinical studies.
CATALYST and RANGER Trials Closed
In addition to our lead programs in rare forms of CKD and a rare neurological disease, we are exploring additional clinical and preclinical programs. In pulmonary disease, we have been conducting the Phase 3 CATALYST study of bardoxolone in pulmonary arterial hypertension (PAH) caused by connective tissue disease (CTD-PAH). InMarch 2020 , we announced that the CATALYST study was stopped in consideration of the risk of severe, adverse outcomes associated with COVID-19 among patients with respiratory and autoimmune diseases, and after consultation with the study's Data Safety Monitoring Board (DSMB). CTD-PAH is a rare, serious, and progressive disease that leads to heart failure and death. We concluded that continued exposure of these high-risk patients to clinic or in-person visits at this time presented an unacceptable risk to their health. An initial review of CATALYST safety data conducted by theDSMB and provided to us suggests that bardoxolone was well-tolerated, with fewer patients discontinuing in the bardoxolone arm compared to the placebo arm. There were no deaths in the bardoxolone arm, and fewer patients reported serious adverse events (SAEs) in the bardoxolone arm compared to the placebo arm. While no futility analyses have been performed, an initial review of 14 -------------------------------------------------------------------------------- available efficacy data provided by theDSMB suggests that the study is unlikely to meet the primary endpoint of improvement in six-minute walk distance compared to placebo at Week 24. After the data are formally analyzed, we will provide safety and efficacy data for CATALYST at a future medical meeting. Concomitant with the close of CATALYST, we also closed RANGER, the open-label extension study of bardoxolone in patients with PAH.
CARDINAL and EAGLE Trials Adapted for Continuity
The Phase 3 CARDINAL trial of bardoxolone in patients with CKD caused by Alport syndrome is fully enrolled and ongoing. We have implemented the use of at-home visits as an alternative to in-clinic visits when necessary to collect blood draws and to assess patient safety. We also arranged for home delivery of the study drug to patients. At this time, we do not believe that the COVID-19 pandemic will have a significant impact on our ability to complete the study or execute on the planned New Drug Application (NDA) submission for CARDINAL. Patients who participated in the CARDINAL study are eligible to enroll in an open-label extension study known as EAGLE. We are implementing procedures for the conduct of EAGLE that are similar to those being used in CARDINAL to ensure continued access to bardoxolone and appropriate safety monitoring.
FALCON Trial Enrollment Temporarily Paused
We have temporarily paused enrollment of new patients in the Phase 3 FALCON trial of bardoxolone in patients with autosomal dominant polycystic kidney disease (ADPKD). Patients already enrolled in FALCON will continue in the study. We are implementing procedures for the conduct of FALCON that are similar to those being used in CARDINAL to ensure continued access to study drug and appropriate safety monitoring. Patient screening and enrollment will resume as soon as the situation permits.
MOXIe Extension Study Advanced with Modifications
The MOXIe Part 2 trial of omaveloxolone in patients with FA was completed prior to the onset of the COVID-19 pandemic. At this time, we do not believe that COVID-19 will have a significant impact on our ability to execute on the planned NDA submission for omaveloxolone in FA. Patients who participated in MOXIe Part 1 or 2 were eligible to enroll in an open-label extension portion of the study. We are implementing procedures for the conduct of the MOXIe extension study that are similar to those being used in our other ongoing studies to ensure continued access to omaveloxolone and appropriate safety monitoring.
Adjustments to Business Operations
In accordance with recommendations from local, state, and national health authorities, we have implemented work-from-home measures and additional safety protocols to protect employees and the broader community and to ensure business continuity. We have restricted on-site staff to only those required to execute their job responsibilities and limited the number of staff working in our research and development laboratory. We have suspended all in-person meetings and international travel, and sharply limited travel withinthe United States . We have also suspended attendance at medical congresses, conferences, and other large events. We will continue to monitor this dynamic situation closely and will take additional measures as required to preserve the safety of our employees and broader community. 15 --------------------------------------------------------------------------------
Background: Our Programs
The following chart outlines each of our programs by indication and phase:
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In addition, KKC, our strategic collaborator in CKD, is currently conducting its
registrational trial of bardoxolone in diabetic (type 1 and 2) CKD in Japan . KKC
completed patient enrollment in this trial in June 2019 and expects to have
topline data in the first half of 2022.
Programs in CKD
We are developing bardoxolone for the treatment of patients with certain rare forms of CKD. CKD is characterized by a progressive worsening in the rate at which the kidney filters waste products from the blood, called the glomerular filtration rate (GFR). When GFR gets too low, patients develop end-stage kidney disease (ESKD) and require dialysis or a kidney transplant to survive. Dialysis leads to a reduced quality of life and increases the likelihood of serious and life-threatening complications. The five-year survival rate for hemodialysis patients is only approximately 42%. Estimated glomerular filtration rate (eGFR) is an estimate of GFR that nephrologists use to track the decline in kidney function and progression of CKD. In 11 separate CKD clinical trials, bardoxolone has been shown to improve eGFR in patients with diverse etiologies of CKD. We believe that bardoxolone treatment has the potential to delay or prevent GFR declines that cause the need for dialysis or a transplant in patients with Alport syndrome, ADPKD, and other rare forms of CKD.
Bardoxolone in CKD Caused by Alport Syndrome
We are developing bardoxolone for the treatment of patients with CKD caused by
Alport syndrome, ADPKD, and other rare forms of CKD that, in the aggregate,
affect more than 700,000 patients in
Alport syndrome is a rare, genetic form of CKD caused by mutations in the genes encoding type IV collagen, which is a major structural component of the glomerular basement membrane in the kidney. The kidneys of patients with Alport syndrome progressively lose the capacity to filter waste products out of the blood, which can lead to ESKD and the need for chronic dialysis treatment or a kidney transplant. Alport syndrome affects both children and adults. In patients with the most severe forms of the disease, approximately 50% progress to dialysis by age 25, 90% by age 40, and nearly 100% by age 60. According to theAlport Syndrome Foundation , Alport syndrome 16 --------------------------------------------------------------------------------
affects approximately 30,000 to 60,000 people in
InNovember 2019 , we announced that the Phase 3 portion of the CARDINAL study of bardoxolone in patients with CKD caused by Alport syndrome met its primary and key secondary Year 1 endpoints. After 48 weeks of treatment, patients treated with bardoxolone had a statistically significant improvement compared to placebo in mean eGFR of 9.50 mL/min/1.73 m2 (p<0.0001). At Week 52, patients treated with bardoxolone had a statistically significant improvement compared to placebo in mean retained eGFR, which is the eGFR change after a four-week withdrawal of drug, of 5.14 mL/min/1.73 m2 (p=0.0012). After 52 weeks, patients in the placebo arm of CARDINAL lost an average of 6.1 mL/min/1.73 m2. Based on these positive results, and subject to discussions with regulatory authorities, we plan to proceed with the submission of regulatory filings this year for marketing approval inthe United States .
Bardoxolone in ADPKD
ADPKD is a rare and serious hereditary form of CKD caused by a genetic defect in PKD1 or PKD2 genes leading to the formation of fluid-filled cysts in the kidneys and other organs. Cyst growth can cause the kidneys to expand up to five to seven times their normal volume, leading to pain and progressive loss of kidney function. ADPKD affects both men and women of all racial and ethnic groups and is the leading inheritable cause of kidney failure with an estimated diagnosed population of 140,000 patients inthe United States . Despite current standard of care treatment, an estimated 50% of ADPKD patients progress to ESKD and require dialysis or a kidney transplant by 60 years of age. In a Phase 2 study calledPHOENIX , bardoxolone demonstrated a statistically significant increase from baseline in mean eGFR of 9.3 mL/min/1.73 m2 after 12 weeks of treatment in 31 patients with ADPKD. Available historical data for 29 of these patients showed an average annual decline in eGFR of 4.8 mL/min/1.73 m2 in the three-year period prior to study entry.The United States Food and Drug Administration (FDA) has provided us with written guidance that, in patients with ADPKD, an analysis of retained eGFR demonstrating an improvement versus placebo after one year of bardoxolone treatment may support accelerated approval, and an improvement versus placebo after two years of treatment may support full approval. InMay 2019 , we began enrollment in FALCON, an international, multi-center, randomized, double-blind, placebo-controlled Phase 3 trial studying the safety and efficacy of bardoxolone in approximately 300 patients with ADPKD. In March of 2020, we announced that enrollment of new patients was temporarily paused due to safety concerns related to the COVID-19 global pandemic. The trial will enroll a broad range of patients from 18 to 70 years old with an eGFR between 30 to 90 mL/min/1.73 m².
Bardoxolone in Other Rare Forms of CKD
Three additional rare forms of CKD were studied inPHOENIX , including IgA nephropathy (IgAN), type 1 diabetic CKD (T1D CKD), and focal segmental glomerulosclerosis (FSGS). In each of these Phase 2 cohorts, bardoxolone demonstrated a statistically significant increase from baseline in mean eGFR after 12 weeks of treatment. We plan to pursue each of these rare and serious forms of CKD as commercial indications. The FDA has granted orphan drug designation to bardoxolone for the treatment of Alport syndrome and ADPKD, and theEuropean Commission has granted orphan drug designation to bardoxolone for the treatment of Alport syndrome.
Prior to our CARDINAL Phase 3 trial, clinical trials enrolling over 2,000
patients exposed to bardoxolone have demonstrated consistent, clinically
meaningful improvement in kidney function across several disease states as
measured by eGFR and other markers of kidney function. Specifically, we have
observed statistically significant increases in eGFR in all Phase 2 and Phase 3
clinical trials in seven distinct patient populations treated with bardoxolone,
including patients with PAH and CKD caused by type 2 diabetes (T2D CKD), Alport
syndrome, ADPKD, IgAN, T1D CKD, and FSGS.
We believe these data, in addition to the CARDINAL Phase 3 data, support the
potential for bardoxolone to delay or prevent dialysis, kidney transplant, and
death in patients with Alport syndrome and other forms of CKD.
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--------------------------------------------------------------------------------Additional observations from the prior clinical trials of bardoxolone include the following:
• Statistically significant increases in directly-measured GFR using the
"gold standard" inulin clearance method, improvements in creatinine
clearance, and reduction in the levels of blood waste products filtered
by the kidney.
• Statistically significant improvements in eGFR versus baseline or
placebo in six different types of CKD, including Alport syndrome, ADPKD,
IgAN, T1D CKD, T2D CKD, and FSGS.
• Sustained improvement in kidney function in long-term trials:
o In the Phase 2 portion of CARDINAL, bardoxolone treatment produced a
statistically significant increase from baseline in mean eGFR of 10.4
mL/min/1.73 m2 (p<0.0001) after 48 weeks of treatment, which, based on
historical data available for 22 of the patients prior toenrolling in
the trial, represents a recovery of over two years of average decline
in kidney function.
o In two large, placebo-controlled clinical studies (BEAM and BEACON) in
patients with T2D CKD, statistically significant increases in mean
eGFR of 14.9 mL/min/1.73 m2 (p<0.001) and 5.6 mL/min/1.73 m2
(p<0.001), respectively, were sustained for at least one year.
• Reduction in risk of adverse kidney outcomes, suggesting that
bardoxolone treatment preserves kidney function and may delay the onset
of kidney failure in patients with T2D and stage 4 CKD:
o In BEACON, patients randomized to bardoxolone were significantly less
likely to experience adverse kidney outcomes as defined by a composite
endpoint consisting of ?30% decline from baseline in eGFR, eGFR <15
mL/min/1.73 m2, or ESKD events (HR=0.48, p<0.0001).
o In BEACON, bardoxolone treatment resulted in a decreased number of
kidney-related SAEs and ESKD events.
• Statistically significant improvement in retained eGFR above baseline in
BEAM, BEACON, the Phase 2 portion of CARDINAL at one year, and the Phase
3 portion of CARDINAL at one year.
o The FDA has provided guidance to us and other sponsors that clinical
trials with a retained eGFR benefit versus placebo may support
approval in certain rare forms of CKD. The FDA has provided guidance
to us that, in patients with CKD caused by Alport syndrome or ADPKD, a
retained eGFR benefit versus placebo after one year of bardoxolone
treatment may support accelerated approval and after two years of
bardoxolone treatment may support full approval.
o We believe the retained eGFR benefit observed in these clinical trials
demonstrates that bardoxolone treatment improved the structure of the
kidney, modified the course of the disease, and may prevent or delay
kidney failure and the need for dialysis or a kidneytransplant.
Programs in Neurological Diseases
Omaveloxolone in FA
We are developing omaveloxolone for the treatment of patients with FA, an inherited, debilitating, and degenerative neuromuscular disorder that is typically diagnosed during adolescence and typically leads to premature death. Patients with FA experience progressive loss of coordination, muscle weakness, and fatigue, which commonly progresses to motor incapacitation and wheelchair reliance. Symptoms generally occur in children, with patients requiring a wheelchair by their teens or early 20s. FA affects approximately 5,000 children and adults inthe United States and 22,000 individuals globally. There are currently no approved therapies to treat FA. InOctober 2019 , we announced that the registrational part 2 portion of the MOXIe Phase 2 trial of omaveloxolone in patients with FA met its primary endpoint of change in the modified Friedreich's Ataxia Rating Scale (mFARS) relative to placebo after 48 weeks of treatment. Patients treated with omaveloxolone (150 mg/day) demonstrated a statistically significant, placebo-corrected 2.40 point mean improvement (decrease) in mFARS after 48 weeks of treatment (p=0.014). Patients treated with omaveloxolone demonstrated improvement in every subcategory measured under mFARS. Omaveloxolone treatment was generally reported to be well-tolerated. Based on these positive results, and subject to discussions with regulatory authorities, we plan to proceed with the submission of regulatory filings this year for marketing approval of omaveloxolone for the treatment of FA in the 18 --------------------------------------------------------------------------------
Omaveloxolone in Other Potential Indications
In addition, we have observed compelling activity of omaveloxolone and our other Nrf2 activators in preclinical models of Parkinson's disease, dementia, epilepsy, Huntington's disease, and amyotrophic lateral sclerosis (ALS), and we plan to pursue the development of omaveloxolone and our other Nrf2 activators for one or more of these diseases.
RTA 901 in Neurodegeneration and Neuroprotection Diseases
We are also developing RTA 901 in neurological indications. RTA 901 is the lead product candidate from our Hsp90 modulator program. We have observed favorable activity of RTA 901 in a range of preclinical models of neurological disease, including models of diabetic neuropathy, neuroinflammation, and neuropathic pain. We have completed a Phase 1 trial to evaluate the safety, tolerability, and pharmacokinetic profile of RTA 901 administered orally, once-daily in healthy adult volunteers, and no safety or tolerability concerns were reported. We plan to continue development for RTA 901 in neurological diseases, such as diabetic neuropathy. We are the exclusive licensee of RTA 901 and have worldwide commercial rights.
Other Clinical Programs
In addition, we are developing RTA 1701, the lead product candidate from our proprietary series of ROR?t inhibitors, for the potential treatment of a broad range of autoimmune, inflammatory, and fibrotic diseases. We have completed a Phase 1 trial to evaluate the safety, tolerability, and pharmacokinetic profile of RTA 1701 in healthy adult volunteers. No safety or tolerability concerns were reported, and we observed an acceptable pharmacokinetic profile. We plan to continue development for RTA 1701 in autoimmune, inflammatory, or fibrotic diseases. We retain all rights to our ROR?t inhibitors, which are not subject to any existing commercial collaborations.
Corporate Overview
To date, we have focused most of our efforts and resources on developing our product candidates and conducting preclinical studies and clinical trials. We have historically financed our operations primarily through revenue generated from our collaborations with AbbVie and KKC, from sales of our securities, and with secured loans. We have not received any payments or revenue from collaborations other than nonrefundable upfront, milestone, and cost sharing payments from our collaborations with AbbVie and KKC and reimbursements of expenses under the terms of our agreement with KKC. We have incurred losses in each year since our inception, other than in 2014. As ofMarch 31, 2020 , we had$624.5 million of cash and cash equivalents and an accumulated deficit of$759.4 million . We continue to incur significant research and development and other expenses related to our ongoing operations. Despite contractual product development commitments and the potential to receive future payments from KKC, we anticipate that we will continue to incur losses for the foreseeable future, and we anticipate that our losses will increase as we continue our development of, seek regulatory approval for, and potential commercialization of our product candidates. If we do not successfully develop and obtain regulatory approval of our existing product candidates or any future product candidates and effectively manufacture, market, and sell any products that are approved, we may never generate revenue from product sales. Furthermore, even if we do generate revenue from product sales, we may never again achieve or sustain profitability on a quarterly or annual basis. 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 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.
Financial Operations Overview
Revenue
Our revenue to date has been generated primarily from licensing fees received
under our collaborative license agreements and reimbursements for expenses. We
currently have no approved products and have not generated any
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revenue from the sale of products to date. In the future, we may generate
revenue 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 from quarter 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 the KKC
Agreement, the AbbVie License Agreement, and the AbbVie Collaboration Agreement
and consists of upfront payments and milestone payments. License revenue
recorded with respect to the KKC Agreement, the AbbVie License Agreement, and
the AbbVie Collaboration Agreement consists solely of the recognition of
deferred revenue. Under our revenue recognition policy, collaboration revenue
associated with upfront, non-refundable license payments received under our
license and collaboration agreements are deferred and recognized ratably over
the expected term of the performance obligations under each agreement. Under the
Reacquisition Agreement, we no longer have performance obligations under the
AbbVie License Agreement and the AbbVie Collaboration Agreement. We only expect
to recognize revenue under the KKC Agreement, which extends through 2021.
Research and Development Expenses
The largest component of our total operating expenses has historically been our investment in research and development activities, including the clinical development of our product candidates. From our inception throughMarch 31, 2020 , we have incurred a total of$822.6 million in research and development expense, a majority of which relates to the development of bardoxolone and omaveloxolone. We expect our research and development expense to continue to increase in the future as we advance our product candidates through clinical trials and expand our product candidate portfolio. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and we consider the active management and development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each product candidate and preclinical program 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;
• the cost of development, scale up, and process validation activities to
support product registration; and
• facilities, depreciation, and other expenses, which include direct and
allocated expenses for rent and maintenance of facilities, insurance, and
other supply costs.
Research and development costs are expensed as incurred. Costs for certain
development activities such as clinical trials are highly judgmental and are
recognized based on an evaluation 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 with multiple
research institutions and contract research organizations (CROs) that conduct
and manage clinical trials on our behalf. The financial terms of these
agreements vary from contract to contract and may result in uneven payment
flows. Payments under some of these contracts depend on factors such as the
successful enrollment of patients and 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 to be 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 or the costs of these services, our
actual expenses could differ from our estimates.
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To date, we have not experienced material changes in our estimates of accrued
research and development expenses after a reporting period. 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 of additional information about the
status or conduct of our clinical trials and other research activities.
Currently, KKC has allowed us to conduct clinical studies of bardoxolone in
CTD-PAH and certain rare forms of kidney diseases in Japan and has reimbursed us
the majority of the costs for our CARDINAL study in Japan and is paying for the
costs of a certain number of patients as the in-country caretaker in our FALCON
study in Japan . We reduced our expenses by $0.0 million and $0.3 million for
KKC's share of the study costs for the three months ended March 31, 2020 and
2019, respectively.
The following table summarizes our research and development expenses incurred:
Three Months Ended
March 31,
2020 2019
(unaudited; in thousands)
Bardoxolone methyl $ 13,962 $ 8,679
Omaveloxolone 6,674 5,803
RTA 901 1,211 337
RTA 1701 1,395 328
Other research and development expenses 24,411 10,967
Total research and development expenses
The program-specific expenses summarized in the table above include costs that we directly allocate to our product candidates. Our other research and development expenses include research and development salaries, benefits, stock-based compensation and preclinical, research, and discovery costs, which we do not allocate on a program-specific basis.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related expenses for executive, operational, finance, legal, compliance, and human resource functions. Other general and administrative expenses include personnel expense, facility-related costs, professional fees, accounting and legal services, 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 research and development and potential commercialization of our product candidates. We have also incurred, and anticipate incurring in the future, increased expenses associated with being a public company, including exchange listing andSEC requirements, director and officer insurance premium, legal, audit and tax fees, compliance with the Sarbanes-Oxley Act, regulatory compliance programs, and investor relations costs. Additionally, if and when we believe the first regulatory approval of one of our product candidates appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially for the sales and marketing of our product candidates. Other Income (Expense), Net Other income (expense) includes interest and gains earned on our cash and cash equivalents, interest expense on term loans, amortization of debt issuance costs, imputed interest on long term payables, loss on extinguishment of debt, foreign currency exchange gains and losses, and gains and losses on sales of assets.
Provision for Taxes on Income
Provision for taxes on income consists of net loss, taxed at federal tax rates
and adjusted for certain permanent differences. We maintain a full valuation
allowance against our net deferred tax assets. Changes in this valuation
allowance also affect the tax provision.
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Comparison of the Three Months Ended
The following table sets forth our results of operations for the three months
ended
2020 2019 Change $ Change %
(in thousands)
Collaboration revenue License and milestone$ 1,169 $ 7,726 $ (6,557 ) (85 ) Other revenue 184 44 140 318 Total collaboration revenue 1,353 7,770 (6,417 ) (83 ) Expenses Research and development 47,653 26,114 21,539 82 General and administrative 20,787 10,038 10,749 107 Depreciation 278 170 108 64 Total expenses 68,718 36,322 32,396 89 Other income (expense), net (3,814 ) (600 ) (3,214 ) (536 ) Loss before taxes on income (71,179 ) (29,152 ) (42,027 ) (144 ) (Benefit from) provision for taxes on income (22,240 ) 2 (22,242 ) ** Net loss$ (48,939 ) $ (29,154 ) $ (19,785 ) (68 ) ** Percentage not meaningful
Revenue
License and milestone revenue represented approximately 86% and 99% of total revenue for the three months endedMarch 31, 2020 and 2019, respectively, and consisted primarily of the recognition of deferred revenue. License and milestone revenue decreased by$6.6 million or 85% during the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , primarily due to the Reacquisition Agreement inOctober 2019 , which ended our performance obligations under the AbbVie Collaboration Agreement and resulted in the writing off of the related remaining deferred revenue balance, after which no further revenue was recognized. Total revenue of$1.2 million was recognized during the three months endedMarch 31, 2020 from deferred revenue related to the KKC Agreement.
Other revenue was immaterial for the three months ended
The following table summarizes the sources of our revenue for the three months endedMarch 31 : 2020 2019 (in thousands) License and milestone AbbVie Collaboration Agreement $ -$ 6,570 KKC Agreement 1,169 1,156 Total license and milestone 1,169 7,726 Other revenue 184 44 Total collaboration revenue$ 1,353 $ 7,770 Expenses
The following table summarizes our expenses, in thousands and as a percentage of
total expenses, for the three months ended
% of Total % of Total
2020 Expenses 2019 Expenses
Research and development $ 47,653 70 % $ 26,114 72 %
General and administrative 20,787 30 % 10,038 28 %
Depreciation 278 0 % 170 0 %
Total expenses $ 68,718 $ 36,322
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Research and Development Expenses
Research and development expenses increased by$21.5 million , or 82%, for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 . The increase was primarily due to$13.2 million in increased personnel and equity compensation expenses related to the growth of our development activities and to additional equity compensation expense related to the accelerated vesting of stock options as a result of the death of an executive; and$8.1 million in increased manufacturing costs to support product registration and increased clinical, clinical pharmacology, and toxicity study expenses to support our registrational programs, as well as RTA 901 and RTA 1701. Research and development expenses, as a percentage of total expenses, was 70% and 72% for the three months endedMarch 31, 2020 and 2019, respectively. The decrease of 2% was primarily due to a proportionately larger increase in general and administrative expenses, which includes personnel and equity compensation expenses and rent and office expenses to support growth in our development and commercial readiness activities.
General and Administrative Expenses
General and administrative expenses increased by$10.7 million , or 107%, for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 . The increase was primarily due to$8.1 million in increased personnel and equity compensation expenses,$1.1 million in increased rent and office expenses to support growth in our development activities, and$0.9 million in increased marketing and commercialization expenses. General and administrative expenses, as a percentage of total expenses, was 30% and 28%, for the three months endedMarch 31, 2020 and 2019, respectively. The increase of 2% was primarily due to a proportionately larger increase in general and administrative expenses, compared to research and development expenses.
Other Income (Expense), Net
Other income (expense), net increased by$3.2 million , or 536%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . The increase was primarily due to$3.5 million in additional interest expense that was attributable to additional borrowings under the Term B Loan inDecember 2019 and to interest incurred under the payable due to collaborator related to the Reacquisition Agreement inOctober 2019 .
(Benefit from) Provision for Taxes on Income
Benefit from taxes on income increased by$22.2 million for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 . The increase was primarily due to a tax refund the Company has applied for under the provisions of the CARES Act. See Note 7, Income Taxes of Notes to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q. 23
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Liquidity and Capital Resources
Since our inception, we have funded our operations primarily through collaboration and license agreements, the sale of preferred and common stock, and secured loans. ThroughMarch 31, 2020 , we have raised gross cash proceeds of$476.6 million through the sale of convertible preferred stock and$780.0 million from payments under license and collaboration agreements. We also obtained$894.7 million in net proceeds from our initial public offering and follow-on offerings of our Class A common stock, and$151.6 million in net proceeds from our Amended Restated Loan Agreement. We have not generated any revenue from the sale of any products. As ofMarch 31, 2020 , we had available cash and cash equivalents of approximately$624.5 million . Our cash and cash equivalents are invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation.
Cash Flows
The following table sets forth the primary sources and uses of cash for each of
the three months ended
2020 2019
(in thousands)
Net cash (used in) provided by:
Operating activities $ (41,173 ) $ (28,732 )
Investing activities (85 ) (1,160 )
Financing activities 1,422 5,158
Net change in cash and cash equivalents
Operating Activities Net cash used in operating activities was$41.2 million for the three months endedMarch 31, 2020 , consisting primarily of a net loss of$48.9 million adjusted for non-cash items including stock-based compensation expense of$19.3 million , depreciation and amortization expense of$0.8 million , and a net increase in operating assets and liabilities of$12.4 million . The significant items in the change in operating assets that impacted our use of cash in operations include increases in income tax receivable of$22.2 million and accounts payable of$10.7 million due to timing of payments, offset by a decrease in deferred revenue of$1.2 million . The decrease in deferred revenue is due to the ratable recognition of revenue over the expected term of the performance obligations under our collaboration agreement with KKC, which resulted in recognition of$1.2 million of license and milestone revenue. Net cash used in operating activities was$28.7 million for the three months endedMarch 31, 2019 , consisting primarily of a net loss of$29.2 million adjusted for non-cash items including stock-based compensation expense of$4.2 million , depreciation and amortization expense of$0.5 million , and a net increase in operating assets and liabilities of$4.2 million . The significant items in the change in operating assets that impacted our use of cash in operations include increases in accrued direct research and other current and long-term liabilities of$3.9 million due to manufacturing activities related to clinical trials and personnel-related activities and a decrease in deferred revenue of$7.7 million . The decrease in deferred revenue is due to the ratable recognition of revenue over the expected term of the performance obligations under our collaboration agreements with AbbVie and KKC, which resulted in recognition of$7.7 million of license and milestone revenue.
Investing Activities
Net cash used in investing activities consisted of purchases and sales of
property and equipment. Net cash used in investing activities for the three
months ended
Financing Activities
Net cash provided by financing activities were
24
--------------------------------------------------------------------------------Operating Capital Requirements
To date, we have not generated any revenue from product sales. We do not know when or whether we will generate any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize one or more of our current or future product candidates. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. 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 with operating as a public company. We anticipate that we will need substantial additional funding in connection with our continuing operations. OnMarch 27, 2020 ,the United States enacted the CARES Act. Under its provisions, for the three months endedMarch 31, 2020 , we recognized a tax benefit and receivable of$22.1 million associated with the ability to carryback an applicable prior year's net operating losses to a preceding year to generate a refund. OnDecember 20, 2019 , under the Amended Restated Loan Agreement, we borrowed$75.0 million under the Term B Loan. We may use the proceeds from the Term Loans for working capital and to fund general business requirements. Our obligations under the Amended Restated Loan Agreement are secured by substantially all of our assets, including our owned intellectual property. All outstanding Term Loans will mature onJune 1, 2023 .
On
OnOctober 15, 2019 , we entered into the Lease Agreement, relating to the lease of approximately 327,400 square feet of office and laboratory space located inPlano, Texas . The term of the Lease is estimated to commence mid-2022, when construction is completed, and continue for 16 years, with up to 10 years of extension at our option. The initial annual base rent will be determined based on the project cost, subject to an initial annual cap of approximately$13.3 million , which may increase in certain circumstances. Beginning in the third lease year, the base rent will increase 1.95% per annum each year. In addition to the annual base rent, we will pay for taxes, insurance, utilities, operating expenses, assessments under private covenants, maintenance and repairs, certain capital repairs and replacements, and building management fees. OnOctober 9, 2019 , we and AbbVie entered into the Reacquisition Agreement pursuant to which we reacquired the development, manufacturing, and commercialization rights concerning our proprietary Nrf2 activator product platform originally licensed to AbbVie in the AbbVie License Agreement and the AbbVie Collaboration Agreement. In exchange for such rights, we will pay AbbVie$330.0 million , of which$100.0 million was paid as ofDecember 31, 2019 ,$150.0 million is payable onJune 30, 2020 , and$80.0 million is payable onNovember 30, 2021 . We will also pay AbbVie an escalating, low single-digit royalty on worldwide net sales, on a product-by-product basis, of omaveloxolone and an identified list of certain next-generation Nrf2 activators. The termination of our deferred revenue balance will not have an impact on our cash flow. InNovember 2017 , we entered into an at-the-market equity offering sales agreement withStifel, Nicolaus & Company, Incorporated , that established a program pursuant to which it may offer and sell up to$50.0 million of its Class A common stock from time to time in at-the-market transactions. InNovember 2019 , we suspended the program in connection with theNovember 2019 equity offering, which remains suspended until we notify Stifel otherwise. To date, no sales have been made under our at-the-market offering program. Our longer term liquidity requirements will require us to raise additional capital, such as through additional equity, debt, or royalty financings or collaboration arrangements. Our future capital requirements will depend on many factors, including the receipt of milestones under our KKC Agreement and the timing of our expenditures related to clinical trials. We believe our existing cash and cash equivalents will be sufficient to enable us to fund our operations through the end of 2021. However, we anticipate opportunistically raising additional capital before that time through equity offerings, collaboration or license agreements, additional debt, or royalty financings in order to maintain adequate capital reserves. In addition, we may choose to raise additional capital at any time for the further development of our existing product candidates and may also need to raise additional funds sooner to pursue other development activities related to additional product candidates. Decisions about the timing or nature of any 25
-------------------------------------------------------------------------------- financing will be based on, among other things, our perception of our liquidity and of the market opportunity to raise equity, debt, or royalty financing. Additional securities may include common stock, preferred stock, or debt securities. We may explore strategic collaborations or license arrangements for any of our product candidates. If we do explore any arrangements, there can be no assurance that any agreement will be reached, and we may determine to cease exploring a potential transaction for any or all of the assets at any time. If an agreement is reached, there can be no assurance that any such transaction would provide us with a material amount of additional capital resources. Until we can generate a sufficient amount of revenue from our product candidates, if ever, we expect to finance future cash needs through public or private equity or debt offerings, commercial loans, royalty financings, and collaboration or license transactions. The outbreak of COVID-19 has caused significant disruption of global financial markets, which may reduce our ability to access capital, which would negatively affect our liquidity. Additional capital may not be available on reasonable terms, if at all. If we 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 the development or commercialization of one or more of our product candidates. If we raise additional funds through the issuance of additional equity or debt securities, it could result in dilution to our existing stockholders or increased fixed payment obligations, and any such securities may have rights senior to those of our common stock. If we incur indebtedness or obtain royalty financing, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, 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 or royalty financing could be secured by some or all of our assets. Any of these events could significantly harm our business, financial condition, and prospects. For a description of the numerous risks and uncertainties associated with product development and raising additional capital, see "Risk Factors" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and in this Quarterly Report on Form 10-Q under "Part II, Item 1A. Risk Factors." Our forecast of the period through which our financial resources will be adequate to support our operations is a forward-looking statement and involves 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 prove to 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
our product 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 collaborator;
• the costs necessary to obtain regulatory approvals, if any, for our
product candidates in
costs of post-marketing studies that could be required by regulatory
authorities in jurisdictions where approval is obtained;
• the continuation of our existing collaboration with KKC 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 any potential loss or corruption of our
information or data in a cyberattack on our computer system;
• the costs associated with being a public company;
26
--------------------------------------------------------------------------------• any additional costs we incur associated with the COVID-19 pandemic; and
• the costs we incur in the filing, prosecution, maintenance, and defense
of our 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, financial condition, and results of operations could be materially adversely affected.
Contractual Obligations and Commitments
As ofMarch 31, 2020 , there have been no material changes, outside of the ordinary course of business, in our outstanding contractual obligations from those disclosed within "Management's Discussion and Analysis of Financial Condition and Results of Operations", as contained in our Annual Report on Form 10-K for year endedDecember 31, 2019 .
Below are our contractual obligations as of
Payments due by period
Less than 1 to 3 4 to 5
1 year years years Total
(in thousands)
Operating lease obligations (1)
$ 10,735 Outstanding secured term loan (2) - 142,083 12,917
155,000
Payable to collaborators 150,000 80,000 -
230,000
Total contractual obligations
(1) Total minimum future lease payments for the
not commenced as of
in the consolidated financial statement, as we do not yet control the
underlying assets. The lease is expected to commence mid-2022 with lease
initial lease term of 16 years.
(2) Total minimum future loan payments include principal payments and do not
include the final exit fee or interest payments. See Note 5, Term Loans of
Notes to the Consolidated Financial Statements contained in this Quarterly
Report on Form 10-Q.
Clinical Trials
As of March 31, 2020 , we have several on-going clinical trials in various
stages. Under agreements with various CROs and clinical trial sites, we incur
expenses related to clinical trials of our product candidates and potential
other clinical candidates. The timing and amounts of these disbursements are
contingent upon the achievement of certain milestones, patient enrollment, and
services rendered or as expenses are incurred by the CROs or clinical trial
sites. 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 Estimates
Our 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 withUnited States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued research and development expenses, income taxes, and stock-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in Note 2 of Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part I, Item 7, "Critical Accounting Policies and Significant Judgments and Estimates" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . There have been no other changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 27 --------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
Since our inception, we have not had any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements, and we have not engaged in any other off-balance sheet arrangements, as defined in the rules and regulations of theSEC .
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, please see Note 2 of Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.
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