Quarterly Report (10-q)

Date : 05/09/2019 @ 11:57AM
Source : Edgar (US Regulatory)
Stock : Reata Pharmaceuticals, Inc. (RETA)
Quote : 87.17  0.24 (0.28%) @ 9:00PM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from         to         

Commission File Number: 001-37785

 

Reata Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

DELAWARE

 

11-3651945

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

2801 Gateway Dr, Suite 150
Irving, Texas

 

75063

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (972) 865-2219

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes       No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, an emerging growth company, or a smaller reporting 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 the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class A Common Stock, Par Value $0.001 Per Share

 

RETA

 

NASDAQ Global Market

 

As of May 6, 2019, the registrant had 24,416,773 shares of Class A common stock, $0.001 par value per share, and 5,639,204 shares of Class B common stock, $0.001 par value per share, outstanding.

 

 

 


 

TABLE OF CONTENTS

 

 

 

Page

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

1

DEFINED TERMS

3

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

4

 

Consolidated Balance Sheets

4

 

Consolidated Statements of Operations

5

 

Consolidated Statements of Stockholders’ Equity (Deficit)

6

 

Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

30

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

31

Signatures

32

 

 

 

 

i


 

CAUTIONARY NOTE REGARDING F ORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties.  We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.  All statements, other than statements of historical or present facts, including statements regarding our future financial condition, future revenues, projected costs, prospects, business strategy, and plans and objectives of management for future operations, are forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as “believe,” “will,” “may,” “might,” “estimate,” “continue,” “anticipate,” “intend,” “target,” “project,” “model,” “should,” “would,” “plan,” “expect,” “predict,” “could,” “seek,” “goals,” “potential,” and similar terms or expressions that concern our expectations, strategy, plans, or intentions.  These forward-looking statements include, but are not limited to, statements about:

 

our expectations regarding the timing, costs, conduct, and outcome of our clinical trials, including statements regarding the timing of the initiation and availability of data from such trials;

 

the timing and likelihood of regulatory filings and approvals for our product candidates;

 

our ability to obtain funding for our operations, including funding necessary to complete further development and commercialization of our product candidates;

 

our plans to research, develop, and commercialize our product candidates;

 

the commercialization of our product candidates, if approved;

 

the rate and degree of market acceptance of our product candidates;

 

our expectations regarding the potential market size and the size of the patient populations for our product candidates, if approved for commercial use, and the potential market opportunities for commercializing our product candidates;

 

the success of competing therapies that are or may become available;

 

our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates;

 

the ability to license additional intellectual property relating to our product candidates and to comply with our existing license agreements;

 

our ability to maintain and establish relationships with third parties, such as contract research organizations, suppliers, and distributors;

 

our ability to maintain and establish collaborators with development, regulatory, and commercialization expertise;

 

our ability to attract and retain key scientific or management personnel;

 

our ability to grow our organization and increase the size of our facilities to meet our anticipated growth;

 

the accuracy of our estimates regarding expenses, future revenue, capital requirements, and needs for additional financing;

 

our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;

 

our expectations related to the use of our available cash;

 

our ability to develop, acquire, and advance product candidates into, and successfully complete, clinical trials;

 

the initiation, timing, progress, and results of future preclinical studies and clinical trials, and our research and development programs;

1


 

 

the impact of governmental laws and regulations and regulatory developments in the United States and foreign countries;

 

developments and projections relating to our competitors and our industry; and

 

other risks and uncertainties, including those described under the heading “Risk Factors” included in our most recent Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements.  Factors that may cause actual results to differ materially from current expectations include, among other things, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.  Given these uncertainties, you should not place undue reliance on these forward-looking statements.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.  Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

2


 

DEFINED TERMS

Unless the context requires otherwise, references to “Reata,” “the Company,” “we,” “us,” or “our” in this Quarterly Report on Form 10-Q refer to Reata Pharmaceuticals, Inc. and its subsidiaries.  We also have used several other terms in this Quarterly Report on Form 10-Q, most of which are explained or defined below.

 

Abbreviated Term

 

Defined Term

6MWD

 

6-minute walk distance

AbbVie

 

AbbVie Inc.

ADPKD

 

Autosomal dominant polycystic kidney disease

ASU

 

Accounting Standards Update

Bard

 

Bardoxolone methyl

CKD

 

Chronic kidney disease

CRO

 

Contract research organization

CTD-PAH

 

Pulmonary arterial hypertension associated with connective tissue disease

DMC

 

Data monitoring committee

DSMB

 

Data safety monitoring board

eGFR

 

Estimated glomerular filtration rate

ESKD

 

End stage kidney disease

Exchange Act

 

Securities Exchange Act of 1934

FA

 

Friedreich’s ataxia

FASB

 

Financial Accounting Standards Board

FDA

 

Food and Drug Administration

FSGS

 

Focal segmental glomerulosclerosis

GFR

 

Glomerular filtration rate

IgAN

 

IgA nephropathy

I-PAH

 

Idiopathic form of PAH

IPO

 

Initial public offering

IRS

 

Internal Revenue Service

JOBS Act

 

Jumpstart Our Business Startups Act

KHK

 

Kyowa Hakko Kirin Co., Ltd.

mFARS

 

Modified Friedreich’s Ataxia Rating Scale

NDA

 

New Drug Application

Omav

 

Omaveloxolone

PAH

 

Pulmonary arterial hypertension

Retained eGFR

 

eGFR change after a four-week withdrawal of drug

SAE

 

Serious adverse event

Sarbanes-Oxley Act

 

The Sarbanes-Oxley Act of 2002

SEC

 

Securities and Exchange Commission

T1D CKD

 

Type 1 diabetic CKD

T2D CKD

 

Type 2 diabetic CKD

 

3


 

PART I - FINANCI AL INFORMATION

 

 

Item 1. Financial Statements.

Reata Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

March 31,

2019

 

 

December 31,

2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

313,056

 

 

$

337,790

 

Prepaid expenses and other current assets

 

 

4,416

 

 

 

4,483

 

Total current assets

 

 

317,472

 

 

 

342,273

 

Property and equipment, net

 

 

2,693

 

 

 

1,445

 

Other assets

 

 

11,120

 

 

 

1,490

 

Total assets

 

$

331,285

 

 

$

345,208

 

Liabilities and stockholders’ (deficit) equity

 

 

 

 

 

 

 

 

Accounts payable

 

 

3,500

 

 

 

4,473

 

Accrued direct research liabilities

 

 

16,263

 

 

 

15,416

 

Other current liabilities

 

 

10,107

 

 

 

4,696

 

Current portion of deferred revenue

 

 

31,335

 

 

 

31,335

 

Total current liabilities

 

 

61,205

 

 

 

55,920

 

Other long-term liabilities

 

 

8,472

 

 

 

524

 

Term loan, net of current portion and debt issuance costs

 

 

79,558

 

 

 

79,219

 

Deferred revenue, net of current portion

 

 

186,660

 

 

 

194,386

 

Total noncurrent liabilities

 

 

274,690

 

 

 

274,129

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ (deficit) equity:

 

 

 

 

 

 

 

 

Common stock A, $0.001 par value:

   500,000,000 shares authorized; issued and outstanding – 24,403,477

   and 24,000,683 shares at March 31, 2019 and December 31, 2018

 

 

24

 

 

 

24

 

Common stock B, $0.001 par value:

   150,000,000 shares authorized; issued and outstanding – 5,639,666

   and 5,728,175 shares at March 31, 2019 and December 31, 2018

 

 

6

 

 

 

6

 

Additional paid-in capital

 

 

444,837

 

 

 

435,452

 

Accumulated deficit

 

 

(449,477

)

 

 

(420,323

)

Total stockholders’ (deficit) equity

 

 

(4,610

)

 

 

15,159

 

Total liabilities and stockholders’ (deficit) equity

 

$

331,285

 

 

$

345,208

 

 

 

See accompanying notes.

4


 

Reata Pharmaceuticals, Inc.

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Collaboration revenue

 

 

 

 

 

 

 

 

License and milestone

 

$

7,726

 

 

$

32,168

 

Other revenue

 

 

44

 

 

 

224

 

Total collaboration revenue

 

 

7,770

 

 

 

32,392

 

Expenses

 

 

 

 

 

 

 

 

Research and development

 

 

26,114

 

 

 

21,407

 

General and administrative

 

 

10,038

 

 

 

6,628

 

Depreciation

 

 

170

 

 

 

101

 

Total expenses

 

 

36,322

 

 

 

28,136

 

Other income (expense)

 

 

 

 

 

 

 

 

Investment income

 

 

1,797

 

 

 

335

 

Interest expense

 

 

(2,397

)

 

 

(509

)

Total other income (expense)

 

 

(600

)

 

 

(174

)

(Loss) income before taxes on income

 

 

(29,152

)

 

 

4,082

 

Provision for taxes on income

 

 

2

 

 

 

 

Net (loss) income

 

$

(29,154

)

 

$

4,082

 

Net (loss) income per share—basic

 

$

(0.98

)

 

$

0.16

 

Net (loss) income per share—diluted

 

$

(0.98

)

 

$

0.15

 

Weighted-average number of common shares used in net (loss) income per

   share basic

 

 

29,830,114

 

 

 

26,155,141

 

Weighted-average number of common shares used in net (loss) income per

   share diluted

 

 

29,830,114

 

 

 

26,633,521

 

 

 

See accompanying notes.

5


 

Reata Pharmaceuticals, Inc.

Unaudited C onsolidated Statements of Stockholders’ (Deficit) Equity

(in thousands, except share and per share data)

 

 

 

Common Stock A

 

 

Common Stock B

 

 

Additional Paid-In

 

 

Shareholder

Notes

 

 

Total

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Receivable

 

 

Deficit

 

 

(Deficit) Equity

 

Balance at December 31, 2018

 

 

24,000,683

 

 

$

24

 

 

 

5,728,175

 

 

$

6

 

 

$

435,452

 

 

$

 

 

$

(420,323

)

 

$

15,159

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,154

)

 

 

(29,154

)

Compensation expense

   related to stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,227

 

 

 

 

 

 

 

 

 

4,227

 

Exercise of options

 

 

 

 

 

 

 

 

314,285

 

 

 

 

 

 

5,051

 

 

 

 

 

 

 

 

 

5,051

 

Conversion of common stock

   Class B to Class A

 

 

402,794

 

 

 

 

 

 

(402,794

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other shareholder transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107

 

 

 

 

 

 

 

 

 

107

 

Balance at March 31, 2019

 

 

24,403,477

 

 

$

24

 

 

 

5,639,666

 

 

$

6

 

 

$

444,837

 

 

$

 

 

$

(449,477

)

 

$

(4,610

)

 

 

 

Common Stock A

 

 

Common Stock B

 

 

Additional Paid-In

 

 

Shareholder

Notes

 

 

Total

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Receivable

 

 

Deficit

 

 

(Deficit) Equity

 

Balance at December 31, 2017

 

 

19,975,340

 

 

$

20

 

 

 

6,166,166

 

 

$

7

 

 

$

190,145

 

 

$

(2

)

 

$

(337,143

)

 

$

(146,973

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,082

 

 

 

4,082

 

Compensation expense

   related to stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,485

 

 

 

 

 

 

7

 

 

 

2,492

 

Exercise of options

 

 

 

 

 

 

 

 

21,093

 

 

 

 

 

 

332

 

 

 

 

 

 

 

 

 

332

 

Conversion of common stock

   Class B to Class A

 

 

15,742

 

 

 

 

 

 

(15,742

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adoption of new accounting

   guidance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,634

)

 

 

(2,634

)

Balance at March 31, 2018

 

 

19,991,082

 

 

$

20

 

 

 

6,171,517

 

 

$

7

 

 

$

192,962

 

 

$

(2

)

 

$

(335,688

)

 

$

(142,701

)

 

6


 

Reata Pharmaceuticals, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(29,154

)

 

$

4,082

 

Adjustments to reconcile net (loss) income to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

170

 

 

 

101

 

Amortization of debt issuance costs

 

 

339

 

 

 

59

 

Stock-based compensation expense

 

 

4,227

 

 

 

2,485

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Amounts earned or due from collaboration agreements

 

 

573

 

 

 

(25,307

)

Prepaid expenses and other current assets

 

 

(506

)

 

 

(174

)

Other assets

 

 

6

 

 

 

273

 

Accounts payable

 

 

(522

)

 

 

(1,065

)

Accrued direct research and other current and long-term liabilities

 

 

3,861

 

 

 

2,636

 

Deferred revenue

 

 

(7,726

)

 

 

(7,111

)

Net cash used in operating activities

 

 

(28,732

)

 

 

(24,021

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,160

)

 

 

(151

)

Net cash used in investing activities

 

 

(1,160

)

 

 

(151

)

Financing activities

 

 

 

 

 

 

 

 

Payments on deferred issuance costs

 

 

 

 

 

(3

)

Exercise of options

 

 

5,051

 

 

 

332

 

Other shareholder transactions

 

 

107

 

 

 

 

Net cash provided by financing activities

 

 

5,158

 

 

 

329

 

Net decrease in cash and cash equivalents

 

 

(24,734

)

 

 

(23,843

)

Cash and cash equivalents at beginning of year

 

 

337,790

 

 

 

129,780

 

Cash and cash equivalents at end of period

 

$

313,056

 

 

$

105,937

 

Supplemental disclosures

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,052

 

 

$

445

 

Purchases of equipment in accounts payable and other current liabilities

 

$

750

 

 

$

74

 

Non-cash activity:

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for lease obligations

 

$

9,636

 

 

$

 

 

See accompanying notes.

 

7


 

Reata Pharmaceuticals, Inc.

Notes to Unaudited Consolidated Financial Statements

 

 

1. Description of Business

The Company’s mission is to develop innovative therapies that change patients’ lives for the better.  The Company focuses on developing small-molecule therapeutics with novel mechanisms of action for the treatment of severe, life-threatening diseases with few or no approved therapies.  The Company’s lead product candidates, bardoxolone methyl (Bard) and omaveloxolone (Omav), activate the transcription factor Nrf2, which plays an important role in regulating the cellular response to injury.  By activating Nrf2, Bard and Omav normalize mitochondrial function, restore redox balance, and resolve inflammation.  The Company has fully enrolled two registrational clinical trials: CARDINAL, studying Bard in chronic kidney disease (CKD) caused by Alport syndrome, and MOXIe, studying Omav in Friedreich’s ataxia (FA).  CKD caused by Alport syndrome and FA are rare, serious diseases with no approved therapy.  The Company designed CARDINAL and MOXIe based on the results of earlier clinical studies and guidance from the FDA on a potential path to approval.  The Company expects to have top-line data from both of these clinical trials in the second half of 2019.  With each of these indications, FDA approval may provide expansion opportunities into other related indications.  The Company is also conducting two additional registrational trials, CATALYST, to study Bard in patients with a rare and serious form of pulmonary arterial hypertension caused by connective tissue disease (CTD-PAH) and FALCON, to study Bard in patients with autosomal dominant polycystic kidney disease (ADPKD).  The Company expects to have top-line data from CATALYST during the first half of 2020 and to initiate enrollment in FALCON in May 2019.  The Company expects its current cash to fund its operations through data readouts for CARDINAL, MOXIe, and CATALYST.  In addition to its lead programs, the Company is currently exploring a battery of additional clinical and preclinical programs in diseases that may include meaningful expansion opportunities for Bard and Omav.

The Company’s consolidated financial statements include the accounts of all majority-owned subsidiaries.  Accordingly, the Company’s share of net earnings and losses from these subsidiaries is included in the consolidated statements of operations.  Intercompany profits, transactions, and balances have been eliminated in consolidation. 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.  The consolidated balance sheet at December 31, 2018, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  For further information, refer to the annual consolidated financial statements and footnotes thereto of the Company.

The Company’s significant accounting policies are described in Note 2 of Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Annual Report on Form 10-K).  During the first quarter of 2019, the Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). As a result of the adoption of Topic 842, the Company has updated its Leases accounting policies. There were no other changes to its significant accounting policies from those disclosed in its 2018 Annual Report on Form 10-K.

Leases

The Company determines if an arrangement is a lease at inception. Lease assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized at the lease commencement date based on the present value of lease payments over the lease term calculated using its incremental borrowing rate

8


 

based on the information available at commencement unless the implicit rate is readily determinable.  Lease assets also include upfront lease payments, lease incentives paid, and direct costs incurred and exclude lease incentives received.  The lease term used to calculate the lease assets and related lease liabilities includes the options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. Lease expense for oper ating leases is recognized on a straight-line basis over the expected lease term as an operating expense while the expense for finance leases is recognized as depreciation expense over the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise.

The Company will account for each separate lease component separately from the nonlease components.  The depreciable life of lease assets and leasehold improvements is limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of its exercise.

Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and operating leases is recognized on a straight-line basis over the lease term.

Recently Adopted Accounting Pronouncements

The Company is an “emerging growth company,” as defined in the JOBS Act.  Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.  The Company has irrevocably elected not to avail itself of this exemption from new or revised accounting standards, and, therefore, will be subject to the same new or revised accounting standards as public companies that are not emerging growth companies.

In February 2016, the Financial Accounting Standards Board (FASB) issued Topic 842, amended by ASU 2018-11, Leases (Topic 842): Targeted Improvements . The new guidance requires a lessee to recognize assets and liabilities for all leases with lease terms of more than 12 months and provide additional disclosures. Topic 842 requires adoption using a modified retrospective transition approach with either 1) transition provisions at the beginning of the earliest comparative period records its cumulative adjustment to retained earnings at the beginning of the earliest period presented or 2) a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption.  We adopted this standard on January 1, 2019 using the cumulative-effect adjustment approach. We elected the package of practical expedients in transition for leases that commenced prior to January 1, 2019 whereby these contracts were not reassessed or reclassified from their previous assessment as of December 31, 2018.  

As a result of implementing Topic 842, the Company recognized an operating lease right-of-use asset of $1,544,000 and an operating lease liability of $1,659,000 on January 1, 2019, with no impact on its beginning retained earnings, consolidated statements of income (loss), or cash flows.  See Note 5, Leases , for further details.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements (ASU 2018-09).  This ASU provided various minor codification updates and improvements to address comments that the FASB had received regarding unclear or vague accounting guidance.  The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year.  The adoption of this guidance did not have a material impact on our financial position, results of operations or disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework (Topic 820) (ASU 2018-13).  This ASU eliminates, modifies, and adds certain disclosure requirements for fair value measurements.  This update is effective in fiscal years, including interim periods, beginning after December 15, 2019, and early adoption is permitted.  The added disclosure requirements and the modified disclosure on the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented.  All other changes to disclosure requirements in this update should be applied retrospectively to all periods presented upon their effective date.  The Company is currently evaluating the impact on its financial statements of adopting this guidance.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808) (ASU 2018-18).  This update provides clarification on the interaction between Revenue Recognition (Topic 606) and

9


 

Collaborative Arrangements (Topic 808) including the alignment of unit of account guidance between the two topics.  This update is effective in fiscal years, including interim periods, beginning after December 15, 2020, and early adoption is permitted.  The Company is currently eva luating the impact on its financial statements of adopting this guidance.

3. Collaboration Agreements

AbbVie

In December 2011, the Company entered into a collaboration agreement with AbbVie Inc. (AbbVie) (the AbbVie Collaboration Agreement) to jointly research, develop, and commercialize the Company’s portfolio of second and later generation oral Nrf2 activators.  The terms of the agreement include payment to the Company of a nonrefundable, up-front payment of $400,000,000. The Company is also participating with AbbVie on joint steering committees.  

The up-front payment and the Company’s collaboration on research, development, and commercialization are accounted for as a single unit of accounting.  Revenue is being recognized ratably through December 2026, which is the estimated minimum period that is needed to complete the deliverables under the terms of the AbbVie Collaboration Agreement.  The Company began recognizing revenue related to the up-front payment upon execution of the agreement and, accordingly, recognized approximately $6,570,000 as collaboration revenue during the three months ended March 31, 2019 and 2018.  As of March 31, 2019, the Company recorded deferred revenue totaling approximately $205,074,000 of which approximately $26,720,000 is reflected as the current portion of deferred revenue.

 

KHK

In December 2009, the Company entered a license agreement with Kyowa Hakko Kirin Co., Ltd. (KHK) (the KHK agreement), which granted KHK an exclusive license to develop and commercialize Bard in the licensed territory.  The Company received a nonrefundable, up-front license fee of $35,000,000 in 2009 and regulatory milestones totaling $45,000,000 in 2010, 2012, and 2018 and could receive additional regulatory milestones of $52,000,000 and commercial milestones of $140,000,000, as well as tiered royalties ranging from the low teens to the low 20 percent range, depending on the country of sale and the amount of annual net sales, on net sales by KHK in the licensed territory.  

The up-front payment and regulatory milestones are accounted for as a single unit of accounting.  Revenue is being recognized ratably through December 2021, which is the estimated minimum period that is needed to complete the deliverables under the terms of the KHK agreement.  The Company began recognizing revenue related to the up-front payment upon execution of the agreement and, accordingly, recognized approximately $1,156,000 and $25,598,000 as collaboration revenue during the three months ended March 31, 2019, and 2018, respectively.  As of March 31, 2019, the Company recorded deferred revenue totaling approximately $12,922,000 of which approximately $4,701,000 is reflected as the current portion of deferred revenue.

 

4. Term Loan

On June 14, 2018, the Company entered into an Amended and Restated Loan and Security Agreement (Restated Loan Agreement) with Oxford Finance LLC and Silicon Valley Bank (collectively, the Lenders), which amended and restated the Loan and Security Agreement entered into among Reata and the Lenders on March 31, 2017, as amended on November 3, 2017 (Loan Agreement).

Under the Restated Loan Agreement, the Term A Loan was increased to $80,000,000, and the Term B Loan availability was increased to $45,000,000 upon the achievement of one of two milestones by the earlier of 30 days after the achievement of a milestone or December 31, 2019.  If the Company is entitled to draw the Term B Loan but does not draw the Term B Loan by December 31, 2019, the Company is obligated to pay a non-utilization fee of $450,000.

All outstanding Term Loans will mature on June 1, 2023.  Under the Term A Loan, the Company will make interest-only payments for 24 months through June 1, 2020; however, if the Company draws the Term B Loan, the Company will make interest-only payments for 36 months through June 1, 2021.  The interest-only payment period

10


 

will be followed by 36 equal monthly payments, or 24 equal monthly payments if the Company draws the Term B Loan, of principal and interest pa yments. The Term Loans will bear interest at a floating per annum rate calculated as 7.79% plus the greater of the 30-day U.S. Dollar LIBOR rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or 1.91%, with a minimum rate of 9.7% and maximum rate of 12.29%.

The Company has the option to prepay all, but not less than all, of the borrowed amounts, provided that the Company will be obligated to pay a prepayment fee equal to (a) the aggregate amount of interest that the Company would have paid through the maturity date if prepayment is made on or before the first anniversary of the applicable funding date of the Term Loan, (b) 4.0% of the outstanding principal balance of the applicable Term Loan if prepayment is made after the first anniversary date and on or before the second anniversary of the applicable funding date, (c) 3.0% of the outstanding principal balance of the applicable Term Loan if prepayment is made after the second anniversary date and on or before the third anniversary of the applicable funding date, or (d) 1.5% of the outstanding principal balance of the applicable Term Loan if prepayment is made after the third anniversary date and on or before the fourth anniversary of the applicable funding date.  The Company will also be required to make a final exit fee payment of 6.5% of the principal balance of the Term A Loan and 4.0% of the Term B Loan, payable on the earliest of the prepayment of the Term Loans, acceleration of any Term Loan, or at maturity of the Term Loans.

The Company may use the proceeds from the Term Loans for working capital and to fund its general business requirements.  The Company’s obligations under the Restated Loan Agreement are secured by substantially all of its current and future assets, including its owned intellectual property.

As of March 31, 2019, the Company had $80,000,000 outstanding under the Term A Loan, which was recorded at its initial carrying value of $80,000,000, less unamortized discount and debt issuance costs of approximately $5,642,000.  In connection with the Term A Loan, the discount and debt issuance costs were recorded as a reduction to debt on its balance sheet and are being accreted to interest expense over the life of the Term A Loan.  Additionally, the final exit fee of approximately $5,200,000 is being accrued over the life of the Term A Loan through interest expense.  The Term A Loan has a current effective interest rate of 11.05% before debt issuance costs and final exit fee and 13.60% including debt issuance costs and final exit fee.  The Company is in compliance with all covenants under the Restated Loan Agreement as of March 31, 2019.

The future principal payments for the Company’s Term A Loan as of March 31, 2019 are as follows (in thousands):

 

2019

 

$

 

2020

 

 

15,555

 

2021

 

 

26,667

 

2022

 

 

26,667

 

2023

 

 

11,111

 

 

 

$

80,000

 

 

5. Leases

 

The Company’s corporate headquarters are located in Irving, Texas, where it leases approximately 34,890 square feet of office and laboratory space. In February 2019, the Company commenced a lease for approximately 122,000 square feet of additional office space in Plano, Texas.  

 

The Company’s leases have remaining contractual terms of up to approximately 39 months, which includes the options to extend the leases for up to one year.  Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

At March 31, 2019, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases held by the Company were 8.3% and 3.0 years, respectively.  During the three months ended March 31, 2019, cash paid for amounts included for the measurement of lease liabilities was $237,000 and the Company recorded operating lease expense of $663,000.  The Company has elected to net the amortization

11


 

of the right-of-use assets and the reduction of the lease liabilities principal in a ccrued direct research and other current and long-term liabilities in the consolidated statements of cash flows.

 

Supplemental balance sheet information related to our operating leases is as follows:

 

 

 

Balance Sheet Classification

 

As of

March 31, 2019

 

 

 

(in thousands)

 

Non-current right-of-use assets

 

Other assets

 

$

9,636

 

Current lease liabilities

 

Other current liabilities

 

 

2,149

 

Non-current lease liabilities

 

Other long-term liabilities

 

 

7,972

 

 

Maturities of lease liabilities by fiscal year for our operating leases:

 

 

 

As of

March 31, 2019

 

 

 

(in thousands)

 

2019

 

$

2,149

 

2020

 

 

3,999

 

2021

 

 

4,090

 

2022

 

 

1,178

 

Total lease payments

 

 

11,416

 

Less: Imputed interest

 

 

(1,295

)

Present value of lease liabilities

 

$

10,121

 

 

6. Income Taxes

The Company’s effective tax rate varies with the statutory rate due primarily to the impact of nondeductible stock-based compensation and the changes in valuation allowance related to certain deferred tax assets generated or utilized in the applicable period.  The Company’s deferred tax assets have been fully offset by a valuation allowance at March 31, 2019, and the Company expects to maintain this valuation allowance until there is sufficient evidence that future earnings can be achieved, which is uncertain at this time.

The IRS examination team has completed its examination of the Company’s 2013, 2014, and 2015 U.S. tax returns and proposed adjustments with respect to certain items that were reported by the Company for the 2013 tax year.  In June 2018, the Company received the Revenue Agent Report from the IRS.  The Company believes that it has accurately reported all amounts in its tax returns and has submitted an administrative protest with the IRS contesting the examination team’s proposed adjustments. The Company intends to vigorously defend its reported positions and believes the ultimate resolution of the adjustments proposed by the IRS examination team will not have a material adverse effect on its consolidated financial statements.

 

 

7. Stock-Based Compensation

Stock Options

The following table summarizes stock-based compensation expense reflected in the consolidated statements of operations (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Research and development

 

$

1,691

 

 

$

961

 

General and administrative

 

 

2,536

 

 

 

1,524

 

 

 

$

4,227

 

 

$

2,485

 

 

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The following table summarizes stock option activity as of March 31, 2019 , and changes during the three months ended March 31, 2019 , under the 2007 Long Term Incentive Plan (the 2007 LTIP) and standalone option agreements:

 

 

 

Number of

Options

 

 

Weighted-

Average

Exercise

Price

 

Outstanding at January 1, 2019

 

 

3,320,571

 

 

 

21.20

 

Granted

 

 

1,032,375

 

 

 

57.33

 

Exercised

 

 

(314,285

)

 

 

16.07

 

Forfeited

 

 

(257,897

)

 

 

33.07

 

Expired

 

 

 

 

 

 

Outstanding at March 31, 2019

 

 

3,780,764

 

 

 

30.78

 

Exercisable at March 31, 2019

 

 

1,405,785

 

 

 

19.96

 

 

The total intrinsic value of all outstanding options and exercisable options at March 31, 2019 was $206,899,000 and $92,094,000, respectively.

 

 

8. Net (Loss) Income per Share

The following table sets forth the computation of basic and diluted net (loss) income per share attributable to common stockholders:

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands, except share

and per share data)

 

Numerator

 

 

 

 

 

 

 

 

Net (loss) income (in thousands)

 

$

(29,154

)

 

$

4,082

 

Denominator

 

 

 

 

 

 

 

 

Weighted-average number of common shares used in net (loss)

   income per share – basic

 

 

29,830,114

 

 

 

26,155,141

 

Dilutive potential common shares

 

 

 

 

 

478,380

 

Weighted-average number of common shares used in net (loss)

   income per share – diluted

 

 

29,830,114

 

 

 

26,633,521

 

Net (loss) income per share – basic

 

$

(0.98

)

 

$

0.16

 

Net (loss) income per share – diluted

 

$

(0.98

)

 

$

0.15

 

 

The number of weighted average options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive represented 3,780,764 and 2,131,219 shares for the three months ended March 31, 2019 and 2018, respectively.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated 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 .  We are currently conducting registrational trials with our lead product candidates, Bard and Omav, which activate the transcription factor Nrf2 to normalize mitochondrial function, restore redox balance, and resolve inflammation.

Our lead registrational programs are evaluating our product candidates for the treatment of four rare diseases: CKD caused by Alport syndrome in our CARDINAL study, FA in our MOXIe study, CTD-PAH in our CATALYST study, and ADPKD in our FALCON study.  We have fully enrolled CARDINAL and MOXIe and expect to have top-line data from both of these clinical trials in the second half of 2019.  We expect to complete enrollment of CATALYST this year and have top-line data during the first half of 2020.  We expect to begin enrollment of FALCON in May 2019.  If we receive FDA approval for any of these indications, it may provide expansion opportunities into other related indications.  We have received orphan drug designation from the FDA and the European Commission for Bard for the treatment of Alport syndrome and for Omav for the treatment of FA and from the FDA for Bard for the treatment of PAH.

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The chart below is a summary of our current registrational programs:

 

Registrational Programs

Program

Next Expected Milestone

Timing of Milestone

  CKD caused by Alport syndrome

Phase 3 Data

2H 2019

Bard

  Friedreich’s ataxia

Phase 2 Part 2 Data

2H 2019

Omav

  CTD-PAH

Phase 3 Data

1H 2020

Bard

  ADPKD

First Patient Enrolled

May 2019

Bard

 

Bard in CKD Caused by Alport Syndrome and Additional Rare Forms of CKD

Bard has been evaluated in multiple clinical trials enrolling over 2,000 patients exposed to active drug and has demonstrated consistent, clinically meaningful improvement in kidney function across several disease states as measured by estimated glomerular filtration rate (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 Bard, including patients with CKD caused by type 2 diabetes (T2D CKD), PAH, CKD caused by Alport syndrome, ADPKD, IgA nephropathy (IgAN), type 1 diabetic  CKD (T1D CKD), and focal segmental glomerulosclerosis ( FSGS) .  We believe these data support the potential for Bard to delay or prevent dialysis, kidney transplant, and death in patients with Alport syndrome and other rare forms of CKD.  Additional observations from the clinical trials of Bard 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, Bard treatment produced a statistically significant increase from baseline in mean eGFR of 10.4 mL/min/1.73 m 2 (p<0.0001) after 48 weeks of treatment, which, based on historical data available for 22 of the patients prior to enrolling 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 m 2 (p<0.001) and 5.6 mL/min/1.73 m 2 (p<0.001), respectively, were sustained for at least one year.

 

Reduction in risk of adverse kidney outcomes, suggesting that Bard 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 Bard 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 m 2 , or end-stage kidney disease (ESKD) events (HR=0.48, p<0.0001).  

 

o

In BEACON, Bard treatment resulted in a decreased number of kidney-related serious adverse events (SAEs) and ESKD events.  

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Statistically significant improvement in retained eGFR, whi ch is the eGFR change after a four-week withdrawal of drug, above baseline in BEAM, BEACON, and the Phase 2 portion of CARDINAL.   To our knowledge, Bard is the first therapy to produce a retained eGFR benefit that is above baseline in a long-term CKD trial .  

 

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 Bard treatment may support accelerated approval and after two years of Bard treatment may support full approval.

 

o

We believe the retained eGFR benefit observed in these clinical trials demonstrates that Bard 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 kidney transplant.

We are developing Bard for the treatment of patients with CKD caused by Alport syndrome in our registrational CARDINAL study, for the treatment of patients with ADPKD in our registrational FALCON study, and for the treatment of patients with four rare forms of CKD, which were studied in our Phase 2 PHOENIX study.  In addition, KHK, one of our strategic collaborators, is currently conducting its registrational trial of Bard in diabetic (type 1 and 2) kidney disease in Japan, with data expected in the first half of 2022.

CARDINAL, a Study in Patients with CKD Caused by Alport Syndrome

Alport syndrome is a rare and serious hereditary disease that manifests as early as the first decade of life and causes average annual declines in eGFR of approximately 3 to 4 mL/min/1.73 m 2 and affects approximately 30,000 to 60,000 patients in the United States.  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.  There are no approved therapies for Alport syndrome anywhere in the world.  

In 2018, we announced positive interim safety and efficacy data for the ongoing open-label Phase 2 portion of CARDINAL.  The Phase 2 portion of the trial enrolled 30 patients, and 25 patients were available for analysis through one year.  No patients discontinued due to drug-related adverse events.  Data demonstrate that Bard significantly improved kidney function in patients with Alport syndrome as measured by eGFR.  In the Phase 2 portion of CARDINAL, we noted the following:

 

A statistically significant increase from baseline in mean eGFR at Week 48 of 10.4 mL/min/1.73 m 2 (p<0.0001) in 25 patients was observed, which positively correlates with the previously-announced Week 12 eGFR increase from baseline of 13.4 mL/min/1.73 m 2 (p<0.0001) in 30 patients.  

 

o

Historical data were available for 22 of the 25 CARDINAL Phase 2 patients.  These patients’ eGFR declined an average of 4.2 mL/min/1.73 m 2 per year in the three-year period prior to enrolling in the trial.

 

o

This magnitude of improvement in eGFR represents the recovery of over two years of average decline in kidney function in patients with Alport syndrome in this trial.

 

A statistically significant increase from baseline in mean retained eGFR at Week 52 of 4.1 mL/min/1.73 m 2 (p<0.05) in 25 patients was observed.  

 

o

Bard and any active metabolites are eliminated from the body within approximately 10 days after withdrawal, so we believe this retained eGFR benefit is a measure of the effect of long-term treatment on the structure of the kidney and its disease-modifying potential.

 

o

We believe this retained eGFR benefit provides evidence that increases in eGFR observed with Bard therapy may prevent or delay kidney failure.

16


 

 

We utilized the Patient Global Impression of Change ( PGIC) instrument, in which the patients provide self-assessments, and the Clinician Global Impression of Change (CGIC), in which clinicians provide their assessments of their patients, to assess patient quality-of-life factors after one year of treatment. Per the PGIC, 78% of patients reported that they were clinically improved while, per the CGIC, 83% of clinicians reported that their patients were clinically improved.

 

Urinary albumin-to-creatinine ratio (UACR) is a primary method used to detect elevated urinary protein.  Persistent, increased protein in the urine may be a significant risk factor for kidney damage and renal disease.  Mean changes in UACR during the 48 weeks on Bard were not clinically significant.  At Week 52, the mean UACR was not clinically significant and was not statistically significantly different from baseline.  We believe these findings further demonstrate that Bard does not increase eGFR through a damaging mechanism.

 

No safety concerns were reported by the data monitoring committee (DMC) that oversees the trial and reviews all safety data.

The Phase 3 portion of CARDINAL is an international, multi-center, randomized, double-blind, placebo-controlled trial that is studying the safety and efficacy of Bard in patients with CKD caused by Alport syndrome.  We are currently conducting the Phase 3 portion of CARDINAL. The protocol allows for enrollment of approximately 150 patients randomized evenly to either Bard or placebo, and the trial has been fully enrolled with 157 patients.  The FDA has provided us with guidance that an analysis of retained eGFR, demonstrating an improvement versus placebo after one year of Bard treatment, may support an NDA submission for accelerated approval of Bard for the treatment of CKD caused by Alport syndrome, and data demonstrating an improvement versus placebo in retained eGFR after two years of treatment may support full approval.  We expect to have one year top-line results available in the second half of 2019.  Based on retained eGFR benefit observed in CARDINAL Phase 2 patients at Week 52, we believe the Phase 3 portion of CARDINAL is conservatively powered.  No safety concerns have been reported by the DMC.

FALCON, a Study in Patients with ADPKD

ADPKD is an inherited, rare form of CKD caused by a genetic defect in PKD1 or PKD2 and is characterized by formation of fluid-filled cysts in the kidneys.  Inflammation appears to play a role in cyst growth and is associated with disease progression in ADPKD.  PKD1 is the most common mutation, causing about 85% of ADPKD cases, and patients generally progress to ESKD, on average, by age 54.  ADPKD is the most common single-gene disorder of the kidneys, and there are an estimated 400,000 patients in the United States, with approximately 140,000 diagnosed.  The only therapy currently approved for ADPKD is tolvaptan, which was approved in the United States in 2018.

We are initiating a registrational Phase 3 trial called FALCON in patients with ADPKD.  FALCON is an international, multi-center, randomized, double-blind, placebo-controlled trial studying the safety and efficacy of Bard in approximately 300 patients with ADPKD randomized one-to-one to active drug or placebo.  We plan to enroll the first ADPKD patient in FALCON in May 2019.  We will measure the retained eGFR benefit versus placebo at 52 weeks after treatment on study drug for 48 weeks and a four-week withdrawal of drug.  After 52 weeks, patients will resume study drug and will continue on study drug for a second year.  The second-year retained eGFR benefit will be measured at Week 104.

PHOENIX, a Study in Patients with Rare Forms of CKD

PHOENIX was an open-label, multi-center Phase 2 trial evaluating the safety and efficacy of Bard in patients with ADPKD, IgAN, T1D CKD, or FSGS.  In aggregate, the prevalence of these diseases exceeds 700,000 patients in the United States, representing a meaningful market for Bard in rare forms of CKD.  A total of 103 patients were enrolled in the study in four separate cohorts, including 31 patients with ADPKD, 26 with IgAN, 28 with T1D CKD, and 18 with FSGS.  Patients were treated with Bard for 12 weeks in all four cohorts, and each cohort showed statistically significant increases in mean eGFR., with the mean change in eGFR from baseline across all four cohorts of 7.8 mL/min/1.73 m2 (n=103; p<0.0001).  Of the patients that reached Week 12, 88% experienced increases in eGFR at Week 12.  Bard significantly reduced mean systolic blood pressure by 3.8 mmHg (n=103; p=0.002) and mean diastolic blood pressure by 2.8mmHg (n=103; p=0.0009).  Urinary albumin excretion was low upon study entry and remained unchanged by Bard treatment (n=103; p=0.6).  The most commonly reported adverse event across all cohorts was muscle spasms, which were not associated with clinical signs or symptoms of muscle injury.  No SAEs were reported as related to Bard.

17


 

Based on the eGFR improvements observed in PHOENIX patients, we plan to pursue IgAN, T1D CKD, and FSGS as commercial indications.  We believe that registrational clinical trial s similar to the design of the Phase 3 CARDINAL and FALCON trials with a two-year duration and a retained eGFR benefit endpoint after one and two years of treatment would be sufficient to form the basis of an NDA submission to the FDA seeking approval of Bard for the treatment of these forms of CKD.

Omav in FA

We are developing Omav for the treatment of patients with FA, an inherited, debilitating, and degenerative neuromuscular disorder, which is normally diagnosed during adolescence and is caused by a mutation in the frataxin gene.  Patients with FA typically become dependent on wheelchairs 10 to 15 years after disease onset, with a median age of death in the mid-30s.  Patients with FA experience an average annual worsening, or increase, in modified Friedreich’s Ataxia Rating Scale (mFARS) scores of one to two points.  FA is an ultra-orphan disease that, based on literature and proprietary research, we believe affects approximately 22,000 people globally, including 6,000 in the United States.  Approximately 2,700 worldwide patients are identified in patient registries, including approximately 1,500 in the United States.  There are no currently approved therapies for the treatment of FA anywhere in the world.  

MOXIe, a Study in Patients with FA

Our Phase 2 trial, called MOXIe, is a two-part, international, multi-center, randomized, double-blind, placebo-controlled registrational trial that studies the safety and efficacy of Omav in patients with FA.  In part 1 of MOXIe, at the optimal dose level of Omav, we noted the following at Week 12:

 

A statistically significant improvement, or decrease, in mFARS scores of 3.8 points (p=0.0001) versus baseline was observed.  This improvement represents approximately two years of average decline in MOXIe patient mFARS scores.

 

A placebo-corrected decrease in mFARS scores of 2.3 points (p=0.06) was observed.  This improvement represents at least one year of average decline in MOXIe patient mFARS scores.

 

No safety concerns were noted by the data safety monitoring board (DSMB) that oversees the trial and reviews all safety data.

We are currently conducting the registrational part 2 of MOXIe.  The protocol allows for enrollment of approximately 100 patients randomized evenly to either 150 mg of Omav or placebo, and the trial has been fully enrolled with 103 patients.  The primary endpoint of part 2 of the trial is the change from baseline in mFARS score, a neurological and functional assessment tool, in patients treated with Omav compared to placebo at 48 weeks. The FDA has provided us with guidance that an analysis of mFARS scores demonstrating an improvement versus placebo after 48 weeks of Omav treatment may support an NDA submission for accelerated or full approval of Omav for the treatment of FA.  We expect to have top-line data from MOXIe available in the second half of 2019.  No safety concerns have been reported by the DSMB.

Bard in Connective Tissue Disease Associated Pulmonary Arterial Hypertension

CATALYST, a Study in Patients with CTD-PAH

We are studying Bard in CTD-PAH, which is a late and often fatal manifestation of many types of autoimmune disease, including systemic sclerosis (scleroderma), systemic lupus erythematosus, mixed connective tissue disease, and others.  CTD-PAH is a subset of PAH, which results in a progressive increase in pulmonary vascular resistance, ultimately leading to right ventricular heart failure and death.  Based on literature and proprietary research, we believe there are approximately 12,000 patients with CTD-PAH in the United States and 50,000 worldwide.  

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In comparison to patients with the idiopathic form of PAH ( I-PAH ) , patients with CTD-PAH generally have a worse prognosis and experience a higher occurrence of small vessel fibrosis and pulmonary veno-obstructive diseases.  CTD-PAH represents approxima tely 30% of the overall PAH population and approximately 10 to 15% of patients with scleroderma or lupus erythematosus. Patients with CTD-PAH are less responsive to existing vasodilator therapies than patients with I-PAH and have a five-year survival rate of approximately 44%, in contrast with a five-year survival rate of approximately 68% for patients with I-PAH.  Currently approved therapies, all systemic vasodilators, are used to treat all etiologies of PAH.  By a meta-analysis of 11 registrational tria ls comprised of more than 2,700 patients, the currently approved therapies were shown to be less beneficial for patients with CTD-PAH compared to patients with I-PAH as measured by 6-minute walk distance (6MWD) responses in patients with CTD-PAH of 9.6 met ers, or approximately one-third, compared to the responses in patients with I-PAH of 30 meters.   Bard is an Nrf2 activator, not a systemic vasodilator, and directly targets the bioenergetic and inflammatory components of PAH.  Additionally, because Bard do es not have systemic hemodynamic effects or cause drug-drug interactions in patients with PAH, it may be used in combination with other therapies to a greater incremental effect than an additional vasodilator.

Initial results from our Phase 2 LARIAT trial in patients with PAH showed that Bard provided the greatest improvement in 6MWD to patients with CTD-PAH.  Patients with CTD-PAH treated with Bard demonstrated a statistically significant increase of 38.2 meters (p<0.001) in mean 6MWD compared to baseline and a placebo-corrected change in 6MWD of 28.4 meters (p=0.07).  Further analysis of data from patients with CTD-PAH who would be eligible for inclusion in our Phase 3 trial, CATALYST, demonstrated a statistically significant increase of 42.7 meters (p<0.001) in mean 6MWD compared to baseline and a placebo-corrected change in 6MWD of 48.5 meters (p=0.005).

We are currently conducting CATALYST, an international, multi-center, randomized, double-blind, placebo-controlled Phase 3 trial that studies the safety and efficacy of Bard in patients with CTD-PAH when added to standard-of-care therapy.  The protocol includes 200 patients with CTD-PAH, and we expect to have top-line data from the CATALYST trial in the first half of 2020.  Data from CATALYST demonstrating an improvement in 6MWD versus placebo may support an NDA submission for approval of Bard for the treatment of CTD-PAH.  No safety concerns have been reported by the DSMB that oversees the trial and reviews all data.

Other Programs

RTA 901 is the lead product candidate from our Hsp90 modulator program, which includes highly potent and selective C-terminal modulators of Hsp90.  We have observed favorable activity of RTA 901 in a range of preclinical models of neurodegeneration and neuroprotection, including models of diabetic neuropathy, neural inflammation, and neuropathic pain.  RTA 901, administered orally once-daily, has been observed to rescue existing nerve function, restore thermal and mechanical sensitivity, and improve nerve conductance velocity and mitochondrial function in rodent disease models.  We have completed a Phase 1 trial to evaluate the safety, tolerability, and pharmacokinetic profile of RTA 901 in healthy adult volunteers.  No safety or tolerability concerns were reported.  We are the exclusive licensee of RTA 901 and have worldwide commercial rights.

RTA 1701 is the lead product candidate from our proprietary series of RORγt inhibitors for the potential treatment of a broad range of autoimmune, inflammatory, and fibrotic diseases.  RTA 1701 is an orally-bioavailable, RORγt-selective allosteric inhibitor that suppresses Th17 differentiation in vitro and demonstrates strong efficacy in rodent disease models of autoimmune disease.  RTA 1701 also potently suppresses production of IL-17A, a clinically important cytokine, in human immune cells and when dosed orally to non-human primates.  We are currently conducting a Phase 1 trial to evaluate the safety, tolerability, and pharmacokinetic profile of RTA 1701 in healthy adult volunteers, with initial results expected in the first half of 2019.  We retain all rights to our RORγt inhibitors, which are not subject to any existing commercial collaborations.

 

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Financial Operations 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 KHK, from sales of our securities, and 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 KHK and reimbursements of expenses under the terms of our agreement with KHK.  We have incurred losses in each year since our inception, other than in 2014.  As of March 31, 2019, we had $313.1 million of cash and cash equivalents and an accumulated deficit of $449.5 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 our collaborators, 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, and seek regulatory approval for, 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.

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 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 our license agreement with KHK, our license agreement with AbbVie, and our collaboration agreement with AbbVie and consists of upfront payments and milestone payments.  License revenue recorded with respect to the KHK agreement, the AbbVie License Agreement, and the AbbVie Collaboration Agreement consists solely of the recognition of deferred revenue.  Under our revenue recognition policy, license revenue associated with upfront, non-refundable license payments received under the license and collaboration agreements with AbbVie and KHK are deferred and recognized ratably over the expected term of the performance obligations under the agreements.  The AbbVie Collaboration Agreement and the KHK agreement extend through 2021, and 2026, respectively.  

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 through March 31, 2019, we have incurred a total of $672.9 million in research and development expense, the majority of which relates to the development of Bard and Omav.  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.

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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 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.

To date, we have not experienced significant 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, AbbVie is not participating in the development of Bard for the treatment of CKD caused by Alport syndrome, ADPKD, CTD-PAH, or other rare kidney diseases, and we are therefore incurring all costs for this program.  AbbVie has the right to opt-in to these programs at any time during development.  Upon opting-in, AbbVie would be required to pay an agreed upon amount of all development costs accumulated up to the point of exercising their opt-in right.  All development costs incurred after AbbVie’s opt-in would be split equally.

In September 2016, we and AbbVie mutually agreed that we would continue unilateral development of Omav.  Therefore, AbbVie no longer co-funds the exploratory development costs of this program, but retains the right to opt back in.  Depending upon what point, if any, AbbVie opts back into development, AbbVie may retain its right to commercialize a product outside the United States, or we may be responsible for commercializing the product on a worldwide basis.  Upon opting back in, AbbVie would be required to pay an agreed upon amount of all development costs accumulated up to the point of exercising their opt-in right, after which development costs incurred and product revenue worldwide would be split equally.

Currently, KHK is not participating in the development of Bard in CTD-PAH, ADPKD, or other rare kidney diseases but is reimbursing us the majority of the costs for our registrational trial in CKD caused by Alport syndrome in Japan.  The Company’s expenses were reduced by $0.3 million for KHK’s share of the study costs for the three months ended March 31, 2019.  

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The following table summarizes our research and development expenses incurred:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

(in thousands)

 

Bardoxolone methyl

 

$

8,679

 

 

$

9,790

 

Omaveloxolone

 

 

5,803

 

 

 

2,581

 

RTA 901

 

 

337

 

 

 

384

 

RTA 1701

 

 

328

 

 

 

961

 

Other research and development expenses

 

 

10,967

 

 

 

7,691

 

Total research and development expenses

 

$

26,114

 

 

$

21,407

 

 

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 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 and SEC 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

Other income represents interest and gains earned on our cash and cash equivalents, which include money market funds.

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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Results of Operations

Comparison of the Three Months Ended March 31, 2019 and 2018 (unaudited)

The following table sets forth our results of operations for the three months ended March 31, 2019:

 

 

 

2019

 

 

2018

 

 

Change $

 

 

Change %

 

 

 

(unaudited)

 

 

 

(in thousands)

 

Collaboration revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License and milestone

 

$

7,726

 

 

$

32,168

 

 

$

(24,442

)

 

 

(76

)

Other revenue

 

 

44

 

 

 

224

 

 

 

(180

)

 

 

(80

)

Total collaboration revenue

 

 

7,770

 

 

 

32,392

 

 

 

(24,622

)

 

 

(76

)

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

26,114

 

 

 

21,407

 

 

 

4,707

 

 

 

22

 

General and administrative

 

 

10,038

 

 

 

6,628

 

 

 

3,410

 

 

 

51

 

Depreciation and amortization

 

 

170

 

 

 

101

 

 

 

69

 

 

 

68

 

Total expenses

 

 

36,322

 

 

 

28,136