Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information appearing in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, 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. You should review the sections of this Annual Report on Form 10-K captioned “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Our discussion and analyses below are focused on our 2022, 2021, and 2020 financial results, including comparisons of our year-over-year performance between these years.
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 omaveloxolone in FA and bardoxolone in rare forms of CKD. Both of our lead product candidates 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 omaveloxolone, bardoxolone, and our other Nrf2 activators have many potential clinical applications. We possess exclusive, worldwide rights to develop, manufacture, and commercialize omaveloxolone, bardoxolone, and our other Nrf2 activators, excluding certain Asian markets for bardoxolone in certain indications, which are licensed to Kyowa Kirin. In addition, we are developing cemdomespib, the lead product candidate from our Hsp90 modulator program, in neurological indications. We are the exclusive licensee of cemdomespib and have worldwide commercial rights.
Collaborations
In October 2019, we and AbbVie entered into the Reacquisition Agreement, under which we reacquired the development, manufacturing, and commercialization rights provided in the AbbVie License Agreement and the Collaboration Agreement. Under the Reacquisition Agreement, the AbbVie License Agreement and the Collaboration Agreement were amended, resulting in AbbVie granting its exclusive sublicenses back to us, such that we reacquired the worldwide rights to bardoxolone, excluding certain Asian countries previously licensed to Kyowa Kirin, and the worldwide rights to omaveloxolone and certain other Nrf2 activators. By reacquiring our rights, we were relieved from our obligations under the AbbVie License Agreement and the Collaboration Agreement.
In exchange for such rights, we agreed to pay AbbVie $330.0 million, all of which has subsequently been paid. Additionally, we will pay AbbVie an escalating, low single-digit royalty on worldwide net sales, on a product-by-product basis, of omaveloxolone and certain other Nrf2 activators.
As a result of the $330.0 million having been paid to AbbVie, the licenses granted to AbbVie and the sublicenses granted to us with respect to omaveloxolone and bardoxolone and certain other Nrf2 activators have terminated, with all rights reverting to us.
Liability Related to Sale of Future Royalties
On June 24, 2020, we closed on the Development Agreement with an affiliate of BXLS, which provided funding for the development and commercialization of bardoxolone for the treatment of CKD caused by Alport syndrome, ADPKD, and certain other rare CKD indications in return for future royalties. The Development Agreement included a $300.0 million payment by an affiliate of BXLS in return for various percentage royalty payments on worldwide net sales of bardoxolone, if and when approved in the United States or certain specified European countries, by Reata and its licensees, other than Kyowa Kirin. Pursuant to the Development Agreement, we have granted BXLS a security interest in substantially all of our assets. After a bardoxolone product approval has been obtained by the Company, the Company is obligated to make certain minimum cumulative payment amounts in 2025 through 2033, but only until BXLS has achieved certain internal rate of return target.
In addition, concurrent with the Development Agreement, the Company entered into the Purchase Agreement with affiliates of BXLS to sell an aggregate of 340,793 shares of the Company’s Class A common stock at $146.72 per share for a total of $50.0 million.
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 Kyowa Kirin, from sales of our securities, with secured loans, and from a strategic financing from BXLS. 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 Kyowa Kirin and reimbursements of expenses under the terms of our agreement with Kyowa Kirin. We have incurred losses in each year since our inception, other than in 2014. As of December 31, 2022, we had $42.3 million of cash and cash equivalents and marketable debt securities of $345.2 million and an accumulated deficit of $1,567.5 million. We continue to incur significant research and development and other expenses related to our ongoing operations. Despite the potential to receive future payments from Kyowa Kirin, 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 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 or sustain on a quarterly or annual basis. Our prior , combined with expected future , have had and will continue to have an effect on our stockholders’ equity and working capital. Our to become and remain could the market price of our Class A common stock and could our ability to raise capital, expand our business, diversify our product offerings, or continue our operations.
The probability of success for each of our product candidates and clinical programs and our ability to generate product revenue and become profitable depend upon a variety of factors, including the quality of the product candidate, clinical results, investment in the program, competition, manufacturing capability, commercial viability, and our collaborators’ ability to successfully execute our development and commercialization plans. We will also require additional capital through equity, debt, or royalty financings or collaboration arrangements in order to fund our operations and execute on our business plans, and there is no assurance that such financing or arrangements will be available to us on commercially reasonable terms or at all. For a description of the numerous risks and uncertainties associated with product development and raising additional capital, see “Risk Factors” included in this Annual Report on Form 10-K.
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 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 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 Kyowa Kirin Agreement, the AbbVie License Agreement, and the Collaboration Agreement and consists of upfront payments and milestone payments. License revenue recorded with respect to the Kyowa Kirin Agreement, the AbbVie License Agreement, and the 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 Collaboration Agreement, , and we have not recognized revenue from either of those agreements since June 2022. Under the Kyowa Kirin Agreement, we recognized the deferred revenue through mid-2022.
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 December 31, 2022, we have incurred a total of $1,259.8 million in research and development expense, a majority of which relates to the development of omaveloxolone and bardoxolone. 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 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.
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, Kyowa Kirin has allowed us to conduct clinical studies of bardoxolone in certain rare forms of kidney diseases in Japan and has reimbursed us the majority of the costs for our CARDINAL study in Japan. Kyowa Kirin is the in-country caretaker in our FALCON study in Japan and we are reimbursing Kyowa Kirin for the costs of a certain number of patients in the study.
The following table summarizes our research and development expenses incurred during the years ended December 31:
Years Ended December 31
(in thousands)
Bardoxolone
Omaveloxolone
Cemdomespib
Other research and development expenses
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 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 and SEC requirements, director and officer insurance premiums, 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 and marketable debt securities, interest expense on term loans, amortization of debt issuance costs, imputed interest on long term payables, loss on extinguishment of debt, gain on termination of lease, foreign currency exchange gains and losses, gains and losses on sales of assets, non-cash interest expense on liability related to the sale of future royalties and employee retention credit under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).
Benefit from Taxes on Income
Provision for taxes on income consists of net loss, taxed at federal tax rates and adjusted for certain permanent differences and changes in valuation allowances also affect the tax provision. During 2020, we recognized a tax benefit and receivable of $22.2 million associated with the ability to carryback an applicable prior year’s net operating losses to a preceding year to generate a refund under the CARES Act. The Company received the tax refund in 2021. Realization of deferred tax assets is generally dependent upon future earnings by jurisdiction, of which the timing and amount are uncertain for the majority of our deferred tax assets, and valuation allowances are maintained against them.
Results of Operations
Comparison of the Years Ended December 31, 2022, 2021, and 2020
The following table sets forth our results of operations for the years ended December 31:
Change %
Change %
(in thousands, except for percentage data)
Collaboration revenue
License and milestone
Other revenue
Total collaboration revenue
Expenses
Research and development
General and administrative
Depreciation
Total expenses
Other income (expense), net
Loss before taxes on income
Benefit from taxes on income
Net loss
Revenue
License and milestone revenue represented approximately 74%, 70%, and 52% of total revenue for the years ended December 31, 2022, 2021, and 2020, respectively, and consisted primarily of the recognition of previously deferred revenue relating to upfront payments and milestones, which were being recognized over our performance period. License and milestone revenue decreased by 80% during 2022 compared to 2021, and consisted of the recognition of revenue from the Kyowa Kirin Agreement. The decrease in license and milestone revenue is primarily due to the achievement of a regulatory milestone in July 2021, variable consideration previously considered constrained, under the Kyowa Kirin Agreements. We did not recognize any revenue subsequent to June 30, 2022 as our performance obligation under the Kyowa Kirin Agreement was completed.
License and milestone revenue increased by 71% during 2021 compared to 2020, and consisted of the recognition of revenue from the Kyowa Kirin Agreement. The increase in license and milestone revenue is primarily due to the achievement of a $5.0 million regulatory milestone in 2021. Upon achievement of the milestone, we recorded $4.7 million in collaboration revenue, representing a cumulative catch-up for the portion of service period relating to our performance obligation that was satisfied in prior periods.
Other revenue decreased by $2.9 million during 2022 compared to 2021, and by $0.9 million during 2021 compared to 2020, primarily due to a decrease in reimbursements of our expenses from Kyowa Kirin for manufacturing.
The following table summarizes our expenses, in thousands and as a percentage of total expenses, for the years ended December 31:
% of Total
Expenses
% of Total
Expenses
% of Total
Expenses
(in thousands, except for percentage data)
Research and development
General and administrative
Depreciation
Total expenses
Research and Development Expenses
Research and development expenses increased by 9% during 2022 compared to 2021. The increase was primarily due to increased personnel and personnel-related costs to support the product development activities.
Research and development expenses decreased by 2% during 2021 compared to 2020. The decrease was primarily due to timing of manufacturing activities related to omaveloxolone. The remaining changes included decreased stock-based compensation expense due to accelerated expense recognized during 2020, offset by an increase in personnel and personnel-related costs to support our product development activities.
Research and development expenses, as a percentage of total expenses, was 60%, 60%, and 67% for 2022, 2021, and 2020, respectively. The decrease in 2022 and 2021 compared to 2020 was primarily due to the proportionately larger increase in general and administrative expenses, compared to research and development expenses.
General and Administrative Expenses
General and administrative expenses increased by 10% during 2022 compared to 2021. The increase was primarily due to rent expense related to the new headquarters building lease that commenced in December 2021.
General and administrative expenses increased by 32% during 2021 compared to 2020. The increase was primarily due to increased spend related to commercial readiness activities, personnel and personnel-related costs to support growth in our development activities, and insurance premiums.
General and administrative expenses, as a percentage of total expenses, were 39%, 39%, and 32% for 2022, 2021, and 2020, respectively. The increase in 2022 and 2021 compared to 2020 was primarily due to the proportionately larger increase in general and administrative expenses, compared to research and development expenses.
Other Income (Expense), Net
Other income (expense), net decreased by $19.2 million during 2022 compared to 2021. The decrease was primarily due to a $6.6 million decrease of interest expense attributable to the payable to AbbVie under the Reacquisition Agreement, which was fully satisfied in 2021, a $4.9 million decrease in non-cash interest expense on liability related to the sale of future royalties due to a lower effective interest rate, a $5.8 million increase in interest income generated from marketable debt securities and a $2.1 million increase related to the employee retention credit under the CARES Act.
Other income (expense), net increased by $9.2 million during 2021 compared to 2020. The increase was primarily due to increased non-cash interest expense on liability related to the sale of future royalties and decreased interest income earned due to lower market rates, offset by decreased interest expense and loss on extinguishment of debt due to the payoff on our Term Loans in 2020.
Benefit from Taxes on Income
Benefit from taxes on income decreased by $0.4 million during 2022 compared to 2021. The decrease was primarily related to the benefit recognized in 2021 from interest earned on tax refunds related to the CARES Act, which was received in 2021.
Benefit from taxes on income decreased by $22.0 million during 2021 compared to 2020, which was primarily due to a tax benefit recognized in 2020 related to a carryback claim associated with the CARES Act.
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, the sale of royalty interests, and secured loans. To date, we have raised gross cash proceeds of $476.6 million through the sale of convertible preferred stock and $785.0 million from payments under license and collaboration agreements. We also obtained $1,222.1 million in net proceeds from our IPO, follow-on offerings, and the sale of our Class A common stock under the Purchase Agreement, and $299.0 million in net proceeds from the sale of future royalties under the Development Agreement. We have not generated any revenue from the sale of any products. As of December 31, 2022, we had available cash and cash equivalents of approximately $42.3 million and marketable debt securities of $345.2 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 the years ended December 31:
(in thousands)
Net cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Net change in cash and cash equivalents
Operating Activities
Net cash used in operating activities was $204.3 million for the year ended December 31, 2022, consisting primarily of net loss of $311.9 million adjusted for non-cash items including stock-based compensation expense of $58.7 million, non-cash interest expense on liability related to sale of future royalty of $41.8 million, and a net increase in operating assets and liabilities of $9.3 million. The change in significant items in the operating assets and liabilities that impacted our use of cash in operations includes an increase of $4.1 million in prepaids and other assets, an increase of $5.2 million in accounts payable due to timing of payments, and $7.3 million increase in operating lease obligations.
Net cash used in operating activities was $235.7 million for the year ended December 31, 2021, consisting primarily of net loss of $297.4 million adjusted for non-cash items including stock-based compensation expense of $56.8 million, non-cash interest expense on liability related to sale of future royalty of $46.7 million, depreciation and amortization expense of $7.8 million, and a net decrease in operating assets and liabilities of $49.6 million. The significant items in the change in operating assets that impacted our use of cash in operations were a decrease in income tax receivable of $22.2 million, an increase in accounts payable $8.7 million due to timing of payments, a decrease in payable to collaborators of $80.0 million for a payment made in December 2021 under the Reacquisition Agreement, and a decrease in deferred revenue of $3.0 million.
Net cash used in operating activities was $322.3 million for the year ended December 31, 2020, consisting primarily of net loss of $247.8 million adjusted for non-cash items including stock-based compensation expense of $57.6 million, non-cash interest expense on liability related to sale of future royalty of $21.9 million, loss on extinguishment of debt of $11.2 million, depreciation and amortization expense of $8.7 million, gain on lease termination of $1.3 million, and a net decrease in operating assets and liabilities of $172.7 million. The significant
items in the change in operating assets that impacted our use of cash in operations were an increase in income tax receivable of $22.2 million, an increase in accounts payable $2.9 million due to timing of payments, a decrease in payable to collaborators of $150.0 million for a payment made on June 30, 2020 under the Reacquisition Agreement, and a decreased in deferred revenue of $4.7 million.
Investing Activities
Net cash used in investing activities was $345.2 million, $1.3 million, and $0.9 million for the years ended December 31, 2022, 2021, and 2020, respectively. The increase during 2022 is due to the purchase of $661.9 million in marketable debt securities during the period, offset by $320.0 million received from maturities of marketable securities. The investing activities for 2021 and 2020, were primarily due to purchases of property and equipment.
Financing Activities
Net cash provided by financing activities for the years ended December 31, 2022 and 2021, was $1.5 million and $9.1 million, respectively, primarily consisting of option exercises.
Net cash provided by financing activities for the year ended December 31, 2020 was $477.1 million, primarily due to net proceeds of $277.5 million from our follow-on public offering, $349.0 million in net proceeds received under the Purchase Agreement and Development Agreement with BXLS, and $17.8 million from options exercised, offset by $167.2 million to pay off our Term Loans.
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.
In October 2019, we entered into the 2019 Lease Agreement, relating to a new headquarter building lease of approximately 327,400 square feet of office and laboratory space located in Plano, Texas.
In December 2021, we obtained control of the building, and, accordingly, we recorded related right-of-use assets and the lease liabilities during the fourth quarter of 2021.
In December 2021, we paused the tenant improvement activities for the new headquarter building. If at a future date, we determine to move into the building, capital expenditures will need to be incurred based on our occupancy requirements at that time.
The initial term of the lease is 16 years, with up to ten years of extension at our option. The annual base rent payment, which began June 2022, will be determined based on the project cost, subject to an initial annual cap of approximately $13.3 million. 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.
In July 2021, Kyowa Kirin announced the submission of an NDA in Japan for bardoxolone for improvement of renal function in patients with Alport syndrome. We earned a $5.0 million milestone related to this event that was received and recognized in the third quarter of 2021 through June 30, 2022.
In December 2020, we closed a follow-on underwritten public offering of 2,000,000 shares of our Class A common stock for gross proceeds of $281.7 million. Net proceeds to us from the offering were approximately $277.5 million, after deducting underwriting discounts and commissions and offering expenses.
In June 2020, we closed on the Development Agreement and Purchase Agreement, each dated June 10, 2020, under which certain BXLS entities paid us an aggregate of $350.0 million in exchange for future royalties on bardoxolone and an aggregate of 340,793 shares of our Class A common stock at $146.72 per share.
In June 2020, we paid off our Term Loans with Oxford Finance LLC and Silicon Valley Bank, which included payments for principal of $155.0 million, prepayment fees of $5.4 million, exit fees of $6.7 million, and accrued and unpaid interest of $1.0 million.
In March 2020, the United States enacted the CARES Act. Under its provisions, we recognized a tax benefit and receivable of $22.2 million associated with the ability to carryback an applicable prior year’s net operating losses to a preceding year to generate a refund.
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 Kyowa Kirin 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 fourth quarter of 2024. However, we anticipate opportunistically raising additional capital before that time through equity offerings, collaboration or license agreements, additional debt financings, 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 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 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, loans, royalty financings, and collaboration or license transactions. 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 our business, financial condition, and prospects.
Our forecast of the period through which our financial resources will be adequate to support our operations is a forward-looking statement 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 collaborators;
the costs necessary to obtain regulatory approvals, if any, for our product candidates in the United States and other jurisdictions, and the 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 Kyowa Kirin 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 or 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 systems or those of our suppliers, vendors, or collaborators who store or transmit our data;
the costs associated with being a public company;
any additional costs we incur, or delays in clinical trials we experience, 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
Contractual Obligations
We have various contractual obligations and other commitments that require payments at certain specified periods. The following table summarizes our contractual obligations and commitments as of December 31, 2022:
Payments due by period
Less than
1 year
years
years
6 years and beyond
Total
(unaudited, in thousands)
Operating lease obligations (1)
Total contractual obligations
Above table assumes one year rent abatement is applied beginning in June 2023 following FDA approval of omaveloxolone
Clinical Trials
As of December 31, 2022, 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 with United 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.
While our significant accounting policies are described in more detail in Note 2 of Notes to Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical to understanding the judgments and estimates used by management in the preparation of our financial statements.
Research and Development Costs
All research and development costs are expensed as incurred, including costs for drug supplies used in research and development or clinical trials, property and equipment acquired specifically for a finite research and development project, and nonrefundable deposits incurred at the initiation of research and development activities. Research and development costs consist principally of costs related to clinical trials managed directly by us and through CROs, manufacture of clinical drug products for clinical trials, preclinical study costs, discovery research expenses, facilities costs, salaries, and related expenses.
As part of the process of recording research and development costs, we are required to estimate and accrue expenses, the largest of which are research and development expenses. This process involves the following:
communicating with appropriate internal personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost;
estimating and accruing expenses in our consolidated financial statements as of each balance sheet date based on facts and circumstances known to us at the time; and
periodically confirming the accuracy of our estimates with service providers and making adjustments, if necessary.
Examples of estimated research and development expenses that we accrue include:
payments to CROs in connection with preclinical and toxicology studies and clinical trials;
payments to investigative sites in connection with clinical trials;
payments to CMOs in connection with the production of clinical trial materials; and
professional service fees for consulting and related services.
We base our expense accruals related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and 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.
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.
Liability Related to Sale of Future Royalties
On June 24, 2020, we closed on the Development Agreement with certain BXLS entities, which provided funding for the development and commercialization of bardoxolone for the treatment of CKD caused by Alport syndrome, ADPKD, and certain other rare CKD indications in return for future royalties. We accounted for the Development Agreement as a sale of future revenues resulting in a debt classification, primarily because we have significant continuing involvement in generating the future revenue on which the royalties are based. The debt will be amortized under the effective interest rate method and, accordingly, we are recognizing non-cash interest expense over the estimated term of the Development Agreement. The liability related to the sale of future royalties, and the debt amortization, are based on our current estimate of future royalties expected to be paid over the estimated term of the Development Agreement. We will periodically assess the expected royalty payments and, if materially different than our previous estimate, will prospectively adjust and recognize the related non-cash interest expense. The transaction costs associated with the liability will be amortized to non-cash interest expense over the estimated term of the Development Agreement.
Revenue Recognition
We recognize revenue generated primarily from licensing fees received under our collaborative licensing agreements in prior years with AbbVie and currently with Kyowa Kirin and reimbursements for expenses from Kyowa Kirin. The terms of the agreements include non-refundable upfront fees, funding of research and development activities, payments based upon achievement of milestones, and royalties on net product sales.
Under Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the promised goods or services in the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as the entity satisfies a performance obligation.
At contract inception, we assess the goods or services promised within each contract, determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when or as the performance obligation is satisfied.
Licenses of intellectual property: If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from non-refundable up-front fees allocated to the license when the license is transferred to the customer, and the customer can use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
Milestone payments: At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission by us) is included in the transaction price, which is then allocated to each performance obligation. Milestone payments that are not within our control, such as approvals from regulators, are not considered probable of being achieved until those approvals are received.
At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and, if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration, and other revenues and earnings in the period of adjustment and in future periods through the end of the performance obligation period.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and where the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of its licensing arrangements.
Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the customer’s discretion are generally considered options. We assess if these options provide a material right to the licensee and, if so, they are accounted for as separate performance obligations. If we are entitled to additional payments when the customer exercises these options, any additional payments are recorded when the customer obtains control of the goods, which is upon delivery.
For a complete discussion of accounting for collaborative licensing agreements, see Note 3, Collaboration Agreements of Notes of Consolidated Financial Statements contained in this Annual Report on Form 10-K. Our revenue to date has been generated primarily from licensing fees received under our collaborative licensing agreements with AbbVie and Kyowa Kirin and reimbursements for expenses from Kyowa Kirin. The terms of the agreements include non-refundable upfront fees, funding of research and development activities, payments based upon achievement of milestones, and royalties on net product sales.
Income Taxes
We account for income taxes and the related accounts under the liability method. Deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Realization of deferred tax assets is generally dependent upon future earnings by jurisdiction, if any, the timing and amount of which are uncertain. As of December 31, 2022, based on known factors, for the majority of our deferred tax assets, we cannot conclude that it is more likely than not that they will be utilized, and we have recorded valuation allowances to offset these deferred tax assets.
We account for uncertain tax positions in accordance with the provisions of Accounting Standards Codification (ASC) 740, Income Taxes . We recognize tax benefit for uncertain tax positions if we believe it is more likely than not that the position will be upheld on audit based solely on the technical merits of the tax position. We evaluate uncertain tax positions after consideration of all available information. As of December 31, 2022, the interest accrued related to provision for or due to uncertain tax positions was immaterial.
Stock-Based Compensation
We measure and recognize compensation expense for all stock option and restricted stock awards based on the estimated fair value of the award on the grant date. We use the Black-Scholes option pricing model to estimate the fair value of stock option awards. The fair value is recognized as expense, over the requisite service period, which is generally the vesting period of the respective award, on a straight-line basis when the only condition to vesting is continued service. If vesting is subject to a performance condition, recognition is based on the derived service period of the award. Expense for awards with performance conditions is estimated and adjusted on a quarterly basis based upon the assessment of the probability that the performance condition will be met. We begin to recognize the value of the performance-based awards when we determine the achievement of each performance condition is deemed probable. At the probable date, we will record a cumulative expense catch-up, with the remaining amortized over the remaining service period. Use of the Black-Scholes option pricing model requires management to apply judgment under highly subjective assumptions. These assumptions include:
Expected term —The expected term represents the period that the stock-based awards are expected to be outstanding and is based on the average period the stock options are expected to be outstanding and was based on our historical information of the options exercise patterns and post-vesting termination behavior.
Expected volatility —During the first two months of the year, we did not have sufficient trading history to estimate the volatility of our common stock, thus, the expected volatility was estimated based on our own historical volatility since our IPO and the average volatility for comparable publicly traded biopharmaceutical companies. When selecting comparable publicly traded biopharmaceutical companies on which we based our expected stock price volatility, we selected companies with comparable characteristics to us, including enterprise value, risk profiles, position within the industry, and historical share price information sufficient to meet the expected life of the stock-based awards. For the remainder part of the year, the expected volatility was estimated based on our own historical volatility since our IPO.
Risk-free interest rate —The risk-free interest rate is based on the United States Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.
Expected dividend —We have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.
We will continue to use judgment in evaluating the expected volatility and expected terms utilized for our stock-based compensation calculations on a prospective basis. We account for forfeitures of share-based awards when they occur.
Stock option and RSU awards have been granted to non-employees, in connection with research and consulting services provided to us, and to employees, under our LTIP Plan. Equity awards generally vest over terms of four or five years. For employees, stock-based compensation expense is recorded ratably through the vesting period for each stock option or tranche of restricted stock award. In the case of performance-based awards, compensation expense is recognized for awards when achievement of the underlying performance-based targets become probable, which have typically been in the same period as when the targets are achieved.
The weighted-average assumptions used in the Black-Scholes option pricing model were as follows:
Years Ended December 31
Dividend yield
Volatility
Risk-free interest rate
Expected term of options (in years)
Weighted average grant date fair value
Leases
We determine if an arrangement is a lease at inception. Lease assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our 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 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 we will exercise those options. Lease expense for operating 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.
We 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.
Key assumptions and judgments included in the determination of the lease liability include the discount rate applied to the present value of the future lease payments, and the exercise of renewal options. Our leases do not provide information about the rate implicit in the lease; therefore, we utilize an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment.
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 the SEC.
Item 7A. Quantitative and Qualitat ive Disclosures About Market Risk.
We are exposed to market risks in the ordinary course of our business. These market risks are principally limited to interest rate fluctuations. We had cash and cash equivalents of $42.3 million and marketable debt securities of $345.2 million at December 31, 2022, primarily invested in U.S. government treasuries. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general U.S. interest rates, particularly if our investments are in short-term securities. The primary objective of our investment activities is to preserve principal and liquidity while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of our investment portfolio, we do not believe an immediate and hypothetical increase of 100 basis points in interest rates would have a material effect on the fair market value of our portfolio, and accordingly we do not expect a sudden change in market interest rates to affect materially our operating results or cash flows.
We contract with research, development, and manufacturing organizations and investigational sites globally. Generally, these contracts are denominated in United States dollars. However, we may be subject to fluctuations in foreign currency rates in connection with agreements not denominated in United States dollars. We do not hedge our foreign currency exchange rate risk.
Item 8. Financial Statemen ts and Supplementary Data.
The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. An index of those financial statements is found in Item 15.
