Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Annual Report on Form 10-K, or Form 10-K , including this management's discussion and analysis of financial condition and results of operations, contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those described in or implied in these forward-looking statements as a result of various factors, including those factors set forth in the “Risk Factors” section included in Part I, Item 1A of this Form 10-K. All references to years, unless otherwise noted, refer to our fiscal years, which end on December 31. For purposes of this section, all references to “we,” “us,” “our,” “Akebia,” or the “Company” refer to Akebia Therapeutics, Inc. and its consolidated subsidiaries.
The following discussion and analysis should also be read in conjunction with the accompanying audited consolidated financial statements and related notes included in Part II, Item 8 of this Form 10-K. This section discusses 2023 and 2022 financial condition, and results of operations and year-to-year comparisons between 2023 and 2022. For discussion of 2022 items and year-over-year comparisons between 2022 and 2021 that are not included in this 2023 Form 10-K, refer to “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” found in our Form 10-K/A for the year ended December 31, 2022, that was filed with the Securities and Exchange Commission on August 28, 2023.
Business Overview
We are a fully integrated commercial-stage biopharmaceutical company committed to addressing patients’ unmet needs. We have built a business focused on developing and commercializing innovative therapeutics that we believe serves as a foundation for future growth. Our purpose is to better the life of each person impacted by kidney disease, and we have established ourselves as a leader in the kidney community. We believe our demonstrated ability to deliver value broadly to the kidney community has enabled us to build a sustainable company. Upon this solid foundation and our continued
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commitment to patients, we believe focusing on all patients who can realize a meaningful benefit from our medicines, will result in delivering value for our shareholders.
Our current portfolio includes:
• Auryxia® (ferric citrate) is an an orally administered medicine approved and marketed in the United States, or U.S. , for two indications: (1) the control of serum phosphorus levels in adult patients with dialysis dependent chronic kidney disease, or DD-CKD , and (2) the treatment of iron deficiency anemia, or IDA , in adult patients with non-dialysis-dependent chronic kidney disease, or NDD-CKD . Today, we market Auryxia in the U.S. with our well-established, nephrology-focused commercial organization. Our Japanese sublicensee, Japan Tobacco, Inc., and its subsidiary, Torii Pharmaceutical Co., Ltd., collectively, JT and Torii , commercialize ferric citrate hydrate as Riona in Japan. Averoa SAS, or Averoa , has an exclusive license to develop and commercialize ferric citrate in the European Economic Area, or EEA , Turkey, Switzerland and the United Kingdom, or UK . We expect Averoa will apply for marketing authorization for ferric citrate in Europe.
• Vafseo™ (vadadustat) is an oral hypoxia-inducible factor prolyl hydroxylase, or HIF-PH , inhibitor, approved in 36 countries as a treatment for anemia due to CKD. In the European Union, or EU , the UK, Switzerland and Australia, vadadustat is approved under the trade name Vafseo for the treatment of symptomatic anemia associated with chronic kidney disease, or CKD , in adults on chronic maintenance dialysis. In May 2023, we entered into a License Agreement with MEDICE Arzneimittel Pütter GmbH & Co. KG, or Medice , pursuant to which we granted Medice an exclusive license to develop and commercialize vadadustat for the treatment of anemia in patients with CKD in the EEA, the UK, Switzerland and Australia, or the Medice Territory . In Japan, vadadustat is approved as a treatment for anemia due to CKD in both dialysis dependent and non-dialysis dependent patients under the trade name Vafseo, and is marketed and sold by our collaborator Mitsubishi Tanabe Pharma Corporation, or MTPC . In Taiwan, vadadustat is approved for the treatment of symptomatic anemia due to CKD in adult patients on chronic maintenance dialysis and in Korea as an anemia treatment for patients with CKD on hemodialysis. MTPC plans to commercialize vadadustat in Taiwan. We continue to pursue approval for vadadustat in the U.S., and in September 2023, we completed our resubmission to our New Drug Application, or NDA , for the treatment of anemia due to CKD for dialysis dependent patients to the U.S. Food and Drug Administration, or FDA . In October 2023, the FDA acknowledged that the resubmission was complete, classified it as a Class 2 response and set a user fee goal date, or PDUFA Date , of March 27, 2024. Beyond seeking U.S. approval, we have several lifecycle management and indication expansion opportunities currently under evaluation for vadadustat, including the potential for alternative dosing and label expansion for treatment of adult patients not on dialysis.
• Our HIF-based pipeline assets are molecules being evaluated to target areas of unmet needs in acute care settings. The discovery of hypoxia-inducible factor, or HIF , laid the foundation to explore the central role of oxygen sensing in many diseases. As we have seen through the development of vadadustat as a treatment for anemia due to CKD, when stabilized, HIF triggers wide-ranging adaptive, protective responses during hypoxic or ischemic conditions. We have selected two additional HIF molecules for preclinical development: AKB-9090, for use in an acute care setting, potentially for acute kidney disease, or AKI , or acute respiratory distress syndrome, or ARDS , and AKB-10108 for retinopathy of prematurity, or ROP , in neonates.
We continue to explore additional commercial and development opportunities to expand our pipeline and portfolio of novel therapeutics through both internal research and external innovation to leverage our fully integrated team.
Factors Affecting Our Performance and Results of Operation
Financial Highlights
Net product revenue in 2023 decreased by approximately 4% to $170.3 million from $176.9 million in 2022, primarily due to a decrease in Auryxia product volume partially offset by increases in pricing, improved payor mix and execution of our contracting strategy with third-party payors.
We have incurred net losses in each year since inception. Our net losses were $51.9 million and $94.2 million for the years ended December 31, 2023 and 2022, respectively. Substantially all of our net losses resulted from costs incurred in connection with the continued commercialization of Auryxia and development efforts relating to vadadustat, including conducting clinical trials of, and seeking regulatory approval for, vadadustat, providing general and administrative support for these operations and protecting our intellectual property.
Financial Components
Product Revenue
We generate product revenue from commercial sales of Auryxia to a limited number of wholesale distributors as well as certain specialty pharmacy providers. Our net product revenue includes many variables, including judgments and estimates of discounts, rebates and product returns, which can fluctuate from quarter-to-quarter and year-over-year. We evaluate, at least
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annually and more frequently, if needed, the price of Auryxia, which will lose exclusivity, or LoE , in March 2025. We expect our product revenue to continue to be generated primarily from our commercial sales of Auryxia.
Due to the buying patterns of our customers we tend to have seasonality from quarter to quarter. In general, our first quarter usually has lower revenues than the preceding fourth quarter, the second and third quarters have higher revenues than the first quarter, and the fourth quarter revenues are the highest in the year. While seasonality may affect quarterly comparisons within a fiscal year, it generally is not material to our annual consolidated results. However, we expect Auryxia to be included in the ESRD bundle starting in January 2025, which coupled with Auryxia's LoE in March 2025 may impact the buying patterns of our existing customers during 2024, and therefore their buying pattern in 2024 may be different than their historical practices.
We believe the Centers for Medicare & Medicaid Services', or CMS , decision to include phosphate binders in the dialysis bundle could potentially lead to higher sales of Auryxia after the LoE date than in other LoE scenarios, and plan to work with payors and providers to seek to continue the use of Auryxia beyond LoE.
License, Collaboration and Other Revenue
License, collaboration and other revenue includes revenue earned under collaboration agreements, license fees, royalty payments and revenue from product we supply under our license and supply agreements with our collaboration partners.
We expect to continue to generate revenue from our collaboration and, if applicable, supply agreements with Medice, MTPC, JT and Torii and any other collaborations into which we have entered or may enter, including our collaboration with Vifor (International) Ltd. (now a part of CSL Limited), or CSL Vifor, if vadadustat is approved in the U.S.
In 2022, we recorded a nonrefundable, non-creditable termination fee pursuant to the terms of the Termination and Settlement Agreement, or Termination Agreement , with Otsuka Pharmaceutical Co. Ltd, or Otsuka. Furthermore, in 2023 we recorded a payment received from Otsuka, in connection with the Packaging Validation Transfer Agreement, to license, collaboration and other revenue. Also in 2022, we recorded revenue from cost sharing agreements under which we were reimbursed by our collaboration partner for expenses incurred by us for research and development, or R&D , activities and, may in the future generate revenue from potential co-promotion activities, under our collaboration agreements. We do not expect to recognize any future revenue under any of our collaboration agreements with Otsuka, which were terminated on June 30, 2022.
Cost of Goods Sold
Cost of goods sold, or COGS , - Cost of product and other revenue - COGS - Cost of product and other revenue includes costs closely correlated or directly related to the costs to manufacture commercial drug substance and drug product for Auryxia, including at our contract manufacturing organizations, or CMOs , as well as indirect costs. Direct and indirect costs include fees for packaging, shipping, insurance and quality assurance, idle capacity charges, changes in reserves for excess inventory, write-offs for inventory that fails to meet specifications or is otherwise no longer suitable for commercial sale, including scrap, changes in our firm purchase commitment liability and royalties due to the licensor of Auryxia related to U.S. and Japan product sales recognized during the period.
COGS also includes costs to manufacture drug product provided to MTPC and Medice for commercial sale of Vafseo in Japan and the Medice Territory, respectively, as well as personnel-related costs, including salaries and bonuses, employee benefits and stock-based compensation attributable to employees in particular functions and associated directly with the manufacturing of our commercial products.
Cost of product and other revenue for a newly launched product does not include the full cost of manufacturing until the initial pre-launch inventory is depleted and additional inventory is manufactured and sold. Unless and until we receive regulatory approval for vadadustat, in the U.S. we record costs incurred to manufacture the U.S. pre-launch inventory, such as raw materials, drug substance and drug product conversion costs as R&D, expense. Likewise, the cost of product and other does not include the full cost of manufacturing until the initial pre-launch inventory, for the supply of vadadustat product to Medice which was previously expensed as R&D is depleted.
Cost of goods sold - Amortization of intangible asset - In addition, COGS includes the amortization of development product rights for Auryxia through the end of 2024.
Research and Development Expenses
R&D expenses consist primarily of costs incurred for the development of vadadustat and costs associated with our pipeline which includes:
• personnel-related expenses, including salaries, bonuses, employee benefits, stock-based compensation and travel expenses for employees engaged in R&D functions;
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• costs associated with feasibility and potential new manufacturing processes and methods for our commercial products;
• regulatory registration and related fees for non-commercial products;
• expenses incurred under agreements with contract research organizations, or CROs , and investigative sites that conduct our clinical trials;
• the cost of acquiring, developing and manufacturing clinical trial materials through contract manufacturing organizations, or CMOs ;
• facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies associated with our laboratory space as well as our R&D team;
• costs associated with discovery and development for preclinical, clinical and regulatory activities; and
• costs associated with the pre-launch inventory build for vadadustat in the U.S., for which the FDA set a PDUFA date of March 27, 2024 for our NDA resubmission, and in Europe prior to the European Commission, or EC , approval in April 2023.
R&D costs are expensed as incurred. Advance payments made for goods or services to be received in the future for use in R&D activities are recorded as prepaid expenses and other current assets. The prepaid amounts are expensed as the benefits are consumed. Costs for certain development activities 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 cannot determine with certainty the duration and completion costs of our R&D projects, the costs of related clinical development, or if, when, or to what extent we will generate revenue from the commercialization or sale of any of our product candidates. In addition, we may never obtain marketing approval for vadadustat in the U.S.
From inception through December 31, 2023, we have incurred $1.6 billion in R&D expenses. We expect to incur significant R&D expenditures for the foreseeable future as we continue the development of Auryxia, vadadustat and any other product or product candidate, including those that may be in-licensed or acquired.
A significant portion of our R&D costs have been external costs, which we track on a program-by-program basis as well as costs related to possible new manufacturing processes and methods associated with our commercial product. These external costs include fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical trials and costs related to acquiring and manufacturing clinical trial materials, including costs paid to CMOs to manufacture clinical trial materials.
We do not track our internal personnel and facilities costs on a program-by-program basis as our personnel are deployed across multiple R&D projects.
Each of our products and product candidates has technical, clinical, regulatory, and commercial risk, including those discussed more fully under the heading “Risk Factors” in Part I, Item 1A of this Form 10-K. A change in the outcome of any of the variables with respect to the development of Auryxia, vadadustat or any other product or product candidate could result in a significant change in the costs and timing associated with that development.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A , expenses consist primarily of compensation for personnel, including stock-based compensation related to commercial, marketing, executive, finance and accounting, information technology, corporate and business development and human resource functions. Other SG&A expenses include costs for marketing initiatives for our commercial products, market research and analysis on our commercial product and potential product candidates, conferences and trade shows, travel expenses, professional services fees (including legal, patent, accounting, audit, tax, and consulting fees), insurance costs, general corporate expenses and allocated facilities-related expenses, including rent and maintenance of facilities.
License Expense
License expense relates to royalties due to Panion & BF Biotech, Inc., or Panion , for sales of Auryxia in the U.S. and Riona in Japan.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income on our interest-bearing accounts, interest expense related to our term loans, accretion of the debt discount on our term loans as well as changes in the fair value of our derivative liabilities, amortization of the discount on the liability related to the termination fees associated with the termination agreement with BioVectra Inc., or BioVectra , entered into in December 2022, or the BioVectra Termination Agreement , and the amortization of the discount and deferred gain related to our refund liability to CSL Vifor. See Note 10, Commitments and
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Contingencies, in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information on the BioVectra Termination Agreement.
Recent Events
Borrowing Under BlackRock Term Loans and Repayment of Pharmakon Term Loans
On January 29, 2024, we entered into a secured term loan facility with Kreos Capital VII (UK) Limited , or Kreos , which are funds and accounts managed by BlackRock Inc., collectively BlackRock , or the BlackRock Credit Agreement , that provides for an aggregate principal amount of up to $55.0 million made available under the following three tranches:
(i) Tranche A — $37.0 million, drawn down on the closing date of the BlackRock Credit Agreement, of which we received $34.5 million, net of debt issuance costs, fees and expenses and was used to repay our senior secured term loans, or the Pharmakon Term Loans , with Pharmakon Advisors LP, or Pharmakon , of $35.0 million,
(ii) Tranche B — $8.0 million available in a single draw through December 31, 2024 and
(iii) Tranche C — $10.0 million available in a single draw through December 31, 2024.
Tranche B and C are only available subject to certain conditions, including receipt of marketing approval for vadadustat from the FDA and, in the case of Tranche C, receipt of a certain amount of cumulative gross cash proceeds from the sale of common stock.
On January 29, 2024, we also entered into a warrant agreement with Kreos Capital VII Aggregator SCSp, an affiliate of Kreos, pursuant to which we (i) issued a warrant to purchase 3,076,923 shares of our common stock, at an exercise price per share of $1.30 (subject to standard adjustments for stock splits, stock dividends, rights offerings and pro rata distributions), or the Exercise Price , and (ii) will issue at the time of drawdown of the Tranche C Loan, if applicable, a warrant to purchase 1,153,846 shares of our common stock, at the Exercise Price. Each warrant shall be exercisable for eight years from date of issuance.
See Note 7, Indebtedness, in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information.
At-the-Market (ATM) Offering
On April 7, 2022, we entered into an Open Market Sale Agreement SM , or Sales Agreement , with Jefferies LLC as agent, to sell up to $26.0 million of our common stock at current market prices from time to time. During the quarter and year ended December 31, 2023, we sold 6,189,974 shares of common stock under this program with net proceeds of $6.7 million, after deducting commissions and other offering expenses. Including the amount sold during the year ended December 31, 2023, through the date of the filing of this Form 10-K, we sold 19,451,285 shares of our common stock under the Sales Agreement with net proceeds of $25.4 million, after deducting commissions and other offering expenses.
PDUFA Date - March 27, 2024
On March 29, 2022, we received a complete response letter, or CRL , from the FDA, in response to our NDA for vadadustat for the treatment of anemia due to CKD in adult patients in its present form. In October 2022, we submitted a Formal Dispute Resolution Request with the FDA and in May 2023, the Office of New Drugs, or OND , denied our appeal but provided a path forward for us to resubmit the NDA for vadadustat for the treatment of anemia due to CKD for dialysis dependent patients without the need for us to generate additional clinical data. In September 2023, we completed our resubmission to our NDA for vadadustat for the treatment of anemia due to CKD in adult patients on dialysis. In October 2023, the FDA acknowledged our NDA resubmission was complete, classified it as a Class 2 response and set a PDUFA date of March 27, 2024.
Impact of Inflation
We are experiencing rising costs for certain inflation-sensitive operating expenses, such as labor, and certain of our service providers are heavily dependent on labor. We do not believe these impacts were material to our net loss during the year ended December 31, 2023 or will be going forward. However, significant sustained inflation rates driven by the macroeconomic environment or other factors could negatively impact our margins, profitability and results of operations in future periods.
Results of Operations
The tables and discussion below present the results for the periods indicated. The year ended December 31, 2022 has been updated to reflect the errors revised in prior periods and as described in more detail in Note 1, Revision of Previously Issued Financial Statements , in the notes to the consolidated financial statements found in Part II, Item 8 of our 2022 Form 10-K/A filed with the SEC on August 28, 2023:
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Years ended December 31,
Change 2023-2022
(dollars in thousands) 2023 2022 $ %
Revenues
Product revenue, net $ 170,301 $ 176,949 $ (6,648) (4) %
License, collaboration and other revenue 24,322 115,535 (91,213) (79) %
Total revenues 194,623 292,484 (97,861) (33) %
Cost of goods sold
Cost of product and other revenue
38,107 49,526 (11,419) (23) %
Amortization of intangible asset 36,042 36,042 — — %
Total cost of goods sold 74,149 85,568 (11,419) (13) %
Operating expenses
R&D 63,079 129,986 (66,907) (51) %
SG&A 100,233 138,601 (38,368) (28) %
License 3,237 3,175 62 2 %
Restructuring 181 15,933 (15,752) (99) %
Total operating expenses 166,730 287,695 (120,965) (42) %
Operating loss (46,256) (80,779) 34,523 (43) %
Other expense, net (5,145) (12,541) 7,396 (59) %
Loss on extinguishment of debt — (906) 906 (100) %
Loss on termination of lease (524) — (524) *
Net loss $ (51,925) $ (94,226) $ 42,301 (45) %
*Percentage change not meaningful.
Product Revenue, Net— Net product revenue is derived from sales of our only commercial product in the U.S., Auryxia. We distribute Auryxia principally through a limited number of wholesale distributors as well as certain specialty pharmacy providers.
Net product revenue was $170.3 million for the year ended December 31, 2023, compared to net product revenue of $176.9 million for the year ended December 31, 2022. The decrease was primarily due to a reduction in volume, partially offset by price increases, favorable payor mix and execution of our contracting strategy with third party payors.
Auryxia will lose exclusivity in the U.S. in March 2025, which may have a negative impact on revenue. We believe CMS's decision to include phosphate binders in the dialysis bundle could potentially lead to higher sales of Auryxia after the LoE date than in other LoE scenarios, and plan to work with third-party payors and providers to continue the use of Auryxia beyond LoE.
License, Collaboration and Other Revenue— License, collaboration and other revenue was $24.3 million for the year ended December 31, 2023, compared to $115.5 million for the year ended December 31, 2022. The decrease was due primarily to the termination of the Otsuka agreements in June 2022 under which we recognized $92.3 million and a reduction of $12.5 million in revenue recognized from the supply of drug product to MTPC, partially offset by a one-time $10.0 million upfront payment from Medice received in 2023 in connection with entering into our license agreement with Medice for their development and commercialization of vadadustat in the EU.
We do not expect to recognize any future revenue under any of the Otsuka agreements, which were terminated on June 30, 2022. Additionally, we expect our revenue under our supply agreement with MTPC to continue to decline due to the assignment of our supply agreement with Esteve Química, S.A. to MTPC in December 2022.
See Note 12, License, Collaboration and Other Revenue , in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information.
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A further breakdown of the license, collaboration and other revenue is as follows:
Years Ended December 31,
License, Collaboration and Other Revenue (dollars in thousands)
2023 2022
License Fees:
Medice upfront license payment $ 10,000 $ —
Drug Product Supply:
MTPC vadadustat drug product supply 3,738 16,191
Medice vadadustat drug product supply 968 —
Drug Product Supply Subtotal
4,706 16,191
Royalties:
JT and Torii royalties 5,394 5,291
MTPC royalties 1,997 1,777
Royalties Subtotal
7,391 7,068
Otsuka U.S. and International Agreements (Terminated) 2,225 92,276
Total License, Collaboration and Other Revenue $ 24,322 $ 115,535
Cost of Goods Sold: Cost of Product and Other Revenue—Cost of product and other revenue was $38.1 million for the year ended December 31, 2023, compared to $49.5 million for the year ended December 31, 2022. The decrease was driven by lower year-over-year sales volume and a reduction in the write-downs of inventories to net realizable value in 2023. In addition, for the year ended December 31, 2023, we realized a lower cost of product and other revenue of $4.3 million due to our ability to commercially sell inventory previously written-down as excess inventory. Primarily during the first half of 2024, we anticipate realizing lower costs of up to $12.3 million related to our ability to commercially sell inventory previously written-down as excess inventory. For the year ended December 31, 2023, we recorded $1.5 million related to our firm purchase commitment liability.
For the year ended December 31, 2022, we recorded a net benefit of $37.2 million comprised of a one-time $28.7 million termination fee in connection with the BioVectra Termination Agreement offset by a one-time benefit of $65.9 million due to the reduction of our firm purchase commitment liability in connection with the BioVectra Termination Agreement.
We expense pre-launch inventory for the U.S. and Medice Territory, including certain manufacturing related expenses as R&D expenses until the product receives the required approval. Medice obtained marketing authorization from the EMA for Vafseo in April 2023. During 2023, under a side-letter, we sold certain lots of Vafseo to Medice. If the pre-launch inventory had been capitalized and the associated cost recognized when we sold the product, cost of product and other revenue for the year ended December 31, 2023 would have increased by approximately $0.8 million. The selling of the remaining zero cost inventories of Vafseo on hand of approximately $28.4 million as of December 31, 2023 will be dependent on the timing of sales of Vafseo related in the U.S., if approved, and Medice Territory.
Cost of Goods Sold: Amortization of Intangible Asset— Amortization of intangible asset relates to the acquired developed product rights for Auryxia, which is being amortized using a straight-line method over its estimated useful life of approximately six years. Amortization of the intangible asset during each of the years ended December 31, 2023 and 2022 was $36.0 million and will continue through the end of 2024.
R&D Expenses— R&D expenses were $63.1 million for the year ended December 31, 2023, compared to $130.0 million for the year ended December 31, 2022. The decrease of $66.9 million was a result of the completion of certain clinical trials coupled with cost reduction efforts that began in 2022 following the complete response letter for vadadustat in the U.S. In 2022, we began streamlining and optimizing our operations to align with our business goals which yielded savings of approximately $15.8 million in 2023, primarily due to the reduced headcount related costs as a result of the 2022 reduction in force and the overall lower headcount in 2023. In 2023, clinical trial costs decreased by approximately $23.7 million, which is largely attributed to the wind-down of certain clinical trials. We also slowed the production of pre-launch inventory while we resubmitted our NDA to the FDA. We submitted the revised NDA in September 2023 and are awaiting a response from the FDA on our PDUFA date of March 27, 2024. We believe we have sufficient levels of pre-launch inventory on hand to support both the U.S., if approved, and the European launch that were previously expensed in the current or prior years to R&D expenses.
During 2022, we incurred higher regulatory compliance fees associated with vadadustat, higher costs associated with the exploration of a new manufacturing method and process costs related to Auryxia and recorded a $8.8 million non-cash
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expense in connection with the R&D services the Company received from Otsuka. In addition, in 2022, received $5.4 million from our then collaboration partner which was used to offset the cost of the pre-launch inventory of $13.0 million ($7.6 million net).
The following table summarizes our R&D expenses for the years ended December 31, 2023 and 2022 (in thousands):
Years ended December 31,
2023 2022
Vadadustat clinical trial and other external costs $ 14,792 $ 51,196
Vadadustat pre-launch inventory
6,434 7,589
External costs for other programs, including feasibility and new processes and methods associated with commercial products 7,902 21,422
Total external R&D expenses 29,128 80,207
Internal personnel, consulting, facilities and other 33,951 49,779
Total R&D expenses $ 63,079 $ 129,986
We expect to incur significant R&D expenses in future periods in support of ongoing or planned studies with respect to the development of potential product candidates and our product candidate portfolio as well as vadadustat.
Selling, General and Administrative Expenses— SG&A expenses were $100.2 million for the year ended December 31, 2023, compared to $138.6 million for the year ended December 31, 2022. The decrease of $38.4 million was primarily due to decreased headcount related costs, including stock-based compensation, as a result of the 2022 reductions in force, decreased professional service, consulting and outsourced contract expenses and lower marketing and promotional expenses. In addition, we successfully reduced our facilities footprint in May 2023 when we assigned our lease for 27,924 square feet of office space that was located in the Boston, Massachusetts, or the Boston Lease , allowing us to reduce our costs by approximately $2.4 million annually. See Note 9, Leases, in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information on the Boston Lease.
While we expect to continue to find ways to operate more efficiently and reduce our general and administrative expenses, we will invest those savings in our sales and marketing and commercial efforts as we prepare for the launch of vadadustat, if approved in the U.S.
License Expenses— License expense related to royalties due to Panion for sales of Riona in Japan were $3.2 million for each of the years ended December 31, 2023 and 2022.
Restructuring Expenses— Restructuring expenses were $0.2 million for the year ended December 31, 2023, compared to $15.9 million for the year ended December 31, 2022. Following the receipt of the complete response letter, or CRL , for vadadustat in the second quarter of 2022, we implemented a reduction of our workforce which reduced our headcount by approximately 42% and impacted all departments, including several members of senior management. On November 7, 2022, we implemented a further reduction in our workforce by approximately 14% consisting solely of individuals within the commercial organization as a result of our decision to shift to a strategic account management focused model for our commercial efforts. These actions reflected our determination to refocus our strategic priorities around our commercial product, Auryxia, and our development portfolio, and were steps in a broader cost savings plan to significantly reduce our operating expense profile. We continue to decrease our operating expenses by seeking to operate more efficiently and curtail non-headcount related expense growth. We expect to slightly increase our headcount primarily on our commercial and medical affairs teams in 2024 in connection with a vadadustat launch, if approved.
Other Expense, Net— Other expense, net, was $5.1 million for the year ended December 31, 2023, compared to $12.5 million for the year ended December 31, 2022. The decrease was primarily due to a decrease in interest expense as a result of reducing our outstanding principal balance on the Pharmakon Term Loans by $32.0 million offset by a nearly 228 basis point increase in the interest rate since the year ended December 31, 2022. In addition, we no longer record interest on our liability for the sale of future royalties.
Loss on Extinguishment of Debt— During the year ended December 31, 2022, we recorded a debt extinguishment loss of $0.9 million related to the principal prepayments made on the Pharmakon Term Loans pursuant to the Second Amendment and Waiver.
Loss on Lease Termination —On May 26, 2023 we incurred a loss on lease termination of $0.5 million in connection with the assignment of our Boston Lease. In accordance with ASC 842, Leases , we wrote off the right-of-use asset and lease liability associated with the Boston Lease, and recognized the difference between the right-of-use asset and the lease liability offset by the payment we made to LG Chem Life Sciences Innovation Center, Inc. in connection with the assignment of $1.3 million. See Note 9, Leases , in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information.
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Liquidity and Capital Resources
As of December 31, 2023, we had cash and cash equivalents of approximately $42.9 million and restricted cash of $1.7 million.
To date, we have funded our operations principally through sales of our common stock, including through our employee stock purchase plan, product sales, payments received from our collaboration and licensing partners, borrowings under term loans, a working capital payment from CSL Vifor also referred to as a refund liability and a royalty transaction. From inception through December 31, 2023, we raised approximately $820.2 million of net proceeds from the sale of equity, including $519.8 million from various underwritten public offerings, $230.4 million from at-the-market offerings, or ATM Offerings, pursuant to our sales agreement with Jefferies LLC and prior sales agreements with Cantor Fitzgerald & Co., and $70.0 million from the sale of 7,571,429 shares of common stock to CSL Vifor. From January 1, 2024 through February 23, 2024, we sold 13,261,311 shares of our common stock under our Sales Agreement, resulting in proceeds to us of $18.7 million, net of offering expenses, which are not included in the above amounts reported under the ATM sales agreement.
We have incurred recurring losses and negative cash flow from operations in each year since inception and anticipate net losses and negative cash flows for the near future. For the years ended December 31, 2023 and 2022, we incurred net operating losses of $51.9 million and $94.2 million, respectively. As of December 31, 2023 and 2022, we had an accumulated deficit of $1.6 billion.
We currently have exclusive rights under a series of patents and patent applications to commercialize Auryxia in the U.S. that protect us from generic drug competition until March 2025. Following LoE, in the U.S., we may not be able to realize enough product revenue from sales of Auryxia to realize net profits from product sales. While we believe CMS's decision to include phosphate binders in the dialysis bundle could potentially lead to higher sales of Auryxia after the LoE date than in other LoE scenarios, and plan to work with payors and providers to continue the use of Auryxia beyond LoE, Auryxia product sales have not generated, and may not generate, now or following LoE in the U.S., sufficient product revenue to realize net profits from product sales to cover our current or long-term operating costs.
We believe our existing cash resources and the cash we expect to generate from product, royalty, supply and license revenues as well as the borrowings and potential future borrowing that are available under the BlackRock Credit Agreement and the working capital liability are sufficient to fund our current operating plan for at least twenty-four months if vadadustat is approved in the U.S. and for at least twelve months from filing the Form 10-K, if vadadustat is not approved in the U.S. However, if our operating performance deteriorates significantly from the levels expected in our operating plan, or if vadadustat is not approved in the U.S., it would have an adverse effect on our liquidity and capital resources and could affect our ability to continue as a going concern in the future. In addition, we may also seek to sell additional private or public equity, enter into new debt transactions, explore potential strategic transactions or a combination of these approaches or other strategic alternatives. If we raise additional funds by issuing equity securities, our shareholders would experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available to us in amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital in sufficient amounts when needed or on attractive terms, we may not be able to pursue development and commercial activities related to Auryxia and vadadustat, if approved, or any additional products and product candidates, including those that may be in-licensed or acquired. Any of these events could significantly harm our business, financial condition and prospects.
There can be no assurance that the current operating plan will be achieved in the time frame anticipated by us, or that our cash resources will fund our operating plan for the period of time anticipated by us, or that additional funding will be available on terms acceptable to us, or at all. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves numerous risks and uncertainties, and actual results could vary as a result of a number of factors, many of which are outside our control. We have based this estimate on assumptions that may be substantially different than actual results, 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, those described under Part I, Item 1A. Risk Factors under the heading "Risks Related to our Financial Position, Need for Additional Capital and Growth Strategy."
Contractual Obligations and Commitments
Debt Agreements and Other Funding Arrangements
BlackRock Term Loans
On January 29, 2024, or the Closing Date , we entered into the BlackRock Credit Agreement, which provides for a senior secured term loan facility, in the aggregate principal amount of up to $55.0 million, or the Term Loan Facility . The initial tranche of $37.0 million, or the Tranche A Loan , was funded on the Closing Date and used to pay off the Pharmakon Term Loans. The Term Loan Facility provides for additional tranches available as follows: (i) $8.0 million available in a single draw
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through December 31, 2024, or the Tranche B Loan , and (ii) $10.0 million available in a single draw through December 31, 2024, or the Tranche C Loan and, together with the Tranche A Loan and the Tranche B Loan, the Term Loans . The Term Loan Facility matures on March 31, 2025, which will be automatically extended to January 29, 2028 if we receive FDA approval for vadadustat on or prior to June 30, 2024, or the BlackRock Maturity Date .
We are required to make interest-only payments until December 31, 2026 after which, we will begin making equal monthly principal payments.
The Term Loan Facility will accrue interest at a floating annual rate equal to the sum of (i) term Secured Overnight Financing Rate, or SOFR , for a tenor of one month (subject to a floor of 4.25% per annum) plus (ii) a margin of 6.75% per annum (subject to an overall cap of 15.00% per annum on the all-in interest rate). During the continuance of any payment event of default the interest rate on such overdue sum will automatically increase by an additional 3.0% per annum, and may be subject to an additional late fee of 2.0% of such overdue sum.
In the event of certain prespecified events, the repayment schedule will be accelerated. For example, if FDA approval of vadadustat is not obtained on or prior to June 30, 2024, the interest only period will automatically terminate on October 1, 2024, and we will be required to repay the Term Loans in seven equal monthly payments (comprised of principal and interest), commencing on October 1, 2024 and ending on the BlackRock Maturity Date.
All obligations under the Term Loan Facility are secured by substantially all of our existing and after-acquired assets. The BlackRock Credit Agreement requires us to either (i) maintain cash and cash equivalents, measured as of the last day of each fiscal month, greater than or equal to $15.0 million or (ii) earn consolidated revenue, measured as of the last day of each fiscal month for the trailing twelve-month period, of $150.0 million. The BlackRock Credit Agreement contains certain representations and warranties, affirmative and negative covenants that limit our ability to engage in specified types of transactions and other provisions typical within a credit agreement. If an event of default occurs and is continuing under the BlackRock Credit Agreement, BlackRock is entitled to take enforcement action, including acceleration of amounts due. If we prepay the Term Loans prior to the BlackRock Maturity Date, we will be required to pay a prepayment fee ranging from 1.0% to 4.0% of the amount prepaid.
On the Closing Date, Kreos Capital VII Aggregator SCSp, an affiliate of Kreos, or the Warrant Holder , received a warrant to purchase 3,076,923 shares of our common stock, at an exercise price per share of $1.30, and upon borrowing of Tranche C, we will become obligated to issue additional warrants to purchase 1,153,846 shares of our common stock at an exercise price per share of $1.30. Each warrant shall be exercisable for eight years from date of issuance.
As of December 31, 2023, we had outstanding debt of $35.0 million, net of debt issuance costs of $0.3 million with Pharmakon.
In connection with the entry into the BlackRock Credit Agreement, on the Closing Date, we terminated the Pharmakon Loan Agreement, all obligations thereunder were paid in full and discharged and Pharmakon's security interests in our assets and property were released. See Note 7, Indebtedness, in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information.
Working Capital Fund/Refund Liability
In February 2022, we amended our agreement with CSL Vifor and they contributed $40.0 million to a working capital fund, or the Working Capital Fund , established to partially fund our costs of purchasing vadadustat from our contract manufacturers. The Working Capital Fund amount may fluctuate, and will be repaid to CSL Vifor over time.
We have recorded the Working Capital Fund as a refund liability under ASC 606, Revenue from Contracts with Customers . The refund liability is considered a debt arrangement with zero coupon interest and we impute interest on the refund liability at a rate of 15.0% per annum. As of December 31, 2023, the $40.1 million refund liability is classified as a long-term liability based on management's estimated timing of the repayment of the refund liability to CSL Vifor exceeding one-year. See Note 8, Deferred Revenue , Refund Liability and Liability Related to Sale of Future Royalties , in the accompanying notes to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information.
Liability Related to Sale of Future Royalties
In February 2021, we sold to HealthCare Royalty Partners IV L.P., or HCR , our right to receive royalties and sales milestones for vadadustat in Japan and certain other Asian countries, such countries collectively, the MTPC Territory , such payments collectively the Royalty Interest Payments , in each case, payable to us under the MTPC Agreement. The Royalty Interest Payments are subject to an annual maximum “cap” of $13.0 million, after which we will receive 85% of the Royalty Interest Payments for the remainder of that year. The Royalty Interest Payments are also subject to an aggregate maximum “cap” of $150.0 million, after which the Royalty Interest Payments will revert back to us.
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We received $44.8 million from HCR, net of certain transaction expenses, which we recorded as a liability at the transaction date. We amortize the liability related to the sale of future royalties using the effective interest method over the life of the arrangement. The annual effective interest rate as of December 31, 2023 was 0%. We retain the right to receive all potential future regulatory milestones for vadadustat under the MTPC Agreement. During the year ended December 31, 2023 and 2022, we recorded $2.0 million and $1.8 million of non-cash royalty revenue, respectively. See Note 8, Deferred Revenue, Refund Liability and Liability Related to Sale of Future Royalties , in the accompanying notes to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information.
Off-Balance Sheet Arrangements
Letter of Credit
As of December 31, 2023, in connection with the Cambridge Lease (as defined below), we had $1.7 million in a letter of credit outstanding.
Director and Officer Indemnification
We have entered into indemnification agreements with our directors and certain officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated financial statements.
Contractual Obligations and Commitments Other Than Debt Agreements
We are party to contractual obligations involving commitments to make payments to third parties in the future. Certain contractual obligations are reflected on our consolidated balance sheet as of December 31, 2023, while others are considered future obligations. Our material cash requirements as of December 31, 2023, include contractual obligations and commitments arising in the normal course of business, including leases, license agreements, manufacturing agreements and unconditional purchases commitments which are described in more detail below.
Cambridge Leases
We lease approximately 65,167 square feet of office, storage and laboratory space in Cambridge, Massachusetts under non-cancelable operating leases, collectively the Cambridge Lease . The office and storage lease expires on September 11, 2026 and the lease for the laboratory space expires on January 31, 2025. We ceased using approximately two-thirds of our office space in 2022 and we are currently marketing the furnished office space for sublease.
See Note 9, Leases , in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information.
License Agreements
We have a license agreement with Panion, under which we are required to pay royalties related to the sale of Auryxia. The royalty payment obligations are contingent upon generating product revenue, and the amount and timing of such payments are not known. See Note 10, Commitments and Contingencies , in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information.
In June 2021, we entered into a license agreement, or Cyclerion Agreement , with Cyclerion Therapeutics Inc. under which we obtained an exclusive global license under certain intellectual property rights to research, develop and commercialize praliciguat, an investigational oral soluble guanylate cyclase stimulator. We may be obligated to pay up to an aggregate of $222.0 million in specified development and regulatory milestone payments, certain specified commercial milestones and tiered royalties ranging from a low-single-digit to mid-double-digit percentage of net sales, on a product-by-product basis, and subject to reduction upon expiration of patent rights or the launch of a generic product in the territory.
Unless earlier terminated, the Cyclerion Agreement will expire on a product-by-product and country-by-country basis upon the expiration of the last royalty term, which ends upon the longest of (i) the expiration of the patents licensed under the Cyclerion Agreement, (ii) the expiration of regulatory exclusivity for such product and (iii) ten years from first commercial sale of such product. We may terminate the Cyclerion Agreement in its entirety or only with respect to a particular licensed compound or product upon 180 days' prior written notice to Cyclerion. The parties also have customary termination rights, subject to a cure period, in the event of the other party’s material breach of the Cyclerion Agreement or in the event of certain additional circumstances.
Manufacturing Agreements
We have various supply arrangements to which we are a party, and we are obligated to pay for drug substance and drug product for commercial use. Under one of our agreements, we are required to purchase a minimum quantity of Auryxia drug substance at a predetermined price. We are also obligated to purchase a certain percentage of the global demand for
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vadadustat drug substance and drug product based on certain quarterly and annual forecasts we provide to certain suppliers. Our supply agreements for vadadustat drug substance and drug product provide for a volume-based pricing structure. We may also be required to reimburse certain suppliers for reasonable expenses.
See Note 10, Commitments and Contingencies , in the accompanying notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information.
Amounts Due Under Former Manufacturing and Unconditional Purchase Commitments
On December 22, 2022, we and BioVectra terminated any and all existing agreements for BioVectra to supply us Auryxia drug substance. Under the BioVectra Termination Agreement, we agreed to pay BioVectra a total of $32.5 million consisting of (i) an upfront payment of $17.5 million that was paid in December 2022 and (ii) six quarterly payments of $2.5 million commencing in April 2024. In addition, we and BioVectra have released one another from all existing and future claims and liabilities and agreed to return certain materials and documents.
Other Third Party Contracts
Unconditional Purchase Commitments
We enter into agreements in the normal course of business with various vendors, which are generally cancellable upon notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including non-cancellable obligations of service providers, up to the date of cancellation. In addition, we contract with various organizations to conduct R&D activities with remaining contract costs to us of approximately $44.7 million as of December 31, 2023. The scope of the services under these R&D contracts can be modified and the contracts cancelled by us upon written notice. In some instances, the contracts may be cancelled by the third party upon written notice.
Cash Flows
The following table provides a summary of cash flow data for each applicable period:
Years ended December 31,
NET CASH PROVIDED BY/(USED IN) (in thousands) :
2023 2022
Operating activities $ (23,384) $ (73,154)
Investing activities — (114)
Financing activities (25,206) 14,598
Net decrease in cash, cash equivalents and restricted cash $ (48,590) $ (58,670)
Cash, cash equivalents and restricted cash — beginning of period 93,169 151,839
Cash, cash equivalents and restricted cash — end of period $ 44,579 $ 93,169
Operating Activities
Net cash used in operating activities during the year ended December 31, 2023 was $23.4 million. Net cash used in operating activities during the year ended December 31, 2023 consisted of a net loss of $51.9 million and net non-cash adjustments of $49.3 million, including amortization of our intangible asset of $36.0 million, and a reduction of $20.7 million in working capital.
Net cash used in operating activities during the year ended December 31, 2022 was $73.2 million. Net cash used in operating activities consisted of a net loss of $94.2 million and non-cash adjustments of $22.5 million, including amortization of our intangible asset of $36.0 million and decrease in our inventory firm purchase commitments that reduced our net loss by $65.9 million, primarily due to the termination of our supply agreement with BioVectra, and a reduction of $1.4 million in working capital.
Investing Activities
No net cash was used in investing activities during the year ended December 31, 2023.
Net cash used in investing activities during the year ended December 31, 2022 of $0.1 million was used to purchase equipment.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2023 was $25.2 million and consisted of principal payments of $32.0 million partially offset by $6.7 million of net proceeds from the sale of common stock under our ATM Facility and from the sale of stock under our employee stock purchase plan.
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Net cash provided by financing activities for the year ended December 31, 2022 was $14.6 million and consisted of net proceeds from a refund liability to a customer of $40.0 million, net proceeds from the issuance of common stock of $7.1 million under our then current at-the-market offering facility and proceeds from the exercise of common stock options and from the sale of stock under our employee stock purchase plan, partially offset by principal payments of debt of $33.0 million.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements not yet adopted, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in Part II, Item 8 of this Form 10-K.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included elsewhere in this Form 10-K, which consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, including the current or long-term classification of such assets, liabilities and expenses, classification of the expenses and the related disclosure of contingent assets and liabilities. We monitor our estimates on an ongoing basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.
While our significant accounting policies are described in more detail in Note 2, Summary of Significant Accounting Policies , to our consolidated financial statements in Part II, Item 8 of this Form 10-K, we believe the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements and to understanding of our results of operations.
Inventories, including Pre-Launch Inventory
We assess the value of our inventories quarterly at the lower-of-cost or net realizable value, with approximate cost determined using the first-in, first-out method. Work-in-process and finished goods inventories include materials, labor, and overhead. Other long-term assets include inventory expected to remain on hand beyond one year.
We write down inventories based on quality control testing data, or when product is obsolete or conditions exist that suggest that inventory may be in excess of the anticipated demand based on assumptions about future demand for our products and market conditions. Our estimates of forecasted demand are based upon our analysis and assumptions including, but not limited to, expected product lifecycles, market conditions, product development plans and historical usage by product. If actual market conditions are less favorable than our forecasts, or actual demand from our customers is lower than our estimates, we may be required to record additional inventory write-downs. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold, resulting in lower cost of sales and higher income from operations than expected in that period.
Impairment charges are recorded as a component of cost of product sales in the consolidated statements of operations and comprehensive loss in the period in which the impairment or excess quantity is identified.
The costs incurred to manufacture pre-launch inventory in advance of marketing authorization in the EU and FDA approval in the U.S. is expensed to R&D.
Impairment of Long-Lived Assets and Intangible Assets Subject to Amortization
Long-lived assets primarily include property and equipment, right-of-use assets, intangible assets and goodwill. Right-of-use assets pertain to leases of our office and laboratory spaces and the property and equipment primarily related to the leasehold improvements made to the right-of-use assets as well as furniture and laboratory equipment. In 2018, we recorded a definite-lived intangible asset related to developed product rights for Auryxia in connection with our merger with Keryx Biopharmaceuticals, Inc., or Keryx . We amortize our intangible asset that has a finite life using the straight-line method, which we estimated to be six years. As of December 31, 2023, we had $36.0 million on our consolidated balance sheet that is being amortized through December 2024.
Goodwill is the amount by which the purchase price of acquired net assets in a business combination exceeded the fair values of net identifiable assets on the date of acquisition. Goodwill is not amortized but is subject to impairment test annually or more frequently if events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable,
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utilizing either the qualitative or quantitative method. The goodwill recorded in our financial statements pertains to the merger with Keryx in 2018.
Annually, or more frequently upon certain indicators of impairment, we review our estimates and assumptions underlying the fair value of our long-lived assets when indicators of impairment are present. If an impairment indicator exists, we perform a recoverability test by a comparison of the carrying amount of an asset or reporting unit to the future undiscounted net cash flows expected to be generated by the asset or reporting unit. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset or reporting unit.
We calculate the fair value of the long-lived asset group as the present value of estimated future cash flows expected to be generated from the long-lived asset group using a risk-adjusted discount rate. In determining estimated future cash flows associated with the long-lived asset group, we use market participant assumptions pursuant to ASC Topic 820, Fair Value Measurements and Disclosures .
Working Capital Fund/Refund Liability to Customer
We treat the refund liability related to the Vifor Working Capital Fund as a debt arrangement with zero coupon interest, which is recorded at net present value. On March 18, 2022, when the funds were received from CSL Vifor, we recorded an initial discount on the refund liability and a corresponding deferred gain to the refund liability on the consolidated balance sheets. The discount on the refund liability is being amortized to interest expense using the effective interest method over the expected term of the Vifor Agreement. The deferred gain is being amortized to interest income on a straight-line basis over the expected term of the Vifor Agreement.
Product Revenue, Net
We recognize revenue on product sales when the customer obtains control of our product, which occurs at a point in time, typically upon delivery to the customer. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less.
The most significant estimate we are required to make is related to government and private payor rebates, chargebacks, discounts and fees, collectively rebates (collectively considered variable consideration). The values of the rebates provided to third-party payors vary significantly and are based on government-mandated discounts and our arrangements with other third-party payors. To estimate our total rebates, we estimate the percentage of prescriptions that will be covered by each third-party payor, which is referred to as the payor mix. Thus, revenue from product sales is recorded at the net sales price (transaction price), which includes estimates of variable consideration, which are described below. We track available information regarding changes, if any, to the payor mix for our products, to our contractual terms with third-party payors and to applicable governmental programs and regulations and levels of our products in the distribution channel. We adjust our estimated rebates based upon new information as it becomes available, including information regarding actual rebates for our products and forecasted customer buying and payment demands. Claims by third-party payors for rebates are submitted to us significantly after the related sales, potentially resulting in adjustments in the period in which the new information becomes known. Our adjustments to revenue related to prior period sales have not been significant.
Further details on the variable consideration components or reserves include:
• Trade Discounts and Allowances— Discounts that include incentive fees that are explicitly stated in our contracts. In addition, we compensate (through trade discounts and allowances) our customers for sales order management, data and distribution services.
• Product Returns— Consistent with industry practice, subject to certain caps for certain customers, we generally offer customers a limited right of return which allows for the product to be returned when the product expiry is within an allowable window, when the quantity delivered is different than quantity ordered, the product is damaged in transit prior to receipt by the customer, or is subject to a recall. This right of return generally lapses once the product is provided to a patient. We estimate the amount of our product sales that may be returned for credit by our customers. Product return reserves are estimated primarily based on our gross sales multiplied by an estimated return rate calculated using our historical actual rate of return for product sales as well as recent trends on lots still subject to the return window. In addition, certain customers are subject to an annual cap on returns of 2% of gross sales in any given year.
• Provider Chargebacks and Discounts— Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. Reserves for chargebacks consist of credits that we expect to issue for units that remain in the distribution
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channel at each reporting period end that we expect will be sold to qualified healthcare providers and chargebacks that customers have claimed but for which we have not yet issued a credit.
• Commercial and Medicare Part D Rebates— We contract with various commercial payor organizations, primarily health insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of our products. We estimate the rebates for commercial and Medicare Part D payors based upon (i) our contracts with the payors and (ii) information obtained from our customers and other third parties regarding the payor mix for Auryxia.
• Other Government Rebates— We are subject to discount obligations under state Medicaid programs and other government programs. We estimate Medicaid and other government programs rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. Our liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel at the end of each reporting period.
• Other Incentives— Other incentives that we offer include voluntary patient assistance programs such as our co-pay assistance program, which are intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on actual claims processed during a given period, as well as historical utilization data to estimate the amount we expect to receive associated with product that has been recognized as revenue, but remains in in the distribution channel at the end of each reporting period.
Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the respective underlying contracts. Our calculation of the reserves, include estimates and judgments that materially affect our recognition of net product revenues. Changes in our estimates of net product revenues could have a material effect on net product revenues recorded in the period in which we determine that change occurs.
Research and Development Expense
R&D costs are expensed as incurred. Internal R&D expenses are comprised of costs incurred in providing R&D activities, including salaries and bonuses, employee benefits and stock-based compensation for personnel engaged in R&D activities. In addition, they include facility costs, including the laboratory and an allocation of office space for utilization by R&D staff, depreciation expense on the laboratory equipment as well as other direct costs such as lab supplies.
External R&D costs include development of potential new manufacturing processes and methods for both commercial and non-commercial products, conceptual formulation and design of possible product and process alternatives for commercial and non-commercial products, research compounds and clinical manufacturing costs, costs incurred for consultants and other outside services, such as data management and statistical analysis support and materials and supplies used in support of the clinical and preclinical programs and costs paid to CROs including investigative sites that conduct our clinical trials.
We also expense pre-launch inventory to R&D until approval from the respective regulatory body is obtained.
We estimate certain costs and expenses and accrue for these liabilities as part of our process of preparing financial statements. Examples of areas in which subjective judgments may be required include, among other things, costs associated with services provided by contract organizations for preclinical development and manufacturing of our product candidates and clinical trials. We accrue for costs incurred as the services are being provided by monitoring the status of the trial or services provided, and the invoices received from our external service providers which can at times be significantly delayed. As actual costs become known to us, we adjust our accruals. To date, our estimates have not differed materially from the actual costs incurred. However, subsequent changes in estimates may result in a material change in our accruals, which could also materially affect our balance sheet and results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and are not required to provide information under this item.
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