ARDELYX, INC. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed financial statements and notes thereto included elsewhere in this report and with the audited financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2021. This discussion and analysis and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled “Risk Factors.” These forward-looking statements speak only as of the date hereof. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason. Unless the context requires otherwise, the terms “Ardelyx”, “Company”, “we”, “us”, and “our” refer to Ardelyx, Inc. Overview We are a biopharmaceutical company founded with a mission to discover, develop and commercialize innovative first-in-class medicines that meet significant unmet medical needs. Since commencing operations in October 2007, substantially all our efforts have been dedicated to our research and development (“R&D”) activities, including developing tenapanor and developing our proprietary drug discovery and design platform. We realized our first product sales of IBSRELA ® (tenapanor) in March 2022. As of September 30, 2022, we had an accumulated deficit of $790.8 million. We expect to continue to incur substantial operating losses for the foreseeable future as we commercialize IBSRELA, seek to gain approval for XPHOZAH ® (tenapanor) for the control of serum phosphorus in adult patients with CKD on dialysis; prepare for the potential commercialization of XPHOZAH, if approved; and incur manufacturing and development cost for, tenapanor. To date, we have funded our operations from the sale and issuance of common stock and convertible preferred stock, funds from our collaboration partnerships, which includes license fees, milestones and product supply revenue, as well as funds from our loan agreements with our lenders. Our Commercial Product IBSRELA for IBS-C Our unique discovery platform and deep understanding of the primary mechanism of sodium transport in the intestine resulted in our discovery and development of IBSRELA, a first-in-class, U.S. Food and Drug Administration (“FDA”) approved, sodium hydrogen exchanger 3 ("NHE3") inhibitor for the treatment of irritable bowel syndrome with constipation (“IBS-C”) in adults. IBSRELA acts locally in the gut and is minimally absorbed. IBS-C is a gastrointestinal disorder characterized by both abdominal pain and altered bowel movements, estimated to affect 11 million people in the U.S. IBS-C is associated with significantly impaired quality of life, reduced productivity, and substantial economic burden. For our commercial launch of IBSRELA, we built a commercial organization highly experienced in launching novel therapies into specialty areas. We recognized our first sales of IBSRELA in the U.S. in March 2022. The established nature of the market, limited number of players, concentration of prescribers, recognized unmet need, and favorable response to the novel mechanism IBSRELA product profile enable a targeted promotional effort centered on the 9,000 health care providers that account for 50% of IBS-C prescriptions. Central to the go to market strategy for IBSRELA is a highly experienced specialty sales force, many with existing relationships across their GI target base, full company engagement, and innovative peer-to-peer and digital initiatives leveraging the rapidly evolving market dynamics in how HCPs receive information and interact with industry. 26 Table of Contents Our Product Pipeline Development Candidate XPHOZAH for The Control of Serum Phosphorus in Adult Patients with CKD on Dialysis XPHOZAH is a first-in-class medicine being developed for the control of serum phosphorus in adult patients with CKD on dialysis. XPHOZAH has a unique mechanism of action and acts locally in the gut to inhibit NHE3. This results in the tightening of the epithelial cell junctions, thereby significantly reducing paracellular uptake of phosphate, the primary pathway of phosphate absorption. If approved, XPHOZAH would be the first therapy for phosphate management that blocks phosphorus absorption at the primary site of uptake. XPHOZAH is not a phosphate binder. In June 2020, we submitted a new drug application ("NDA") to the FDA for XPHOZAH for the control of serum phosphorus in adult patients with CKD on dialysis. The NDA was supported by three Phase 3 trials involving over 1,000 adult patients that evaluated the use of tenapanor for the control of serum phosphorus in adult patients with CKD on dialysis, with two trials evaluating tenapanor as monotherapy and one trial evaluating tenapanor as part of a dual mechanism approach with phosphate binders. All three Phase 3 trials met their primary and key secondary endpoints. On July 28, 2021, we received a Complete Response Letter ("CRL") from the FDA regarding our NDA for tenapanor for the control of serum phosphorus in adult patients with CKD on dialysis. According to the CRL, while the FDA agrees “that the submitted data provide substantial evidence that tenapanor is effective in reducing serum phosphorus in adult patients with CKD on dialysis,” the FDA characterizes the magnitude of the treatment effect as “small and of unclear clinical significance.” In December 2021, we submitted a Formal Dispute Resolution Request (“FDRR”). The FDRR was focused on demonstrating that the data submitted in the NDA supported the clinical significance of the treatment effect of tenapanor. On February 4, 2022, we received an Appeal Denied Letter (“ADL”) from the FDA’s Office of Cardiology, Hematology, Endocrinology and Nephrology (“OCHEN”). On February 18, 2022, we submitted an appeal of the ADL to the FDA’s Center for Drug Evaluation and Research, Office of New Drugs (“OND”). On April 25, 2022, we announced that OND had provided an interim response to our second level of appeal of the CRL. The OND noted that additional input from the Cardiovascular and Renal Drug Advisory Committee (“Advisory Committee”) in general, and specifically, from experts, including expert clinicians, would be valuable in further considering the clinical meaningfulness of the phosphate lowering effect observed in our phase 3 clinical program for XPHOZAH. Accordingly, the OND directed the Division of Cardiology and Nephrology to convene the Advisory Committee, and indicated that a response to our appeal could be expected within thirty calendar days after the conclusion of the Advisory Committee meeting. The Advisory Committee is scheduled for November 16, 2022. There can be no assurances that the response from the Advisory Committee will be positive, or if the outcome of the Advisory Committee is positive, that approval of our NDA will ultimately be granted by the FDA. RDX013 Program: Small Molecule for Treating Hyperkalemia Our small molecule potassium secretagogue program, RDX013, is focused on the development of a potential treatment for hyperkalemia. Hyperkalemia is a common problem in patients with heart and kidney disease, particularly in patients taking customary blood pressure medications known as renin-angiotensin-aldosterone system (“RAAS”) inhibitors. RDX013 is a novel mechanism agent designed to target the underlying biological mechanisms of potassium secretion to lower elevated potassium. On April 25, 2022, we reported that we have completed our data analyses of the Phase 2 dose ranging clinical trial for RDX013 evaluating the safety and efficacy of our potassium secretagogue for the treatment of hyperkalemia, or elevated potassium, in chronic kidney disease patients who are not on dialysis. While the results of the study demonstrated an acceptable safety and tolerability profile for RDX013 and supported proof of concept in its ability to lower serum potassium levels, with statistically significant reductions compared to placebo after eight days of treatment, the study did not meet its primary endpoint of significantly reducing serum potassium levels compared to placebo after four weeks of treatment. We currently expect that the next steps for the program will be to evaluate a new formulation that potentially enhances subject compliance and the efficacy of RDX013 in an additional Phase 2 clinical study at such time as we have determined our available resources support conducting such an additional clinical study after prioritization of the commercialization of IBSRELA and preparations for the Advisory Committee meeting for XPHOZAH. 27 Table of Contents RDX020 Program: Small molecule for Treating Metabolic Acidosis We have an ongoing discovery program targeting the inhibition of bicarbonate exchange for the treatment of metabolic acidosis, a highly prevalent comorbidity in CKD patients that is strongly correlated with disease progression and adverse outcomes. We have identified lead compounds that are potent, selective and proprietary inhibitors of bicarbonate secretion. Our research organization was eliminated as part of our October 2021 restructuring, and therefore, we currently expect to continue to advance this discovery program utilizing third-party resources managed by internal non-clinical expertise. Collaboration Partners We have exclusive rights to tenapanor in the U.S. and we have established agreements with Kyowa Kirin Co., Ltd. (“KKC”) in Japan, Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd. (“Fosun Pharma”) in China and Knight Therapeutics, Inc. (“Knight“) in Canada for the development and commercialization of tenapanor for certain indications in their respective territories. Knight has exclusive rights for the development, commercialization and distribution of tenapanor in Canada for hyperphosphatemia and IBS-C. In March 2021, Knight announced the commercial availability of IBSRELA in Canada, following its approval by Health Canada in April 2020. Under the terms of the Knight Agreement, Knight paid us a $2.3 million upfront payment. We may also be eligible to receive approximately CAD22.2 million for development and commercialization milestones, or approximately $16.1 million at the currency exchange rate on September 30, 2022, of which $0.7 million has been received and recognized as revenue as of September 30, 2022. We are also eligible to receive royalties throughout the term of the agreement, and a transfer price for manufacturing services. The variable consideration related to the remaining development milestone payments has not been included in the transaction price as they were fully constrained at September 30, 2022. KKC has exclusive rights for the development, commercialization and distribution of tenapanor in Japan for cardiorenal indications. Under the terms of the agreement with KKC, we received a $30.0 million upfront payment from KKC, and we may be entitled to receive up to $55.0 million in total development and regulatory milestones, of which $10.0 million has been received and recognized as revenue as of September 30, 2022. We may also be eligible to receive approximately ¥8.5 billion for commercialization milestones, or approximately $58.7 million at the currency exchange rate on September 30, 2022, as well as reimbursement of costs plus a reasonable overhead for the supply of product and royalties on net sales throughout the term of the agreement. As discussed in Note 7. Deferred Royalty Obligation , the future royalties and commercial milestone payments we may receive under the 2017 KKC Agreement will be remitted to HealthCare Royalty Partners IV, L.P. pursuant to a Royalty and Sales Milestone Interest Acquisition Agreement. On April 11, 2022, we entered into a second amendment to the 2017 KKC Agreement (the "2022 Amendment"). Under the terms of the 2022 Amendment, we and KKC agreed to a reduction in the royalty rate payable to us by KKC upon net sales of tenapanor in Japan. The royalty rate will be reduced from the high teens to low double digits for a two-year period of time following the first commercial sale in Japan, and then to mid-single digits for the remainder of the royalty term. As discussed in Note 7. Deferred Royalty Obligation , the future royalties we may receive under the 2017 KKC Agreement will be remitted to HealthCare Royalty Partners IV, L.P. pursuant to a Royalty and Sales Milestone Interest Acquisition Agreement. As consideration for the reduction in the royalty rate, KKC has agreed to pay us up to an additional $40.0 million payable in two tranches, with the first payment due following KKC's filing with the Japanese Ministry of Health, Labour and Welfare of its application for marketing approval for tenapanor and the second payment due following KKC’s receipt of regulatory approval to market tenapanor for hyperphosphatemia in Japan. Fosun Pharma has exclusive rights for the development and commercialization of tenapanor in China for both hyperphosphatemia and IBS-C. Under the terms of the Fosun Agreement, Fosun paid us a $12.0 million upfront license fee. We may be entitled to receive development and commercialization milestones of up to $113.0 million, of which $3.0 million has been received and recognized as revenue as of September 30, 2022, as well as reimbursement of cost plus a reasonable overhead for the supply of product and tiered royalties on net sales ranging from the mid-teens to 20%. 28 Table of Contents Impact of COVID-19 The global COVID-19 pandemic has impacted the operational decisions of companies worldwide. It also has created and may continue to create significant uncertainty in the global economy. We have undertaken measures to protect our employees, partners, collaborators, and vendors, some of which impact our normal operations. To date, we have been able to continue our operations with our workforce, most of whom are working remotely, and our pre-existing infrastructure that supports secure access to our internal systems. If, however, the COVID-19 pandemic has a substantial impact on the productivity of our employees, the results of our operations and overall financial performance may be adversely impacted. The extent of the impact from the COVID-19 pandemic on our business will depend largely on future developments that are highly uncertain and cannot be predicted. For a discussion of risks of COVID-19 relating to our business, see “Part II: Other Information-Item 1A.- Risk Factors- Risks Related to Our Business- The ongoing effects of the COVID-19 pandemic, or any other outbreak of epidemic diseases, or the perception of their effects, could have a material adverse effect on our business, financial condition, results of operations or cash flows .” As of the date of issuance of this financial report, we are not aware of any specific event or circumstance that would require updates to our estimates and judgments or revisions to the carrying value of our assets or liabilities. These estimates may change as new events occur and additional information is obtained. Critical Accounting Policies and Significant Judgments and Estimates Our discussion and analysis of financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Critical accounting policies are those that require significant judgment and/or estimates by management at the time that financial statements are prepared such that materially different results might have been reported if other assumptions had been made. These estimates form the basis for making judgments about the carrying values of assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates. The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our condensed financial statements presented in this report are described in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , in our Annual Report on Form 10-K filed with the SEC on February 28, 2022. During the nine months ended September 30, 2022, we adopted the following critical accounting policies and significant judgements and estimates: Product Sales, Net We account for our commercial product sales, net in accordance with Topic 606 - Revenue from Contracts with Customers . We received approval from the FDA in September 2019 to market IBSRELA, the first and only NHE3 inhibitor for the treatment of IBS-C in adults, in the United States ("U.S."). We began selling IBSRELA in the U.S. in March 2022. We distribute IBSRELA principally through major wholesalers, specialty pharmacies and group purchasing organizations ("GPOs") (collectively, our "Customers"). Our Customers subsequently sell IBSRELA to pharmacies and patients. Separately, we enter into arrangements with third parties that provide for government-mandated rebates, chargebacks and discounts. Revenue from product sales is recognized when our performance obligations are satisfied, which is when Customers obtain control of our product and occurs upon delivery. 29 Table of Contents Reserves for Variable Consideration Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration, including discounts which may be settled in the form of off-invoice discounts, chargebacks, or rebates depending on the customer, wholesaler fees, group purchasing organization administrative fees, patient copay assistance programs, and estimated product returns. These estimates are based on the amounts earned or to be claimed for related sales and are classified as reductions of gross accounts receivable settlement is expected to occur through a reduction in the amounts paid by our customers or a current liability if settlement is expected to occur through a payment from us. Where appropriate, these estimates are based on factors such as industry data and forecasted customer buying and payment patterns, our historical experience, current contractual and statutory requirements, specific known market events and trends. Overall, these reductions to gross sales reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we adjust these estimates, which would affect product revenue and earnings in the period such variances become known. As we gain more historical experience, estimates will be more heavily based on the expected utilization from historical data we have accumulated since the IBSRELA product launch. Rebates: Rebates include wholesaler fees, GPO fees, as well as mandated discounts under the Medicaid Drug Rebate Program ("Medicaid") and the Medicare Coverage Gap Program ("Medicare"). Estimates for rebates are recorded in the same period the related gross revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the condensed balance sheets. We estimate our Medicaid and Medicare rebates based upon the estimated payor mix, and statutory discount rates. Our estimates for payor mix are guided by payor information received from specialty pharmacies, expected utilization for wholesaler sales to pharmacies, and available industry payor information. Chargebacks: Chargebacks are discounts that occur when certain contracted purchasers purchase directly from our wholesalers at a discounted price. The wholesaler, in turn, charges back the difference between the price initially paid to us by the wholesaler and the discounted price paid to the wholesaler by the contracted purchaser. Amounts for estimated chargebacks are established in the same period that the related gross revenue is recognized, resulting in a reduction of product revenue and accounts receivable. The accrual for wholesaler chargebacks is estimated based on known chargeback rates, known sales to wholesalers, and estimated purchases by types of contracted purchasers. Discounts and Fees: Our payment terms are generally 30 to 60 days. Wholesalers, GPOs and specialty pharmacies are offered various forms of consideration, including off-invoice discounts which may be paid to GPOs and specialty pharmacies. Wholesalers and GPOs may also receive prompt pay discounts for payment within a specified period. We expect discounts to be earned when offered and therefore, we deduct the full amount of these discounts from product sales when revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Other Reserves: Patients who have commercial insurance may receive copay assistance when product is dispensed by pharmacies to patients. We estimate the amount of copay assistance provided to eligible patients based on the terms of the program and redemption information provided by third-party claims processing organizations and are recorded in accounts payable and accrued expenses and other current liabilities on the condensed balance sheets. Other reserves include estimated product returns which are recorded in the same period the related gross revenue is recognized, resulting in a reduction of product revenue as well as gross accounts receivable. We estimate our product returns reserve based upon our historical experience, and specific known market events and trends Non-cash Interest Expense on Deferred Royalty Obligation The net proceeds we receive from the sale of certain future royalties is recorded as deferred royalty obligation related to the sale of future royalties on our condensed balance sheets. As we earn royalties and remit those royalties pursuant to the agreement, the balance of the deferred royalty obligation will be effectively repaid over the life of agreement and non-cash interest expense related to the sale of future royalties is recorded using the effective interest method. To determine the amortization of our deferred royalty obligation, we are required to estimate the total amount of future royalty payments we expect to earn. There are a number of factors that could materially affect the amount and timing of royalty payments, most of which are not within our control. We periodically assess the amount of royalty payments we expect to receive which are subject to the agreement and, to the extent that the amount or timing of such payments is materially different than our original estimates, we prospectively adjust the imputed interest rate and the related amortization of the deferred royalty obligation. 30 Table of Contents Recent Accounting Pronouncements A summary of recent accounting pronouncements that we have adopted or may expect to adopt is included in Note 1 – Organization and Basis of Presentation to our condensed financial statements (see Part I, Item 1 Notes to Condensed Financial Statements , of this Quarterly Report on Form 10-Q). Financial Operations Overview Revenue Our revenue to date has been generated primarily through license, research and development collaborative agreements with various collaboration partners. We realized our first commercial product sales of IBSRELA in March 2022. In the future, we may generate revenue from a combination of our own product sales and payments in connection with our current or future collaborative partnerships, including license fees, other upfront payments, milestone payments, royalties and payments for drug product and/or drug substance. We expect that any revenue we generate will fluctuate in future periods as a result of, among other factors: whether and the extent to which we are successful in our commercialization of IBSRELA, whether we are able to gain approval from the FDA for our NDA for XPHOZAH; the timing and progress of goods and services provided pursuant to our current or future collaborative partnerships; our or our collaborators’ achievement of clinical, regulatory or commercialization milestones, to the extent achieved; the timing and amount of any payments to us relating to the aforementioned milestones; and the extent to which tenapanor is approved and successfully commercialized by a collaboration partner. If our current collaboration partners or any future collaboration partners fail to obtain regulatory approval for tenapanor, our ability to generate future revenue from our collaborative arrangements, and our results of operations and financial position, would be materially and adversely affected. Our past revenue performance is not necessarily indicative of results to be expected in future periods. Cost of Revenue Cost of revenue consists of the cost of commercial goods sold to Customers, collaboration partners under product supply agreements, and royalty expense based on sales of tenapanor. We capitalize inventory costs associated with the production of our products after regulatory approval or when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. Otherwise, such costs are expensed as research and development. A portion of the costs of IBSRELA units recognized as revenue during the three and nine months ended September 30, 2022 were expensed prior to the fourth quarter of 2021, when our intent to commercialize IBSRELA was established and we commenced preparation for the commercial launch of IBSRELA. We believe our cost of revenue for the three and nine months ended September 30, 2022 would have been $0.2 million and $1.2 million higher, respectively, if we had not previously expensed certain material and production costs with respect to the units sold. As of September 30, 2022, we had approximately $28.8 million of inventory on hand that was previously expensed as research and development expense and will not be reported as cost of revenue sold in future periods when sales of IBSRELA are recognized as revenue. Cost of revenue includes payments due to AstraZeneca, which under the terms of a termination agreement entered into in 2015 (the "AZ Termination Agreement") is entitled to (i) future royalties at a rate of 10% of net sales of tenapanor or other NHE3 products by us or our licensees, and (ii) 20% of non-royalty revenue received from our collaboration partners in connection with the development and commercialization of tenapanor or certain other NHE3 inhibitors. We have agreed to pay AstraZeneca up to a maximum of $75.0 million in the aggregate for (i) and (ii). We recognize these expenses as cost of revenue when we recognize the corresponding revenue that gives rise to payments due to AstraZeneca. To date, we have recognized an aggregate of $12.4 million as cost of revenue under the AZ Termination Agreement. Research and Development Pursuant to the October 2021 restructuring plan, we eliminated our internal research organization and expect to continue our discovery efforts with respect to RDX020 through the use of third-parties managed internally by non-clinical expertise. We recognize all research and development expenses as they are incurred to support the discovery, research, development and manufacturing of our product candidates. Research and development expenses include, but are not limited to, the following: • external research and development expenses incurred under agreements with consultants, third-party contract research organizations (“CROs”) and investigative sites where a substantial portion of our clinical studies are conducted, and with contract manufacturing organizations where our clinical supplies are produced; • expenses associated with supplies and materials consumed in connection with our research operations; 31 Table of Contents • expenses associated with producing tenapanor for the control of serum phosphorus in adult patients with CKD on dialysis prior to FDA approval; • other costs associated with research, clinical development and regulatory activities; • employee-related expenses, which include salaries, bonuses, benefits, travel and stock-based compensation; and • facilities and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation and amortization expense, information technology expense and other supplies. Selling, General and Administrative Selling, general and administrative expenses relate to sales and marketing, finance, human resources, legal and other administrative activities, including information technology investments. Selling, general and administrative expenses consist primarily of personnel costs, facilities costs not otherwise allocated to research and development, outside marketing, advertising and legal expenses and other general and administrative costs. Interest Expense Interest expense represents the interest paid on our loan payable. Non-cash interest expense related to the sale of future royalties Non-cash interest expense related to the sale of future royalties represents the imputed interest expense on our deferred royalty obligation related to the sale of future royalties using the effective interest method. As further described in Note 7. Deferred Royalty Obligation , in June 2022, we and HealthCare Royalty Partners IV, L.P. (“HCR”) entered into a Royalty and Sales Milestone Interest Acquisition Agreement (the “HCR Agreement”). Under the terms of the HCR Agreement, HCR has agreed to pay us up to $20.0 million in exchange for the royalty payments and commercial milestone payments (collectively the “Royalty Interest Payments”) that we may receive under our 2017 License Agreement with KKC based upon KKC's net sales of tenapanor in Japan. As part of the HCR Agreement, we received a $10.0 million upfront payment from HCR in June 2022 and recorded it as a deferred royalty obligation on our condensed balance sheet. Non-cash interest expense will be recognized over the life of the HCR Agreement using the effective interest method based on the imputed interest rate derived from estimated amounts and timing of future royalty payments to be received from KKC. Other Income, net Other income, net consists of interest income earned on our cash and cash equivalents and available-for-sale investments, the periodic revaluation of the exit fee related to our loan, gains on sales of property and equipment, and currency exchange gains and losses. 32 Table of Contents RESULTS OF OPERATIONS The results of operations are not necessarily indicative of the results to be expected for the year ending December 31, 2022, for any other interim period, or for any other future year. Comparison of the three and nine months ended September 30, 2022 and 2021 Revenue Below is a summary of our total revenue (dollars in thousands): Three Months Ended September 30, Change 2022 vs. 2021 Nine Months Ended September 30, Change 2022 vs. 2021 2022 2021 $ % 2022 2021 $ % Product sales, net $ 4,885 $ — $ 4,885 (a) $ 6,899 $ — $ 6,899 (a) Product supply revenue 92 285 (193) (67.7) % 1,058 411 647 157 % Licensing revenue 9 2 7 350 % 23 5,007 (4,984) (100) % Collaborative development revenue — 886 (886) (100) % — 3,650 (3,650) (100) % Total revenues $ 4,986 $ 1,173 $ 3,813 325 % $ 7,980 $ 9,068 $ (1,088) (12) % (a) There were no product sales during the prior year period. The increase to total revenues during the three months ended September 30, 2022 is primarily attributable to $4.9 million of net product sales for IBSRELA to our Customers in connection with the commercial launch of IBSRELA. Partially offsetting this increase was the full recognition of upfront payments associated with the 2019 KKC Agreement through the end of 2021. The decrease to total revenues during the nine months ended September 30, 2022 is primarily attributable to a $5.0 million development milestone that was earned during the prior year that did not recur during the current year, as well as the full recognition of upfront payments associated with the 2019 KKC Agreement through the end of 2021, for which there was no comparable revenue during the nine months ended September 30, 2022. Partially offsetting these decreases is recognition of $6.9 million of net product sales for sales of IBSRELA to our Customers in connection with the commercial launch of IBSRELA. Operating Expenses Below is a summary of our operating expenses (dollars in thousands): Three Months Ended September 30, Change 2022 vs. 2021 Nine Months Ended September 30, Change 2022 vs. 2021 2022 2021 $ % 2022 2021 $ % Cost of revenue $ 732 $ — $ 732 (a) $ 955 $ 1,000 $ (45) (5) % Research and development 7,467 23,695 (16,228) (68) % 26,059 70,172 (44,113) (63) % Selling, general and administrative 18,667 19,714 (1,047) (5) % 56,868 56,969 (101) — % Total operating expenses $ 26,866 $ 43,409 $ (16,543) (38) % $ 83,882 $ 128,141 $ (44,259) (35) % (a) There were no product sales during the prior year period. Cost of Revenue The fluctuations in cost of revenue for the three and nine months ended September 30, 2022 are primarily attributable to payments due to AstraZeneca under the AZ Termination Agreement related to the commercial sales of IBSRELA during the three and nine months ended September 30, 2022 and a development milestone we earned during the nine months ended September 30, 2021. In addition, during the three and nine months ended September 30, 2022, we incurred cost of revenue from sales of IBSRELA to our Customers in connection with the commercial launch of IBSRELA. 33 Table of Contents Research and Development Below is a summary of our research and development expenses (dollars in thousands): Three Months Ended September 30, Change 2022 vs. 2021 Nine Months Ended September 30, Change 2022 vs. 2021 2022 2021 $ % 2022 2021 $ % External R&D expenses $ 2,693 $ 15,310 $ (12,617) (82) % $ 10,240 $ 44,316 $ (34,076) (77) % Employee-related expenses 3,462 6,702 (3,240) (48) % 11,214 20,434 (9,220) (45) % Facilities, equipment and depreciation expenses 611 1,518 (907) (60) % 2,441 4,240 (1,799) (42) % Other 701 165 536 325 % 2,164 1,182 982 83 % Total research and development expenses $ 7,467 $ 23,695 $ (16,228) (68) % $ 26,059 $ 70,172 $ (44,113) (63) % The decrease in our external R&D expenses for the three months ended September 30, 2022 is primarily the result of lower clinical study costs as a result of the completion of the OPTIMIZE study, lower tenapanor manufacturing expense as we have begun to capitalize costs associated with the production of IBSRELA to inventory, and lower expenses for research following the significant reduction in the research function in the fourth quarter of 2021. The decrease in our employee-related expenses for the three and six months ended September 30, 2022 is due to lower compensation and benefits expenses for our research and development workforce following restructuring actions in 2021. Selling, General and Administrative The decrease in selling, general and administrative expenses for the three and nine months ended September 30, 2022 is primarily due to a reduction in ongoing and one-time costs as a result of the restructuring action carried out during the third quarter of 2021, offset by increased costs associated with the commercial launch of IBSRELA during 2022. The changes consisted of headcount and related personnel costs and external spending for disease awareness initiatives, commercial infrastructure and strategy. Interest Expense Below is a summary of our interest expense (dollars in thousands): Three Months Ended September 30, Change 2022 vs. 2021 Nine Months Ended September 30, Change 2022 vs. 2021 2022 2021 $ % 2022 2021 $ % Interest expense $ (886) $ (1,216) $ 330 (27) % $ (2,409) $ (3,518) $ 1,109 (32) % The fluctuation in interest expense for the three and nine months ended September 30, 2022 was due to higher principal outstanding on our loan payable in 2021 prior to principal repayments under our 2018 Loan commencing during the fourth quarter of 2021. We repaid the remaining principal balance of the 2018 Loan in the amount of $25.0 million and entered into the new 2022 Loan in the amount of $27.5 million in February 2022. 34 Table of Contents Non-Cash Interest Expense Related to the Sale of Future Royalties Below is a summary of our interest expense (dollars in thousands): Three Months Ended September 30, Change 2022 vs. 2021 Nine Months Ended September 30, Change 2022 vs. 2021 2022 2021 $ % 2022 2021 $ % Non-cash interest expense related to the sale of future royalties $ (831) $ — $ (831) (a) $ (841) $ — $ (841) (a) (a) There was no non-cash interest expense related to the sales of future royalties during the prior year period. Non-cash interest expense related to the sales of future royalties or the three and nine months ended September 30, 2022 was due to the recognized amortization of the deferred royalty obligation that we recorded following the receipt of the $10.0 million upfront payment from HCR during June 2022. Other Income (Expense), net Below is a summary of our other income (expense), net (dollars in thousands): Three Months Ended September 30, Change 2022 vs. 2021 Nine Months Ended September 30, Change 2022 vs. 2021 2022 2021 $ % 2022 2021 $ % Other income (expense), net $ 704 $ (134) $ 838 (625) % $ 1,258 $ 664 $ 594 89 % The increase in other income (expense), net for the three months ended September 30, 2022 is primarily due to unrealized gains on foreign currency. The increase in other income (expense), net for the nine months ended September 30, 2022 is primarily due to revaluation of our 2018 Exit Fee during the three months ended June 30, 2021 following the receipt of the CRL from the FDA. Also contributing to the fluctuations during the three and nine month periods are sales of certain lab equipment and supplies for a net gain of $1.5 million during the nine months ended September 30, 2022. Liquidity and Capital Resources Below is a summary of our cash, cash equivalents and investments (dollars in thousands): September 30, 2022 December 31, 2021 Change $ Change % Cash and cash equivalents $ 61,628 $ 72,428 $ (10,800) (15) % Short-term investments 28,995 44,261 (15,266) (34) % Total liquid funds $ 90,623 $ 116,689 $ (26,066) (22) % As of September 30, 2022, we had cash, cash equivalents and investments totaling $90.6 million compared to $116.7 million as of December 31, 2021. We have incurred operating losses since inception and our accumulated deficit as of September 30, 2022 is $790.8 million. Our current level of cash and investments alone is not sufficient to meet our plans for the next twelve months following the filing of these financial statements on November 3, 2022. These factors raise substantial doubt regarding our ability to continue as a going concern for a period of one year from the issuance of these financial statements. We plan to address our operating cash flow requirements with our current cash and investments, cash generated from the product launch of IBSRELA, our potential receipt of anticipated milestone payments from our collaboration partners, our potential receipt of anticipated payments from KKC under the 2022 Amendment, our ability to access the capital markets, and execute asset monetization strategies, as well as through the implementation of cash preservation activities to reduce or defer discretionary spending. 35 Table of Contents There are no assurances that our efforts to meet our operating cash flow requirements will be successful. If our current cash and investments as well as our plans to meet our operating cash flow requirements are not sufficient to fund necessary expenditures and meet our obligations for at least the next twelve months following the issuance of these financial statements, our liquidity, financial condition and business prospects will be materially affected. These financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary in the event that we can no longer continue as a going concern. In July 2020, we filed a Form S-3 registration statement, which became effective in August 2020 ("Registration Statement"), containing (i) a base prospectus for the offering, issuance and sale by us of up to a maximum aggregate offering price of $250.0 million of our common stock, preferred stock, debt securities, warrants and/or units, from time to time in one or more offerings; and (ii) a prospectus supplement for the offering, issuance and sale by us of up to a maximum aggregate offering price of $100.0 million of our common stock that may be issued and sold, from time to time, under a sales agreement with Jefferies LLC ("Jefferies"), deemed to be “at the market offerings” (the "2020 Open Market Sales Agreement"). As of December 31, 2021, we had sold 23.3 million shares and received the maximum gross proceeds of $100.0 million pursuant to the 2020 Open Market Sales Agreement. In August 2021, we filed an additional prospectus supplement under the Registration Statement for the offering, issuance and sale by us of up to a maximum aggregate offering price of $150.0 million of our common stock that may be issued and sold, from time to time, under an additional sales agreement we entered into with Jefferies (the "2021 Open Market Sales Agreement"), pursuant to which we may, from time to time, sell up to $150.0 million in shares of our common stock through Jefferies. We are not required to sell shares under the 2021 Open Market Sales Agreement. Pursuant to the 2021 Open Market Sales Agreement, Jefferies, as our sales agent, receives a commission of up to 3% of the gross sales price for shares of common stock sold under the 2021 Open Market Sales Agreement. During the three months ended September 30, 2022 we sold 32.6 million shares and received gross proceeds of $35.1 million at a weighted average sales price of approximately $1.08 per share under the 2021 Open Market Sales Agreement. During the nine months ended September 30, 2022 we sold 53.1 million shares and received gross proceeds of $54.0 million at a weighted average sales price of approximately $1.02 per share under the 2021 Open Market Sales Agreement. As of September 30, 2022, we have sold a total of 68.8 million shares and received aggregate gross proceeds of $79.0 million under the 2021 Open Market Sales Agreement. In February 2022, we entered into a loan and security agreement (the “2022 Loan Agreement”) with SLR Investment Corp. The 2022 Loan Agreement provides for a senior secured term loan facility, with $27.5 million funded at closing and an additional $22.5 million that we may borrow on or prior to July 25, 2023; provided that (i) we have received approval by the FDA for our NDA for tenapanor for the control of serum phosphorus in chronic kidney disease patients on dialysis by December 31, 2022, and (ii) we have achieved certain product revenue milestone targets described in the 2022 Loan Agreement. The initial funding of $27.5 million is being used to repay the 2018 Loan and to fund our ongoing operations. On August 1, 2022, we entered into an amendment to the 2022 Loan Agreement with SLR Investment Corp. that extends the date by which we must receive approval by the FDA for our NDA for the control of serum phosphorus in chronic kidney disease patients on dialysis in order to borrow the additional $22.5 million from December 31, 2022 to March 31, 2023. We had $25.0 million principal from the 2018 Loan outstanding as of the closing date. In connection with entering into the 2022 Loan Agreement, we entered into an agreement, whereby we agreed to pay an exit fee in the amount of 2% of the 2022 Loan funded (the “2022 Exit Fee”) upon (i) any change of control transaction or (ii) our achievement of net revenue from the sale of any products equal to or greater than $100.0 million, measured on a six (6) months basis (the "Revenue Milestone"), tested monthly at the end of each month. Notwithstanding the prepayment or termination of the 2022 Loan, the 2022 Exit Fee will expire on February 23, 2032. We concluded that the 2022 Exit Fee is a freestanding derivative which should be accounted for at fair value on a recurring basis. The estimated fair value of the 2022 Exit Fee is recorded as a derivative liability and included in accrued expenses and other current liabilities on the accompanying condensed balance sheets. 36 Table of Contents As discussed in Note 16. Subsequent Events, on October 31, 2022, we announced that our collaboration partner, KKC, submitted a New Drug Application to the Japanese Ministry of Health, Labour and Welfare for tenapanor for the improvement of hyperphosphatemia in adult patients with CKD on dialysis. This submission triggers the obligation to make an aggregate of $35.0 million to us in milestone payments and payments under the 2022 Amendment. In accordance with the terms of the 2022 Amendment, we expect to receive these payments during the fourth quarter of 2022. Our primary sources of cash have been from the sale and issuance of common stock (in both public offerings and private placements) and private placements of convertible preferred stock, funds from our collaboration partnerships and funds from our 2018 Loan Agreement and 2022 Loan Agreement. Our primary uses of cash have been to fund operating expenses, primarily research and development expenditures, pre-commercial and commercial expenses. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. Our future funding requirements are difficult to forecast and will depend on many factors, including: • the extent to which we are able to generate product revenue from sales of IBSRELA; • whether we are successful in our efforts under the FDR process, including the Advisory Committee meeting scheduled for November 16, 2022, and whether we are ultimately able to secure approval for our NDA for XPHOZAH, or to reach resolution with the FDA regarding a path to address the deficiencies in the NDA noted in the CRL, and the time and cost associated with such path; • the availability of adequate third-party reimbursement for IBSRELA and, if approved, the sales price and the availability of adequate third-party reimbursement for XPHOZAH; • the manufacturing, selling and marketing costs of IBSRELA and, if approved, XPHOZAH; • our ability to maintain our existing collaboration partnerships and to establish additional collaboration partnerships, in-license/out-license, joint ventures or other similar arrangements and the financial terms of such agreements; • the timing, receipt and amount of any milestones that may be received from our collaboration partners in connection with tenapanor, if any; • the timing, receipt and amount of revenue, if any, that may be received from KKC in connection with the 2022 Amendment; • the timing, receipt, and amount of sales of, or royalties we may receive as a result of sales of tenapanor by our collaboration partners in China and Canada, if any; • the cash requirements for the development of product candidates, including RDX013 and RDX020; • the time and cost necessary to respond to technological and market developments; • the costs of filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights, including litigation costs and the outcome of such litigation, including costs of defending any claims of infringement brought by others in connection with the development, manufacture or commercialization of tenapanor or any of our product candidates; and • the payment of interest and principal related to the 2022 Loan Agreement. Please see the risk factors set forth in Part II, Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q for additional risks associated with our capital requirements. 37 Table of Contents CASH FLOW ACTIVITIES The following table summarizes our cash flows (dollars in thousands): Nine Months Ended September 30, Change 2022 vs. 2021 2022 2021 $ % Net cash used in operating activities $ (84,328) $ (113,082) $ 28,754 (25) % Net cash provided by investing activities 16,974 28,852 (11,878) (41) % Net cash provided by financing activities 56,554 68,486 (11,932) (17) % Net decrease in cash and cash equivalents $ (10,800) $ (15,744) $ 4,944 (31) % Cash Flows from Operating Activities Net cash used in operating activities during the nine months ended September 30, 2022 decreased by $28.8 million primarily as a result of decreased spending on research and development expenses during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. Partially offsetting the net loss improvement were changes to our operating assets and liabilities related to expenditures for commercial manufacturing and inventory for the production of IBSRELA. Cash Flows from Investing Activities Net cash provided by investing activities decreased by $11.9 million due to the timing of our investment maturities and purchases, as well as $1.8 million proceeds from sale of laboratory equipment and supplies during the nine months ended September 30, 2022. Cash Flows from Financing Activities Net cash provided by financing activities decreased by $11.9 million primarily due to net proceeds from issuance of our common stock pursuant to the at the market offerings of $67.2 million during the nine months ended September 30, 2021 compared to $52.8 million during the nine months ended September 30, 2022. In addition, during the nine months ended September 30, 2022, we received net proceeds of $27.0 million pursuant to the 2022 Loan Agreement, $9.6 million in proceeds for the sale of certain future royalties, and repaid $33.0 million, net of settlement costs, to repay the 2018 Loan. Off-Balance Sheet Arrangements As of September 30, 2022 and 2021, respectively, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K as promulgated by the SEC.