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, 2022. 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. We developed a unique and innovative platform that enabled the discovery of new biological mechanisms and pathways to develop potent, and efficacious therapies that minimize the side effects and drug-drug interactions frequently encountered with traditional, systemically absorbed medicines. The first molecule we discovered and developed was tenapanor, a minimally absorbed, first-in-class, oral, small molecule therapy. Tenapanor, branded as IBSRELA®, is approved in the U.S. for the treatment of adults with irritable bowel syndrome with constipation (IBS-C). Tenapanor, branded as XPHOZAH®, was approved by the U.S. Food and Drug Administration (FDA) on October 17, 2023, to reduce serum phosphorus in adults with chronic kidney disease (CKD) on dialysis as add-on therapy in patients who have an inadequate response to phosphate binders or who are intolerant of any dose of phosphate binder therapy. We also have a development stage asset, RDX013 for adult patients with CKD and/or heart failure with hyperkalemia, or elevated serum potassium, and a discovery phase asset, RDX020 for adult patients with metabolic acidosis, a serious electrolyte disorder, in patients with CKD. 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, 2023, we had an accumulated deficit of $817.4 million. 25 Table of Contents We expect to continue to incur substantial operating losses for the foreseeable future as we invest in the commercialization of IBSRELA and XPHOZAH (tenapanor); 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, funds from our loan agreements with our lenders, as well as from sales of IBSRELA. Our Commercial Products 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, FDA approved, sodium hydrogen exchange 3 (NHE3) inhibitor for the treatment of IBS-C in adults. IBSRELA acts locally in the gut and is minimally absorbed. IBS-C is a gastrointestinal (GI) disorder characterized by both abdominal pain and altered bowel movements, and depending on the diagnostic criteria employed, is estimated to affect up to 13 million people in the U.S. IBS-C is associated with significantly impaired quality of life, reduced productivity, and substantial economic burden. We recognized our first sales of IBSRELA in the U.S. in March 2022. For our commercial launch of IBSRELA, we designed a market-responsive commercial strategy and built a commercial organization highly experienced in launching novel therapies into specialty areas. The dynamics of the IBS-C market reflect an established patient base, limited number of competitors all confined to a single mechanism of action, concentrated number of prescribers, and recognized unmet need. In addition, market research indicated a favorable response to the IBSRELA product profile as a novel mechanism therapy. These dynamics enabled a targeted promotional focus on patients currently being managed for IBS-C by the approximately 9,000 high-writing healthcare providers that account for 50% of IBS-C prescriptions. Central to our go to market strategy for IBSRELA has been our 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. We expect competition for IBSRELA will come largely from the three prescription products indicated for IBS-C: Linzess (linaclotide), Amitiza (lubiprostone) and Trulance (plecanatide). Generic lubiprostone is also available in the U.S. Additionally, over-the-counter products, not indicated for IBS-C are commonly used to treat the constipation component of IBS-C, alone and in combination with the IBS-C-indicated prescription therapies. We have established commercial agreements with Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd. (Fosun Pharma) in China and Knight Therapeutics, Inc. (Knight) in Canada for IBSRELA for IBS-C. Knight is currently marketing IBSRELA in Canada. In October 2023, we announced that Fosun Pharma received approval from the Hong Kong Department of Health for the marketing application for tenapanor for the treatment of irritable bowel syndrome with constipation (IBS-C). XPHOZAH to Reduce Serum Phosphorus in Adults with CKD on dialysis as Add-on Therapy in Patients who have an Inadequate Response to Phosphate Binders or who are Intolerant of any Dose of Phosphate Binder Therapy On October 17, 2023, XPHOZAH (tenapanor) is a first-in-class medicine received approval from the FDA to market XPHOZAH in the U.S. to reduce serum phosphorus in adults with chronic kidney disease (CKD) on dialysis as add-on therapy in patients who have an inadequate response to phosphate binders or who are intolerant of any dose of phosphate binder therapy XPHOZAH has a differentiated 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. It is estimated that there are more than 550,000 adult patients with CKD on dialysis in the U.S. and approximately eighty percent of those patients are being treated with phosphate lowering therapies. Seventy-seven percent of patients treated with phosphate binders to treat hyperphosphatemia were unable to consistently maintain phosphorous levels <=5.5 mg/dL over a six-month period. XPHOZAH is the first therapy for phosphate management that blocks phosphate absorption at the primary site of uptake. We currently expect XPHOZAH to be available to patients in November 2023. We have established commercial agreements with Kyowa Kirin, Co. Ltd. (Kyowa Kirin) in Japan, Fosun Pharma in China and Knight in Canada for tenapanor for hyperphosphatemia. In July 2023, we announced that an NDA for tenapanor had been accepted for review by China’s Center for Drug Evaluation of the National Medical Products Administration (NMPA) for the control of serum phosphorus in adult patients with CKD on hemodialysis. In September 2023, we announced that Kyowa Kirin received approval from the Japanese Ministry of Health, Labour and Welfare (MHLW) for the new drug application (NDA) for tenapanor for the improvement of hyperphosphatemia in adult patients with CKD on dialysis. 26 Table of Contents Discovery and Developmental Assets We have a small molecule potassium secretagogue program, RDX013, for the potential treatment of hyperkalemia, or elevated serum potassium. 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. We have completed a Phase 2 dose ranging clinical trial evaluating the safety and efficacy of RDX013 for the treatment of hyperkalemia in CKD 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 have a discovery program targeting the inhibition of the chloride bicarbonate exchanger 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. We do not currently expect to meaningfully advance either of these two assets until such time as we have determined our available resources can support additional activities after prioritization of the commercialization of IBSRELA and XPHOZAH. Collaboration Partners We have exclusive rights to tenapanor in the U.S. and we have established agreements with Kyowa Kirin in Japan, Fosun Pharma in China and Knight in Canada for the development and commercialization of tenapanor for certain indications in their respective territories. In March 2018, we entered into an exclusive license agreement with Knight (Knight Agreement) 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 non-refundable, one-time payment in March 2018. We may also be eligible to receive approximately CAD 22.2 million for development and commercialization milestones, or approximately $16.4 million at the currency exchange rate on September 30, 2023, of which $0.7 million has been received and recognized as revenue as of September 30, 2023. 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, 2023. In November 2017, we entered into an exclusive license agreement with Kyowa Kirin (2017 Kyowa Kirin Agreement) for the development, commercialization and distribution of tenapanor in Japan for cardiorenal indications. Under the terms of the 2017 Kyowa Kirin Agreement, we received a $30.0 million upfront payment from Kyowa Kirin, and we may be entitled to receive up to $55.0 million in total development and regulatory milestones, of which $35.0 million has been recognized as revenue and $20.0 million has been received as of September 30, 2023. We may also be eligible to receive approximately ¥8.5 billion for commercialization milestones, or approximately $57.0 million at the currency exchange rate on September 30, 2023, 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 Related to the Sale of Future Royalties , the future royalties and commercial milestone payments we may receive under the 2017 Kyowa Kirin 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 Kyowa Kirin Agreement (2022 Amendment). Under the terms of the 2022 Amendment, we and Kyowa Kirin agreed to a reduction in the royalty rate payable to us by Kyowa Kirin upon net sales of tenapanor in Japan. The royalty rate was 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 Related to the Sale of Future Royalties , the future royalties we may receive under the 2017 Kyowa Kirin 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, Kyowa Kirin agreed to pay us up to an additional $40.0 million payable in two tranches, with the first payment received in the fourth quarter of 2022 following Kyowa Kirin’s October 2022 filing with the Japanese MHLW of its application for marketing approval for tenapanor and the second payment due following Kyowa Kirin’s receipt of regulatory approval to market tenapanor for hyperphosphatemia in Japan. 27 Table of Contents In October 2022, we announced that Kyowa Kirin submitted an NDA to the Japanese MHLW for tenapanor for the improvement of hyperphosphatemia in adult patients with CKD on dialysis, which resulted in payment to us from Kyowa Kirin for an aggregate of $35.0 million for milestone payments and payments under the 2022 Amendment. In September 2023, we announced that Kyowa Kirin received approval from the Japanese MHLW for the NDA for tenapanor for the improvement of hyperphosphatemia in adult patients with chronic kidney disease on dialysis, which results in payment to us from Kyowa Kirin for an aggregate of $30.0 million for milestone payments and payments under the 2022 Amendment. In December 2017, we entered into an exclusive license agreement with Fosun Pharma (Fosun Agreement) 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. In July 2023, we announced that an NDA for tenapanor had been accepted for review by China’s Center for Drug Evaluation of the NMPA for the control of serum phosphorus in adult patients with chronic kidney disease on hemodialysis. This acceptance triggered a $2.0 million milestone payment to us under the terms of the Fosun Agreement, which we received in the third quarter of 2023. We may be entitled to receive development and commercialization milestones of up to $113.0 million, of which $5.0 million has been received and recognized as revenue as of September 30, 2023, 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%. In October 2023, we announced that the FDA has approved XPHOZAH to reduce serum phosphorus in adults with CKD on dialysis as add-on therapy in patients who have an inadequate response to phosphate binders or who are intolerant of any dose of phosphate binder therapy. This triggered an additional $3.0 million milestone payment to us under the terms of the Fosun Agreement, which we expect to receive during the fourth quarter of 2023. Also, in October 2023, we announced that Fosun Pharma received approval from the Hong Kong Department of Health for the marketing application for tenapanor for the treatment of irritable bowel syndrome with constipation (IBS-C). 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 March 2, 2023. During the nine months ended September 30, 2023, we did not adopt any new critical accounting policies and significant judgements and estimates. 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). 28 Table of Contents 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 beginning 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: the extent to which we are successful in our commercialization of IBSRELA; our ability to obtain and sustain an adequate level of coverage and reimbursement for IBSRELA by third-party payors; whether and the extent to which we are successful in our commercialization of XPHOZAH; whether or when XPHOZAH, along with other oral ESRD-related drugs without an injectable or intravenous equivalent, are bundled into the end stage renal disease (ESRD) prospective payment system, and the manner in which such introduction into the ESRD prospective payment system may occur, including the length of any applicable Transitional Drug Add-on Payment Adjustment (TDAPA) period, the amount of the add-on payment available during the TDAPA period and whether, and the extent to which, the ESRD PPS base rate is adjusted following any applicable TDAPA period; the timing and progress of goods and services provided pursuant to our current or future collaborative partnerships; 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; addressing any competing technological and market developments; maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets, and know-how, and our ability to develop, manufacture and commercialize our product candidates and products without infringing intellectual property rights of others; attracting, hiring, and retaining qualified personnel; and the extent to which tenapanor or other licensed products are 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 or other licensed products, 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 Goods Sold Cost of sales consists of the cost of commercial goods sold to our Customers. Other cost of revenue consists of the cost of materials sold to our international partners under product supply agreements, as well as payments due to AstraZeneca AB (AstraZeneca) 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, 2023 were expensed prior to the fourth quarter of 2021, at which time our intent to commercialize IBSRELA was established and we commenced preparation for the commercial launch of IBSRELA. We believe our cost of goods sold for the three and nine months ended September 30, 2023 would have been $1.0 million and $3.4 million higher, respectively, if we had not previously expensed certain material and production costs with respect to the units sold. We believe our cost of goods sold 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, 2023 and December 31, 2022, we had approximately $25.0 million and $28.0 million, respectively, of inventory on hand that was previously expensed as research and development expense and will not be reported as cost of goods sold in future periods when sales of IBSRELA are recognized as revenue. Other cost of revenue includes payments due to AstraZeneca, which under the terms of a termination agreement entered into in 2015 (AstraZeneca 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 other NHE3 products. 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 other 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 $23.9 million as other cost of revenue under the AstraZeneca Termination Agreement. See details in Note 6, Collaboration and Licensing Agreements , under AstraZeneca, in the notes to our financial statement of this Quarterly Report on Form 10-Q. 29 Table of Contents Research and Development Pursuant to the October 2021 restructuring plan, we eliminated our internal research organization and we do not currently expect to meaningfully advance our efforts with respect to our discovery and developmental assets until such time as we have determined our available resources can support additional activities after prioritization of the commercialization of IBSRELA and XPHOZAH. 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; • expenses associated with producing XPHOZAH prior to FDA approval; • expenses associated with producing discovery and developmental assets 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, outside professional services, marketing, advertising and legal expenses, facilities costs not otherwise allocated to research and development 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 Related to the Sale of Future Royalties , in June 2022, we and HealthCare Royalty Partners IV, L.P. (HCR) entered into a Royalty and Sales Milestone Interest Acquisition Agreement (HCR Agreement). Under the terms of the HCR Agreement, HCR 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 Kyowa Kirin based upon Kyowa Kirin's net sales of tenapanor in Japan for hyperphosphatemia. 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 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 Kyowa Kirin. 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. 30 Table of Contents RESULTS OF OPERATIONS The results of operations as of September 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023, for any other interim period, or for any other future year. Comparison of the three and nine months ended September 30, 2023 and 2022 Revenue Below is a summary of our total revenue (dollars in thousands): Three Months Ended September 30, Change 2023 vs. 2022 Nine Months Ended September 30, Change 2023 vs. 2022 2023 2022 $ % 2023 2022 $ % Product sales, net $ 22,285 $ 4,885 $ 17,400 356 % $ 51,949 $ 6,899 $ 45,050 653 % Product supply revenue 2,092 92 2,000 2174 % 5,354 1,058 4,296 406 % Licensing revenue 32,014 9 32,005 355,611 % 32,790 23 32,767 142,465 % Total revenues $ 56,391 $ 4,986 $ 51,405 1,031 % $ 90,093 $ 7,980 $ 82,113 1,029 % The increase in product sales, net during the three and nine months ended September 30, 2023 as compared to the same periods in 2022 is attributable to increased net product sales for IBSRELA. The increase in product supply revenue during the three and nine months ended September 30, 2023 as compared to the same periods in 2022 is attributable to increased product supply revenue to Kyowa Kirin. The increase in licensing revenue during the three and nine months ended September 30, 2023 as compared to the same periods in 2022 is attributable to earning an aggregate of $30.0 million for milestones under the 2017 Kyowa Kirin Agreement and payments under the 2022 Kyowa Kirin Amendment upon approval from the Japanese MHLW for the NDA for tenapanor for the improvement of hyperphosphatemia in adult patients with CKD on dialysis. We also earned a $2.0 million milestone under the terms of the Fosun Agreement upon acceptance of the NDA for tenapanor by China’s Center for Drug Evaluation of the NMPA for the control of serum phosphorus in adult patients with CKD on hemodialysis. Cost of Goods Sold Below is a summary of our cost of goods sold (dollars in thousands): Three Months Ended September 30, Change 2023 vs. 2022 Nine Months Ended September 30, Change 2023 vs. 2022 2023 2022 $ % 2023 2022 $ % Cost of sales $ 644 $ 230 $ 414 180 % $ 1,508 $ 287 $ 1,221 425 % Other cost of revenue 7,048 502 6,546 1,304 % 11,210 668 10,542 1,578 % Total cost of goods sold $ 7,692 $ 732 $ 6,960 951 % $ 12,718 $ 955 $ 11,763 1,232 % The increase to cost of sales for the three and nine months ended September 30, 2023 as compared to the same periods in 2022 is attributable to cost of goods sold for increased net product sales of IBSRELA. The increase to other cost of revenue for the three and nine months ended September 30, 2023 as compared to the same periods in 2022 is primarily attributable to payments due to AstraZeneca under the AstraZeneca Termination Agreement as well as cost of goods sold for product supply sold to our international partners. 31 Table of Contents Operating Expenses Below is a summary of our operating expenses (dollars in thousands): Three Months Ended September 30, Change 2023 vs. 2022 Nine Months Ended September 30, Change 2023 vs. 2022 2023 2022 $ % 2023 2022 $ % Research and development $ 8,637 $ 7,467 $ 1,170 16 % $ 26,012 $ 26,059 $ (47) — % Selling, general and administrative 32,664 18,667 13,997 75 % 86,653 56,868 29,785 52 % Total operating expenses $ 41,301 $ 26,134 $ 15,167 58 % $ 112,665 $ 82,927 $ 29,738 36 % Research and Development Below is a summary of our research and development expenses (dollars in thousands): Three Months Ended September 30, Change 2023 vs. 2022 Nine Months Ended September 30, Change 2023 vs. 2022 2023 2022 $ % 2023 2022 $ % External R&D expenses $ 3,089 $ 2,693 $ 396 15 % $ 10,295 $ 10,240 $ 55 1 % Employee-related expenses 4,454 3,462 992 29 % 12,549 11,214 1,335 12 % Facilities, equipment and depreciation expenses 763 611 152 25 % 2,120 2,441 (321) (13) % Other 331 701 (370) (53) % 1,048 2,164 (1,116) (52) % Total research and development expenses $ 8,637 $ 7,467 $ 1,170 16 % $ 26,012 $ 26,059 $ (47) — % The change in our external R&D expenses for the three months ended September 30, 2023 as compared to the same period in 2022 is primarily the result of tenapanor manufacturing expenses as well as regulatory consulting expenses related to the FDA appeal of XPHOZAH. The change in our external R&D expenses for the nine months ended September 30, 2023 as compared to the same period in 2022 is primarily the result of clinical trial and pharmacovigilance activities related to IBSRELA. Selling, General and Administrative The increase in selling, general and administrative expenses for the three and nine months ended September 30, 2023 as compared to the same periods in 2022 is primarily due to increased costs associated with the commercial launch of IBSRELA as well as preparation for the commercial launch of XPHOZAH and increases in expenses associated with administrative support functions as our company has grown in headcount and activity level. The increases 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 2023 vs. 2022 Nine Months Ended September 30, Change 2023 vs. 2022 2023 2022 $ % 2023 2022 $ % Interest expense $ (1,107) $ (886) $ (221) 25 % $ (3,210) $ (2,409) $ (801) 33 % The increase in interest expense for the three and nine months ended September 30, 2023 as compared to the same periods in 2022 is due to a higher variable interest rate applied to our loan balance primarily resulting from market fluctuations. 32 Table of Contents Non-Cash Interest Expense Related to the Sale of Future Royalties Below is a summary of our non-cash interest expense (dollars in thousands): Three Months Ended September 30, Change 2023 vs. 2022 Nine Months Ended September 30, Change 2023 vs. 2022 2023 2022 $ % 2023 2022 $ % Non-cash interest expense related to the sale of future royalties $ (922) $ (831) $ (91) 11 % $ (2,859) $ (841) $ (2,018) 240 % Non-cash interest expense related to the sales of future royalties for the three and nine months ended September 30, 2023 is accrued on the deferred royalty obligation that we recorded following the receipt of the $10.0 million upfront payment from HCR during June 2022. We recognized nine months of expense during the nine months ended September 30, 2023 compared to approximately three months of expense during the nine months ended September 30, 2022. Other Income, net Below is a summary of our other income, net (dollars in thousands): Three Months Ended September 30, Change 2023 vs. 2022 Nine Months Ended September 30, Change 2023 vs. 2022 2023 2022 $ % 2023 2022 $ % Other income, net $ 1,460 $ 704 $ 756 107 % $ 4,308 $ 1,258 $ 3,050 242 % The increase in other income, net for the three and nine months ended September 30, 2023 as compared to the same periods in 2022 is primarily due to increased income on our investments resulting from both higher interest rates and larger investment balances throughout the period. Liquidity and Capital Resources Below is a summary of our cash, cash equivalents and short-term investments (dollars in thousands): September 30, 2023 December 31, 2022 Change $ Change % Cash and cash equivalents $ 33,767 $ 96,140 $ (62,373) (65) % Short-term investments 131,313 27,769 103,544 373 % Total liquid funds $ 165,080 $ 123,909 $ 41,171 33 % As of September 30, 2023, we had cash, cash equivalents and short-term investments of approximately $165.1 million. In August 2021, we filed a prospectus supplement under a Registration Statement which was filed in July 2020 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 was authorized for issuance and sale, from time to time, under a sales agreement (2021 Open Market Sales Agreement) we entered into with Jefferies LLC (Jefferies), pursuant to which we, from time to time, sold up to $150.0 million in shares of our common stock through Jefferies. Pursuant to the 2021 Open Market Sales Agreement, Jefferies, as our sales agent, received a commission of up to 3% of the gross sales price for shares of common stock sold under the 2021 Open Market Sales Agreement. As of March 2023, we had received the maximum gross proceeds of $150.0 million under the 2021 Open Market Sales Agreement, which included 15.5 million shares of our common stock for which we received gross proceeds of $51.9 million during the quarter ended March 31, 2023. 33 Table of Contents In January 2023, we filed a Form S-3 registration statement, which became effective in January 2023 (2023 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 $150.0 million of our common stock that may be issued and sold, from time to time, under a sales agreement with Jefferies, deemed to be “at-the-market offerings” (2023 Open Market Sales Agreement). Pursuant to the 2023 Open Market Sales Agreement, Jefferies, as sales agent, may receive a commission of up to 3.0% of the gross sales price for shares of common stock sold under the 2023 Open Market Sales Agreement. During the three months ended September 30, 2023, we initiated sales pursuant to the 2023 Open Market Sales Agreement resulting in the issuance of 13.8 million shares of our common stock and receipt of gross proceeds of $58.4 million at a weighted average sales price of approximately $4.24 per share. During the nine months ended September 30, 2023, we completed sales pursuant to the 2023 Open Market Sales Agreement resulting in the issuance of 16.8 million shares of our common stock and receipt of gross proceeds of $70.0 million at a weighted average sales price of approximately $4.17 per share. In February 2022, we entered into a loan and security agreement (2022 Loan Agreement) with SLR Investment Corp (SLR). The 2022 Loan Agreement was subsequently amended on August 1, 2022 and February 9, 2023. The 2022 Loan Agreement as amended 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 December 20, 2023; provided that (i) we have received approval by the FDA for our NDA for XPHOZAH by November 30, 2023 and (ii) we have achieved certain product revenue milestone targets described in the 2022 Loan Agreement. The initial funding of $27.5 million was used to repay the 2018 Loan and is funding our ongoing operations. We had $25.0 million principal from the 2018 Loan outstanding as of the closing date, as well as the 2018 Exit Fee in the amount of $1.5 million. We paid the 2018 Exit Fee in October 2023 following approval from the FDA for XPHOZAH to reduce serum phosphorus in adults with chronic kidney disease (CKD) on dialysis as add-on therapy in patients who have an inadequate response to phosphate binders or who are intolerant of any dose of phosphate binder therapy. As discussed in Note 9. Derivative Liabilities , in connection with entering into the 2022 Loan Agreement, we entered into the 2022 Exit Fee agreement, whereby we agreed to pay an exit fee in the amount of 2% of the 2022 Loan funded if certain conditions are met. Notwithstanding the prepayment or termination of the 2022 Loan, the 2022 Exit Fee will expire on February 23, 2032. In October 2022, we announced that our collaboration partner, Kyowa Kirin, submitted an NDA to the Japanese MHLW for tenapanor for the improvement of hyperphosphatemia in adult patients with CKD on dialysis. In accordance with the terms of the 2022 Amendment, Kyowa Kirin paid an aggregate of $35.0 million to us in milestone payments and payments associated with the 2022 Amendment during the quarter ended December 31, 2022. In September 2023, we announced that Kyowa Kirin received approval from the Japanese MHLW for the NDA for tenapanor for the improvement of hyperphosphatemia in adult patients with chronic kidney disease on dialysis, which results in payment to us from Kyowa Kirin for an aggregate of $30.0 million for milestone payments and payments under the 2022 Amendment and we expect will also entitle us to the first $5.0 million payment under the terms of the HCR Agreement. We received these payments in October 2023. In October 2023, we entered into a Third Amendment (the Third Amendment) to the 2022 Loan Agreement by and between us and the 2022 Lenders. As discussed in Note 8. Borrowing , the Third Amendment, among other things, (1) provides us with the option to draw an additional $50.0 million of committed capital by March 15, 2024 (the Term C Loan); (2) provides us with the option to draw up to an additional $50.0 million of uncommitted capital, subject to approval by the Agent's investment committee (the Term D Loan); and (3) extends the interest-only period for the Four Loans to December 31, 2026, effective upon our decision to draw the Term B Loan in the amount of $22.5 million. We provided the Agent with notice of our decision to draw the Term B Loan in October 2023 to support the commercial launch of XPHOZAH. We have incurred operating losses since inception in 2007 and our accumulated deficit as of September 30, 2023 is $817.4 million. Our primary sources of cash have been from the sale and issuance of common stock (in both public offerings and private placements), private placements of convertible preferred stock, funds from our collaboration partnerships, funds from our 2018 Loan Agreement, as amended, and 2022 Loan Agreement, as amended, as well as from sales of IBSRELA. Our primary uses of cash have been to fund operating expenses, primarily research and development expenditures, as well as 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. 34 Table of Contents Since December 31, 2021 and prior to September 30, 2023, our liquidity position raised substantial doubt about our ability to continue as a going concern. We have addressed our operating cash flow requirements through cash generated from product sales of IBSRELA, proceeds from the sale of shares of our common stock under our at-the-market offering, and from the receipt of milestones payments from our collaboration partners and payments from our Japanese collaboration partner under the second amendment to our License Agreement, which were received in October 2023. We believe our available cash, cash equivalents and short-term investments as of September 30, 2023 will be sufficient to fund our operations for at least a period of one year from the issuance of these condensed financial statements. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. In particular, our operating plan may change and we may require significant additional capital to fund our operations. There are no assurances that our efforts to meet our operating cash flow requirements will be successful. If our current cash, cash equivalents and short-term 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 condensed financial statements, our liquidity, financial condition and business prospects will be materially affected. Our future funding requirements will depend on many factors, including, but not limited to: • the extent to which we are able to generate product revenue from sales of IBSRELA and XPHOZAH; • the availability of adequate third-party reimbursement for IBSRELA and XPHOZAH; • the manufacturing, selling and marketing costs associated with IBSRELA and XPHOZAH; • whether or when XPHOZAH, along with other oral ESRD-related drugs without an injectable or intravenous equivalent, are bundled into the ESRD prospective payment system (ESRD PPS), the manner in which such introduction into the ESRD PPS may occur, including the length of any applicable TDAPA period and the amount of the add-on payment available during the TDAPA period and whether, and the extent to which, the ESRD PPS base rate is adjusted following any applicable TDAPA period; • 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 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 discovery and/or development of other potential 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, and 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 our loan and security agreement entered into with SLR Investment Corp. in February 2022, as amended to date. 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. CASH FLOW ACTIVITIES The following table summarizes our cash flows (dollars in thousands): Nine Months Ended September 30, Change 2023 vs. 2022 2023 2022 $ % Net cash used in operating activities $ (80,999) $ (84,328) $ 3,329 (4) % Net cash (used in) provided by investing activities (101,681) 16,974 (118,655) (699) % Net cash provided by financing activities 120,307 56,554 63,753 113 % Net decrease in cash and cash equivalents $ (62,373) $ (10,800) $ (51,573) 478 % 35 Table of Contents Cash Flows from Operating Activities Net cash used in operating activities during the nine months ended September 30, 2023 decreased by $3.3 million as compared to the same period in 2022 primarily as a result of our lower net loss, partially offset by changes in our working capital, including a $30.8 million increase in accounts receivable. Accounts receivable was elevated at September 30, 2023 due to $30.0 million receivable from Kyowa Kirin for milestone payments and payments under the 2022 Amendment that were earned in September 2023 and received in October 2023. Cash Flows from Investing Activities Net cash (used in) provided by investing activities during the nine months ended September 30, 2023 decreased by $118.7 million as compared to the same periods in 2022 due to increased investment purchases during 2023, as we invested higher levels of cash as compared to the same period in 2022. Cash Flows from Financing Activities Net cash provided by financing activities during the nine months ended September 30, 2023 increased by $63.8 million as compared to the same periods in 2022 primarily due to net proceeds from issuance of our common stock pursuant to the at the market offerings of $119.2 million during the nine months ended September 30, 2023 compared to $52.8 million during the nine months ended September 30, 2022. In addition, during the nine months ended September 30, 2022 we expended net $6.1 million in conjunction with entering into the 2022 Loan and repaying the principal outstanding under the 2018 Loan and received net proceeds of $9.6 million from the sale of future royalties to HCR.