What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-07-31 · 38 added, 40 removed, 177 unchanged (31% of the section changed)

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Uncertainty Related to the COVID-19 Pandemic

In March 2020, the World Health Organization ("WHO") classified the COVID-19 outbreak as a pandemic.

While the impact of the COVID-19 pandemic did not have a material adverse effect on our financial position or results of operations for the three and six months ended June 30, 2020, we have been monitoring the developments and assessing areas where there is potential for our business to be impacted.

While the impact of the ongoing COVID-19 pandemic did not have a material adverse effect on our financial position or results of operations for the three and nine months ended September 30, 2020, we have been monitoring the developments and assessing areas where there is potential for our business to be impacted.

Our labor force is currently working remotely, which could, among other things, negatively impact our ability to conduct research and development activities, engage in sales-related initiatives, or efficiently conduct day-to-day operations, and we are aware that other businesses with which we engage are likely operating under similar restrictions and experiencing disruptions in their own operations, which may create obstacles in the coordination of business activities.

Circumstances arising from the pandemic have slowed and could continue to slow the pace of enrollment in our clinical trials or otherwise hinder patient’s abilities to comply with the clinical trial protocols and could ultimately delay the availability of results and analysis of outcomes.

Circumstances arising from the pandemic have slowed and could continue to slow the pace of enrollment in our clinical trials or otherwise hinder patients' abilities to comply with the clinical trial protocols and could ultimately delay the availability of results and analysis of outcomes.

Disruptions in the supply chain could negatively impact our ability to source materials or manufacture and distribute product.

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The financial markets have been subject to significant volatility that could impact our ability to enter into, modify, and negotiate favorable terms and conditions relative to equity and debt financing activities.

We currently have $237.2 million in cash and cash equivalents and $220.2 million in available-for-sale securities as of June 30, 2020, which we believe provides sufficient capital to fund our operations for at least the next twelve months and withstand the anticipated near-term consequences of the pandemic, although liquidity constraints and access to capital markets could warrant changes to our investment strategy.

We had $456.3 million in cash and cash equivalents and available-for-sale securities as of September 30, 2020, which we believe provides sufficient capital to fund our operations for at least the next twelve months and withstand the anticipated near-term

consequences of the pandemic, although liquidity constraints and access to capital markets could warrant changes to our investment strategy.

While we have not yet experienced a material impact to date, the full magnitude of the pandemic cannot be measured at this time, and therefore any of the aforementioned circumstances, as well as other factors, may cause our results of operations to vary substantially from year to year and quarter to quarter.

Acquisition of Orphan Technologies Limited

On October 21, 2020, we entered into a Stock Purchase Agreement (the “Agreement”) with Orphan Technologies Limited (“Orphan”) and Citco Trustees (Cayman) Limited (“Trustee”) acting solely in its capacity as the sole trustee of The Fuhrer Family Trust (the “Trust” and Trustee, acting in such capacity, “Seller”), pursuant to which we will acquire Orphan, and its sole pharmaceutical candidate, OT-58, by purchasing all of the outstanding shares of Orphan (the “Shares”) from Seller.

In exchange for the Shares, we agreed to pay Seller an upfront cash payment at closing of $ 90 million.

Under the Agreement, we have also agreed to pay Seller contingent cash payments up to an aggregate of $ 427 million based on the achievement of certain development, regulatory and commercialization events as set forth in the Agreement, as well as additional tiered mid-single digit royalty payments based upon future net sales of any OT-58 products in the US and Europe, subject to certain reductions as set forth in the Agreement, and a contingent payment in the event a pediatric rare disease voucher for any OT-58 product is granted.

The closing payment of $ 90 million may be adjusted after the closing, pursuant to procedures set forth in the Agreement, in connection with the finalization of the closing cash, severance payments, transaction expenses, debt and working capital amounts.

Our Product Candidates and Approved Products

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The DUPLEX Study protocol provides for an unblinded analysis of at least 190 patients to be performed after 36 weeks of treatment to evaluate the interim efficacy endpoint - the proportion of patients achieving a FSGS partial remission of proteinuria endpoint (FPRE), which is defined as urine protein-to-creatinine ratio (Up/C) ≤1.5 g/g and a >40 percent reduction in Up/C from baseline, at week 36.

While the confirmatory endpoint of the study is the change in slope of estimated glomerular filtration rate (eGFR) after 108 weeks of treatment, successful achievement of the interim 36-week proteinuria endpoint is expected to serve as the basis for submission of a New Drug Application ("NDA") under the Subpart H accelerated approval pathway in the U.S.

While the confirmatory endpoint of the study is the change in slope of estimated glomerular filtration rate (eGFR) after 108 weeks of treatment from baseline, successful achievement of the interim 36-week proteinuria endpoint is expected to serve as the basis for submission of a New Drug Application ("NDA") under the Subpart H accelerated approval pathway in the U.S.

and Conditional Marketing Authorization ("CMA") consideration in Europe.

The DUPLEX Study protocol also provides for a sample size re-assessment to support the confirmatory portion of the study.

At this time, topline data from the 36-week proteinuria endpoint analysis are expected to become available in the first quarter of 2021, and we are monitoring the potential impact the evolving COVID-19 pandemic in conjunction with the outcome of the planned sample size reassessment may have on this timing.

• Immunoglobulin A nephropathy ("IgAN") is characterized by hematuria, proteinuria, and variable rates of progressive renal failure.

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The current standard of care is renin-angiotensin-aldosterone system ("RAAS") blockade with immunosuppression also being commonly used for patients with significant proteinuria or rapidly progressive glomerulonephritis.

In 2018, we announced that the first patient had been dosed in the PROTECT Study, a global, randomized, multicenter, double-blind, parallel-arm, active-controlled pivotal Phase 3 clinical trial evaluating the safety and efficacy of sparsentan in patients with IgAN, and

the study continues to enroll.

The PROTECT Study protocol provides for an unblinded analysis of at least 280 patients to be performed after 36 weeks of treatment to evaluate the primary efficacy endpoint – the change in proteinuria (urine protein-to-creatinine ratio) at Week 36 from baseline.

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Secondary efficacy endpoints include the rate of change in eGFR following the initiation of randomized treatment over 58-week and 110-week periods, as well as the rate of change in eGFR over 52-week and 104-week periods following the first six weeks of randomized treatment in approximately 380 patients.

At this time, topline data from the 36-week proteinuria endpoint analysis are expected to become available in the second half of 2021 and we are monitoring the potential impact the evolving COVID-19 pandemic may have on this timing.

At this time, topline data from the 36-week proteinuria endpoint analysis are expected to become available in the third quarter of 2021 and we are monitoring the potential impact the evolving COVID-19 pandemic may have on this timing.

In January 2020, we randomized the first patients in a Phase 3 clinical trial to evaluate the effects of Chenodal in adult and pediatric patients with cerebrotendinous xanthomatosis (“CTX”).

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Results of Operations

Results of operations for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019.

Results of operations for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019.

Net Product Sales:

The following table provides information regarding net product sales ( in thousands ):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 Change 2020 2019 Change

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Total net product revenues $ 51,139 $ 44,373 $ 6,766 $ 147,338 $ 128,651 $ 18,687

The sales increase for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 was due to increased patient counts, as well as the normal fluctuations in timing of new patient starts and prescription refills.

The sales increase for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019 was due to increased patient counts, as well as the normal fluctuations in timing of new patient starts and prescription refills.

Operating Expenses:

The following table provides information regarding operating expenses ( in thousands ):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 Change 2020 2019 Change

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Write off of L-UDCA contingent consideration — — — — (18,000) 18,000

Impairment of long-term investment — 15,000 (15,000) — 15,000 (15,000)

$ 70,574 $ 78,810 $ (8,236) $ 204,950 $ 237,844 $ (32,894)

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Research and development costs are expensed as incurred and include salaries and bonuses, benefits, non-cash share-based compensation, license fees, costs paid to third-party contractors to perform research, conduct clinical trials, and develop drug materials, and associated overhead expenses and facility costs.

For the three and six months ended June 30, 2020 as compared to the three and six months ended June 30, 2019, our research and development expenses decreased by $7.1 million and $10.3 million, respectively, due to the discontinuation of the fosmetpantotenate program in PKAN.

For the three and nine months ended September 30, 2020 as compared to the three and nine months ended September 30, 2019, our research and development expenses decreased by $0.9 million and $11.2 million, respectively, due to the discontinuation of the fosmetpantotenate program in PKAN.

Selling, general and administrative expenses

Selling, general and administrative expenses include salaries and bonuses, benefits, non-cash share-based compensation, professional fees, rent, depreciation and amortization, travel, insurance, business development, sales and marketing programs, and other operating expenses.

For the three and six months ended June 30, 2020 as compared to the three and six months ended June 30, 2019, our selling, general and administrative expenses decreased by $4.0 million and $3.5 million, respectively.

This decrease is primarily due to lower legal expenses.

For the three and nine months ended September 30, 2020 as compared to the three and nine months ended September 30, 2019, our selling, general and administrative expenses increased by $2.2 million and decreased by $1.4 million, respectively.

The increase observed for the quarter is primarily due to new marketing activities and additional amortization expenses, while the decrease observed for the nine month period is primarily due to lower legal expenses.

Change in the valuation of contingent consideration

For the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, the change in fair value of contingent consideration is due to changes in market driven discount rates.

For the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, the change in fair value of contingent consideration is due to a change in revenue projections.

For the three months ended September 30, 2020 as compared to the three months ended September 30, 2019, the change in fair value of contingent consideration is due to changes in market driven discount rates.

For the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, the change in fair value of contingent consideration is due to the timing of future payments and changes in market driven discount rates, offset by a change in revenue projections.

During the first quarter of 2019, we elected to discontinue development of the L-UDCA program, resulting in the removal of the intangible asset of $25.5 million, which was originally recorded in 2016, and the reversal of associated contingent consideration of $18.0 million.

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The following table provides information regarding other income (expenses), net ( in thousands ):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 Change 2020 2019 Change

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$ (3,091) $ (2,576) $ (515) $ (9,085) $ (7,028) $ (2,057)

The change in our other income (expenses) for the three and six months ended June 30, 2020 as compared to the three and six months ended June 30, 2019 of $0.8 million and $1.5 million, respectively, is primarily due to lower average balances in investments in debt securities and lower interest rates.

The change in our other income (expenses) for the three and nine months ended September 30, 2020 as compared to the three and nine months ended September 30, 2019 of $0.5 million and $2.1 million, respectively, is primarily due to lower average balances in investments in debt securities and lower interest rates.

Income Tax Benefit (Provision):

For the six months ended June 30, 2020, we recognized an income tax benefit of $18.9 million, primarily related to provisions of the CARES Act concerning net operating loss carrybacks.

For the nine months ended September 30, 2020, we recognized an income tax benefit of $18.9 million, primarily related to provisions of the CARES Act concerning net operating loss carrybacks.

Under GAAP, quarterly effective tax rates may vary significantly depending on the actual operating results in the various tax jurisdictions, and significant transactions, as well as changes in the valuation allowance related to the expected recovery of deferred tax assets.

At June 30, 2020, we had no unrecognized tax benefits.

We did not recognize any interest or penalties related to unrecognized tax benefits during the six months ended June 30, 2020.

At September 30, 2020, we had no unrecognized tax benefits.

We did not recognize any interest or penalties related to unrecognized tax benefits during the nine months ended September 30, 2020.

Liquidity and Capital Resources

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Management believes that our operating results will vary from quarter to quarter and year to year depending upon various factors including revenues, general and administrative expenses, and research and development expenses.

We had the following balances at June 30, 2020 and December 31, 2019 ( in thousands ):

June 30, 2020 December 31, 2019

We had the following balances at September 30, 2020 and December 31, 2019 ( in thousands ):

September 30, 2020 December 31, 2019

Cash & Cash Equivalents $ 200,481 $ 62,436

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We have future minimum rental commitments totaling $46.7 million arising from our operating leases.

These commitments consist of $1.4 million in aggregate base rent for our existing office lease estimated to expire in January 2021 and $12.8 million in aggregate base rent through August 2028, less seven months of rent abatement totaling $0.9 million for the new office lease space delivered in June 2020.

Excluded from these rental commitments is one month of advance rent totaling $0.1 million, and lease incentives in the form of tenant improvements allowances totaling $2.0 million for the office space delivered in June 2020.

Our future minimum rental commitments will increase by $34.0 million upon taking possession of the remainder of the new office lease space, which is expected to occur in the latter part of 2020.

These additional commitments consist of $36.5 million in aggregate base rent through August 2028, less seven months of rent abatement totaling $2.5 million for the new office lease space not yet delivered.

Excluded from these additional rental commitments is lease incentives in the form of tenant improvements allowances totaling $5.8 million for the office space not yet delivered.

See additional discussion of our operating leases within Note 6 of the financial statement disclosures.

These commitments consist of $0.8 million in aggregate base rent for our existing office lease estimated to expire in January 2021 and $49.5 million in aggregate base rent through August 2028 for the new lease space, less seven months of rent abatement totaling $3.4 million and $0.1 million in advance rent.

Underwritten Public Offering of Common Stock

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In February 2020, we entered into an Open Market Sale Agreement ("ATM Agreement") with Jefferies LLC, as agent (“Jefferies”), pursuant to which we may offer and sell, from time to time through Jefferies, shares of our common stock having an aggregate offering price of up to $100.0 million.

Shares will be sold

pursuant to our effective registration statement on Form S-3 (Registration Statement No.

Shares will be sold pursuant to our effective registration statement on Form S-3 (Registration Statement No.

333-227182), as previously filed with the Securities and Exchange Commission.

Through the period ended June 30, 2020, we have not sold any shares under the ATM Agreement.

Through the period ended September 30, 2020, we have not sold any shares under the ATM Agreement.

Convertible Notes Payable

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The composition of our 2025 Notes are as follows ( in thousands ):

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

2.50% convertible senior notes due 2025 $ 276,000 $ 276,000

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Cash Flows from Operating Activities

Cash used in operating activities was $35.6 million for the six months ended June 30, 2020 compared to cash used of $39.6 million for the six months ended June 30, 2019.

The change in cash used in operations is due to lower R&D expenses from the discontinuation of the fosmetpantotenate program in PKAN and lower legal expenses, offset by changes in net working capital.

Cash used in operating activities was $28.9 million for the nine months ended September 30, 2020 compared to cash used of $53.7 million for the nine months ended September 30, 2019.

The change in cash used in operations is due to lower R&D expenses from the discontinuation of the fosmetpantotenate program in PKAN and lower legal expenses, offset by increased revenues and changes in net working capital.

Cash Flows from Investing Activities

Cash provided by investing activities for the six months ended June 30, 2020 was $107.4 million, compared to cash provided of $13.8 million for the six months ended June 30, 2019.

Cash provided by investing activities for the nine months ended September 30, 2020 was $64.2 million, compared to cash provided of $18.3 million for the nine months ended September 30, 2019.

The change was due to the sale and maturity of our available-for-sale investments that were not reinvested.

Cash Flows from Financing Activities

Cash provided by financing activities for the six months ended June 30, 2020 was $103.0 million compared to cash used of $1.4 million for the six months ended June 30, 2019.

Cash provided by financing activities for the nine months ended September 30, 2020 was $102.7 million compared to cash used of $2.2 million for the nine months ended September 30, 2019.

The increase in cash provided was due to the underwritten public offering of our common stock in June 2020.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis