Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our audited Consolidated Financial Statements, including the notes thereto.
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Overview
We are a biopharmaceutical company headquartered in San Diego, California, focused on identifying, developing and delivering life-changing therapies to people living with rare kidney, liver, and metabolic diseases.
Uncertainty Related to the COVID-19 Pandemic
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 year ended December 31, 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 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. While we do not currently anticipate a material reduction in demand for our commercialized products, we could experience a decrease in new patient identification and increased requests for patient assistance due to increased levels of unemployment, either of which would negatively impact our revenues and hinder our cash flows. Similarly, we could face challenges with regard to healthcare programs, including access and changes in coverage. Growth in revenue could also be impeded by these factors. 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 had $361.6 million in cash and cash equivalents and available-for-sale securities as of December 31, 2020, which does not take into account $189.0 million in net proceeds we received in February 2021 pursuant to an underwritten public offering, which we believe provides sufficient capital to fund our operations for at least the next twelve months. 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 November 12, 2020, we completed the acquisition of Orphan Technologies Limited (“Orphan”), which included Orphan’s rare metabolic disorder drug OT-58, which we refer to internally as TVT-058. We acquired Orphan by purchasing all of the outstanding shares. In exchange for the shares, we made an upfront cash payment at closing of $90.0 million plus closing adjustments, net liabilities assumed, and transaction expenses of $1.2 million, $1.8 million, and $4.2 million, respectively. Under the Agreement, we have also agreed to make contingent cash payments up to an aggregate of $427.0 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 TVT-058 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 TVT-058 product is granted.
Research and Development
Sparsentan
Sparsentan, also known as RE-021, is a novel investigational product candidate with a dual mechanism of action, a selective endothelin receptor antagonist (“ERA”), with in vitro selectivity toward endothelin receptor type A and a potent angiotensin receptor blocker (“ARB”), in a single molecule. Sparsentan is currently being evaluated in two pivotal Phase 3 clinical studies in rare kidney diseases, including:
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• Focal segmental glomerulosclerosis ("FSGS") , a leading cause of end-stage kidney disease (ESKD) and nephrotic syndrome. There are currently no United States Food and Drug Administration ("FDA") approved pharmacologic treatments for FSGS and there remains a high unmet need for patients living with FSGS as off-label treatments such as ACE/ARBs, steroids, and immunosuppressant agents are effective in only a subset of patients and use of some of these off-label treatments may be further inhibited by their safety profiles. Every year approximately 5,400 patients are diagnosed with FSGS and we estimate that there are more than 40,000 FSGS patients in the United States and a similar number in Europe with approximately half of them being candidates for sparsentan. Sparsentan has orphan drug designation for FSGS in the United States and European Union. In 2016, we generated positive data from our Phase 2 DUET study in FSGS. In 2018, we announced the initiation of the Phase 3 DUPLEX study of sparsentan in FSGS. The DUPLEX Study is a global, randomized, multicenter, double-blind, parallel-arm, active-controlled clinical trial evaluating the safety and efficacy of sparsentan in 371 patients. The DUPLEX Study protocol provided 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% reduction in Up/C from baseline, at week 36. In February 2021, we announced that the ongoing Phase 3 DUPLEX Study achieved its pre-specified interim FSGS partial remission of proteinuria endpoint following the 36-week interim period. After 36 weeks of treatment, 42.0 percent of patients receiving sparsentan achieved FPRE, compared to 26.0 percent of irbesartan-treated patients (p=0.0094). A preliminary review of the results from the interim analysis suggest that to date in the study, sparsentan has been generally well-tolerated and the overall safety results in the study to date have been generally comparable between treatment groups. The confirmatory primary endpoint of the DUPLEX Study to support full regulatory approval is the rate of change in eGFR over 108 weeks of treatment. As of the time of the interim analyses, available long-term eGFR data for the confirmatory endpoint were limited. Consistent with the DUPLEX Study protocol, patients will continue in a blinded manner to assess the treatment effect on eGFR slope over 108 weeks in the confirmatory endpoint analysis. The DUPLEX Study is fully enrolled and topline results from the confirmatory endpoint are expected in the first half of 2023.
Based on the data from the interim analysis, we intend to pursue submissions for accelerated approval of sparsentan for FSGS under the Subpart H regulatory pathway in the United States and pursuant to Conditional Marketing Authorization ("CMA") in Europe. During the first half of 2021, we plan to have a pre-NDA meeting with the U.S. Food and Drug Administration ("FDA"), and to initiate corresponding interactions with the European Medicines Agency ("EMA"), to discuss the ongoing study and to establish next steps for filing with the available data set.
• Immunoglobulin A nephropathy ("IgAN") is characterized by hematuria, proteinuria, and variable rates of progressive renal failure. With an estimated prevalence of more than 100,000 people in the United States and greater numbers in Europe and Asia, IgAN is the most common primary glomerular disease. Most patients are diagnosed between the ages of 16 and 35, with up to 40% progressing to end stage kidney disease within 15 years. There are currently no FDA approved treatments for IgAN. 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. Successful achievement of the proteinuria endpoint is expected to support submission of an NDA under the Subpart H accelerated approval pathway in the U.S., as well as an application for CMA consideration in Europe. 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, top-line 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. Sparsentan has orphan drug designation for IgAN in the United States and European Union.
TVT-058
TVT-058 ( previously OT-58) is a novel investigational human enzyme replacement candidate being evaluated for the treatment of classical homocystinuria (HCU). Classical HCU is a rare metabolic disorder characterized by elevated levels of plasma homocysteine that can lead to vision, skeletal, circulatory and central nervous system issues. TVT-058 is currently being tested in a Phase 1/2 double blind, randomized, placebo-controlled dose escalation study to assess its safety, tolerability, pharmacokinetics, pharmacodynamics and clinical effects in patients with classical HCU. At this time, preliminary data from the ongoing Phase 1/2 study are expected to become available in 2021 and we are monitoring the potential impact the evolving COVID-19 pandemic may have on this timing. TVT-058 has been granted Rare Pediatric Disease and Fast Track designations by the FDA, as well as orphan drug designation in the United States and European Union. It is estimated that there are at least 3,500 people living with HCU in the US with similar numbers in Europe. We acquired TVT-058 as part of the November 2020 acquisition of Orphan Technologies Limited.
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Chenodal
Chenodal (chenodeoxycholic acid or CDCA) is a naturally occurring bile acid that is approved for the treatment of people with radiolucent stones in the gallbladder. While indicated for radiolucent stones in the gallbladder, Chenodal has been recognized as the standard of care for cerebrotendinous xanthomatosis (CTX) for more than three decades, although it is not currently labeled for this indication. CTX is a rare, progressive and underdiagnosed bile acid synthesis disorder affecting many parts of the body. In January 2020, we randomized the first patients in our Phase 3 RESTORE Study to evaluate the effects of Chenodal in adult and pediatric patients with CTX, and the study continues to enroll. The pivotal study is intended to support an NDA submission for marketing authorization of Chenodal for CTX in the United States.
Preclinical Programs
We are a participant in two Cooperative Research and Development Agreements ("CRADAs"), which form a multi-stakeholder approach to pool resources with leading experts, and incorporate the patient perspective early in the therapeutic identification and development process. We have partnered with the National Institutes of Health’s National Center for Advancing Translational Sciences ("NCATS") and leading patient advocacy organizations, CDG Care and Alagille Syndrome Alliance, aimed at the identification of potential small molecule therapeutics for NGLY1 deficiency and Alagille syndrome ("ALGS"), respectively. There are no treatment options currently approved for these diseases.
Approved Products
Thiola and Thiola EC (tiopronin)
Thiola and Thiola EC are approved by the FDA for the treatment of cystinuria, a rare genetic cystine transport disorder that causes high cystine levels in the urine and the formation of recurring kidney stones. Due to the larger stone size, cystine stones may be more difficult to pass, often requiring surgical procedures to remove. More than 80 percent of people with cystinuria develop their first stone by the age of 20. More than 25 percent will develop cystine stones by the age of 10. Recurring stone formation can cause loss of kidney function in addition to substantial pain and loss of productivity associated with renal colic and stone passage. While a portion of people living with the disease are able to manage symptoms through diet and fluid intake, the prevalence of cystinuria in the US is estimated to be 10,000 to 12,000, indicating that there may be as many as 4,000 to 5,000 affected individuals with cystinuria in the US that would be candidates for Thiola or Thiola EC.
In June 2019 we announced that the FDA approved 100 mg and 300 mg tablets of Thiola EC, a new enteric-coated formulation of Thiola, to be used for the treatment of cystinuria. Thiola EC offers the potential for administration with or without food, and the ability to reduce the number of tablets necessary to manage cystinuria. Thiola EC became available to patients in July of 2019.
Cholbam (cholic acid)
The FDA approved Cholbam (cholic acid capsules) in March 2015, the first FDA-approved treatment for pediatric and adult patients with bile acid synthesis disorders due to single enzyme defects, and for adjunctive treatment of patients with peroxisome biogenesis disorder-Zellweger spectrum disorder. The effectiveness of Cholbam has been demonstrated in clinical trials for bile acid synthesis disorders and the adjunctive treatment of peroxisomal disorders. An estimated 200 to 300 patients are current candidates for therapy.
Cholbam was previously marketed in Europe under the branded name Kolbam. Sales of Kolbam in Europe were not a material component of our business, and in July 2020, we withdrew our European marketing approval application for Kolbam.
Chenodal (chenodiol)
Chenodal is a synthetic oral form of chenodeoxycholic acid ("CDCA"), a naturally occurring primary bile acid synthesized from cholesterol in the liver. The FDA approved Chenodal for the treatment of people with radiolucent stones in the gallbladder. In 2010, Chenodal was granted orphan drug designation for the treatment of cerebrotendinous xanthomatosis ("CTX"), a rare autosomal recessive lipid storage disease. We acquired Chenodal in March 2014.
While Chenodal is not labeled for CTX, it received a medical necessity determination in the US by the FDA and has been used as the standard of care for more than three decades. We are working to obtain FDA approval of Chenodal for the treatment of CTX and initiated a Phase 3 clinical trial for this indication in January 2020. The prevalence of CTX is estimated in the literature to be as high as 1 in 70,000 in the overall population. Pathogenesis of CTX involves deficiency of the enzyme 27-hydroxylase (encoded by the gene CYP27A1), a rate-limiting enzyme in the synthesis of primary bile acids, including CDCA, from cholesterol. The disruption of primary bile acid synthesis in CTX leads to toxic accumulation of cholesterol and cholestanol in most tissues. Patients may present with intractable diarrhea, premature cataracts, tendon xanthomas, atherosclerosis, and cardiovascular disease in childhood and adolescence. Neurological manifestations of the disease, including dementia and cognitive and cerebellar deficiencies, emerge during late adolescence and adulthood. The types, combinations and severity of symptoms can be different from person to person, and making diagnosis challenging and often delayed. Oral administration of CDCA has been shown to normalize primary bile acid synthesis in patients with CTX.
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Financial Overview
Acquired IPR&D
We assess whether IPR&D assets acquired from others in an asset acquisition have alternative future use (in research and development projects or otherwise) at the acquisition date. If such assets have alternative future use, they are capitalized and recognized as an intangible asset. If such assets do not have alternative use, nor is there an alternative indication that the Company plans to pursue, the upfront consideration transferred, including any contingent consideration that is probable and reasonably estimable, is charged to expense at the acquisition date. We applied this treatment in accounting for the acquisition of Orphan Technologies, which included the developmental product candidate for the treatment of classical homocystinuria (HCU), TVT-058, or OT-58 as it was known to Orphan.
Research and Development Costs
Research and development costs include expenses related to sparsentan, discontinued programs fosmetpantotenate and CNSA-001, and our other pipeline programs, including the recently acquired TVT-058 program. We expense all research and development costs as they are incurred. Our research and development costs are comprised of salaries and bonuses, benefits, non-cash share-based compensation, license fees, milestones under license agreements, costs paid to third-party contractors to perform research, conduct clinical trials, and develop drug materials and delivery methods, and associated overhead expenses and facilities costs. We charge direct internal and external program costs to the respective development programs. We also incur indirect costs that are not allocated to specific programs because such costs benefit multiple development programs and allow us to increase our pharmaceutical development capabilities. These consist of internal shared resources related to the development and maintenance of systems and processes applicable to all of our programs.
We record expenses in connection with our clinical trials under contracts with contract research organizations ("CROs") that support conducting and managing clinical trials. The financial terms and activities of these agreements vary from contract to contract and may result in uneven expense levels. Generally, these agreements set forth activities that drive the recording of expenses such as start-up, initiation activities, enrollment, treatment of patients, or the completion of other clinical trial activities.
Expenses related to clinical trials are accrued based on our estimates and/or representations from service providers regarding work performed, including actual level of patient enrollment, completion of patient studies and progress of the clinical trials. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If the amounts we are obligated to pay under our clinical trial agreements are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), we adjust our accruals accordingly on a prospective basis. Revisions to our contractual payment obligations are charged to expense in the period in which the facts that give rise to the revision become reasonably certain.
We currently have three Phase 3 clinical trials in process that are in varying stages of activity, with ongoing non-clinical support studies. As such, clinical trial expenses will vary depending on the all the factors set forth above and may fluctuate significantly from quarter to quarter.
At any point in time, we typically have various early stage research and drug discovery projects. Our internal resources, employees and infrastructure are not directly tied to any one research or drug discovery project and are typically deployed across multiple projects. As such, we do not maintain information regarding costs incurred for these early stage research and drug discovery programs on a project-specific basis.
We routinely engage vendors and service providers for scientific research, clinical trial, regulatory compliance, manufacturing and other consulting services. We also make grants to research and non-profit organizations to conduct research which may lead to new intellectual properties that we may subsequently license under separately negotiated license agreements. Such grants may be funded in lump sums or installments.
The following table summarizes our research and development expenses during the years ended December 31, 2020, 2019 and 2018. The internal costs include personnel, facility costs, and discovery and research related activities associated with our pipeline. The external program costs reflect external costs attributable to our clinical development candidates and preclinical candidates selected for further development. Such expenses primarily include third-party contract costs relating to clinical trial activities, nonclinical studies and manufacturing.
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For the Year Ended December 31,
(in thousands)
2020 2019 2018
External service provider costs:
Sparsentan $ 70,486 $ 48,533 $ 39,826
Fosmetpantotenate (discontinued) (2,295) 1 31,193 21,330
Censa (discontinued) — 3,166 16,831
TVT-058 1,962 — —
Other product candidates — 496 242
General 15,433 19,638 16,258
Total external service provider costs 85,586 103,026 94,487
Internal personnel costs 46,187 37,937 29,270
Total research and development $ 131,773 $ 140,963 $ 123,757
1 Credit received in 2020.
Most of our product development programs are in clinical trials which are highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each product candidate and are difficult to project. Given the uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine the duration and completion costs of current or future clinical trials of our product candidates, or if and to what extent we will generate revenues, if any, from the commercialization and sale of any of our product candidates.
Selling, General and Administrative
Selling, general and administrative expenses consist of salaries and bonuses, benefits, non-cash share-based compensation, legal and other professional fees, rent, depreciation and amortization, travel, insurance, business development, sales and marketing programs, and other operating expenses.
Other Income/Expenses
Other income/expenses consists of interest income and expense, finance expense, loss on the extinguishment of debt, change in fair value of derivative instruments and miscellaneous other income/expenses.
License Agreements
Ligand License Agreement
In 2012, we entered into a license agreement with Ligand, granting us a worldwide license for the development, manufacture and commercialization of sparsentan, which we are developing in connection with the treatment of FSGS. Under the license agreement, Ligand granted us a sublicense under certain of its patents and other intellectual property in connection with the development and commercialization of sparsentan. Under the license agreement, Ligand is obligated to transfer to us certain information, records, regulatory filings, materials and inventory controlled by Ligand and relating to or useful for developing sparsentan. We must use commercially reasonable efforts to develop and commercialize sparsentan in specified major market countries and other countries in which we believe it is commercially reasonable to develop and commercialize such products.
As consideration for the license, we are required to make payments upon the achievement of certain milestones, totaling up to $114.1 million. Should we commercialize sparsentan or any products containing any of the licensed compounds, we will be obligated to pay Ligand an escalating annual royalty between 15% and 17% of net sales of all such products. Through 2020, we made milestone payments to Ligand of $7.2 million under the license agreement.
Under the terms of the license agreement, Bristol-Myers Squibb Company (“BMS”) has a right of first negotiation and Ligand has a right of second negotiation with respect to any license arrangement for a licensed compound, except to the extent such rights may be waived.
The license agreement will continue until neither party has any further payment obligations under the agreement and is expected to continue for approximately 10 to 20 years from the effective date. Ligand may terminate the license agreement due to (i) our insolvency, (ii) our material uncured breach of the agreement, (iii) our failure to use commercially reasonable efforts to develop and commercialize sparsentan as described above or (iv) certain other conditions. We may terminate the license agreement due to a material uncured breach of the agreement by Ligand.
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Thiola License Agreement
In 2014, we entered into a license agreement with Mission Pharmacal ("Mission"), pursuant to which we obtained an exclusive, royalty-bearing license to market, sell and commercialize Thiola (tiopronin) in the United States and Canada, and a non-exclusive license to use know-how relating to Thiola to the extent necessary to market Thiola. We paid Mission an up-front license fee of $3.0 million and will pay guaranteed minimum royalties during each calendar year the greater of $2.0 million or 20% of our net sales of Thiola in the United States and Canada.
In October 2015, the license agreement was amended to allow for us to secure enough API to ensure an adequate level of safety stock to prevent an interruption in the supply of Thiola and to prepare for a reformulation development project.
In March 2016, the license agreement was amended to, among other things, include a new formulation development project for tiopronin tablets.
In November 2017, we amended the license agreement to extend the term through May of 2029.
In November 2018, the license agreement was amended to remove all territorial restrictions on our license rights. As consideration for the expanded territory we paid an up-front fee of $0.3 million and will pay guaranteed minimum royalties equaling the greater of $0.1 million or 20% of our Thiola net sales generated outside of the United States during each calendar year.
See Note 9 to Consolidated Financial Statements for further discussion.
Results of Operations
Net Product Sales
The following table provides information regarding net product sales ( in thousands ):
Year Ended December 31, Year Ended December 31,
2020 2019 Change 2019 2018 Change
Tiopronin products $ 108,883 $ 95,638 $ 13,245 $ 95,638 $ 89,176 $ 6,462
Bile acid products 89,438 79,700 9,738 79,700 75,070 4,630
Total net product revenues $ 198,321 $ 175,338 $ 22,983 $ 175,338 $ 164,246 $ 11,092
Net product sales for the years ended December 31, 2020, 2019 and 2018 were $198.3 million, $175.3 million and $164.2 million, respectively, and consisted of sales of Thiola ("Tiopronin products"), Chenodal and Cholbam ("Bile acid products"). In June 2019, the Company announced that the FDA approved 100 mg and 300 mg tablets of Thiola EC (tiopronin), a new enteric-coated formulation of THIOLA® (tiopronin), to be used for the treatment of cystinuria.
The increase in net product sales for the year ended December 31, 2020 as compared to the same period in 2019, is due to increased patient counts for all products.
The increase in net product sales for the year ended December 31, 2019 as compared to the same period in 2018, is due to increased patient counts for all products.
We use a direct-to-patient distributor. Under this distribution model, we record revenues when customers take control of the product (at delivery).
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Operating Expenses
The following table provides information regarding operating expenses ( in thousands ):
Year Ended December 31, Year Ended December 31,
2020 2019 Change 2019 2018 Change
Cost of goods sold $ 6,126 $ 5,234 $ 892 $ 5,234 $ 5,527 $ (293)
Research and development 131,773 140,963 (9,190) 140,963 123,757 17,206
Selling, general and administrative 135,799 128,951 6,848 128,951 103,654 25,297
Change in fair value of contingent consideration 3,655 15,051 (11,396) 15,051 11,590 3,461
Restructuring — — — — (242) 242
Impairment of L-UDCA IPR&D intangible asset — 25,500 (25,500) 25,500 — 25,500
Write off of L-UDCA contingent consideration — (18,000) 18,000 (18,000) — (18,000)
Acquired IPR&D expense 97,131 — 97,131 — — —
Impairment of long-term investment — 15,000 (15,000) 15,000 — 15,000
$ 374,484 $ 312,699 $ 61,785 $ 312,699 $ 244,286 $ 68,413
2020 versus 2019 results
Operating expenses for the year ended December 31, 2020, were $374.5 million compared to $312.7 million for the year ended December 31, 2019, an increase of $61.8 million.
Cost of goods sold increased by $0.9 million due increased sales and higher FDA fees in 2020.
Research and development costs decreased by $9.2 million due to decreased clinical trial expenses and internal costs related to our ongoing Phase 3 studies, as well as the Phase 3 FORT Study of fosmetpantotenate in PKAN, which was discontinued in the third quarter of 2019.
Selling, general and administrative expenses increased by $6.8 million due to increased personnel expenses arising from increased headcount, as well as increased distribution fees and marketing expenses.
Acquired IPR&D of $97.1 million arises in 2020 as a result of the November 2020 acquisition of Orphan Technologies Limited, which included the developmental rare metabolic disorder drug OT-58.
We impaired the $15.0 million long-term investment during the third quarter of 2019 following the decision to decline to exercise our option to acquire Censa Pharmaceuticals and accordingly discontinue our joint development program for CNSA-001.
Write off of L-UDCA Contingent Consideration and impairment of L-UDCA IPR&D intangible assets: In June 2016, we acquired certain rights to our product candidate L-UDCA for $0.5 million cash. At the same time, we established a related non-cash asset of $25.5 million and liability of $25.0 million for IPR&D and contingent consideration (deferred financing) related net sales royalties and milestones. As a result of our ongoing quarterly valuation update process the resulting balance of the L-UDCA contingent liability at December 31, 2018 was $18.0 million. 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. This resulted in a net $7.5 million non-cash charge to operations in that quarter.
The following table provides the change in the fair value of contingent consideration of $11.4 million, which was primarily due to changes in discount factors, along with changes in revenue forecasts and timing of payments (in thousands):
Year Ended December 31,
2020 2019 Change
Bile acid products 3,655 15,051 (11,396)
2019 versus 2018 results
Our operating expenses for the year ended December 31, 2019 were $312.7 million compared to $244.3 million for the year ended December 31, 2018, an increase of $68.4 million.
Cost of goods sold decreased by $0.3 million due primarily to higher inventory reserves in 2018.
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Research and development costs increased by $17.2 million due to increased clinical trial expenses and internal costs related to our two ongoing Phase 3 studies for sparsentan in FSGS and IgAN, as well as the Phase 3 FORT Study of fosmetpantotenate in PKAN, which was discontinued in the third quarter of 2019.
Selling, general and administrative expenses increased by $25.3 million due to increased legal and compensation expenses.
Restructuring expenses decreased by $0.2 million as we completed the consolidation of our research and development function to San Diego in 2018.
We impaired the $15.0 million long-term investment during the third quarter of 2019 following the decision to decline to exercise our option to acquire Censa Pharmaceuticals and accordingly discontinue our joint development program for CNSA-001.
The following table provides the change in the fair value of contingent consideration of $3.5 million, which was due to changes in revenue forecasts, discount factors and timing of payments (in thousands):
Year Ended December 31,
2019 2018 Change
Bile acid products $ 15,051 $ 10,590 $ 4,461
L-UDCA — 1,000 (1,000)
$ 15,051 $ 11,590 $ 3,461
Write off of L-UDCA Contingent Consideration and impairment of L-UDCA IPR&D intangible assets: In June 2016, we acquired certain rights to our product candidate L-UDCA for $0.5 million cash. At the same time, we established a related non-cash asset of $25.5 million and liability of $25.0 million for IPR&D and contingent consideration (deferred financing) related net sales royalties and milestones. As a result of our ongoing quarterly valuation update process the resulting balance of the L-UDCA contingent liability at December 31, 2018 was $18.0 million. 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. This resulted in a net $7.5 million non-cash charge to operations in that quarter.
Other Income/Expenses
The following table provides information regarding other income (expenses) ( in thousands ):
Year Ended December 31, Year Ended December 31,
2020 2019 Change 2019 2018 Change
Other income (expense), net $ 1,420 $ (314) $ 1,734 $ (314) $ (474) $ 160
Interest income 5,003 10,055 (5,052) 10,055 5,499 4,556
Interest expense (19,050) (18,828) (222) (18,828) (9,810) (9,018)
Loss on extinguishment of debt — — — — (17,042) 17,042
$ (12,627) $ (9,087) $ (3,540) $ (9,087) $ (21,827) $ 12,740
Other expense for the year ended December 31, 2020 was $12.6 million compared to other expense of $9.1 million for the year ended December 31, 2019, which represents a change of $3.5 million. The change was primarily attributable to a decrease in interest income earned on our available-for-sale debt securities.
Other expense for the year ended December 31, 2019 was $9.1 million compared to other expense of $21.8 million for the year ended December 31, 2018, which represents a change of $12.7 million. The change was primarily attributable to the 2018 loss on the partial extinguishment of our 4.5% senior convertible notes due in 2019 and the increase in interest expense related to the 2.50% senior convertible notes due 2025.
Income Tax Benefit (Provision):
We follow ASC 740, Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the asset will not be realized.
The standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax
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position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. Our policy is to record estimated interest and penalty related to the underpayment of income taxes or unrecognized tax benefits as a component of its income tax provision.
Tax benefit for fiscal 2020 of $19.4 million increased from the fiscal 2019 tax benefit of $0.02 million due to the income tax benefit related to the CARES Act NOL carryback.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Liquidity and Capital Resources
We believe that our available cash and short-term investments as of the date of this filing will be sufficient to fund our anticipated level of operations beyond the next 12 months. 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.
For the years ended December 31, 2020 and 2019, we had the following balances and financial performance ( in thousands ):
December 31, 2020 December 31, 2019
Revenue $ 198,321 $ 175,338
Net loss (169,431) (146,427)
Cash & cash equivalents 84,772 62,436
Short-term investments 276,817 336,088
Accumulated deficit (585,875) (416,444)
Stockholders' equity 211,213 221,196
Working capital $ 317,747 $ 333,615
Working capital ratio 4.43 4.50
Operating Leases
Future Minimum Rental Commitments
We have future minimum rental commitments totaling $46.1 million arising from our operating leases. These commitments consist of $0.2 million in aggregate base rent for our existing office lease estimated to expire in January 2021 and $49.2 million in aggregate base rent through August 2028 for the new lease space, less rent abatement totaling $3.2 million and $0.1 million in advance rent.
Equity Offerings
2021 Underwritten Public Offering of Common Stock
In February 2021, we sold an aggregate of 7.5 million shares of our common stock in an underwritten public offering, at a price of $26.75 per share. The net proceeds to us from the offering, after deducting the underwriting discounts and offering expenses, was $189.0 million.
2020 Underwritten Public Offering of Common Stock
In June 2020, we sold an aggregate of 7.5 million shares of our common stock in an underwritten public offering, at a price of $15.50 per share. The net proceeds to us from the offering, after deducting the underwriting discounts and offering expenses, were $108.7 million.
At-the-Market Equity Offering
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. 333-227182), as previously filed with the Securities and Exchange Commission. Through the period ended December 31, 2020, we have sold 867,806 shares under the ATM Agreement, resulting in net proceeds of $22.8 million. As of December 31, 2020, an aggregate amount of $76.5 million remained eligible for sale under the facility.
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Borrowings
Convertible Senior Notes Due 2025
On September 10, 2018, we completed a registered underwritten public offering of $276 million aggregate principal amount of 2.50% Convertible Senior Notes due 2025 ("2025 Notes"), and entered into a base indenture and supplemental indenture agreement ("2025 Indenture") with respect to the 2025 Notes. The 2025 Notes will mature on September 15, 2025 ("Maturity Date”), unless earlier repurchased, redeemed, or converted. The 2025 Notes are senior unsecured obligations of ours and bear interest at an annual rate of 2.50%, payable semi-annually in arrears on March 15 and September 15 of each year.
The net proceeds from the issuance of the 2025 Notes were approximately $267.2 million, after deducting commissions and the offering expenses payable by us. A portion of the net proceeds from the 2025 Notes were used by us to repurchase $23.4 million aggregate principal amount of its then-outstanding 4.5% senior convertible notes due in 2019 in privately-negotiated transactions.
The initial conversion rate for the 2025 Notes is 25.7739 shares of our common stock per $1,000 principal amount of 2025 Notes, which represents an initial conversion price of approximately $38.80 per share. If a “make-whole fundamental change” (as defined in the 2025 Indenture) occurs, then we will, in certain circumstances, increase the conversion rate for a specified period of time.
The 2025 Notes will be redeemable, in whole or in part, at our option at any time, and from time to time, on or after September 15, 2022 and, in the case of any partial redemption, on or before the 40th scheduled trading day before the Maturity Date, at a cash redemption price equal to the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of our common stock exceeds 130% of the conversion price on each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice. If a fundamental change (as defined in the 2025 Indenture) occurs, then, subject to certain exceptions, holders may require us to repurchase their 2025 Notes at a cash repurchase price equal to the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.
The effective interest rate on the liability components of the 2025 Notes for the period from the date of issuance was 7.7%.
Convertible Senior Notes Due 2019
On May 29, 2014, the Company entered into a Note Purchase Agreement relating to a private placement by the Company of $46.0 million aggregate principal amount of 2019 Notes which were convertible into shares of the Company’s common stock at an initial conversion price of $17.41 per share. The conversion price was subject to customary anti-dilution protection. The 2019 Notes bore interest at a rate of 4.5% per annum, payable semiannually in arrears on May 15 and November 15 of each year. The maturity date of the 2019 Notes was on May 30, 2019, and there were no contractual payments due prior to that date.
In September 2018, the Company used part of the net proceeds from the issuance of the 2025 Notes to repurchase $23.4 million aggregate principal amount of the 2019 Notes in privately-negotiated transactions for approximately $40.2 million in cash. The partial repurchase of the 2019 Notes resulted in a $17.0 million loss on early extinguishment of debt in September 2018.
In May 2019, the remaining $22.6 million outstanding principal amount of 2019 Notes was converted by the holders thereof into approximately 1.3 million shares of common stock. At December 31, 2019, there was no outstanding balance on the 2019 Notes.
Interest Expense
Total interest expense recognized for the years ended December 31, 2020, 2019 and 2018 was $19.1 million, $18.8 million, and $9.8 million, respectively.
License Agreement Obligations
See discussion above under the heading "License Agreements".
Funding Requirements
We believe that our available cash and short-term investments as of the date of this filing will be sufficient to fund our anticipated level of operations for at least the next 12 months. This belief is based on many factors, some factors are beyond our control. Factors that may affect funding requirements include, but are not limited to:
• the rate of progress and cost of our clinical trials, preclinical studies and other discovery and research and development activities, including any delays resulting from the COVID-19 pandemic;
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• the timing of, and costs involved in, seeking and obtaining marketing approvals for our products, and in maintaining quality systems standards for our products;
• increases or decreases in revenue from our marketed products, including decreases in revenue resulting from the COVID-19 pandemic, if any;
• debt service obligations on the 2025 Notes;
• our ability to manufacture sufficient quantities of our products to meet expected demand;
• the costs of preparing, filing, prosecuting, maintaining and enforcing any patent claims and other intellectual property rights, litigation costs and the results of litigation;
• our ability to enter into collaboration, licensing or distribution arrangements and the terms and timing of these arrangements;
• the potential need to expand our business, resulting in additional payroll and other overhead expenses;
• the potential in-licensing of other products or technologies; and
• the emergence of competing technologies or other adverse market or technological developments.
Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products and technologies.
Cash Flows
The following table summarizes our cash flows for the periods set forth below ( in thousands ):
Twelve Months Ended December 31,
2020 2019 2018
Net cash provided by (used in) operating activities $ (42,743) $ (58,214) $ (24,958)
Net cash provided by (used in) investing activities (61,327) 19,863 (203,291)
Net cash provided by (used in) financing activities 127,713 (2,077) 231,863
Effect of exchange rate changes on cash (1,307) (9) (135)
Net increase (decrease) in cash & cash equivalents 22,336 (40,437) 3,479
Cash & cash equivalents, beginning of period 62,436 102,873 99,394
Cash & cash equivalents, end of period $ 84,772 $ 62,436 $ 102,873
Management considers marketable securities to be available to fund current operations, and they are classified as available for sale and included within current assets in our Consolidated Balance Sheets. Therefore, cash and short-term investments available to fund operations is $361.6 million as of December 31, 2020.
Cash Flows from Operating Activities
Operating activities used $42.7 million of cash during the year ended December 31, 2020 compared to $58.2 million of cash used for the year ended December 31, 2019. The decrease in cash used is attributable to increased revenue arising from increase patient counts across all products offset by changes in operating assets and liabilities, including accounts receivable and accounts payable and an increase in the tax receivable.
Operating activities used $58.2 million of cash during the year ended December 31, 2019 compared to $25.0 million of cash used for the year ended December 31, 2018. The increase in cash used is attributable to increased research and development and legal expenses and changes in working capital.
Cash Flows from Investing Activities
Cash used in investing activities for the year ended December 31, 2020 was $61.3 million compared to cash provided of $19.9 million for the year ended December 31, 2019. The change was due to cash paid to Orphan Technologies and the related IPR&D.
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Cash provided by investing activities for the year ended December 31, 2019 was $19.9 million compared to $203.3 million of cash used for the year ended December 31, 2018. The change was due to timing differences associated with the purchases and sales and maturities of our available-for-sale investments, as well as changes in our portfolio-mix between cash equivalents and short-term and long-term investment holdings, along with our $15.0 million investment in Censa in the first quarter of 2018.
Cash Flows from Financing Activities
For the year ended December 31, 2020, cash provided by financing activities was $127.7 million compared to $2.1 million of cash used for the year ended December 31, 2019. The change was due to the June 2020 issuance of stock through an underwritten public offering that provided $108.7 million and an At-The-Market public offering facilitated during the fourth quarter of 2020 that provided $22.8 million.
For the year ended December 31, 2019, cash used by financing activities was $2.1 million compared to cash provided of $231.9 million during the year ended December 31, 2018. The change was due to the issuance of convertible debt in 2018 and lower proceeds from the exercise of stock options in 2019.
Contractual Commitments
The following table summarizes our principal contractual commitments, excluding open orders that support normal operations, as of December 31, 2020 ( in thousands ):
Total Less than 1 year 1-3 years 3-5 years More than 5 years
Operating leases $ 46,131 $ 2,412 $ 12,220 $ 12,964 $ 18,535
Convertible notes, including contractual interest 326,338 9,000 18,000 291,988 7,350
Sales support services 1,388 416 833 139 —
Product supply contracts 4,560 2,036 1,283 1,241 —
Purchase order commitments 1,954 1,954 — — —
$ 380,371 $ 15,818 $ 32,336 $ 306,332 $ 25,885
Excluded from the above table are certain contingent cash payments associated with our acquisition of Orphan Technologies Limited (“Orphan”), including Orphan’s rare metabolic disorder drug OT-58, which amount to an aggregate of $427.0 million based on the achievement of certain development, regulatory and commercialization events as set forth in the Agreement. In accordance with ASC 450, contingent cash payments will be accrued for when it is probable that a liability has been incurred and the amount can be reasonably estimated. As of December 31, 2020, no contingent cash payments have been accrued.
Critical Accounting Policies and Estimates
See Note 2 to the Consolidated Financial Statements for discussion.
Recently Issued Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for discussion.