Business context and reporting period
Ardelyx, Inc. is a clinical-stage biopharmaceutical company focused on renal and gastrointestinal diseases. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018. The company had no approved products and generated no product-sale revenue.
Its lead candidate, tenapanor, was in a second Phase 3 trial for hyperphosphatemia in dialysis patients; after two positive Phase 3 trials in IBS-C, Ardelyx planned to submit an FDA application in the second half of 2018. The company was also advancing RDX013 for potential treatment of hyperkalemia.
Financial and operating performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2017 period.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $0.030 | $0 | $2.350 | $0 |
| Gross profit | $0.030 | $0 | $1.886 | $0 |
| Research and development | $16.046 | $20.572 | $29.396 | $42.960 |
| General and administrative | $6.138 | $5.846 | $12.329 | $11.892 |
| Operating loss | $(22.154) | $(26.418) | $(39.839) | $(54.852) |
| Net loss | $(22.291) | $(25.721) | $(39.310) | $(53.729) |
| Net loss per share | $(0.42) | $(0.54) | $(0.78) | $(1.13) |
Six-month revenue comprised $2.320 million of licensing revenue, primarily the upfront payment under the Knight agreement, and $0.030 million of other revenue from KHK supply services. Six-month cost of revenue was $0.464 million, largely reflecting payments due to AstraZeneca. The resulting gross margin was approximately 80%, but is not representative of product economics given the small, licensing-led revenue base. Ardelyx remained loss-making and expects losses to continue.
R&D expense fell 22% in Q2 and 32% for the half year. Management attributed the reductions mainly to discontinuation of RDX7675, reduced RDX8940 activity, completion of IBS-C and the first hyperphosphatemia Phase 3 trial, and lower personnel costs following a 2017 workforce reduction; costs for the second hyperphosphatemia Phase 3 trial partially offset these declines. G&A rose 5% in Q2 and 4% year to date, principally due to professional services and stock-based compensation.
At June 30, cash and cash equivalents were $91.751 million and short-term investments were $120.980 million, totaling $212.731 million, versus $133.976 million at December 31, 2017. Total assets were $228.536 million; current liabilities were $15.609 million; total liabilities were $65.122 million; and stockholders’ equity was $163.414 million. The accumulated deficit was $313.524 million.
For the first half, operating cash use was $24.819 million, compared with $50.647 million in 2017. Investing activities used $62.176 million, mainly reflecting purchases of short-term investments; financing provided $103.363 million, including $53.770 million net proceeds from the public offering and $49.292 million net loan proceeds. Cash and cash equivalents increased $16.368 million during the period. The filing reports no off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Revenue increased from zero, mainly because of the $2.3 million Knight license payment recognized in the first half; no product sales were reported.
- Net loss narrowed to $22.291 million for Q2 and $39.310 million for the first half, primarily alongside lower R&D expense.
- Liquid funds increased by $78.755 million from year-end, supported by the May 2018 equity offering and new term loan.
- Ardelyx issued 14.375 million shares in the offering, raising approximately $53.8 million net; shares outstanding rose from 47.535 million at year-end to 62.054 million at June 30.
- The company adopted revenue standard Topic 606 on January 1, 2018. Adoption recorded a $5.0 million receivable, a $1.0 million payable to AstraZeneca, and an approximately $4.0 million reduction in accumulated deficit. The filing reports no change to first-half revenue from adopting the standard.
Outlook, commentary, risks and unusual items
- Management said existing capital resources should fund projected operating requirements for at least 12 months from June 30, 2018, while cautioning that assumptions may prove wrong. It also stated that additional capital and collaboration partnerships will be needed to complete development and commercialization plans; no unused credit facility or committed capital source was available.
- The $50 million term loan, funded in May, matures November 1, 2022 and bears interest at 7.45% plus one-month LIBOR. Interest-only payments may continue through December 1, 2020 if the specified Phase 3 endpoint is achieved before June 1, 2020; otherwise the interest-only period runs through June 1, 2020. Thereafter, monthly principal and interest payments are due. The loan is secured by substantially all assets other than intellectual property and specified exclusions. The company reported compliance with covenants and no defaults at quarter-end.
- Loan-related costs include a final fee of 3.95% of principal and a prepayment premium. A separate $1.5 million exit fee may become payable on a change of control or upon FDA approval of tenapanor for both specified indications; its recorded fair value was $0.546 million.
- Key business risks include failure or delay in the second hyperphosphatemia Phase 3 trial, FDA review or approval, IBS-C NDA timing, securing a U.S. commercialization partner, manufacturing and supply execution, reimbursement and pricing, competition, and the need to raise capital. The filing notes that tenapanor’s clinical side effects have included diarrhea and gastrointestinal symptoms.
- Ardelyx said R&D investment would remain substantial and G&A could rise with pre-commercial work and public-company compliance. It also noted potential effects of ESRD drug reimbursement changes, including possible future bundling of oral-only ESRD drugs.
- The company reported no pending litigation expected to have a material adverse effect and believed reasonably possible losses from other claims would not be material to consolidated financial condition or cash flows. Management concluded disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Progress, timing, enrollment and results of the second Phase 3 tenapanor hyperphosphatemia trial, and the timing and status of the planned IBS-C NDA.
- Whether the stated 12-month liquidity assessment remains valid after operating cash use, trial spending and any changes to development plans.
- Loan covenants, interest-rate exposure, repayment schedule, final fee, prepayment terms and the conditions triggering the exit fee.
- Terms and revenue-recognition timing for collaboration milestones, royalties and supply payments, including amounts payable to AstraZeneca.
- Share dilution and potential future financing needs, alongside the company’s ability to secure an IBS-C commercialization partner and reliable manufacturing supply.