Akebia Therapeutics, Inc. annual report, FY2018

Akebia Therapeutics, Inc. — FY 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report. Akebia completed its merger with Keryx Biopharmaceuticals on December 12, 2018; the consolidated results include Keryx only from that date, including just 20 days of Auryxia U.S. product sales.

Business context

Akebia develops and commercializes kidney-disease therapeutics. After the merger, its portfolio included Auryxia (ferric citrate), marketed in the U.S. for hyperphosphatemia in dialysis patients and iron deficiency anemia in non-dialysis CKD patients, and vadadustat, an investigational oral HIF-PHI in global Phase 3 trials for anemia due to CKD. Auryxia was also marketed in Japan as Riona; EU-approved Fexeric was not being marketed.

Financial results and liquidity

Metric	FY 2018	FY 2017
Total revenue	$207.7 million	$181.2 million
Net product revenue	$6.8 million	None reported
License, collaboration and other revenue	$200.9 million	$181.2 million
Cost of goods sold	$7.8 million	None reported
Research and development	$291.0 million	$230.9 million
Selling, general and administrative	$87.1 million	$27.0 million
Operating loss	$(178.2) million	$(76.7) million
Net loss	$(143.6) million	$(73.7) million
Net loss per share, basic and diluted	$(2.47)	$(1.69)

• Collaboration revenue accounted for nearly all FY 2018 revenue and was primarily recognized under agreements with Otsuka and Mitsubishi Tanabe Pharma (MTPC). Akebia reported $6.8 million of Auryxia sales from December 12 through year-end; the stated average net sales price was about 40% of wholesale acquisition cost for that short period, with management estimating future gross-to-net deductions could be closer to 50%.
• FY 2018 R&D increased $60.1 million, largely from Phase 3 vadadustat work and manufacturing. SG&A rose $60.1 million, reflecting merger-related and other professional costs, increased personnel, and a $13.4 million non-cash charge for additional Baupost shares.
• Cost of goods sold included a $4.8 million inventory fair-value step-up from purchase accounting and $1.5 million of acquired-intangible amortization. Therefore, the brief post-merger product-sales period is not a useful indicator of normalized product margins.
• Fourth-quarter 2018 revenue was $59.9 million, including $6.8 million of product revenue; operating loss was $90.2 million and net loss was $60.1 million. The quarter included merger-related costs and a $28.3 million income-tax benefit.
• Operating cash flow was $(97.5) million, versus $(56.2) million in 2017. Investing activities provided $36.6 million and financing activities provided $96.6 million, mainly from equity issuance.
• Cash, cash equivalents and available-for-sale securities totaled $321.6 million at year-end, versus $317.8 million in 2017. Working capital was $202.6 million, down from $217.3 million. Total assets were $996.5 million and total liabilities were $360.6 million.
• Akebia reported $15.0 million outstanding on Keryx’s revolving credit facility, classified as current. The company stated that events of default had occurred and no formal waiver had been obtained from Silicon Valley Bank; the lender could accelerate repayment. The $40.0 million facility had approximately $16.0 million of borrowing-base availability at year-end.

Material changes and merger effects

• The December 12 merger added Auryxia’s commercial business and substantially increased the company’s scale. Akebia issued 57.8 million common shares as merger consideration; year-end shares outstanding were 116.9 million, compared with 47.6 million a year earlier.
• The acquisition was accounted for using the acquisition method. Akebia recorded $329.1 million of developed Auryxia product rights, $55.1 million of goodwill, and a $29.5 million preliminary liability for an unfavorable Auryxia supply commitment. The Auryxia intangible is amortized over nine years.
• The reported 2018 net loss included a $28.3 million tax benefit from releasing part of a valuation allowance following acquisition accounting. The merger also created a Section 382 ownership change that limits use of certain tax attributes.
• FY 2017 comparative revenue and loss were revised for retrospective adoption of ASC 606; the revision increased reported 2017 collaboration revenue by $3.2 million and reduced the reported net loss by the same amount.

Outlook, risks and contingencies

• Management expected cash resources, including committed collaborator funding, to support the current operating plan into the third quarter of 2020. This estimate assumes payment of amounts due to SVB and no future facility borrowings; the company cautioned that actual funding needs and timing could differ and additional capital may be needed.
• Remaining external CRO costs for the global PRO2TECT and INNO2VATE Phase 3 programs were estimated at $190–$220 million as of year-end. The programs were designed to enroll up to approximately 7,600 patients and compare vadadustat with darbepoetin alfa, including cardiovascular safety assessment. Management expected top-line data in mid-2020 for PRO2TECT and in the second quarter of 2020 for the smaller INNO2VATE study, subject to MACE-event accrual; these are forward-looking estimates.
• In March 2019, after the reporting date, MTPC announced that two Japanese Phase 3 studies met their primary hemoglobin non-inferiority endpoints. MTPC expected to submit a Japanese application in 2019. These post-period results do not establish U.S. or global Phase 3 success.
• Auryxia faced four generic ANDA challenges. Patent-infringement suits triggered expected 30-month FDA approval stays extending into 2021, subject to court outcomes. The company also disclosed pending merger-related shareholder litigation and older Auryxia supply-related shareholder litigation; it could not estimate a loss range.
• CMS did not consider Auryxia covered under Medicare Part D when used solely for the IDA indication. Part D plans required prior authorization for Auryxia prescriptions to confirm use for the covered hyperphosphatemia indication; the company was discussing the matter with CMS and plan sponsors.
• Fexeric’s EU marketing authorization was due to cease being valid on December 23, 2019 unless marketing commenced by then. The company was exploring a partner and working with Panion on a commercialization plan.
• Vadadustat remained investigational and subject to Phase 3 efficacy and cardiovascular-safety outcomes, regulatory review, reimbursement, competition and manufacturing risks. Earlier studies included a case of liver injury meeting Hy’s Law criteria assessed as probably related to vadadustat, and a death considered possibly related in a Japanese peritoneal-dialysis study.
• Supply obligations are significant: the company disclosed minimum Auryxia drug-substance purchase commitments of approximately $154.0 million through 2026 under the BioVectra agreement and $85.1 million through 2021 under the Siegfried agreement. It relies on third parties for manufacturing and distribution.
• The auditor issued an unqualified opinion on the financial statements. Management concluded internal control over financial reporting was effective, but excluded Keryx from its assessment because the acquisition occurred late in the year.

Most important facts for investors to verify

• Whether SVB waived or the company otherwise resolved the disclosed defaults, and the status and terms of any repayment or refinancing.
• Actual cash burn, collaborator funding and liquidity against management’s runway estimate, including the impact of Phase 3 costs and Auryxia commercialization.
• Vadadustat Phase 3 enrollment, MACE accrual, timing and results, including whether the Japanese findings translate to larger global trials.
• Auryxia’s underlying sales, net pricing and access trends after a full quarter of reporting, including Medicare Part D prior-authorization effects.
• Outcomes and timing of the generic patent litigation, merger-related lawsuits, and any resulting financial or commercial effects.
• Whether Akebia and Panion establish an EU commercialization plan for Fexeric before the authorization deadline, and whether the large Auryxia supply commitments align with demand.