Ardelyx, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Ardelyx is a clinical-stage biopharmaceutical company developing tenapanor and other candidates; it reported no product sales and had no approved products.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $18,000 | $30,000 | $18,000 | $2.35 million |
| Operating expenses | $24.8 million | $22.2 million | $50.3 million | $41.7 million |
| Operating loss | $24.8 million | $22.2 million | $50.3 million | $39.8 million |
| Net loss | $25.5 million | $22.3 million | $51.6 million | $39.3 million |
| Net loss per share | $0.41 | $0.42 | $0.82 | $0.78 |
| Cash used in operating activities | — | $44.7 million | $24.8 million |
- Revenue was primarily supply-related revenue from Kyowa Kirin; the 2018 six-month comparison included $2.32 million of licensing revenue.
- Research and development expense was $19.5 million in Q2, up 21%, and $39.9 million for six months, up 36%. General and administrative expense declined 12% in Q2 and 15% for six months.
- At June 30, cash and cash equivalents were $89.6 million and short-term investments were $34.3 million, totaling $123.9 million in liquid funds. Total assets were $138.0 million and stockholders’ equity was $68.6 million.
- Loan payable was $49.6 million. The $50 million term loan bears interest at one-month LIBOR plus 7.45% and matures November 1, 2022. Principal payments are scheduled to begin in 2020, subject to the loan terms.
- Current assets were $127.2 million and current liabilities were $16.3 million. No gross margin percentage is meaningful given nominal revenue and zero cost of revenue in Q2 2019.
Material changes and unusual items
- Six-month net loss increased to $51.6 million from $39.3 million, while operating cash use rose to $44.7 million from $24.8 million. Revenue fell sharply because the prior-year period included licensing revenue.
- In Q2, the company recorded a $4.1 million cumulative adjustment reducing research and development expense and accrued liabilities to correct prior-period overaccruals of clinical trial expenses. The filing says the errors affected 2018 quarters, year-end 2018, and Q1 2019; it concluded the correction was not material to any individual prior period.
- Management identified a material weakness in internal control over financial reporting related to interpreting clinical-trial contracts and estimating accrued trial expenses. Disclosure controls and internal control over financial reporting were reported ineffective as of June 30, 2019. A remediation plan was underway.
- Adoption of the new lease standard resulted in recognition of $4.9 million of right-of-use assets and $5.8 million of operating lease liabilities at June 30.
Outlook, commentary, and risks
- Management expected PHREEDOM Phase 3 topline results in Q4 2019 and AMPLIFY results in Q3 2019. The FDA target action date for the IBS-C application was September 12, 2019.
- The company expects operating losses to continue and said existing resources were expected to fund operations and capital needs for at least 12 months after issuance of the financial statements. It cautioned that assumptions may prove wrong and that additional capital or collaborations may be needed.
- Key risks include clinical-trial outcomes and regulatory decisions, manufacturing and supply execution, commercialization and reimbursement, competition, and the ability to raise capital. Management noted that a 100-basis-point increase in LIBOR would add approximately $0.1 million to interest expense based on debt outstanding at quarter-end.
- The loan is secured by substantially all assets other than intellectual property and customary exclusions; the company reported covenant compliance and no known event of default at June 30. A potential $1.5 million exit fee may be payable under specified change-of-control or FDA-approval conditions.
- The company reported no material pending litigation expected to adversely affect results or financial condition; it stated that reasonably possible losses beyond reserves were not expected to be material to financial condition or cash flows.
Important facts for investors to verify
- Whether PHREEDOM and AMPLIFY results met their endpoints and how results affected development plans and funding needs.
- The FDA’s decision and timing for the IBS-C application, and any resulting commercialization or partnership plans.
- Progress and independent evidence of remediation of the material weakness, including whether clinical-trial accrual estimates remain reliable.
- Cash burn, liquidity runway, and financing or collaboration plans relative to development and commercialization costs.
- Loan payment schedule, interest-rate exposure, covenant compliance, and conditions associated with the exit fee.