Ardelyx, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Clinical-stage biopharmaceutical company focused on gastrointestinal and cardio-renal diseases. This unaudited filing covers the quarter and six months ended June 30, 2016. Ardelyx had no approved products or product-sales revenue. Its lead candidate, tenapanor, was in Phase 3 trials for IBS-C and in a registration study for hyperphosphatemia in dialysis patients; RDX227675 was being developed for hyperkalemia.
Financial performance and position
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 | Comparable 2015 period |
|---|---|---|---|
| Total revenue | $0 | $0 | $18.1 million; $24.0 million |
| Research and development expense | $23.8 million | $43.1 million | $6.2 million; $12.4 million |
| General and administrative expense | $4.9 million | $9.1 million | $2.9 million; $6.1 million |
| Net loss (income) | $(28.6) million | $(52.1) million | $9.0 million income; $5.5 million income |
| Net cash used in operating activities | Not reported separately | $(41.1) million | $(38.4) million for six months |
At June 30, 2016, cash and cash equivalents were $146.7 million, up from $107.0 million at December 31, 2015. Current assets were $150.4 million and current liabilities $14.1 million; working capital was approximately $136.3 million. Total liabilities were $14.8 million, with no borrowings or credit facility disclosed. Six-month investing cash use was $0.5 million and financing cash provided was $81.3 million, principally from the January public offering. Operating margins are not meaningful for this pre-revenue development company.
Material changes and unusual items
- Revenue fell to zero after termination of the AstraZeneca collaboration in June 2015 ended license revenue and reimbursement of development costs. The 2015 comparison included a one-time $43.1 million recognition of deferred revenue upon termination, partly offset by $25.0 million in payments recorded as reductions to licensing revenue. The prior-period income is therefore not a recurring operating baseline.
- R&D expense increased 285% in Q2 and 248% for the first six months, primarily due to tenapanor clinical development and clinical manufacturing and process development for tenapanor, RDX227675 and RDX98940. G&A expense rose 68% and 51%, respectively, including professional services, commercialization-related work, personnel and facility costs.
- Six-month 2016 cash flow included $80.8 million of net proceeds from the January equity offering. In July 2016, after quarter-end, the company issued 12,600,230 shares for approximately $110 million in net proceeds. This is a material subsequent financing and a substantial increase in shares outstanding.
- Common shares outstanding were 34.65 million at June 30 and 47.25 million at August 3, 2016. Total contractual obligations disclosed were $8.7 million, all operating leases; a May 2016 lease amendment extended the Fremont facility lease through September 2021.
Outlook, risks and other disclosures
- Management expected T3MPO-1 IBS-C Phase 3 results in mid-2017 and T3MPO-2 results at year-end 2017; results from the first tenapanor hyperphosphatemia registration study were expected in Q1 2017.
- Management planned to initiate an RDX227675 Phase 3 trial and a hyperkalemia onset-of-action trial in Q4 2016, with onset-of-action results expected in the first half of 2017. An IND filing for RDX98940 was expected in Q4 2016.
- Management expected R&D and G&A spending to increase during the remainder of 2016. It believed June 30 resources would fund projected needs for at least 12 months, but cautioned that estimates could prove wrong. The company anticipated significant future financing needs and had no committed capital sources or credit facility.
- Principal risks include clinical failure or delays, regulatory and manufacturing hurdles, tenapanor-associated gastrointestinal side effects (including higher-than-expected diarrhea and discontinuations at the highest doses in a Phase 2b hyperphosphatemia study), competition, reimbursement and pricing uncertainty, and reliance on third-party manufacturers and clinical research organizations. RDX227675’s proposed 505(b)(2) pathway and clinical efficacy in hyperkalemia patients remained uncertain.
- No litigation pending at June 30 was identified as reasonably expected to have a material adverse effect. Management reported disclosure controls effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Check subsequent tenapanor and RDX227675 trial progress and results against the stated timelines, including safety, enrollment and regulatory requirements.
- Assess cash use and projected runway in light of rising development costs, the July financing, and the company’s stated need for additional capital.
- Confirm the accounting and nonrecurring nature of 2015 AstraZeneca termination-related revenue and payments when comparing periods.
- Review dilution from the July share issuance and outstanding options and warrants, as well as the lease and other operating commitments.
- Monitor manufacturing scale-up, competitive developments and future reimbursement prospects for the targeted indications.