Akebia Therapeutics, Inc. quarterly report, Q2 FY2017

Akebia Therapeutics, Inc. — Q2 2017 Form 10-Q

Reporting period: Three and six months ended June 30, 2017. The company is a clinical-stage biopharmaceutical developer; vadadustat, its lead candidate for anemia associated with chronic kidney disease (CKD), was in Phase 3. Akebia had no approved products and no product sales. Financial statements are unaudited.

Financial performance and liquidity

Metric	Q2 2017	Q2 2016	Six months 2017	Six months 2016
Collaboration revenue	$28.5 million	None	$49.4 million	None
Research and development expense	$43.8 million	$30.9 million	$103.8 million	$51.1 million
General and administrative expense	$6.9 million	$5.3 million	$12.7 million	$11.1 million
Net loss	$21.5 million	$35.8 million	$66.1 million	$61.6 million
Basic and diluted loss per share	$0.53	$0.95	$1.66	$1.65

• Q2 collaboration revenue came from Otsuka: approximately $16.6 million under the U.S. agreement and $11.9 million under the EU agreement. Six-month revenue was approximately $37.5 million from the U.S. agreement and $11.9 million from the EU agreement.
• Q2 operating loss was $22.1 million, versus $36.2 million in Q2 2016. For the first half, operating loss increased to $67.1 million from $62.2 million as R&D spending rose substantially.
• Cash, cash equivalents and available-for-sale securities totaled $321.2 million at June 30, 2017, compared with $260.3 million at December 31, 2016. Current assets were $332.4 million and current liabilities $181.6 million. Deferred revenue was $237.9 million in total, including current and long-term portions.
• Six-month operating cash flow was positive $14.8 million, compared with negative $9.5 million in 2016. The 2017 result included collaboration-related changes in deferred revenue and collection of an Otsuka receivable; it should not be read as evidence of operating profitability. Investing cash flow was negative $124.0 million, largely reflecting purchases of available-for-sale securities; financing cash flow was positive $47.2 million.
• The filing reports no material borrowing debt. It does disclose operating lease commitments and small capital lease obligations. Accumulated deficit was $363.2 million at June 30.

Material changes and notable items

• R&D expense increased $52.7 million year over year for the first half, primarily due to the PRO 2 TECT and INNO 2 VATE Phase 3 programs. The increase also included FO 2 RWARD and TRILO 2 GY study costs, a $3.4 million noncash warrant charge and a $1.0 million Janssen license fee.
• In May, Akebia received $50.0 million from Vifor for 3,571,429 common shares. A $4.7 million portion, representing the premium over the transaction-date closing share price, was recorded as deferred revenue tied to the conditional Vifor agreement.
• In July, the company raised approximately $62.6 million net from a follow-on offering of 4.6 million shares at $14.50 per share. Otsuka waived its option to convert the U.S. collaboration profit share to a royalty on August 4, 2017.
• Akebia corrected an immaterial error in R&D expense and related Otsuka revenue recognition affecting 2016 quarters and Q1 2017; management said the prior-period impact was not material.
• Management disclosed a material weakness in internal control over financial reporting involving expense recognition for clinical-research cash advances and related collaboration revenue. Disclosure controls and procedures were deemed ineffective as of June 30; remediation was underway but had not yet been validated as effective.

Outlook, risks and contingencies

• Management expected cash resources, July offering proceeds and committed collaboration funding to support its current operating plan into Q2 2019. This forecast is conditional: spending, trial timing, partner funding and access to future financing could differ from assumptions. Akebia said it would need additional capital for further development and additional candidates.
• Management expected top-line PRO 2 TECT results in the second half of 2018 or first half of 2019, and INNO 2 VATE results in the first half of 2019. If results were favorable, it anticipated U.S. and European marketing applications in the second half of 2019. FO 2 RWARD results were expected in the second half of 2018; TRILO 2 GY was planned to begin in the second half of 2017.
• The Phase 3 program was designed to enroll up to approximately 6,300 patients. The filing estimated total external CRO costs for the program at $450–$480 million and said enrollment and completion timing depend partly on major adverse cardiovascular event rates.
• MTPC revenue recognition had not begun because the company and partner had not resolved whether Japan would be included in the global Phase 3 program or use a local development scenario. The decision, expected after Japanese Phase 2 results and consultation with the PMDA, affects deliverables and potential funding.
• Key risks include Phase 3 safety or efficacy failure, enrollment delays, regulatory approval and reimbursement uncertainty, reliance on CROs and contract manufacturers, dependence on collaboration partners, competition, and intellectual-property disputes. FibroGen patent proceedings had produced favorable European rulings for Akebia, but appeals remained pending; Akebia’s own European ’005 patent was also under appeal.
• Committed Quintiles work for the PRO 2 TECT and INNO 2 VATE programs totaled approximately $334.7 million at June 30, with performance estimated through Q4 2019. Other R&D contracts had approximately $26.5 million in remaining costs. These commitments and the company’s clinical-stage losses make spending and financing execution important.

Most important facts for investors to verify

• Whether vadadustat trials meet enrollment, safety, efficacy and timing expectations, and whether the stated regulatory filing schedule remains achievable.
• Whether collaboration funding, including Otsuka cost sharing and the unresolved MTPC development scenario, arrives as expected; distinguish cash received from revenue recognized and deferred revenue.
• Whether the company’s runway assumptions remain credible in light of Phase 3 costs, contractual commitments, continuing losses and potential need for additional financing.
• Whether management remediates and independently validates the material weakness in expense and revenue controls.
• How patent appeals, other intellectual-property disputes, and future coverage and reimbursement decisions could affect development, commercialization and the Vifor arrangement.