REATA PHARMACEUTICALS INC - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2020

OR

For the transition period from         to         

Commission File Number: 001-37785

Reata Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

(972) 865-2219

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, an emerging growth company, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No ☒

As of November 4, 2020, the registrant had 28,836,422 shares of Class A common stock, $0.001 par value per share, and 5,044,931 shares of Class B common stock, $0.001 par value per share, outstanding.

TABLE OF CONTENTS

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties.  We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.  In this Quarterly Report on Form 10-Q, all statements, other than statements of historical or present facts, including statements regarding our future financial condition, future revenues, projected costs, prospects, business strategy, and plans and objectives of management for future operations, are forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as “believe,” “will,” “may,” “might,” “estimate,” “continue,” “anticipate,” “intend,” “target,” “project,” “model,” “should,” “would,” “plan,” “expect,” “predict,” “could,” “seek,” “goals,” “potential,”  and similar terms or expressions that concern our expectations, strategy, plans, or intentions.  These forward-looking statements include, but are not limited to, statements about:

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Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.  Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

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DEFINED TERMS

Unless the context requires otherwise, references to “Reata,” “the Company,” “we,” “us,” or “our” in this Quarterly Report on Form 10-Q refer to Reata Pharmaceuticals, Inc. and its subsidiaries.  We also have used several other terms in this Quarterly Report on Form 10-Q, most of which are explained or defined below.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Reata Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

See accompanying notes.

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Reata Pharmaceuticals, Inc.

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share data)

See accompanying notes.

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Reata Pharmaceuticals, Inc.

Unaudited Consolidated Statements of Stockholders’ Equity (Deficit)

(in thousands, except share and per share data)

See accompanying notes.

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Reata Pharmaceuticals, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

See accompanying notes.

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Reata Pharmaceuticals, Inc.

Notes to Unaudited Consolidated Financial Statements

1. Description of Business

The Company’s mission is to identify, develop, and commercialize innovative therapies that change patients’ lives for the better.  The Company focuses on small-molecule therapeutics with novel mechanisms of action for the treatment of severe, life-threatening diseases with few or no approved therapies.  The Company’s lead programs are in rare forms of chronic kidney disease (CKD) and a rare neurological disease.  The Company announced positive topline data from registrational trials for both of its lead product candidates, bardoxolone methyl (bardoxolone) in patients with CKD caused by Alport syndrome, and omaveloxolone in patients with a neurological disorder called Friedreich’s ataxia (FA).  Both bardoxolone and omaveloxolone activate the transcription factor Nrf2 to normalize mitochondrial function, restore redox balance, and resolve inflammation.  Because mitochondrial dysfunction, oxidative stress, and inflammation are features of many diseases, the Company believes bardoxolone and omaveloxolone have many potential clinical applications.  Reata possesses exclusive, worldwide rights to develop, manufacture and commercialize bardoxolone, omaveloxolone, and our next-generation Nrf2 activators, excluding certain Asian markets for bardoxolone in certain indications, which are licensed to Kyowa Kirin Co., Ltd. (KKC).

The Company’s consolidated financial statements include the accounts of all majority-owned subsidiaries.  Accordingly, the Company’s share of net earnings and losses from these subsidiaries is included in the consolidated statements of operations.  Intercompany profits, transactions, and balances have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.  The consolidated balance sheet at December 31, 2019, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  For further information, refer to the annual consolidated financial statements and footnotes thereto of the Company.

Summary of Significant Accounting Policies

The significant accounting policies used in the preparation of these condensed consolidated financial statements for the three and nine months ended September 30, 2020 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, except as noted below with respect to the Company’s liability related to the sale of future royalties and as noted within the “Recent Accounting Pronouncements – Recently Adopted Accounting Pronouncements” section.

Liability Related to Sale of Future Royalties

On June 10, 2020, the Company entered into a Development and Commercialization Funding Agreement with an affiliate of Blackstone Life Sciences, LLC (BXLS) that provides funding for the development and commercialization of bardoxolone for the treatment of CKD caused by Alport syndrome, autosomal dominant polycystic kidney disease (ADPKD), and certain other rare CKD indications in return for future royalties (Development Agreement).  The Company accounted for the Development Agreement as a sale of future revenues resulting in a debt classification, primarily because the Company has significant continuing involvement in generating the future revenue on which the royalties are based. The debt will be amortized under the effective interest rate method and, accordingly, the Company is recognizing non-cash interest expense over the estimated term of the Development Agreement. The liability related to sale of future royalties, and the debt amortization, are based

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on the Company’s current estimate of future royalties expected to be paid over the estimated term of the Development Agreement. The Company will periodically assess the expected royalty payments and, if materially different than its previous estimate, will prospectively adjust and recognize the related non-cash interest expense. The transaction costs associated with the liability will be amortized to non-cash interest expense over the estimated term of the Development Agreement. See Note 5, Liability Related to Sale of Future Royalties, of Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

Fair Value Measurements

The Company categorizes its financial instruments measured at fair value into a three-level fair value hierarchy that prioritizes the inputs used in determining the fair value of the asset or liability. The three levels of the fair value hierarchy are as follows:

The Company has determined the fair value of the liability related to the sale of future royalties is based on the Company’s current estimates of future royalties expected to be paid to BXLS, over the life of the arrangement, which are considered Level 3. See Note 5, Liability Related to Sale of Future Royalties, of Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Topic 842, amended by ASU 2018-11, Leases (Topic 842): Targeted Improvements. The new guidance requires a lessee to recognize assets and liabilities for all leases with lease terms of more than 12 months and provide additional disclosures. Topic 842 requires adoption using a modified retrospective transition approach with either 1) transition provisions at the beginning of the earliest comparative period with its cumulative adjustment recognized to retained earnings at the beginning of the earliest period presented or 2) a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption.  We adopted this standard on January 1, 2019, using the cumulative-effect adjustment approach. We elected the package of practical expedients in transition for leases that commenced prior to January 1, 2019 whereby these contracts were not reassessed or reclassified from their previous assessment as of December 31, 2018.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808) (ASU 2018-18).  This update provides clarification on the interaction between Revenue from Contracts with Customers (Topic 606) and Collaborative Arrangements (Topic 808) including the alignment of unit of account guidance between the two topics.  This update is effective in fiscal years, including interim periods, beginning after December 15, 2019, and early adoption is permitted.  The Company adopted this standard on January 1, 2020 and its adoption did not have a material impact on the Company’s consolidated financial statements and related disclosure.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.  This update requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to defer and recognize as an asset.  This guidance should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.  The Company adopted this standard on January 1, 2020 and its adoption did not have material impact to the Company’s consolidated financial statements and related disclosure.

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Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The Board issued this Update as part of its Simplification Initiative to improve areas of GAAP and reduce cost and complexity while maintaining usefulness.  The main provision that impacts the Company is the removal of the exception to the incremental approach of intra-period tax allocation when there is a loss from continuing operations and income or gain from other items.  ASU 2019-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020.  Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.

3. Collaboration Agreements

AbbVie

In September 2010, the Company entered into a license agreement with AbbVie Inc. (AbbVie) (the AbbVie License Agreement) for an exclusive license to develop and commercialize bardoxolone in the Licensee Territory (as defined in the AbbVie License Agreement).

In December 2011, the Company entered into a collaboration agreement with AbbVie (the AbbVie Collaboration Agreement) to jointly research, develop, and commercialize the Company’s portfolio of second and later generation oral Nrf2 activators.

On October 9, 2019, the Company and AbbVie entered into an Amended and Restated License Agreement (the Reacquisition Agreement) pursuant to which the Company reacquired the development, manufacturing, and commercialization rights concerning its proprietary Nrf2 activator product platform originally licensed to AbbVie in the AbbVie License Agreement and the AbbVie Collaboration Agreement.  In exchange for such rights, the Company agreed to pay AbbVie $330.0 million, of which $100.0 million was paid as of December 31, 2019, $150.0 million was paid on June 30, 2020, and $80.0 million will be payable on November 30, 2021.  Additionally, the Company will pay AbbVie an escalating, low single-digit royalty on worldwide net sales, on a product-by-product basis, of omaveloxolone and certain next-generation Nrf2 activators. The Company recognized interest expense related to the Reacquisition Agreement of approximately $1.7 million and $0 million, during the three months ended September 30, 2020 and 2019, respectively, and $4.9 million and $0 million, during the nine months ended September 30, 2020 and 2019, respectively.  As of September 30, 2020, the Company’s payable to collaborators was $80.0 million, with a present value of $71.7 million.  

The execution of the Reacquisition Agreement ended our performance obligations under the AbbVie Collaboration Agreement and included the write off of the remaining related deferred revenue balance, after which no further revenue was recognized.  Accordingly, there was no revenue recognized in 2020.  The Company recognized revenue related to the AbbVie Collaboration Agreement totaling approximately $6.7 million and $19.9 million during the three and nine months ended September 30, 2019, respectively. The deferred revenue balance was $0 million as of September 30, 2020.

KKC

In December 2009, the Company entered into an exclusive license with KKC (the KKC Agreement) to develop and commercialize bardoxolone in the licensed territory.  The Company received a nonrefundable, up-front license fee of $35.0 million in 2009 and regulatory milestones totaling $45.0 million in 2010, 2012, and 2018 and could receive additional regulatory milestones of $52.0 million and commercial milestones of $140.0 million, as well as tiered royalties ranging from the low teens to the low 20 percent range, depending on the country of sale and the amount of annual net sales, on net sales by KKC in the licensed territory.  

The up-front payment and regulatory milestones are accounted for as a single unit of accounting.  Revenue is being recognized ratably through December 2021, which is the estimated minimum period that is needed to complete the deliverables under the terms of the KKC Agreement.  The Company began recognizing revenue related to the up-front payment upon execution of the KKC Agreement. The Company recognized collaboration revenue totaling approximately $1.2 million during each of the three months ended September 30, 2020 and 2019 and $3.5 million during each of the nine months ended September 30, 2020 and 2019.  As of September 30, 2020, the

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Company recorded deferred revenue totaling approximately $5.9 million of which approximately $4.7 million is reflected as the current portion of deferred revenue.

4. Term Loan

On October 9, 2019, the Company entered into the First Amendment to the Amended and Restated Loan and Security Agreement (the Amended Restated Loan Agreement).  Under the Amended Restated Loan Agreement, the Term A Loan principal amount was $80.0 million, and the Term B Loan availability was increased from $45.0 million to $75.0 million (collectively with the Term A Loan, the Term Loans).  On December 20, 2019, the Company borrowed $75.0 million under the Term B Loan resulting in a principal balance of the Term Loans of $155.0 million.

On June 24, 2020, the Company paid off the total outstanding balance of the Term Loans prior to the maturity date.  The payoff consisted of (i) the outstanding principal balance of $155.0 million, (ii) exit fees of $6.7 million, which has been partially accrued up to the date of repayment, (iii) prepayment fees of $5.4 million, and (iv) accrued and unpaid interest of $1.0 million. At the time of payoff, all liabilities and obligations under the Amended Restated Loan Agreement were terminated. In connection with the payoff of the Term Loans, the Company recorded a loss on extinguishment of debt of $11.2 million in the nine months ended September 30, 2020.

5. Liability Related to Sale of Future Royalties

On June 24, 2020, the Company closed on the Development Agreement with BXLS.  The Development Agreement includes a $300.0 million payment by an affiliate of BXLS in return for various percentage royalty payments on worldwide net sales of bardoxolone, once approved in the United States or certain specified European countries, by Reata and its licensees, other than KKC.  The royalty percentage will initially be in the mid-single digits and, in future years, can vary between higher-mid single digit percentages to low-single digit percentages depending on various milestones, including indication approval dates, cumulative royalty payments, and cumulative net sales.  Pursuant to the Development Agreement, we have granted BXLS a security interest in substantially all of our assets.

In addition, concurrent with the Development Agreement, the Company entered into a common stock purchase agreement (Purchase Agreement) with affiliates of BXLS to sell an aggregate of 340,793 shares of the Company’s Class A common stock at $146.72 per share for a total of $50.0 million.

The Company concluded that there were two units of accounting for the consideration received, comprised of the liability related to the sale of future royalties and the common shares.  The Company allocated the $300.0 million from the Development Agreement and $50.0 million from the Purchase Agreement between the two units of accounting on a relative fair value basis at the time of the transaction. The Company allocated $294.2 million, which includes $0.8 million in transaction costs incurred, in transaction consideration to the liability, and $55.5 million to the common shares.  The Company determined the fair value of the common shares based on the closing stock price on the June 24, 2020, the closing date of the Development Agreement. The effective interest rate under the Development Agreement, including transaction costs, is approximately 13.8%.

The following table shows the activity within the liability related to sale of future royalties for the nine months ended September 30, 2020:

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6. Other Income (Expense), Net

Investment Income

Interest income consists primarily of interest generated from our cash and cash equivalents.

Interest Expense

Interest expense consists primarily of interest on our borrowing activities under our loan agreements and the imputed interest from amount due to AbbVie under the Reacquisition Agreement.

Non-Cash Interest Expense on Liability Related to Sale of Future Royalties

Non-cash interest expense consists of recognition of interest expense based on the Company’s current estimate of future royalties expensed to be paid over the estimated term of the Development Agreement.

Other Income (Expense)

Other income (expense) consists primarily of gains and losses on foreign currency exchange, sales of assets, extinguishment of debt, and lease termination.

In June 2020, the Company paid off the Term Loans and recorded a loss on the extinguishment of debt of $11.2 million, which consisted primarily of prepayment fees, exit fees and unamortized debt issuance costs.

In September 2020, the Company’s sublease agreement for its offices in Plano, Texas was terminated, resulting in recognition of a $0.8 million gain on lease termination.  See Note 7, Leases, of Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

7. Leases

The Company’s headquarters are located in Plano, Texas, where it leases approximately 122,000 square feet of office space.  On September 2, 2020, the Company’s sublease agreement for its offices in Plano, Texas (the Sublease Agreement), was terminated due to the bankruptcy filing of its lessor. In connection with the termination, the Company was relieved from its obligations under the Sublease Agreement and derecognized the right-of-use asset of approximately $5.7 million and operating lease liabilities of approximately $6.5 million as of September 30, 2020, which resulted in a gain on lease termination of $0.8 million recorded in the three and nine months ended September 30, 2020.  On October 1, 2020, the Company entered into a lease agreement with the owner of its offices in Plano, Texas (the Plano Lease Agreement), with lease terms extending through June 30, 2022 with an option to renew up to three months.  The Company will record approximately $4.8 million as a right-of-use asset and operating lease liabilities in October 2020.

The Company leases additional office and laboratory space of approximately 34,890 square feet located in Irving, Texas, with lease terms extending through April 30, 2022 with an option to renew up to four successive three-month periods.  

The Company has an additional lease of a single-tenant, build-to-suit building of approximately 327,400 square feet of office and laboratory space located in Plano, Texas with an initial lease term of 16 years.  The Company entered into the lease agreement on October 15, 2019 (the Lease Agreement), and at the Company’s

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option, it may renew the lease for two consecutive five-year renewal periods or one ten-year renewal period.  The Company does not have control of the space or the construction prior to completion of construction.  Therefore, no right-of-use or lease liabilities were recorded in connection with the Lease Agreement as of September 30, 2020.  Under the First Amendment to the Lease Agreement executed in May 2020, the landlord will fund the Company’s leasehold improvements up to $31.3 million, of which the Company has recorded a leasehold incentive obligation of approximately $2.1 million as other long-term liabilities as of September 30, 2020.

At September 30, 2020, the weighted average incremental borrowing rate and the weighted average remaining lease term for the operating leases held by the Company were 9.6% and 2.1 years, respectively.  During the three and nine months ended September 30, 2020, cash paid for amounts included for the measurement of lease liabilities was $0.7 million and $2.7 million, respectively. During the three and nine months ended September 30, 2020, the Company recorded operating lease expense of $1.0 million and $2.8 million, respectively.  The Company has elected to net the amortization of the right-of-use assets and the reduction of the lease liabilities principal in accrued direct research and other current and long-term liabilities in the consolidated statements of cash flows.

Supplemental balance sheet information related to the Company’s operating leases is as follows:

Maturities of lease liabilities by fiscal year for the Company’s operating leases:

8. Income Taxes

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).  The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the U.S. economy and to provide assistance to individuals, families, and businesses affected by COVID-19.  Accordingly, under its provisions, for the nine months ended September 30, 2020, the Company recognized a tax benefit and receivable of $22.1 million associated with the ability to carryback an applicable prior year’s net operating losses to a preceding year to generate a refund.

For the three months ended September 30, 2020, the Company’s effective tax rate was a benefit of 0.1% compared to an expense of 0.1% for the three months ended September 30, 2019.  The Company’s effective tax rate for the three months ended September 30, 2020 varies with the statutory rate primarily due to valuation allowances on deferred taxes.  For the nine months ended September 30, 2020, the Company’s effective tax rate was a benefit of 10.9% compared to an expense of 0.1% for the nine months ended September 30, 2019.  The Company’s effective tax rate for the nine months ended September 30, 2020 varies with the statutory rate primarily due to the favorable impact associated with the CARES Act and changes in the valuation allowance related to certain deferred tax assets generated or utilized in the applicable period.  The Company’s deferred tax assets for the United States have been fully offset by a valuation allowance at September 30, 2020, and the Company expects to maintain this valuation allowance until there is sufficient evidence that future earnings can be achieved, which is uncertain at this time.  

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9. Stock-Based Compensation

The following table summarizes stock-based compensation expense reflected in the consolidated statements of operations:

Restricted Stock Units (RSUs)

The following table summarizes RSUs as of September 30, 2020, under the Second Amended and Restated Long Term Incentive Plan (LTIP Plan) agreement:

As of September 30, 2020, the performance targets for the performance-based RSUs have not been met. Accordingly, the total unrecognized stock-based compensation expense related to these performance-based RSUs is approximately $4.2 million. As of September 30, 2020, the Company recognized $0.7 million in compensation expense related to time-based RSUs.

Stock Options  

The following table summarizes stock option activity as of September 30, 2020, and changes during the nine months ended September 30, 2020, under the LTIP and standalone option agreements:

Stock-based compensation expense for the three and nine months ended September 30, 2020, included accelerated recognition of expense due to modifications of outstanding stock options as a result of the death of an executive and employees who entered into consulting agreements at the termination of employment, which were considered to be non-substantive services. Accordingly, the Company recognized $0.0 million and $10.0 million for the three and nine months ended September 30, 2020, respectively.

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As of September 30, 2020, the Company has approximately 288,000 shares of performance-based stock options for which the performance targets have not been met.  Accordingly, the total unrecognized stock-based compensation expense related to these performance-based stock options is approximately $34.1 million.

The total intrinsic value of all outstanding options and exercisable options at September 30, 2020 was $203.6 million and $142.3 million, respectively.

10. Commitments and Contingencies

Litigation

From time to time, the Company is a party to legal proceedings in the course of its business, including the matters described below.  The claims and legal proceedings in which the Company could be involved include challenges to the scope, validity or enforceability of patents relating to its product candidates, and challenges by it to the scope, validity or enforceability of the patents held by others.  These may include claims by third parties that the Company infringes their patents.  The outcome of any such legal proceedings, regardless of the merits, is inherently uncertain.  In addition, litigation and related matters are costly and may divert the attention of our management and other resources that would otherwise be engaged in other activities.  If the Company were unable to prevail in any such legal proceedings, its business, results of operations, liquidity and financial condition could be adversely affected.  The Company recognizes accruals for litigations to the extent that it can conclude that a loss is both probable and reasonably estimable and recognizes legal expenses as incurred.

Patel Litigation

On October 15, 2020, Toshif Patel filed a complaint for alleged violation of federal securities laws against the Company, its Chief Executive Officer and its Chief Financial Officer in the United States District Court for the Eastern District of Texas.  The complaint purports to bring a federal securities class action on behalf of a class of persons who acquired the Company’s common stock between October 15, 2019 and August 7, 2020.  The complaint alleges, among other things, that the defendants made false and misleading statements regarding the sufficiency of its MOXIe Part 2 study results to support a single study marketing approval of omaveloxolone for the treatment of FA in the United States.  The plaintiff seeks, among other things, the designation of this action as a class action, an award of unspecified compensatory damages and interest, costs, and expenses, including counsel fees and expert fees.

The Company believes that the allegations contained in the complaint are without merit and intends to defend the case vigorously.  The Company cannot predict at this point the length of time that this action will be ongoing or the liability, if any, which may arise therefrom.

11. Net Loss per Share

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders:

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The number of weighted average options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive represented 4,560,002 and 4,272,757 shares as of September 30, 2020 and 2019, respectively.

12. Subsequent Events

See Note 7, Leases, of Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information appearing in this Quarterly Report on Form 10-Q.  Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, operations, and product candidates, includes forward-looking statements that involve risks and uncertainties.  Factors that may cause actual results to differ materially from current expectations include, among other things, those described under the heading “Risk Factors” and discussed elsewhere in this Quarterly Report on Form 10-Q.

Overview

We are a clinical-stage biopharmaceutical company focused on identifying, developing, and commercializing innovative therapies that change patients’ lives for the better.  We concentrate on small-molecule therapeutics with novel mechanisms of action for the treatment of severe, life-threatening diseases with few or no approved therapies.  Our lead programs are in rare forms of chronic kidney disease (CKD) and a rare neurological disease.  We have announced positive topline data from registrational trials for both of our lead product candidates, bardoxolone methyl (bardoxolone) in patients with CKD caused by Alport syndrome and omaveloxolone in patients with a neurological disorder called Friedreich’s ataxia (FA).  Both bardoxolone and omaveloxolone activate the transcription factor Nrf2 to normalize mitochondrial function, restore redox balance, and resolve inflammation.  Because mitochondrial dysfunction, oxidative stress, and inflammation are features of many diseases, we believe bardoxolone and omaveloxolone have many potential clinical applications.  We possess exclusive, worldwide rights to develop, manufacture, and commercialize bardoxolone, omaveloxolone, and our next-generation Nrf2 activators, excluding certain Asian markets for bardoxolone in certain indications, which are licensed to KKC.

Recent Key Developments

Bardoxolone for CKD Caused by Alport Syndrome

On November 9, 2020, we announced that the Phase 3 CARDINAL study of bardoxolone in patients with CKD caused by Alport syndrome met its primary and key secondary endpoints at the end of Year 2.  At Week 100, in the intent-to-treat (ITT) population, which included eGFR values for patients who either remained on or have discontinued study drug, patients treated with bardoxolone had a statistically significant improvement compared to placebo in mean change from baseline in estimated glomerular filtration rate (eGFR) of 7.7 mL/min/1.73 m² (p=0.0005). In the modified ITT (mITT) analysis, which assessed the effect of receiving treatment by excluding values after patients discontinued treatment, patients treated with bardoxolone had a statistically significant improvement compared to placebo in mean change from baseline in eGFR at Week 100 of 11.3 mL/min/1.73 m² (p<0.0001).  At Week 104 (four weeks after last dose in second year of treatment), patients in the ITT population treated with bardoxolone had a statistically significant improvement compared to placebo in mean change from baseline in eGFR of 4.3 mL/min/1.73 m² (p=0.023).  Bardoxolone treatment was generally reported to be well-tolerated.  Based on these positive results and following a recently completed pre-NDA meeting with the U.S. Food and Drug Administration (FDA), we plan to proceed with the submission of an NDA for full marketing approval in the United States in the first quarter of 2021.  We also plan to pursue marketing approval outside of the United States and work has commenced on preparations to file for marketing approval in Europe.

Additionally, we provided data on kidney function from patients with Alport syndrome from EAGLE, a long-term extension study of bardoxolone in patients with rare forms of CKD.  Change from baseline in eGFR has been assessed for 14 patients with Alport syndrome who were treated with bardoxolone for three years, with four-week off-treatment periods occurring at Weeks 48 and 100.  Bardoxolone treatment resulted in a mean increase from baseline in eGFR of 11.5 mL/min/1.73 m² at Year 1, 13.3 mL/min/1.73 m² at Year 2, and 11.0 mL/min/1.73 m² at Year 3.

Omaveloxolone for Friedreich’s Ataxia

As previously announced, at a Type C meeting, the FDA provided us guidance that although it does not have any concerns with the reliability of the modified Friedreich’s Ataxia Rating Scale (mFARS) primary endpoint

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results from the registrational Part 2 of the MOXIe trial (Part 2) of omaveloxolone in FA patients, it was not convinced that the results from Part 2 support a single study approval.  The FDA stated that we will need to conduct a second pivotal trial that confirms the mFARS results of Part 2 with a similar magnitude of effect.  As an alternative, Reata proposed a second study (the Baseline-Controlled Study, previously called the crossover study) in which patients serve as their own controls, and changes in mFARS during the pre-treatment period in either Part 1 or Part 2 of the MOXIe study are compared to changes in mFARS during the treatment period in the open-label extension study (MOXIe Extension).  The design of the Baseline-Controlled Study was discussed and agreed upon by external experts and Reata, and the statistical analysis plan (SAP) was submitted to the FDA prior to conducting the analysis contemplated by the proposed plan.  The FDA acknowledged it would consider the study design but, to date, it has not provided comments on the study design.

The Baseline-Controlled Study met its primary endpoint of paired difference in annualized mFARS slope with a statistically significant 3.76 point improvement (p=0.0022) between the treatment and pre-treatment periods in the primary analysis population.  Further, all sensitivity analyses of the primary analysis showed a significant treatment effect.  Thus, we believe that the results of the Baseline-Controlled Study support the positive mFARS results of Part 2 and provide additional evidence of the effectiveness of omaveloxolone in FA.

We completed the Baseline-Controlled Study in October 2020 and provided the results to the FDA.  The FDA confirmed that it will review the study results and may request a meeting with us to discuss the conclusions of its review.  If the FDA views these results as sufficient to increase the persuasiveness of data from Part 2, our plan would be to submit an NDA in mid-2021.  However, there can be no assurance that the FDA will accept the design of the Baseline-Controlled Study or view these results as sufficient, in which case we will determine next steps, including whether it is feasible to conduct a second pivotal study in patients with FA as previously suggested by the FDA.  At present, we plan to pursue marketing approval outside of the United States and work has commenced on preparations to file for marketing approval in Europe.

Background: Our Programs

The following chart outlines each of our programs by indication and phase:

In addition, KKC, our strategic collaborator in CKD, is currently conducting its registrational trial of bardoxolone in diabetic (type 1 and 2) CKD in Japan.  KKC completed patient enrollment in this trial in June 2019 and expects to have topline data in the first half of 2022.

NYU has initiated an Investigator-Sponsored Trial (IST) (Phase 2/3 trial) of bardoxolone in COVID-19 patients called BARCONA.

*NDA submission planned in first quarter 2021

**See discussion below under “Regulatory Update on Omaveloxolone for Friedreich’s Ataxia”

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Clinical Studies Adapted for Continuity During COVID-19

As the coronavirus disease (COVID-19) emerged as a pandemic with serious public health implications during the first quarter of 2020, we undertook a series of measures to protect the health and safety of patients and health care workers involved in our ongoing clinical studies, while maintaining the conduct of our studies in accordance with guidance provided by the FDA and the European Medicines Agency.  For example, we have implemented the use of at-home visits as an alternative to in-clinic visits when necessary to collect blood draws and to assess patient safety and arranged for home delivery of the study drug to patients.  We issued an addendum to the SAP to accommodate COVID-19 impact.  We continue to utilize these measures to ensure continued access to drug treatment and appropriate safety monitoring.

Bardoxolone Development Programs

We are developing bardoxolone for the treatment of patients with certain rare forms of CKD, including Alport syndrome, ADPKD, and other rare forms of CKD that, in the aggregate, affect more than 700,000 patients in the United States.  CKD is characterized by a progressive worsening in the rate at which the kidney filters waste products from the blood, called the glomerular filtration rate (GFR).  When GFR drops below approximately 15 mL/min/1.73 m², patients develop end-stage kidney disease (ESKD) and require dialysis or a kidney transplant to survive.  Dialysis leads to a reduced quality of life and increases the likelihood of serious and life-threatening complications.  The five-year survival rate for hemodialysis patients is only approximately 42%.

eGFR is an estimate of GFR that nephrologists use to track the decline in kidney function and progression of CKD.  In 11 separate CKD clinical trials, bardoxolone has been shown to improve eGFR in patients with diverse etiologies of CKD.  We believe that bardoxolone treatment has the potential to delay or prevent GFR declines that cause the need for dialysis or a transplant in patients with Alport syndrome, ADPKD, and other rare forms of CKD.

Bardoxolone in CKD Caused by Alport Syndrome

Alport syndrome is a rare, genetic form of CKD caused by mutations in the genes encoding type IV collagen, which is a major structural component of the glomerular basement membrane in the kidney.  The kidneys of patients with Alport syndrome progressively lose the capacity to filter waste products out of the blood, which can lead to ESKD and the need for chronic dialysis treatment or a kidney transplant.  Alport syndrome affects both children and adults.  In patients with the most severe forms of the disease, approximately 50% progress to dialysis by age 25, 90% by age 40, and nearly 100% by age 60.  According to the Alport Syndrome Foundation, Alport syndrome affects approximately 30,000 to 60,000 people in the United States.  There are currently no approved therapies to treat CKD caused by Alport syndrome.

On November 9, 2020, we announced that the Phase 3 CARDINAL study of bardoxolone in patients with CKD caused by Alport syndrome met its primary and key secondary endpoints at the end of Year 2.  At Week 100, in the ITT population, patients treated with bardoxolone had a statistically significant improvement compared to placebo in mean change from baseline in eGFR of 7.7 mL/min/1.73 m² (p=0.0005).  Patients treated with bardoxolone experienced a mean change from baseline in eGFR of -0.8 mL/min/1.73 m², while patients treated with placebo experienced a mean change from baseline in eGFR of -8.5 mL/min/1.73 m².  In the mITT analysis, patients treated with bardoxolone had a statistically significant improvement compared to placebo in mean change from baseline in eGFR at Week 100 of 11.3 mL/min/1.73 m² (p<0.0001).  In the mITT analysis, patients treated with bardoxolone experienced a mean increase from baseline in eGFR of 1.7 mL/min/1.73 m², while patients treated with placebo experienced a mean decline from baseline in eGFR of -9.6 mL/min/1.73 m².  At Week 104 (four weeks after last dose in second year of treatment), patients in the ITT population treated with bardoxolone had a statistically significant improvement compared to placebo in mean change from baseline in eGFR of 4.3 mL/min/1.73 m² (p=0.023).  Patients treated with bardoxolone experienced a mean change from baseline in eGFR of -4.5 mL/min/1.73 m², while patients treated with placebo experienced a mean change from baseline in eGFR of -8.8 mL/min/1.73 m².  

Efficacy was observed across multiple subgroups at Week 100 and Week 104, including pediatric patients and patients with different genetic subtypes of Alport syndrome.  The largest treatment effect at Week 104 was observed in the pediatric subgroup where the difference between treatment groups was 14.6 mL/min/1.73 m² (p=0.004).  The risk of kidney failure events (defined as ESKD, confirmed 30% eGFR decline, or confirmed eGFR < 15

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mL/min/1.73 m²) was reduced by approximately 50% in bardoxolone-treated patients (9 patients versus 17 patients in placebo, with a hazard ratio of 0.49 and a p-value of 0.086).

Bardoxolone was generally reported to be well tolerated in this study, and the safety profile was similar to that observed in prior trials.  Seventy-five patients (97%) receiving bardoxolone and 77 patients (96%) receiving placebo experienced an adverse event (AE).  Ten patients (13%) receiving bardoxolone and four patients (5%) receiving placebo discontinued study drug due to an AE, and no individual AE contributed to more than two discontinuations in either group.  The reported AEs were generally mild to moderate in intensity, and the most common AEs observed more frequently in patients treated with bardoxolone compared to patients treated with placebo were muscle spasms and increases in aminotransferases, and are thought to be associated with the pharmacology of the drug.

Eight patients (10%) receiving bardoxolone and 15 patients (19%) receiving placebo experienced a treatment-emergent serious adverse event (SAE).  No SAEs were reported in pediatric patients treated with bardoxolone.  No fluid overload or major adverse cardiac events were reported in patients treated with bardoxolone.  Blood pressure was not significantly different between the two groups.  The urinary albumin-to-creatinine ratio (UACR) was not significantly different between treatment groups at Week 100 or Week 104.  Non-kidney symptoms associated with Alport syndrome, including psychiatric, hearing, vestibular, and ocular AEs, occurred less frequently in bardoxolone-treated patients.

We also reported results from the EAGLE study, in which the change from baseline in eGFR was assessed for 14 patients with Alport syndrome who were treated with bardoxolone for three years (two years in CARDINAL and one year in EAGLE), with four-week off treatment periods occurring at Weeks 48 and 100.  Bardoxolone treatment resulted in a mean increase from baseline in eGFR of 11.5 mL/min/1.73 m² at Year 1, 13.3 mL/min/1.73 m² at Year 2, and 11.0 mL/min/1.73 m² at Year 3.

We recently completed the previously announced pre-NDA meeting with the FDA to discuss the NDA submission content and plans.  Based on that meeting and the FDA’s responses and the subsequently announced positive results of the Year 2 data of the CARDINAL Phase 3 study, we plan to proceed with an NDA filing for full marketing approval of bardoxolone in patients with CKD caused by Alport syndrome in the first quarter of 2021.  We will also continue preparations to file for marketing approval in Europe.

Bardoxolone in ADPKD

ADPKD is a rare and serious hereditary form of CKD caused by a genetic defect in PKD1 or PKD2 genes leading to the formation of fluid-filled cysts in the kidneys and other organs.  Cyst growth can cause the kidneys to expand up to five to seven times their normal volume, leading to pain and progressive loss of kidney function.  ADPKD affects both men and women of all racial and ethnic groups and is the leading inheritable cause of kidney failure with an estimated diagnosed population of 140,000 patients in the United States.  Despite current standard of care treatment, an estimated 50% of ADPKD patients progress to ESKD and require dialysis or a kidney transplant by 60 years of age.

In a Phase 2 study called PHOENIX, bardoxolone demonstrated a statistically significant increase from baseline in mean eGFR of 9.3 mL/min/1.73 m² (p<0.0001) after 12 weeks of treatment in 31 patients with ADPKD.  Available historical data for 29 of these patients showed an average annual decline in eGFR of 4.8 mL/min/1.73 m² in the three-year period prior to study entry.  The FDA has provided us with written guidance that, in patients with ADPKD, an analysis of eGFR during the off-treatment period demonstrating an improvement versus placebo after one year of bardoxolone treatment may support accelerated approval, and an improvement versus placebo after two years of treatment may support full approval.  In May 2019, we began enrollment in FALCON, an international, multi-center, randomized, double-blind, placebo-controlled Phase 3 trial studying the safety and efficacy of bardoxolone in approximately 300 patients with ADPKD.  The trial will enroll a broad range of patients from 18 to 70 years old with an eGFR between 30 to 90 mL/min/1.73 m².  The enrollment of new patients was temporarily paused in March of 2020 due to safety concerns related to the COVID-19 global pandemic.  We began to lift the screening hold in FALCON in June 2020, and currently, most sites are able to screen and randomize patients.  The measures we implemented to the conduct of FALCON in response to COVID-19 have been effective, and we anticipate no meaningful impact on data integrity due to COVID-19.  

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Bardoxolone in Other Rare Forms of CKD

Three additional rare forms of CKD were studied in PHOENIX, including IgA nephropathy (IgAN), type 1 diabetic CKD (T1D CKD), and focal segmental glomerulosclerosis (FSGS).  In each of these Phase 2 cohorts, bardoxolone demonstrated a statistically significant increase from baseline in mean eGFR after 12 weeks of treatment.  We plan to pursue each of these rare and serious forms of CKD as commercial indications.

The FDA has granted orphan drug designation to bardoxolone for the treatment of Alport syndrome and ADPKD, and the European Commission has granted orphan drug designation to bardoxolone for the treatment of Alport syndrome.

Bardoxolone in Patients with CKD at Risk of Rapid Progression

We plan to evaluate the potential effect of bardoxolone in CKD patients at risk of rapid disease progression.  This double-blind placebo-controlled Phase 2 trial is currently being developed to evaluate the efficacy and safety of bardoxolone in patients with CKD secondary to a variety of etiologies who are at risk of rapid progression.  The study will require patients to have at least one of several risk factors for rapid progression of kidney disease prior to study enrollment.  Patients with eGFR as low as 20 and as high as 60 mL/min/1.73 m² will be enrolled in the study and the treatment duration will be 12 weeks.

Investigator-Sponsored BARCONA Study of Bardoxolone in Patients with COVID-19

Researchers at NYU Grossman School of Medicine (NYU) have initiated an IST, known as BARCONA, to study the effect of bardoxolone in patients suffering from COVID-19.  Serious complications of COVID-19 are caused by excessive, systemic inflammation, which can result in dysfunction of the lungs, kidneys, and other organs.  Acute kidney injury has been reported to occur in up to 28% of all hospitalized COVID-19 patients, and in up to 72% of patients who do not survive COVID-19.  Bardoxolone and its analogs have demonstrated anti-inflammatory activity in animal models of acute lung and kidney injury, have increased survival in models of systemic inflammation, have been shown to suppress replication of several types of viruses and have shown improvements in kidney function in multiple clinical trials that enrolled over 3,000 patients with various forms of CKD where approximately 1,800 were exposed to bardoxolone treatment.  

The Phase 2 BARCONA study is a randomized, double-blind trial that will enroll approximately 40 patients with a primary endpoint of safety and treatment duration of up to 29 days in hospitalized patients.  Major exclusion criteria include patients who are intubated and on invasive mechanical ventilation for three or more days, prior hospitalization for heart failure, or eGFR <30 mL/min/1.73 m².  To further mitigate any safety risk, the trial was designed to pause after the enrollment of five patients to assess safety.  The first five patients were enrolled, and the Executive Steering Committee reviewed the blinded safety data and decided to continue with enrollment.  As with all trials conducted at NYU, the trial will be overseen by a Data Safety Monitoring Board that meets every other week.

We were involved in the design of the trial, have a member on the study’s executive steering committee, and are providing drug supply, as requested by NYU.  Any further enrollment in a potential Phase 3 trial will be gated based on an assessment of Phase 2 safety and activity, as well as feasibility of conducting a Phase 3 trial.

Historical Development of Bardoxolone

Clinical trials enrolling over 2,000 patients exposed to bardoxolone have demonstrated consistent, clinically meaningful improvement in kidney function across several disease states as measured by eGFR and other markers of kidney function.  Specifically, we have observed statistically significant increases in eGFR in all Phase 2 and Phase 3 clinical trials in numerous patient populations treated with bardoxolone, including patients with CKD caused by type 2 diabetes (T2D CKD), Alport syndrome, ADPKD, IgAN, T1D CKD, and FSGS.  

We believe these data, in addition to the CARDINAL Phase 3 Year 2 data, support the potential for bardoxolone to delay or prevent dialysis, kidney transplant, and death in patients with Alport syndrome and other forms of CKD.  

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Additional observations from the prior clinical trials of bardoxolone include the following:

Programs in Neurological Diseases

Omaveloxolone in FA

We are developing omaveloxolone for the treatment of patients with FA, an inherited, debilitating, and degenerative neuromuscular disorder that is normally diagnosed during adolescence and can lead to premature death.  Patients with FA experience progressive loss of coordination, muscle weakness, and fatigue, which commonly progresses to motor incapacitation and wheelchair reliance.  Symptoms generally occur in children, with patients requiring a wheelchair by their teens or early twenties.  FA affects approximately 5,000 children and adults in the United States and 22,000 individuals globally.  There are currently no approved therapies to treat FA.

Regulatory Update on Omaveloxolone for Friedreich’s Ataxia

Our Phase 2 trial, called MOXIe, was a two-part, international, multi-center, randomized, double-blind, placebo-controlled registrational trial that studied the safety and efficacy of omaveloxolone in patients with FA. Additionally, patients who completed the study and met eligibility requirements could participate in the MOXIe Extension during which investigators and patients remained blinded to prior treatment assignments. In October 2019, we announced that Part 2 in patients with FA met its primary endpoint of change in mFARS relative to placebo after 48 weeks of treatment.  Patients treated with omaveloxolone (150 mg/day) demonstrated a statistically significant, placebo-corrected 2.40 point mean improvement (decrease) in mFARS after 48 weeks of treatment (p=0.014).  Patients treated with omaveloxolone demonstrated improvement relative to placebo in every subcategory measured under mFARS.  Omaveloxolone treatment was generally reported to be well-tolerated.  

Following the announcement of the positive data from Part 2 in October 2019, we have planned, subject to discussion with the FDA, to proceed with a submission for marketing approval of omaveloxolone for the treatment of FA in the United States. As previously announced, at a Type C meeting, the FDA provided us guidance that, although it does not have any concerns with the reliability of the mFARS primary endpoint results in Part 2, it was not convinced that the results from Part 2 support a single study approval.  The FDA stated that we will need to conduct a second pivotal trial that confirms the mFARS results of Part 2 with a similar magnitude of effect. As an alternative, Reata proposed the Baseline-Controlled Study in which patients served as their own controls by comparing their treatment period during the MOXIe Extension with their pre-treatment period in either Part 1 of the MOXIe study (Part 1) or Part 2. The design of the Baseline-Controlled Study was discussed and agreed upon by external experts and Reata, and the SAP was submitted to the FDA prior to conducting the analysis contemplated by

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the proposed plan.  The FDA acknowledged it would consider the study design but, to date, it has not provided comments on the study design.

Baseline-Controlled Study Results

The Baseline-Controlled Study evaluated the efficacy of omaveloxolone treatment using a baseline-controlled analysis design from patients in Part 1 and patients assigned to the placebo-arm of Part 2 who were enrolled in the MOXIe Extension.  Efficacy was assessed by comparing the annualized rate of change in mFARS during the pre-treatment period to the annualized rate of change in mFARS during the treatment period for patients who received approximately 48 weeks of omaveloxolone in the MOXIe Extension (the paired difference). The pre-treatment period for Part 1 patients is the period from enrollment in Part 1 to enrollment in the MOXIe Extension.  The pre-treatment period for Part 2 patients is the 48-week treatment period, during which they received placebo in Part 2.

The primary efficacy analyses were analyzed according to a statistical hierarchy. The primary analysis population included Part 1 and Part 2 patients without pes cavus who had an mFARS assessment at Week 48 of the MOXIe Extension. The Part 2 placebo population was then analyzed separately followed by the Part 1 population.  

The Baseline-Controlled Study demonstrated statistically significant evidence of efficacy (p=0.0022) for the primary endpoint of the paired difference in annualized mFARS slopes between the treatment and pre-treatment periods in the primary analysis population (Table 1, Hierarchy 1). Evaluation of the data for patients from Part 2 and Part 1, separately, also demonstrated a statistically significant treatment effect, consistent with the primary analysis of the Baseline-Controlled Study and Part 2. All three analysis populations, including the primary analysis population, the Part 2 placebo population, and the Part 1 population, on average, demonstrated worsening (positive slope) during the pre-treatment period and an improvement (negative slope) during the treatment period. There was no significant difference between the paired differences of patients from Part 1 and Part 2 (two-sample t-test, p=0.53), confirming suitability for pooling for the primary analysis population (Part 1 and Part 2 combined).

Table 1:          Analyses of Annualized Rate of Change in mFARS

Sensitivity analyses were performed to assess multiple alternate methods for calculating slope and comparing treatment and pre-treatment periods. Additionally, analyses were performed using the all enrolled population, which included patients with and without pes cavus. All of these analyses consistently demonstrated a significant treatment effect and upheld the conclusion of the primary analysis.

In conclusion, the Baseline-Controlled Study met its primary endpoint of paired difference in annualized mFARS slope with a statistically significant paired difference between the treatment and pre-treatment periods in the primary analysis population of a 3.76 improvement (p=0.0022), and all sensitivity analyses of the primary analysis showed a significant treatment effect. Thus, we believe that the results of the Baseline-Controlled Study, which utilized patients as their own control, support the positive mFARS results of Part 2 and provide evidence of the effectiveness of omaveloxolone in FA.

We completed the Baseline-Controlled Study in October 2020 and provided the results to the FDA.  The FDA confirmed that it will review the study results after which it may request a meeting with us to discuss the conclusions of its review.  Assuming that the FDA views these results as sufficient to increase the persuasiveness of data from Part 2, our plan would be to submit an NDA in mid-2021.  However, there can be no assurance that the FDA will accept the design of the Baseline-Controlled Study or view these results as sufficient to support submission of an NDA for approval of omaveloxolone without the conduct of a second study.  In that event, we will determine next steps, including whether it is feasible to conduct a second pivotal study in FA patients to confirm the results of Part 2 as previously suggested by the FDA.  At present, we plan to pursue marketing approval outside of the United States and work has commenced on preparations to file for marketing approval in Europe.

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Recent FA Data Presentations/ Publications

In September 2020, additional data analyses from Part 2 were presented at the American Academy of Neurology’s Emerging Science conference and the FARA 2020 Biomarker & Clinical Endpoint Meeting by Dr. David Lynch, M.D., Ph.D. Dr. Lynch is an attending physician at the Children’s Hospital of Philadelphia, professor of neurology at the Perelman School of Medicine at the University of Pennsylvania, and the principal investigator of the MOXIe study. These analyses provided new insights that were not communicated previously in the announcement of topline results in 2019.

An analysis of the change in mFARS from baseline demonstrated that patients in the omaveloxolone arm performed numerically better than placebo on all subsections of the mFARS exam.  Furthermore, omaveloxolone patients in subgroups that typically have a worse prognosis and progress faster, including patients with longer GAA1 repeats, patients with cardiomyopathy, non-ambulatory patients, and younger patients, on average, experienced a larger placebo-corrected improvement in mFARS compared to the study population as a whole.  

Additionally, all secondary endpoints either favored the omaveloxolone arm or were neutral.  Patients on omaveloxolone experienced a nominal improvement in the Activities of Daily Living questionnaire (ADL), with all nine questions favoring the omaveloxolone arm.  On average, ADL for patients on omaveloxolone did not change from baseline, while placebo-treated patients worsened.  Both patient global impression of change (PGIC) and clinical global impression of change (CGIC) numerically favored omaveloxolone, and improvement in PGIC correlated with the observed improvement in mFARS.

In October 2020, the results from Part 2 evaluating the efficacy and safety of omaveloxolone in patients with FA were published in the journal Annals of Neurology.

Omaveloxolone in Other Potential Indications

In addition, we have observed compelling activity of omaveloxolone and our other Nrf2 activators in preclinical models of Parkinson’s disease, dementia, epilepsy, Huntington’s disease, and amyotrophic lateral sclerosis (ALS), and we plan to pursue the development of omaveloxolone and our other Nrf2 activators for one or more of these diseases.

RTA 901 in Neurodegeneration and Neuroprotection Diseases

We are also developing RTA 901 in neurological indications.  RTA 901 is the lead product candidate from our Hsp90 modulator program.  We have observed favorable activity of RTA 901 in a range of preclinical models of neurological disease, including models of diabetic neuropathy, neuroinflammation, and neuropathic pain.  We have completed a Phase 1 trial to evaluate the safety, tolerability, and pharmacokinetic profile of RTA 901 administered orally, once-daily in healthy adult volunteers, and no safety or tolerability concerns were reported.  We plan to continue development for RTA 901 in neurological diseases, such as diabetic neuropathy.  We are the exclusive licensee of RTA 901 and have worldwide commercial rights.

Other Clinical Programs

In addition, we are developing RTA 1701, the lead product candidate from our proprietary series of RORγt inhibitors, for the potential treatment of a broad range of autoimmune, inflammatory, and fibrotic diseases.  We have completed a Phase 1 trial to evaluate the safety, tolerability, and pharmacokinetic profile of RTA 1701 in healthy adult volunteers.  No safety or tolerability concerns were reported, and we observed an acceptable pharmacokinetic profile.  We plan to continue development for RTA 1701 in autoimmune, inflammatory, or fibrotic diseases.  We retain all rights to our RORγt inhibitors, which are not subject to any existing commercial collaborations.

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Corporate Overview

To date, we have focused most of our efforts and resources on developing our product candidates and conducting preclinical studies and clinical trials.  We have historically financed our operations primarily through revenue generated from our collaborations with AbbVie and KKC, from sales of our securities, with secured loans, and most recently from a strategic financing from BXLS.  We have not received any payments or revenue from collaborations other than nonrefundable upfront, milestone, and cost sharing payments from our collaborations with AbbVie and KKC, from the Development Agreement with BXLS, and from reimbursements of expenses under the terms of our agreement with KKC.  We have incurred losses in each year since our inception, other than in 2014. As of September 30, 2020, we had $578.3 million of cash and cash equivalents and an accumulated deficit of $892.5 million. We continue to incur significant research and development and other expenses related to our ongoing operations.  Despite contractual product development commitments and the potential to receive future payments from KKC, we anticipate that we will continue to incur losses for the foreseeable future, and we anticipate that our losses will increase as we continue our development of, seek regulatory approval for, and potential commercialization of our product candidates.  If we do not successfully develop and obtain regulatory approval of our existing product candidates or any future product candidates and effectively manufacture, market, and sell any products that are approved, we may never generate revenue from product sales.  Furthermore, even if we do generate revenue from product sales, we may never again achieve or sustain profitability on a quarterly or annual basis.  Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.  Our failure to become and remain profitable could depress the market price of our Class A common stock and could impair our ability to raise capital, expand our business, diversify our product offerings, or continue our operations.

Financial Operations Overview

Revenue

Our revenue to date has been generated primarily from licensing fees received under our collaborative license agreements and reimbursements for expenses.  We currently have no approved products and have not generated any revenue from the sale of products to date.  In the future, we may generate revenue from product sales, royalties on product sales, reimbursements for collaboration services under our current collaboration agreements, or license fees, milestones, or other upfront payments if we enter into any new collaborations or license agreements.  We expect that our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such payments and sales.

Our license and milestone revenue has been generated primarily from the KKC Agreement, the AbbVie License Agreement, and the AbbVie Collaboration Agreement and consists of upfront payments and milestone payments.  License revenue recorded with respect to the KKC Agreement, the AbbVie License Agreement, and the AbbVie Collaboration Agreement consists solely of the recognition of deferred revenue.  Under our revenue recognition policy, collaboration revenue associated with upfront, non-refundable license payments received under our license and collaboration agreements are deferred and recognized ratably over the expected term of the performance obligations under each agreement.  Under the Reacquisition Agreement, we no longer have performance obligations under the AbbVie License Agreement and the AbbVie Collaboration Agreement.  We only expect to recognize revenue under the KKC Agreement, which extends through 2021.

Research and Development Expenses

The largest component of our total operating expenses has historically been our investment in research and development activities, including the clinical development of our product candidates.  From our inception through September 30, 2020, we have incurred a total of $896.6 million in research and development expense, a majority of which relates to the development of bardoxolone and omaveloxolone.  We expect our research and development expense to continue to increase in the future as we advance our product candidates through clinical trials and expand our product candidate portfolio.  The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and we consider the active management and development of our clinical pipeline to be crucial to our long-term success.  The actual probability of success for each product candidate and

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preclinical program may be affected by a variety of factors, including the safety and efficacy data for product candidates, investment in the program, competition, manufacturing capability, and commercial viability.

Research and development expenses include:

Research and development costs are expensed as incurred.  Costs for certain development activities such as clinical trials are highly judgmental and are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.

We base our expense accruals related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations (CROs) that conduct and manage clinical trials on our behalf.  The financial terms of these agreements vary from contract to contract and may result in uneven payment flows.  Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.  In accruing costs, we estimate the time period over which services will be performed and the level of effort to be expended in each period.  If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

To date, we have not experienced material changes in our estimates of accrued research and development expenses after a reporting period.  However, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trials and other research activities.

Currently, KKC has allowed us to conduct clinical studies of bardoxolone in certain rare forms of kidney diseases in Japan and has reimbursed us the majority of the costs for our CARDINAL study in Japan and is paying for the costs of a certain number of patients as the in-country caretaker in our FALCON study in Japan.  We reduced our expenses by $0.0 million and $0.5 million for KKC’s share of CARDINAL costs for the nine months ended September 30, 2020 and 2019, respectively.

The following table summarizes our research and development expenses incurred:

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The program-specific expenses summarized in the table above include costs that we directly allocate to our product candidates.  Our other research and development expenses include research and development salaries, benefits, stock-based compensation and preclinical, research, and discovery costs, which we do not allocate on a program-specific basis.

General and Administrative Expenses

General and administrative expenses consist primarily of employee-related expenses for executive, operational, finance, legal, compliance, and human resource functions.  Other general and administrative expenses include personnel expense, facility-related costs, professional fees, accounting and legal services, depreciation expense, other external services, and expenses associated with obtaining and maintaining our intellectual property rights.

We anticipate that our general and administrative expenses will increase in the future as we prepare for our potential commercialization of our product candidates.  We have also incurred, and anticipate incurring in the future, increased expenses associated with being a public company, including exchange listing and SEC requirements, director and officer insurance premium, legal, audit and tax fees, compliance with the Sarbanes-Oxley Act, regulatory compliance programs, and investor relations costs.  Additionally, if and when we believe the first regulatory approval of one of our product candidates appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially for the sales and marketing of our product candidates.

Other Income (Expense), Net

Other income (expense) includes interest and gains earned on our cash and cash equivalents, interest expense on term loans, amortization of debt issuance costs, imputed interest on long term payables, loss on extinguishment of debt, gain on termination of lease, foreign currency exchange gains and losses, gains and losses on sales of assets, and non-cash interest expense on liability related to the sale of future royalties.

Benefit from (Provision for) Taxes on Income

Provision for taxes on income consists of net loss, taxed at federal tax rates and adjusted for certain permanent differences.  We maintain a full valuation allowance against our net deferred tax assets in the United States.  Changes in this valuation allowance also affect the tax provision.

Results of Operations

Comparison of the Three Months Ended September 30, 2020 and 2019 (unaudited)

The following table sets forth our results of operations for the three months ended September 30:

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Revenue

License and milestone revenue represented approximately 84% and 96% of total revenue for the three months ended September 30, 2020 and 2019, respectively, and consisted primarily of the recognition of deferred revenue.  License and milestone revenue decreased by $6.7 million or 85% during the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily due to the Reacquisition Agreement in October 2019, which ended our performance obligations under the AbbVie Collaboration Agreement and resulted in the writing off of the related remaining deferred revenue balance, after which no further revenue was recognized.  Total revenue of $1.2 million was recognized during the three months ended September 30, 2020 from deferred revenue related to the KKC Agreement.

Other revenue was immaterial for the three months ended September 30, 2020 and 2019.

The following table summarizes the sources of our revenue for the three months ended September 30:

Expenses

The following table summarizes our expenses, as a percentage of total expenses, for the three months ended September 30:

Research and Development Expenses

Research and development expenses increased by $4.9 million, or 15%, for the three months ended September 30, 2020, compared to the three months ended September 30, 2019.  The increase was primarily due to $5.1 million in increased personnel-related stock-based compensation expenses related to the growth of our development activities and $2.1 million in increased manufacturing and regulatory costs to support product registration offset by a decrease in clinical study expenses related to studies terminated in the first quarter 2020; and $1.9 million in decreased medical affairs expenses.  Research and development expenses, as a percentage of total expenses, was 66% and 68% for the three months ended September 30, 2020 and 2019, respectively.  

General and Administrative Expenses

General and administrative expenses increased by $4.0 million, or 28%, for the three months ended September 30, 2020, compared to the three months ended September 30, 2019.  The increase was primarily due to $4.9 million in increased personnel and stock-based compensation expenses, offset by a decrease of $0.7 million in marketing and commercialization expenses.  General and administrative expenses, as a percentage of total expenses, was 33% and 31%, for the three months ended September 30, 2020 and 2019, respectively.  

Other Income (Expense), Net

Other income (expense), net increased by $10.1 million for the three months ended September 30, 2020, compared to the three months ended September 30, 2019.  The increase was primarily due to $10.4 million from non-cash interest expense on liability related to the sale of future royalties.

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Benefit from (Provision for) Taxes on Income

Benefit from taxes on income was immaterial for the three months ended September 30, 2020 and 2019.

Comparison of the Nine Months Ended September 30, 2020 and 2019 (unaudited)

The following table sets forth our results of operations for the nine months ended September 30: