REATA PHARMACEUTICALS INC - Quarter Report: 2021 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, 2021

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 3, 2021, the registrant had 31,472,578 shares of Class A common stock, $0.001 par value per share, and 4,919,249 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

(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, and its lead product candidates are bardoxolone methyl (bardoxolone) in patients with CKD caused by Alport syndrome and omaveloxolone in patients with a neurological disorder called Friedreich’s ataxia (FA).  The Company has an NDA under review with the FDA for bardoxolone in patients with CKD caused by Alport syndrome and plans to file an NDA for omaveloxolone in patients with 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, omaveloxolone, and our next-generation Nrf2 activators 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. (Kyowa Kirin).

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, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.  The consolidated balance sheet at December 31, 2020, 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 nine months ended September 30, 2021 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, 2020.

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Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes.  The FASB issued this update as part of its Simplification Initiative to improve areas of U.S. 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.  The Company adopted this standard on January 1, 2021, and its adoption did not have material impact to the Company’s consolidated financial statements and related disclosure.

3. Collaboration Agreements

Subsequent to the 2019 reacquisition of certain rights originally licensed to AbbVie Inc. (AbbVie) (see AbbVie below), the Company’s collaboration revenue and deferred revenue have been generated primarily from licensing fees and reimbursements for expenses received under our exclusive license with Kyowa Kirin (the Kyowa Kirin Agreement).

Kyowa Kirin

In December 2009, the Company entered into an exclusive license with Kyowa Kirin to develop and commercialize bardoxolone in the licensed territory.  The terms of the agreement include payment to the Company of a nonrefundable, up-front license fee of $35.0 million and additional development and commercial milestone payments.  As of September 30, 2021, the Company has received $50.0 million related to regulatory development milestone payments from Kyowa Kirin and has the potential in the future to achieve another $47.0 million from regulatory milestones and $140.0 million from commercial milestones. The Company also has the potential to achieve 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 Kyowa Kirin in the licensed territory.  The Company is participating on a joint steering committee with Kyowa Kirin to oversee the development and commercialization activities related to bardoxolone.  Any future milestones and royalties received are subject to mid to lower single digit percent declining tiered commissions to certain consultants as compensation for negotiations of the Kyowa Kirin Agreement.  

The up-front payment and regulatory milestones are accounted for as a single unit of accounting. The Company regularly evaluates its remaining performance obligation under the Kyowa Kirin Agreement. Accordingly, revenue may fluctuate from period to period due to changes to its estimated performance obligation period and variable considerations.  The Company began recognizing revenue related to the up-front payment upon execution of the Kyowa Kirin Agreement.  

In March 2021, the Company’s performance obligation period under the Kyowa Kirin Agreement was extended to June 2022, which decreased quarterly revenue recognition by approximately $0.4 million prospectively.

On July 27, 2021, Kyowa Kirin, submitted an NDA in Japan to the Ministry of Health, Labour and Welfare (MHLW) for bardoxolone for improvement of renal function in patients with Alport syndrome.  Based on this submission, the Company earned a $5.0 million milestone payment, variable consideration previously considered constrained, under the Kyowa Kirin Agreement. As a result, the Company recorded $4.7 million in collaboration revenue, a cumulative catch-up for the portion of this milestone that was satisfied in prior periods, and $0.3 million in deferred revenue that will be recognized over the remaining performance obligation period, ending in June 2022.  

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AbbVie

In September 2010, the Company entered into a license agreement with 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 Collaboration Agreement) to jointly research, develop, and commercialize the Company’s portfolio of second and later generation oral Nrf2 activators.

In October 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 Collaboration Agreement.  In exchange for such rights, the Company agreed to pay AbbVie $330.0 million, of which total payments of $250.0 million have been made as of September 30, 2021, with the remaining $80.0 million 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 execution of the Reacquisition Agreement ended our performance obligations under the Collaboration Agreement.

The Company recognized interest expense related to the Reacquisition Agreement of approximately $1.8 million and $1.7 million, during the three months ended September 30, 2021 and 2020, respectively, and $5.3 million and $4.9 million during the nine months ended September 30, 2021 and 2020, respectively.  As of September 30, 2021, the Company’s payable to collaborators was $80.0 million, with a present value of $78.8 million.  

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 which it borrowed $155.0 million as of December 20, 2019.  On June 24, 2020, the Company paid off the total outstanding balance of the term loans under the Amended Restated Loan Agreement (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. The Company recognized approximately $0 million and $8.3 million in interest expense, during the three months and nine months ended September 30, 2020, respectively.  No interest expense was recognized in 2021 as the term loan was paid off in June 2020.

5. Liability Related to Sale of Future Royalties

On June 24, 2020, the Company closed on the Development and Commercialization Funding Agreement with an affiliate of Blackstone Life Sciences, LLC (BXLS), which 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 (the Development Agreement).  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 Kyowa Kirin.  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.

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In addition, concurrent with the Development Agreement, the Company entered into a common stock purchase agreement (the 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 $294.5 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, 2021:

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 the imputed interest from amount due to AbbVie under the Reacquisition Agreement and interest on its Term Loans in 2020.

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.

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Other Income (Expense)

Other income (expense) consists primarily of gains and losses on foreign currency exchange.

Other income of $0.8 million recorded in the three and nine months ended September 30, 2020 related to a gain on the Company’s lease termination due to the bankruptcy filing of its lessor.

Loss on Extinguishment of Debt

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.

7. Leases

The Company’s headquarters are located in Plano, Texas, where it leases approximately 122,000 square feet of office space, with lease terms extending through June 30, 2022 with an option to renew up to three months. The Company leases additional office and laboratory space of approximately 34,890 square feet located in Irving, Texas, with lease terms extending through October 31, 2022 with an option to renew up to six months.  

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.  During the three and nine months ended September 30, 2021, cash paid for amounts included for the measurement of lease liabilities was $0.8 million and $2.4 million, respectively.  During the three and nine months ended September 30, 2021, the Company recorded operating lease expense of $0.8 million and $2.4 million, respectively.  

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:

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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 2019 Lease Agreement), and at the Company’s 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 2019 Lease Agreement as of September 30, 2021.  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 $4.1 million as other long-term liabilities as of September 30, 2021.  The initial annual base rent will be determined based on the project cost, subject to an initial annual cap of approximately $13.3 million, which may increase in certain circumstances.  Beginning in the third lease year, the base rent will increase 1.95% per annum each year.  In addition to the annual base rent, the Company will pay for taxes, insurance, utilities, operating expenses, assessments under private covenants, maintenance and repairs, certain capital repairs and replacements, and building management fees.  

8. Income Taxes

On March 27, 2020, the United States enacted 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, in March 2020, the Company recognized tax benefits and receivables totaling $22.2 million associated with the ability to carryback an applicable prior year’s net operating losses to a preceding year, which had previously been fully reserved by its valuation allowance.  During the second quarter of 2021, the Company received a total of $22.9 million from the IRS, comprising $22.2 million of the income tax receivable plus $0.7 million in interest.

The following table summarizes income tax (benefit) expense and effective income tax rate:

The Company’s effective tax rate for the three months and nine months ended September 30, 2021, varies with the statutory rate primarily due to changes in the valuation allowance related to certain deferred tax assets generated or utilized in the applicable period.  

Deferred tax assets are regularly reviewed for recoverability by jurisdiction and valuation allowances are established based on historical and projected future taxable losses and the expected timing of the reversals of existing temporary differences.  The Company has recorded valuation allowances against the majority of its deferred tax assets as of September 30, 2021, and the Company expects to maintain these valuation allowances 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 time-based and performance-based stock compensation expense reflected in the consolidated statements of operations:

Restricted Stock Units (RSUs)

The following table summarizes RSU activity as of September 30, 2021, under the Second Amended and Restated Long Term Incentive Plan (LTIP Plan) agreement:

As of September 30, 2021, total unrecognized compensation expense related to RSU and performance-based RSUs awards that were deemed probable of vesting was approximately $10.1 million, which excludes 278,100 shares of unvested performance-based RSUs that were deemed not probable of vesting totaling unrecognized stock-based compensation expense of $31.4 million.

Stock Options  

The following table summarizes stock option activity as of September 30, 2021, under the LTIP Plan and standalone option agreements:

Stock-based compensation expense for the nine months ended September 30, 2021 included accelerated recognition of expense of $1.4 million, due to modifications of outstanding stock options as a result of an employee who entered into a consulting agreement at the termination of employment, which was considered to be non-substantive services.

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As of September 30, 2021, total unrecognized compensation expense related to stock options was approximately $106.6 million, which excludes 479,350 shares of unvested performance-based stock options that were deemed not probable of vesting totaling unrecognized stock-based compensation expense of $48.5 million.

The total intrinsic value of all outstanding options and exercisable options as of September 30, 2021 was $176.8 million and $151.7 million, respectively.

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 4,705,515 and 4,560,002 shares as of September 30, 2021 and 2020, respectively.

10. Employee Benefit Plans

In 2010, we adopted an Employee Investment Plan, qualified under Section 401(k) of the Internal Revenue Code, which is a retirement savings plan covering substantially all of our U.S. employees (the Plan).  The Plan is administered under the “safe harbor” provision of ERISA.  Under the Plan, an eligible employee may elect to contribute a percentage of their salary on a pre-tax basis, subject to federal statutory limitations.  Beginning in January 2019, the Company implemented a discretionary employer matching contribution of $1.00 for every $1.00 contributed by a participating employee up to $6,000 and $5,000 annually in 2021 and 2020, respectively, which such matching contributions become fully vested after four years of service.  The Company recorded expense of $0.2 million and $0.1 million for the three months ended September 30, 2021 and 2020, respectively, and $1.4 million and $1.0 million for the nine months ended September 30, 2021 and 2020, respectively, which includes the Company’s contributions and administrative costs.

11. 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 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 (the Plaintiff) 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. On September 27, 2021, the plaintiff voluntarily dismissed the case with prejudice.

Indemnifications

ASC 460, Guarantees, requires that, upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumes under that guarantee.

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As permitted under Delaware law and in accordance with the Company’s bylaws, officers and directors are indemnified for certain events or occurrences, subject to certain limits, while the officer or director is or was serving in such capacity.  The maximum amount of potential future indemnification is unlimited; however, the Company has obtained director and officer insurance that limits its exposure and may enable recoverability of a portion of any future amounts paid.  The Company believes the fair value for these indemnification obligations is minimal.  Accordingly, the Company has not recognized any liabilities relating to these obligations as of September 30, 2021.  

The Company has certain agreements with licensors, licensees, collaborators, and vendors that contain indemnification provisions.  In such provisions, the Company typically agrees to indemnify the licensor, licensee, collaborator, or vendor against certain types of third-party claims.  The Company accrues for known indemnification issues when a loss is probable and can be reasonably estimated.  There were no accruals for expenses related to indemnification issues for any period presented.  

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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 headings “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” 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 CKD and a rare neurological disease.  We have an NDA under review with the FDA for bardoxolone in patients with CKD caused by Alport syndrome and plan to file an NDA for 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 Kyowa Kirin.

Recent Key Developments

Bardoxolone in Patients with CKD Caused by Alport Syndrome

In April 2021, the FDA accepted for filing the NDA for bardoxolone for the treatment of patients with CKD caused by Alport syndrome, which is currently under review by the FDA.  The FDA completed a bioresearch monitoring inspection of Reata.  We did not receive any observations.

We also completed a mid-cycle communication meeting with the FDA and were advised that an Advisory Committee meeting is scheduled for December 8, 2021.  The Prescription Drug User Fee Act (PDUFA) date, the FDA action date for the application, is scheduled for February 25, 2022.

We are pursuing marketing approvals outside of the United States.  On October 28, 2021, we announced our submission of our Marketing Authorization Application (MAA) with the European Medicines Agency (EMA) for marketing approval of bardoxolone for the treatment of CKD caused by Alport syndrome in the European Union.  On July 27, 2021, Kyowa Kirin, our strategic collaborator in CKD in Japan, submitted an NDA in Japan to the Ministry of Health, Labour and Welfare (MHLW) for bardoxolone for improvement of renal function in patients with Alport syndrome, which is currently under review.

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Bardoxolone in Patients with Autosomal Dominant Polycystic Kidney Disease (ADPKD)

We are currently enrolling patients in FALCON, an international, multi-center, randomized, double-blind, placebo-controlled Phase 3 trial studying the safety and efficacy of bardoxolone in patients with ADPKD randomized one-to-one to active drug or placebo.  The study is enrolling patients in a broad range of ages, 18 to 70 years old, with an estimated glomerular filtration rate (eGFR) between 30 to 90 mL/min/1.73 m².  We are preparing a protocol amendment for FALCON following the Type B meeting with the FDA regarding the ADPKD development program as outlined in our Quarterly Report on Form 10-Q for the second quarter of 2021 and as follows.  The primary endpoint is the off-treatment eGFR change from baseline versus placebo at Week 104.  We increased the sample size from 550 to 700 patients to account for this dilution in the treatment effect.  

Patients will be treated with bardoxolone or placebo for 100 weeks followed by a four-week withdrawal period.  There will be no off-treatment period from Week 48 to Week 52.  The trial will remain blinded until study completion.  The key secondary endpoint is the eGFR change from baseline versus placebo at Week 100.

More than 450 patients are currently enrolled in the study, and we expect to complete enrollment by the middle of 2022.

Bardoxolone in Patients with CKD at Risk of Rapid Progression

MERLIN is a multi-center, double-blind, placebo-controlled, Phase 2 trial to evaluate the safety and efficacy of bardoxolone in patients at risk of rapidly progressing CKD due to multiple etiologies including IgA Nephropathy (IgAN), focal segmental glomerulosclerosis (FSGS), type 1 diabetic CKD (T1D CKD), type 2 diabetic CKD (T2D CKD), hypertensive CKD, and others.  The primary endpoint of the trial is change in eGFR from baseline to Week 12.  We have completed enrollment in the MERLIN trial and expect to have top-line data in the first quarter of 2022.  If the results of this study are positive, we would potentially proceed to a larger Phase 3 trial with similar eligibility criteria.  Patients at risk for rapid progression experience a significant risk of progressing to end-stage kidney disease (ESKD) and are a population with high unmet need across multiple forms of CKD.

Omaveloxolone in Patients with Friedreich’s Ataxia (FA)

On September 30, 2021, we announced that we completed our pre-NDA meeting with the FDA for omaveloxolone for the treatment of patients with FA.  The purpose of the pre-NDA meeting was to discuss the content of Reata’s planned NDA submission for full approval for omaveloxolone for the treatment of FA.  We are not planning to conduct a second pre-approval clinical study prior to the NDA submission.  In response to our questions about the contents of the filing, and because of the seriousness of the indication, the FDA exercised its discretion, subject to review, to permit us to submit the results of certain clinical pharmacology and nonclinical studies after approval.  We continue to work with the FDA as we finalize the NDA package for submission during the first quarter of 2022.

Update on Adjustments to Operations Due to COVID-19

We continue to closely monitor and adhere to COVID-19 guidance issued by local, state, and national authorities.  Since May 2021, we have permitted employees to voluntarily return to the office on flexible work schedules.  Due to the current Covid-19 pandemic situation, we have not committed to a formal return to the office date and are asking employees to continue to work with management on schedules that meet both Reata’s and the employee’s needs.  Pandemic management protocols remain in place for those who do attend either campus.

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Background: Our Programs

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

In addition, Kyowa Kirin, our strategic collaborator in CKD, is currently conducting its registrational trial of bardoxolone in diabetic (type 1 and 2) CKD in Japan.  Kyowa Kirin completed patient enrollment in this trial in June 2019.

*NDA under review.  NDA accepted for filing on April 26, 2021, with a PDUFA date of February 25, 2022.

**NDA submission planned for 1Q 2022.

***DPNP: Diabetic peripheral neuropathic pain

Programs in Chronic Kidney Disease

We are developing bardoxolone for the treatment of patients with CKD caused by Alport syndrome, ADPKD, and certain other 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 glomerular filtration rate (GFR), which is the rate at which the kidney filters waste products from the blood.  When GFR drops below approximately 15 mL/min/1.73 m², patients develop 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 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.

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Bardoxolone in Patients with 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.  

The Alport Syndrome Foundation estimates that Alport syndrome affects approximately 30,000 to 60,000 people in the United States.  According to data provided by IQVIA in April 2020, there are approximately 14,000 projected patients diagnosed with Alport syndrome in all stages of CKD in the United States.  However, recent literature suggests that a large number of patients with Alport syndrome are either undiagnosed or misdiagnosed with other forms of CKD.  To help nephrologists identify the genetic basis of various forms of CKD, including Alport syndrome, Reata and Invitae Corporation are sponsoring the KIDNEYCODE® genetic testing program.

In November 2020, we announced that the Phase 3 CARDINAL study met its primary and key secondary endpoints at the end of Year 2.  The Phase 3 portion of CARDINAL was an international, multi-center, double-blind, placebo-controlled, randomized registrational trial that enrolled 157 patients with CKD caused by Alport syndrome at approximately 50 study sites in the United States, Europe, Japan, and Australia.  Patients were randomized one-to-one to bardoxolone or placebo.

At Week 100, in the intent to treat (ITT) population, which included eGFR values for patients who either remained on or discontinued study drug, 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 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).  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.  The primary endpoint was analyzed using mixed-model repeated measures with no imputation, and the key secondary endpoint was analyzed using analysis of covariance with treatment-based multiple imputation for missing data.

Bardoxolone was generally reported to be well tolerated in this study, and the safety profile was similar to that observed in prior trials.  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 SAEs or major adverse cardiac events were reported in patients treated with bardoxolone.  Blood pressure, a sensitive measure of fluid status, was not significantly different between the two groups.  Weight loss was more pronounced in patients with a higher body mass index, and mean decreases in weight were not observed in pediatric patients.  The urinary albumin-to-creatinine ratio (UACR) was not significantly different between treatment groups at Week 100 or Week 104.

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The reported adverse events (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 which are thought to be associated with the pharmacology of the drug.  Muscle spasms were generally transient and were associated with reductions of creatine kinase, which is evidence of improved energy metabolism and inconsistent with muscle injury.

Additionally, an update on results from EAGLE was provided during ASN Kidney Week 2021, which was held virtually from November 4 - 7, 2021.  EAGLE is an ongoing, international, multi-center, open-label, extended access trial evaluating the longer-term safety and tolerability of bardoxolone in patients with CKD caused by Alport syndrome who participated in the CARDINAL trial or patients with ADPKD who participated in the FALCON trial.

The change from baseline eGFR was evaluated for the patients with Alport syndrome who were treated with bardoxolone for up to three years (two years in CARDINAL and one year in EAGLE), with four-week off-treatment periods occurring at Weeks 48 and 100.  Mean increases in eGFR were observed in patients who previously received placebo and initiated treatment with bardoxolone in EAGLE.  Patients who previously received bardoxolone for two years in CARDINAL also continued to experience mean increases in eGFR in their third year of treatment.

For the 19 patients randomized to bardoxolone in CARDINAL who completed 48 weeks in EAGLE (bardoxolone-to-bardoxolone group), bardoxolone treatment resulted in a mean change from baseline in eGFR (relative to original CARDINAL Phase 3 baseline) of 7.8 mL/min/1.73 m² at Year 1, 8.6 mL/min/1.73 m² at Year 2, and 6.2 mL/min/1.73 m² at Year 3.  This sustained improvement of kidney function is notable when compared to the CARDINAL study population’s expected yearly eGFR decline of 5.1 mL/min/1.73 m², which was calculated based on five-year historical eGFR data collected before patients entered the study.

The change from baseline eGFR was also evaluated at Week 12, Week 24, and Week 48 relative to Day 0 (before treatment) in EAGLE.  The bardoxolone-to-bardoxolone and placebo-to-bardoxolone groups experienced similar increases in eGFR at all time points.

In April 2021, the FDA accepted for filing the NDA for bardoxolone for the treatment of patients with CKD caused by Alport syndrome, which is currently under review by the FDA.  The FDA completed a bioresearch monitoring inspection of Reata.  We did not receive any observations.

We also completed a mid-cycle communication meeting with the FDA and were advised that an Advisory Committee meeting is scheduled for December 8, 2021.  The PDUFA date, the FDA action date for the application, is scheduled for February 25, 2022.  

Ex-U.S. Updates for Bardoxolone in Patients with CKD Caused by Alport Syndrome

We are pursuing marketing approvals outside of the United States.  On October 28, 2021, we announced our submission of our MAA with the EMA for marketing approval of bardoxolone for the treatment of CKD caused by Alport syndrome in the European Union.

On July 27, 2021, Kyowa Kirin, our partner in Japan, submitted an NDA in Japan to the MHLW for bardoxolone for improvement of renal function in patients with Alport syndrome.  Based on this submission, we earned a $5 million milestone payment under the Kyowa Kirin Agreement related to this event, which we received and recognized in the third quarter of 2021.  If approved for commercial sales, Kyowa Kirin is required to pay us royalties on net sales of bardoxolone in its territory ranging from the low teens to the low 20% range depending on the country of sale and the amount of annual net sales.

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Bardoxolone in Patients with Autosomal Dominant Polycystic Kidney Disease (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.

We are currently enrolling patients in FALCON, an international, multi-center, randomized, double-blind, placebo-controlled Phase 3 trial studying the safety and efficacy of bardoxolone in patients with ADPKD randomized one-to-one to active drug or placebo.  The study is enrolling patients in a broad range of ages, 18 to 70 years old, with an eGFR between 30 to 90 mL/min/1.73 m².  We are preparing a protocol amendment for FALCON following the Type B meeting with the FDA regarding the ADPKD development program as outlined in our Quarterly Report on Form 10-Q for the second quarter of 2021 and as follows.  The primary endpoint is the off-treatment eGFR change from baseline versus placebo at Week 104.  The changed primary endpoint includes data at Week 104 for all patients irrespective of time off-treatment, instead of the off-treatment value four weeks after last dose.  Patients who discontinue treatment early will have shortened treatment exposure and longer off-treatment duration, which, therefore is expected to dilute the treatment effect.  We increased the sample size from 550 to 700 patients to account for this dilution in the treatment effect.

Patients will be treated with bardoxolone or placebo for 100 weeks followed by a four-week withdrawal period.  There will be no off-treatment period from Week 48 to Week 52.  The trial will remain blinded until study completion.  The key secondary endpoint is the eGFR change from baseline versus placebo at Week 100.  We will also add a Week 108 off-treatment eGFR analysis to the study.

More than 450 patients are currently enrolled in the study, and we expect to complete enrollment by the middle of 2022.  

Bardoxolone in Patients with CKD at Risk of Rapid Progression

MERLIN is a multi-center, double-blind, placebo-controlled, Phase 2 trial to evaluate the safety and efficacy of bardoxolone in patients at risk of rapidly progressing CKD due to multiple etiologies including IgAN, FSGS, T1D CKD, T2D CKD, hypertensive CKD, and others.  The study includes patients with eGFR between 20 and 60 mL/min/1.73 m², and patients must meet at least one of the following criteria: UACR ≥ 300 mg/g; eGFR decline at a rate of ≥ 4 mL/min/1.73 m² in prior year; or hematuria defined as > 5-10 red blood cells per high power field (manual method), documented history of positive urinary dipstick for blood in prior year, or macroscopic hematuria in prior 3 years.  The primary endpoint of the trial is change in eGFR from baseline to Week 12.  

We have completed enrollment in the MERLIN trial.  We expect to have top-line data in the first quarter of 2022.  If the results of this study are positive, we would potentially proceed to a larger Phase 3 trial with similar eligibility criteria.  Patients at risk for rapid progression experience a significant risk of progressing to ESKD and are a population with high unmet need across multiple forms of CKD.

Both the FALCON and MERLIN trials draw from the results of our Phase 2 study called PHOENIX, an open-label, multi-center Phase 2 trial evaluating the safety and efficacy of bardoxolone in patients with ADPKD, IgAN, T1D CKD, or FSGS completed in 2019.  In each of these cohorts, patients treated with bardoxolone experienced a statistically significant mean increase from baseline in eGFR after 12 weeks of treatment.  The most commonly reported AE across all cohorts was muscle spasms, which were not associated with clinical signs or symptoms of muscle injury.  The overall rate of SAEs was low, with three patients reporting treatment-emergent SAEs, none of which were reported as related to bardoxolone.  We plan to pursue development opportunities in each of these rare and serious forms of CKD, maintaining our intent to expand the commercial indications for bardoxolone.

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Programs in Neurological Diseases

Omaveloxolone in Patients with Friedreich’s Ataxia (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 leads 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.

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 Modified Friedreich’s Ataxia Rating Scale (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.  

The FDA provided us guidance that, although it did not have concerns with the reliability of the mFARS primary endpoint results from MOXIe Part 2, it was not convinced that the results from MOXIe Part 2, as a single study, were sufficient to support approval.  The FDA stated that we would need to conduct a second pivotal trial that confirms the mFARS results of MOXIe Part 2 with a similar magnitude of effect.  As an alternative, to increase the persuasiveness of MOXIe Part 2 results, we completed additional analyses, including the Delayed-Start Analyses.

During the first quarter of 2021, we submitted results from the Delayed-Start Analyses to the FDA.  These additional exploratory analyses analyzed data from MOXIe Part 2 and the MOXIe Extension.  In these analyses, parallel trajectories between the patients randomized to placebo (placebo-to-omaveloxolone group) and those randomized to omaveloxolone (omaveloxolone-to-omaveloxolone group) in the double-blind period from MOXIe Part 2 through 48 weeks in the MOXIe Extension could provide evidence of disease-modifying activity.  A total of 73 out of 75 (97%) patients without pes cavus who completed MOXIe Part 2 enrolled in the MOXIe Extension.  On September 10, 2021, we presented a poster at the International Parkinson and Movement Disorder Society Virtual Congress with an update to the Delayed-Start Analyses increasing from 9 to 13 patients in the placebo-to-omaveloxolone group and increasing from 11 to 17 patients in the omaveloxolone-to-omaveloxolone group.  A longitudinal analysis used to calculate annualized slopes incorporating all available data from the MOXIe Extension showed similar slopes in mFARS for the placebo-to-omaveloxolone group (0.29 ± 0.68 points per year) when compared to the omaveloxolone-to-omaveloxolone group (0.17 ± 0.61 points per year) with no significant difference between slopes (p=0.85).  The resulting parallel trajectories between both treatment groups are consistent with disease-modifying activity.

On September 30, 2021, we announced that we completed our pre-NDA meeting with the FDA for omaveloxolone for the treatment of patients with FA.  The purpose of the pre-NDA meeting was to discuss the content of Reata’s planned NDA submission for full approval for omaveloxolone for the treatment of FA. We are not planning to conduct a second pre-approval clinical study prior to the NDA submission. In response to our questions about the contents of the filing, and because of the seriousness of the indication, the FDA exercised its discretion, subject to review, to permit us to submit the results of certain clinical pharmacology and nonclinical studies after approval.  We continue to work with the FDA as we finalize the NDA package for submission during the first quarter of 2022.

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Omaveloxolone in Other Potential Indications

Omaveloxolone is a promising platform molecule.  Because mitochondrial dysfunction is a key feature of many neurological and neuromuscular diseases, we believe omaveloxolone may be broadly applicable to treat such diseases by activating Nrf2 to normalize and improve mitochondrial function and ATP production.

Based on our understanding of the pathophysiology of neurological diseases, characterized by mitochondrial dysfunction, inflammation, and oxidative stress, we believe omaveloxolone may be applicable to diseases such as progressive supranuclear palsy, Parkinson’s disease, frontotemporal dementia, Huntington’s disease, Amyotrophic lateral sclerosis (ALS), Alzheimer’s disease, and epilepsy.  Consistent with this, we have observed compelling activity of omaveloxolone and our other Nrf2 activators in preclinical models of many of these diseases.

Our Nrf2 activators reduced seizure frequency in refractory, progressive epilepsy models and restored mitochondrial function in patient biopsy samples and preclinical models of FA, ALS, familial and sporadic Parkinson’s disease, and frontotemporal dementia.  In clinical trials, improvements in neuromuscular function have been observed in FA patients treated with omaveloxolone as assessed by mFARS, and improvements in mitochondrial function, as measured by reductions in blood lactate and heart rate, have been observed in patients with primary mitochondrial disease.  Accordingly, we believe that omaveloxolone has the potential to treat a number of neurological and neuromuscular diseases that currently have few or no effective therapies, 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

RTA 901 is the lead product candidate from our Hsp90 modulator program, which includes highly potent and selective C-terminal modulators of Hsp90.  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.

Historically, other companies have explored N-terminal Hsp90 inhibitors for cancer therapeutics; however, this approach has been associated with multiple adverse effects including peripheral neuropathy and ocular toxicity.  Binding at the C-terminus of Hsp90 leads to increased transcription of Hsp70, a cytoprotective and molecular chaperone gene, which facilitates cell survival in response to stress without the deleterious activities of N-terminal inhibition.

In preclinical rodent disease models, we observed that RTA 901 administered orally once-daily rescued existing nerve function, restored thermal and mechanical sensitivity within four weeks, and improved nerve conductance velocity and mitochondrial function.  These effects are dose-dependent, reversible, and Hsp70-dependent.

We completed a Phase 1 single and multiple ascending dose trial of oral, once-daily RTA 901 in healthy adult volunteers to evaluate the safety, tolerability, and pharmacokinetic (PK) profile.  The PK was linear up to the highest doses evaluated with a half-life ranging from two to nine hours, and exposures were easily achievable in 10-fold excess of those necessary for efficacy in multiple animal models.  No safety or tolerability concerns were reported.  Due to additional delays in clinical drug supply, we now plan to initiate additional Phase 1 studies to evaluate the PK and drug-drug interaction potential of RTA 901 in the first half of 2022 and a randomized, placebo-controlled Phase 2 study in diabetic peripheral neuropathic pain (DPNP) in the second half of 2022.

There are about four million patients with moderate to severe DPNP in the United States, and about two million adult patients diagnosed with DPNP seek treatment annually.  We are the exclusive licensee of RTA 901 and maintain worldwide commercial rights.

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U.S. Commercial Readiness

We are actively building the necessary commercial infrastructure in the United States to effectively support the commercialization of our product candidates, bardoxolone for the treatment of patients with CKD caused by Alport syndrome and omaveloxolone for the treatment of patients with FA.  Our ability to launch bardoxolone and omaveloxolone is dependent on the acceptance and successful defense of an NDA and approval by the FDA.  

The FDA has granted a PDUFA date of February 25, 2022 for bardoxolone for the treatment of patients with CKD caused by Alport syndrome. If approved, we anticipate that bardoxolone will be our first US product launch, and our commercial readiness efforts align with this date. In the United States, our commercial leadership team is in place. We are expanding quality and compliance functions to support commercialization and are building the organization, infrastructure, systems, and processes necessary for the launch of bardoxolone, including sales, marketing, market access, patient support, and distribution.  We recently hired a team of payer account directors focused on educating private and public payers about Alport syndrome, disease severity, and the need to treat diagnosed patients.  Their role is to facilitate coverage and reimbursement of bardoxolone for Alport syndrome upon approval.  We have hired our regional business directors who will be responsible for hiring our clinical sales specialists and for driving sales at approval.

Launch readiness efforts are underway for omaveloxolone for the treatment of patients with FA in the United States.  We are efficiently building core functions for our bardoxolone program to also support the planned launch of omaveloxolone for FA, including shared distribution, access and patient hub services, IT, insights, and analytics functions. Disease awareness efforts to help providers more quickly identify FA patients are underway, and we continue to engage with the patient community through multiple digital and social platforms.

If and when we receive regulatory approval for our product candidates, we plan to utilize a specialty pharmacy distribution model to support product availability to patients, with a patient-centered hub to support on-label utilization, ease of access, and patient education and compliance.  We also completed preliminary field force sizing and structure for our sales teams and have launched disease awareness campaigns to educate physicians about Alport syndrome and FA.  Trade names for bardoxolone and omaveloxolone have been selected.

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 Kyowa Kirin, from sales of our securities, secured loans, and 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 Kyowa Kirin, from the Development Agreement with BXLS, and from reimbursements of expenses under the terms of our agreement with Kyowa Kirin.  We have incurred losses in each year since our inception, other than in 2014. As of September 30, 2021, we had $713.2 million of cash and cash equivalents and an accumulated deficit of $1,170.2 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 Kyowa Kirin, 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 potentially commercialize 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.

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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 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 Kyowa Kirin Agreement, the AbbVie License Agreement, and the Collaboration Agreement and consists of upfront payments and milestone payments.  License revenue recorded with respect to the Kyowa Kirin Agreement, the AbbVie License Agreement, and the 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 Collaboration Agreement.  Under the Kyowa Kirin Agreement, we only expect to recognize the deferred revenue through mid-2022.

On July 27, 2021, Kyowa Kirin submitted an NDA in Japan to the MHLW for bardoxolone for improvement of renal function in patients with Alport syndrome.  Based on this submission, we earned a $5.0 million milestone payment, variable consideration previously considered constrained, under the Kyowa Kirin Agreement. As a result, we recorded $4.7 million in collaboration revenue, a cumulative catch-up for the portion of this milestone that was satisfied in prior periods, and $0.3 million in deferred revenue that will be recognized over the remaining performance obligation period, ending in June 2022.

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, 2021, we have incurred a total of $1,048.3 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 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:

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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 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, Kyowa Kirin 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.

The following table summarizes our research and development expenses incurred:

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.

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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 premiums, legal, audit and tax fees, compliance with the Sarbanes-Oxley Act of 2002, 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 our 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 Taxes on Income

Benefit from taxes on income consists of net loss, taxed at federal tax rates and adjusted for certain permanent differences. Realization of deferred tax assets is generally dependent upon future earnings by jurisdiction, of which the timing and amount are uncertain for the majority of our deferred tax assets, and valuation allowances are maintained against them.  Changes in valuation allowances also affect the tax provision.

Results of Operations

Comparison of the Three Months Ended September 30, 2021, and 2020 (unaudited)

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

** Percentage not meaningful

Revenue

License and milestone revenue represented approximately 75% and 84% of total revenue for the three months ended September 30, 2021 and 2020, respectively, and consisted of the recognition of Kyowa Kirin deferred revenue.  The increase in license and milestone revenue is primarily due to the achievement of a regulatory milestone, variable consideration previously considered constrained, under the Kyowa Kirin Agreement.  As a result, we recorded $4.7 million in collaboration revenue, a cumulative catch-up for the portion of this milestone that was satisfied in prior periods.

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Other revenue increased during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to an increase in reimbursements of expenses from Kyowa Kirin for manufacturing expenses incurred.

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 $2.2 million, or 6%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020.  The increase was primarily due to increased personnel and personnel-related costs to support the product development activities, offset by a decrease in spend related to manufacturing activities of omaveloxolone.

Research and development expenses, as a percentage of total expenses, was 60% and 66% for the three months ended September 30, 2021 and 2020, respectively.  The decrease of 6% was due to the proportionately larger increase in general and administrative expenses, which was primarily due to increased commercial readiness activities.

General and Administrative Expenses

General and administrative expenses increased by $7.4 million, or 41%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020. The increase was primarily due to increased spend related to commercial readiness activities and personnel and personnel-related costs to support growth in our development activities.

General and administrative expenses, as a percentage of total expenses, was 39% and 33%, for the three months ended September 30, 2021 and 2020, respectively. The increase of 6% was due to the proportionately larger increase in general and administrative expenses, compared to research and development expenses.

Other Income (Expense), Net

Other income (expense), net increased by $2.6 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020.  The increase was primarily due to an increase in non-cash interest expense on liability related to the sale of future royalties.

Benefit from Taxes on Income

Benefit from taxes on income was immaterial for the three months ended September 30, 2021 and 2020.

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Comparison of the Nine Months Ended September 2021, and 2020 (unaudited)

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