# ARDELYX, INC. (ARDX) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ARDELYX, INC.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1437402/000162828025006653/ardx-20241231.htm
Accession: 0001628280-25-006653
Filing date: 2025-02-20
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ARDX/
All MD&A years: /company/ARDX/mda/
Previous year: /company/ARDX/mda/fy2023/ (FY 2023)
Next year: /company/ARDX/mda/fy2025/ (FY 2025)

ITEM 7.    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 in conjunction with our financial statements and related notes included elsewhere in this report. This discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled “Risk Factors.” These forward-looking statements speak only as of the date hereof. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason. Unless the context requires otherwise, the terms “Ardelyx,” “we,” “us,” “our” and “the Company” refer to Ardelyx, Inc.

EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

We are a biopharmaceutical company founded with a mission to discover, develop and commercialize innovative, first-in-class medicines that meet significant unmet medical needs. We developed a unique and innovative platform that enabled the discovery of new biological mechanisms and pathways to develop potent and efficacious therapies that minimize the side effects and drug-drug interactions frequently encountered with traditional, systemically absorbed medicines. The first molecule we discovered and developed was tenapanor, a minimally absorbed, first-in-class, oral, small molecule therapy. Tenapanor, branded as IBSRELA®, is approved in the U.S. for the treatment of adults with IBS-C. Tenapanor, branded as XPHOZAH®, is approved in the U.S. to reduce serum phosphorus in adults with CKD on dialysis as add-on therapy in patients who have an inadequate response to phosphate binders or who are intolerant of any dose of phosphate binder therapy.

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Below is a summary of our product sales, net by product for the years ended December 31 and total cash, cash equivalents and short-term investments as of December 31:

[[GREPCENT_TABLE]]
[["(in thousands)","","","","","2024","","2023"],["IBSRELA product sales, net","","","","","$","158,286","","","$","80,062"],["XPHOZAH product sales, net","","","","","160,910","","","2,464"],["Total product sales, net","","","","","$","319,196","","","$","82,526"],["Cash, cash equivalents and short-term investments","","","","","$","250,100","","","$","184,299"]]
[[/GREPCENT_TABLE]]

IBSRELA and XPHOZAH product sales have continually grown since their respective commercial launches. IBSRELA net sales growth was attributed to patient demand for this first-in-class therapy as well as increased product awareness achieved through the IBSRELA field-based team. XPHOZAH’s commercial launch has been met with a strong response from the prescribing community and net sales continued to increase during 2024, the first full year of commercialization. As of January 1, 2025, we no longer receive reimbursement for XPHOZAH from Medicare Part D following the decision by the Centers of Medicare and Medicaid Services to eliminate Medicare Part D reimbursement to transition oral only therapies, including XPHOZAH, into the End Stage Renal Disease Prospective Payment System. Patient access to XPHOZAH remains through a prescription written by a qualifying healthcare provider through our ArdelyxAssist specialty pharmacy partner. Patients who do not have affordable access will be evaluated for eligibility to receive XPHOZAH fulfilled by our Ardelyx patient assistance program.

The increase in our cash, cash equivalents and short-term investment was attributed to higher product sales, net and incremental borrowings. During 2024, we amended the 2022 Loan Agreement with SLR and drew an additional $100.0 million in debt as discussed in Note 9. Borrowing. We expect that we will increasingly rely on cash generated from operations to fund our operating plan. We believe our existing cash, cash equivalents and short-term investments, and cash generated from operations will be sufficient to satisfy our anticipated cash needs for operations for at least the next few years. Our access to additional capital, including our ability to source cash from future equity sales and debt financing, provides us financial flexibility to execute our principal strategy as discussed below.

Strategy

We are committed to our mission of discovering, developing and commercializing first-in-class medicines that address unmet patient needs. Our principal strategy is to maintain our commercial momentum with our current products while identifying additional assets that leverage our core capabilities, including clinical, developmental and regulatory expertise and commercial excellence while maintaining a solid financial foundation, to support our future growth.

Our priorities include: (i) accelerating IBSRELA growth momentum; (ii) executing our XPHOZAH strategy to grow utilization; (iii) building a pipeline focused on areas of unmet patient need; and (iv) continuing to deliver strong commercial and financial performance.

RECENT ACCOUNTING PRONOUNCEMENTS

A summary of recent accounting pronouncements that we have adopted or may expect to adopt is included in Note 2. Summary Of Significant Accounting Policies in the notes to our financial statements, included in Part II, Item 8, of this Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A detailed discussion of our significant accounting policies can be found in Note 2. Summary Of Significant Accounting Policies, in the notes to our financial statements, included in Part II, Item 8, of this Annual Report on Form 10-K. The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. Our critical accounting policies are those that significantly affect our financial condition and results of operations and require the most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain.

While we believe that our estimates, assumptions and judgments are reasonable, they are based on information available when the estimate or assumption was made. Actual results may differ significantly. Additionally, changes in our assumptions, estimates or assessments due to unforeseen events or otherwise could have a material impact on our financial position or results of operations.

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Revenue Recognition

The application of ASC 606 Revenue from Contracts with Customers substantially impacts our reported results, particularly product sales, net, which requires certain estimates in determining the transaction price. Total revenues are recognized following a five-step model: (i) identify the customer contract; (ii) identify the contract’s performance obligations; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue when or as a performance obligation is satisfied.

Product Sales, Net

GTN adjustments are primarily a function of sales volume, payor mix, contractual or legislative discounts and rebates. The transaction price for product sales, net is reduced for estimates of variable consideration related to GTN adjustments for discounts and chargebacks, rebates, wholesaler and GPO fees, copay assistance and returns. Except for certain wholesaler and GPO fees and discounts, which are based on contracts, these adjustments involve estimation and judgment. The GTN adjustments for rebates, copay assistance and chargebacks are impacted by our estimate of payor mix, which requires significant judgment. We consider legal interpretations of applicable laws and regulations, historical experience, current contract prices under applicable programs, unbilled claims, processing time lags and inventory levels in the distribution channel in determining our estimates. Estimates are assessed each period and adjusted as required to revise information or actual experience.

Discounts and chargebacks:

Our U.S. business participates in programs with government entities, the most significant of which are the U.S. Department of Defense and the U.S. Department of Veterans Affairs, and other parties, including covered entities under the 340B program, whereby pricing on products is extended below wholesaler list price to participating entities. These entities purchase products through wholesalers at the lower program price and the wholesalers then charge us the difference between their acquisition cost and the lower program price. Accounts receivable is reduced for the estimated amount of unprocessed chargeback claims attributable to a sale (typically within a two to four week time lag).

Our Customers may also receive prompt pay discounts for payment within a specified period, generally approximating two percent of the invoiced sales price. Our payment terms are generally 30 to 60 days. We expect discounts to be earned when offered and we deduct the full amount of these discounts from product sales when revenue is recognized.

Accounts receivable is reduced for the estimated amount of fees and cash discount at the time of sale and the discount is typically taken by the customer within contractual terms.

Rebates, wholesaler and GPO fees:

Our U.S. business participates in state government Medicaid and Medicare programs and other qualifying Federal and state government programs requiring discounts and rebates to participating state and local government entities. All discounts and rebates provided through these programs are included in our Medicaid and Medicare rebate accruals. Medicaid rebates have also been extended to drugs used in managed Medicaid plans. The estimated amount of unpaid or unbilled rebates and discounts is presented as a liability. Settlement of Medicare and Medicaid accruals can lag for multiple quarters due to extensive time delays between recording an accrual and subsequent receipt of an invoice. Due to this lag, adjustments can incorporate revision of several prior quarters. Through December 31, 2024, we paid a 70% discount to CMS when the Medicare Part D beneficiaries were in the coverage gap. Beginning in 2025, as part of the Medicare Part D redesign within the IRA, there is a $2,000 cap for out-of-pocket costs for Medicare Beneficiaries and manufacturers are responsible for 10% of costs up to the cap and 20% after the cap is reached.

Wholesaler and GPO administrative fees are a significant portion of our GTN adjustments, however, since they are based on contracts, they require inherently less estimation.

Copay assistance and returns:

Patients who have commercial insurance may receive copay assistance when product is dispensed by pharmacies to patients. We estimate the amount of copay assistance provided to eligible patients based on the terms of the program and redemption information provided by third-party claims processing organizations. We also estimate the amount of copay assistance that we will provide to patients associated with product we have sold but has not yet been dispensed to commercial patients, which requires significant estimation and judgment. Our estimates are recorded in accrued expenses and other current liabilities on the balance sheets.

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Considering the timing of our respective product launches, and limited experiences with returns, we are primarily reliant on historical sales returns of similar products, such as those within the same product line, similar therapeutic area, similar distribution model, estimated levels of inventory in the distribution channel and projected demand. We increasingly rely on our products’ actual returns history and other factors, including levels of our inventory in the distribution channel and estimated shelf life, to estimate our returns. Our estimates are recorded in accrued expenses and other current liabilities on the balance sheets.

Use of Information from External Sources:

Information from external sources is used to estimate GTN adjustments. Our estimate of inventory at the wholesalers is based on the historical inventory experience, as well as our analysis of third-party information, including written and oral information obtained from certain wholesalers with respect to their inventory levels and sell-through to customers and our internal information. The inventory information received from wholesalers is a product of their recordkeeping process and excludes inventory held by intermediaries to whom they sell, such as retailers and hospitals. We also use information from external sources to identify prescription trends, patient demand and average selling prices. Our estimates are subject to inherent limitations of estimates that rely on third-party information, as certain third-party information was itself in the form of estimates and reflect other limitations including lags between the date as of which third-party information is generated and the date on which we receive third-party information.

RESULTS OF OPERATIONS

Revenue

Our revenue to date has been generated primarily through a combination of product sales and payments in connection with license, research and development collaborative agreements with our various collaboration partners. In the future, we may generate revenue from a combination of our own product sales and payments in connection with our current or future collaborative partnerships, including license fees, other upfront payments, milestone payments, royalties and payments for drug product and/or drug substance. We expect that any revenue we generate will fluctuate in future periods as a result of many factors as described in Part I, Item 1A, “Risk Factors,” of this Annual Report on Form 10-K.

Below is a summary of our total revenues:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change 2024 vs. 2023","","Change 2023 vs. 2022"],["($ in thousands)","2024","","2023","","2022","$","","%","","$","","%"],["Product sales, net","$","319,196","","","$","82,526","","","$","15,600","","","$","236,670","","","287","%","","$","66,926","","","429","%"],["Product supply revenue","11,649","","","6,121","","","1,527","","","5,528","","","90","%","","4,594","","","301","%"],["Licensing revenue","78","","","35,809","","","35,031","","","(35,731)","","","(100)","%","","778","","","2","%"],["Non-cash royalty revenue related to the sale of future royalties","2,692","","","\u2014","","","\u2014","","","2,692","","","(a)","","\u2014","","","(a)"],["Total revenues","$","333,615","","","$","124,456","","","$","52,158","","","$","209,159","","","168","%","","$","72,298","","","139","%"]]
[[/GREPCENT_TABLE]]

(a) Percent change is not meaningful.

Below is a summary of our product sales, net by product:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(in thousands)","2024","","2023","","2022"],["Product sales, net"],["IBSRELA","$","158,286","","","$","80,062","","","$","15,600"],["XPHOZAH","160,910","","","2,464","","","\u2014"],["Total product sales, net","$","319,196","","","$","82,526","","","$","15,600"]]
[[/GREPCENT_TABLE]]

Product sales, net:

The increase in IBSRELA product sales, net in 2024 and 2023 was due to higher demand since its commercial launch in March 2022, reflecting continued increase in awareness and prescriber experience. In addition, the increase in 2024 was attributable to the completion of our field-base team expansion.

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The increase in XPHOZAH product sales, net in 2024 and 2023 was due to higher demand since its commercial launch in November 2023. As of January 1, 2025, we no longer receive reimbursement for XPHOZAH from Medicare Part D following the decision by the Centers of Medicare and Medicaid Services to eliminate Medicare Part D reimbursement to transition oral only therapies, including XPHOZAH, into the End Stage Renal Disease Prospective Payment System. Patient access to XPHOZAH remains through a prescription written by a qualifying healthcare provider through our ArdelyxAssist specialty pharmacy partner. Patients who do not have affordable access will be evaluated for eligibility to receive XPHOZAH fulfilled by our Ardelyx patient assistance program.

Product supply revenue:

The increase in product supply revenue in 2024 and 2023 was due to product supply shipments to our collaboration partners, primarily Kyowa Kirin, under our respective commercial supply agreements in support of non-US launches.

Licensing revenue:

Licensing revenue is primarily impacted by the timing of regulatory and commercial milestone achievements from our out-licensing partners, as well as sales-based royalties received from Knight. The 2023 licensing revenue included $30.0 million in payments received under the Kyowa Kirin Agreement, following Kyowa Kirin’s submission to the Japanese MHLW for the NDA for tenapanor in the improvement of hyperphosphatemia in adult patients with CKD on dialysis; and a $5.0 million payment under the Fosun Agreement, following the NDA acceptance by China’s Center for Drug Evaluation of the NMPA for tenapanor in the control of serum phosphorus in adult patients with CKD on hemodialysis and the U.S. FDA approval of XPHOZAH to reduce serum phosphorus in adults with CKD on dialysis as add-on therapy in patients who have an inadequate response to phosphate binders or who are intolerant of any dose of phosphate binder therapy.

Non-cash royalty revenue:

Non-cash royalty revenue in 2024 was attributable to royalties from Kyowa Kirin for sales of PHOZEVEL in Japan since its launch in February 2024, which we remitted to HCR upon receipt in accordance with the HCR Agreement.

GTN Adjustments

We recognize product sales net of GTN adjustments that are further described in Note 6. Revenue and the “Critical Accounting Policies and Estimates” caption in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Reconciliation of gross product sales to product sales, net by GTN adjustment category is as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["($ in thousands)","2024","","2023","","2022"],["Gross product sales","$","429,053","","","$","113,861","","","$","21,648"],["GTN adjustments","(109,857)","","","(31,335)","","","(6,048)"],["Product sales, net","$","319,196","","","$","82,526","","","$","15,600"],["GTN adjustment percentage","25.6","%","","27.5","%","","27.9","%"]]
[[/GREPCENT_TABLE]]

GTN adjustments are primarily a function of sales volume, payor mix, contractual or legislative discounts and rebates. Adjustments to provisions for product sales made in prior periods due to changes in estimates were not significant for any of the years presented. The decrease in GTN adjustment percentage in 2024 was primarily due to a higher percentage of sales which had a more favorable GTN rate. The reduction was mainly due to lower sales subjected to copay assistance and contractual chargebacks which had higher GTN adjustment percentages. We expect GTN adjustment percentages to increase in the future due to unfavorable payor mix shifts associated with loss of XPHOZAH Medicare Part D reimbursement beginning January 1, 2025.

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The activities and ending reserve balances for each significant category of GTN adjustments on product sales, net, which constitute variable consideration, were as follows:

[[GREPCENT_TABLE]]
[["(in thousands)","Discounts and chargebacks","","Rebates, wholesaler and GPO fees","","Copay assistance and returns","","Total"],["Balance as of December 31, 2022","$","142","","","$","1,444","","","$","1,258","","","$","2,844"],["Provisions","5,341","","","15,365","","","10,629","","","31,335"],["Credits/payments","(5,005)","","","(12,575)","","","(7,971)","","","(25,551)"],["Balance as of December 31, 2023","478","","","4,234","","","3,916","","","8,628"],["Provisions","15,099","","","65,833","","","28,925","","","109,857"],["Credits/payments","(13,934)","","","(55,592)","","","(21,671)","","","(91,197)"],["Balance as of December 31, 2024","$","1,643","","","$","14,475","","","$","11,170","","","$","27,288"]]
[[/GREPCENT_TABLE]]

Adjustments to prior period provisions recorded in the current period were not material.

Expenses

Below is a summary of our cost of goods sold, operating expenses, interest expense, non-cash interest expense related to the sale of future royalties and other income, net:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change 2024 vs. 2023","","Change 2023 vs. 2022"],["($ in thousands)","2024","","2023","","2022","","$","","%","","$","","%"],["Cost of product sales","$","6,851","","","$","2,323","","","$","566","","","$","4,528","","","195","%","","$","1,757","","","310","%"],["Other cost of revenue","43,705","","","15,472","","","3,551","","","28,233","","","182","%","","11,921","","","336","%"],["Total cost of goods sold","$","50,556","","","$","17,795","","","$","4,117","","","$","32,761","","","184","%","","$","13,678","","","332","%"],["Research and development","$","52,317","","","$","35,536","","","$","35,201","","","$","16,781","","","47","%","","$","335","","","1","%"],["Selling, general and administrative","258,692","","","134,401","","","76,599","","","124,291","","","92","%","","57,802","","","75","%"],["Total operating expenses","$","311,009","","","$","169,937","","","$","111,800","","","$","141,072","","","83","%","","$","58,137","","","52","%"],["Interest expense","$","(13,006)","","","$","(4,950)","","","$","(3,400)","","","$","(8,056)","","","163","%","","$","(1,550)","","","46","%"],["Non-cash interest expense related to the sale of future royalties","(7,088)","","","(3,924)","","","(1,673)","","","(3,164)","","","81","%","","(2,251)","","","135","%"],["Other income, net","9,174","","","6,630","","","1,633","","","2,544","","","38","%","","4,997","","","306","%"]]
[[/GREPCENT_TABLE]]

Cost of Goods Sold

Cost of product sales consists of the cost of commercial goods sold to our Customers and includes the cost of materials, third-party contract manufacturing, third-party packaging services, freight, labor costs for personnel involved in the manufacturing process and indirect overhead costs. Other cost of revenue consists of the cost of materials sold to our international partners under product supply agreements, certain costs related to capacity expansion at current and future CMOs, as well as payments due to AstraZeneca based on sales of tenapanor. See the “AstraZeneca” caption in Note 7. Collaboration And Licensing Agreements for further detail.

Cost of product sales:

The increase in cost of product sales in 2024 and 2023 was due to higher product sales. A portion of the costs of IBSRELA and XPHOZAH units recognized as revenue during the years ended December 31, 2024 and 2023 were expensed as research and development expenses in periods prior to the commencement of capitalization of inventory costs for each respective product as discussed in Note 2. Summary Of Significant Accounting Policies. The cost associated with inventory sold but previously expensed as research and development was $6.3 million, $4.4 million and $1.9 million in 2024, 2023 and 2022, respectively. The value of inventory on hand as of December 31, 2024 and 2023 that was previously expensed as research and development was approximately $15.6 million and $21.8 million, respectively.

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Other cost of revenue:

The increase in other cost of revenue in 2024 and 2023 was primarily due to higher AstraZeneca royalties, driven by higher product sales, net of tenapanor. In 2023, AstraZeneca royalties attributed to licensing revenue had a greater impact on the obligation than royalties from product sales, net. Other cost of revenue related to the AstraZeneca Termination Agreement was $34.7 million, $12.4 million and $3.6 million in 2024, 2023 and 2022, respectively. The remaining future royalty obligation to AstraZeneca was $12.1 million as of December 31, 2024. In addition, the increase in other cost of revenue was due to higher product supply revenue and costs associated with that revenue.

Research and Development

Research and development activities include research and early discovery, preclinical and clinical development, drug formulation and medical support to marketed products. External R&D expenses include research and development expenses incurred under agreements with outside consultants, third-party CROs and investigative sites where a substantial portion of our clinical studies are conducted, and with CMOs where our clinical supplies are produced; employee-related expenses, which include salaries, bonuses, benefits, travel and stock-based compensation; expenses associated with supplies and materials consumed in connection with our research operations; and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation and amortization expense, information technology expense and other supplies.

Below is a summary of our research and development expenses:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change 2024 vs. 2023","","Change 2023 vs. 2022"],["($ in thousands)","2024","","2023","","2022","","$","","%","","$","","%"],["External R&D and other expenses","$","20,723","","","$","15,213","","","$","17,011","","","$","5,510","","","36","%","","$","(1,798)","","","(11)","%"],["Employee-related expenses","27,541","","","17,391","","","15,065","","","10,150","","","58","%","","2,326","","","15","%"],["Facilities, equipment, depreciation and other expenses","4,053","","","2,932","","","3,125","","","1,121","","","38","%","","(193)","","","(6)","%"],["Total research and development expenses","$","52,317","","","$","35,536","","","$","35,201","","","$","16,781","","","47","%","","$","335","","","1","%"]]
[[/GREPCENT_TABLE]]

The increase in R&D expenses in 2024, including other R&D expenses, primarily reflected increased medical engagement with scientific communities in the areas of gastroenterology and nephrology related to our marketed products. The increase in external R&D expenses was also attributable to clinical trial and pharmacovigilance activities. The increase in employee-related R&D expenses was the result of increases in headcount and personnel costs, including an increase in stock-based compensation expenses totaling $6.0 million and $0.4 million in 2024 and 2023, respectively.

R&D expenses in 2023 remained relatively stable as compared to 2022, however, the focus of 2023 activities primarily shifted towards medical and pharmacovigilance efforts supporting our marketed products. Whereas, in 2022, activities focused more on clinical activities in preparation for the respective regulatory approvals.

Selling, General and Administrative

Selling, general and administrative expenses relate to sales and marketing, finance, human resources, legal and other administrative activities, including information technology investments. Selling, general and administrative expenses consist primarily of personnel costs, outside professional services, marketing, advertising and legal expenses, facilities costs not otherwise allocated to research and development and other general and administrative costs.

The increase in selling, general and administrative expenses in 2024 and 2023 was primarily due to increased commercialization and administrative costs to support net sales growth of IBSRELA and XPHOZAH and to support our strategy. The increases consisted of external spending for disease awareness initiatives, patient affordability, access support and related patient awareness, as well as increased commercial infrastructure and increased legal fees incurred related to the Company’s lawsuit against CMS in 2024. The increase was also attributable to increases in headcount and related personnel costs, including an increase in stock-based compensation expense totaling $17.8 million and $2.4 million in 2024 and 2023, respectively.

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Interest Expense

Interest expense represents the interest associated with our loan agreements.

The increase in interest expense in 2024 and 2023 was due to a higher loan balance resulting from the term loan draws in each respective year: $50.0 million for the Term D Loan in October 2024, $50.0 million for the Term C Loan in March 2024, and $22.5 million for the Term B Loan in October 2023.

Non-Cash Interest Expense Related to the Sale of Future Royalties

Non-cash interest expense related to the sale of future royalties represents the imputed interest expense on our deferred royalty obligation related to the sale of future royalties using the effective interest method. Non-cash interest expense is impacted by the outstanding balance of the deferred royalty obligation, which increases from milestone payments received from HCR under the sale of future royalties agreement and imputed interest accrued on the outstanding deferred royalty obligation, and decreases as royalties received from Kyowa Kirin related to the sale of tenapanor for cardiorenal indications in Japan are subsequently remitted to HCR. Refer to Note 8. Deferred Royalty Obligation Related To The Sale Of Future Royalties for further detail.

The increase in non-cash interest expense related to the sale of future royalties in 2024 and 2023 was due to the increasing outstanding balance of the deferred royalty obligation attributed to the upfront milestones received from HCR, including the $10.0 million upfront payment received in June 2022 and the $5.0 million milestone payment received in October 2023 as a result of Kyowa Kirin’s receipt of regulatory approval to market tenapanor for hyperphosphatemia in Japan in February 2024 and imputed interest accrued on the outstanding balance. In 2024, we began to receive royalties from Kyowa Kirin which were remitted to HCR, thereby reducing the outstanding deferred royalty obligation.

Other Income, Net

Other income, net consists of interest income earned on our cash, cash equivalents and short-term investments, the periodic revaluation of the exit fees related to our loan agreements, as well as currency exchange gains and losses.

The increase in other income, net in 2024 and 2023 primarily reflected higher income on our investments, resulting from both higher interest rates and larger investment balances throughout the periods.

Provision for Income Taxes

Our provision for income taxes includes current and deferred tax, including foreign withholding taxes paid on payments received from certain collaboration partners. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their income tax bases, as well as from net operating loss and tax credit carryforwards. Our deferred tax assets continue to be fully offset by a valuation allowance, including deferred tax assets related to our net operating loss and tax credit carryforwards, which may be subject to annual limitations as a result of ownership changes that may have occurred or could occur in the future.

Refer to Note 2. Summary Of Significant Accounting Policies for further discussion of our significant accounting policies.

LIQUIDITY AND CAPITAL RESOURCES

Below is a summary of our cash, cash equivalents and short-term investments:

[[GREPCENT_TABLE]]
[["","December 31,","","Change 2024 vs. 2023"],["($ in thousands)","2024","","2023","","$","","%"],["Cash and cash equivalents","$","64,932","","","$","21,470","","","$","43,462","","","202","%"],["Short-term investments","185,168","","","162,829","","","22,339","","","14","%"],["Total liquid funds","$","250,100","","","$","184,299","","","$","65,801","","","36","%"]]
[[/GREPCENT_TABLE]]

We regularly assess our cash position and our working capital needs to execute our strategy. Our primary uses of cash to date have been to fund research and development expenditures related to our development of tenapanor and to support the commercialization of our marketed products. We have funded our operations primarily from the sale of common stock, product sales, funds from our collaboration partnerships, funds from our loan agreements with SLR, as well as sales of future royalties to HCR. We expect that we will increasingly rely on cash generated from operations to fund our operating plan while maintaining financial flexibility from our ability to source cash from future equity sales and debt financing.

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Under a registration statement filed in 2020, we had the ability to sell up to $150.0 million of our common stock through Jefferies, as our sales agent. As of March 2023, we had received the maximum gross proceeds of $150.0 million at a weighted average share price of approximately $1.57.

In January 2023, we filed a registration statement on Form S-3, which became effective in January 2023, containing (i) a base prospectus for the offering, issuance and sale by us of up to a maximum aggregate offering price of $250.0 million of our common stock, preferred stock, debt securities, warrants and/or units, from time to time in one or more offerings; and (ii) a prospectus supplement for the offering, issuance and sale by us of up to a maximum aggregate offering price of $150.0 million of our common stock that may be issued and sold, from time to time, under a sales agreement with Jefferies, deemed to be “at-the-market offerings” (2023 Open Market Sales Agreement). Pursuant to the 2023 Open Market Sales Agreement, Jefferies, as sales agent, may receive a commission of up to 3.0% of the gross sales price for shares of common stock sold under the 2023 Open Market Sales Agreement. As of December 31, 2024, we have completed sales pursuant to the 2023 Open Market Sales Agreement resulting in the issuance of 16.8 million shares of our common stock and receipt of gross proceeds of $70.0 million at a weighted average sales price of approximately $4.17.

We have a loan and security agreement (as amended, the 2022 Loan Agreement) with SLR. The 2022 Loan Agreement provides a total of $200.0 million, of which $150.0 million has been drawn as of December 31, 2024 to support our ongoing operations and the commercial launches of IBSRELA and XPHOZAH. The borrowings under the 2022 Loan Agreement bear interest at SOFR plus a spread based on our public debt rating. We classify outstanding borrowings under the 2022 Loan Agreement as long-term based on the maturity date of the loan. All the term loans mature on July 1, 2028. See Note 9. Borrowing for further discussion.

We believe our available cash, cash equivalents and short-term investments as of December 31, 2024 will be sufficient to fund our planned operations for at least a period of one year from the issuance of these financial statements. We have based this estimate on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect. In particular, our operating plan may change and we may require significant additional capital to fund our operations. There are no assurances that our efforts to meet our operating cash flow requirements will be successful. If our current cash, cash equivalents and short-term investments as well as our plans to meet our operating cash flow requirements are not sufficient to fund necessary expenditures and meet our obligations following the issuance of these financial statements, our liquidity, financial condition and business prospects will be materially affected.

Our future funding requirements will depend on many factors as described in Part I, Item 1A, “Risk Factors,” of this Annual Report on Form 10-K.

CASH FLOW ACTIVITIES

The following table summarizes our cash flows activities:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change 2024 vs. 2023","","Change 2023 vs. 2022"],["($ in thousands)","2024","","2023","","2022","","$","","%","","$","","%"],["Net cash used in operating activities","$","(44,809)","","","$","(89,717)","","","$","(70,044)","","","$","44,908","","","(50)","%","","$","(19,673)","","","28","%"],["Net cash (used in) provided by investing activities","(18,318)","","","(131,248)","","","18,415","","","112,930","","","(86)","%","","(149,663)","","","(813)","%"],["Net cash provided by financing activities","106,589","","","146,295","","","75,341","","","(39,706)","","","(27)","%","","70,954","","","94","%"],["Net increase (decrease) in cash and cash equivalents","$","43,462","","","$","(74,670)","","","$","23,712","","","$","118,132","","","(158)","%","","$","(98,382)","","","(415)","%"]]
[[/GREPCENT_TABLE]]

Cash Flows from Operating Activities

Net cash used in operating activities decreased in 2024 compared to 2023, primarily due to cash generated from higher product sales, net, partially offset by working capital cash uses to support our commercial growth. Net working capital cash outflows were driven primarily by increases in customer credit and inventory purchases, which were partially offset by increases in accounts payable and accruals.

Net cash used in operating activities increased in 2023 compared to 2022, primarily due to working capital cash uses to support our commercial launches, partially offset by cash generated from higher product sales, net from such launches. Net working capital cash outflows were driven primarily by increases in customer credit, upfront payments to CMOs for the commercial manufacturing of IBSRELA and XPHOZAH and increased prepaid selling and marketing spending.

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Cash Flows from Investing Activities

Net cash used in investing activities for 2024 and 2023 was primarily impacted by the timing of our investment maturities and purchases. In 2023, net investment purchases were significantly higher when compared to other reported periods. To a lesser extent, the 2024 cash used for investing activities included property, plant and equipment purchases associated with our new leased facility and build outs of existing facilities.

Cash Flows from Financing Activities

Net cash provided by financing activities decreased in 2024 compared to 2023, primarily due to $99.5 million net proceeds from the Term C Loan and Term D Loan and proceeds from the issuance of common stock under our equity incentive and stock purchase plans in 2024 which were less than $119.2 million received in 2023 from the issuance of common stock pursuant to at the market offerings. We have not received any proceeds under the 2021 Open Market Sales Agreement in 2024.

Net cash provided by financing activities increased in 2023 compared to 2022, primarily due to higher net proceeds from issuance of our common stock pursuant to the at the market offerings of $47.6 million, as well as net proceeds received of $22.4 million from drawing the Term B Loan as compared to net expenditure of $6.1 million in 2022 in conjunction with entering into the 2022 Loan Agreement and repaying the principal outstanding under the 2018 Loan. This increase was partially offset by lower net proceeds from the sale of future royalties to HCR of $5.0 million.

SMALLER REPORTING COMPANY AND LARGE ACCELERATED FILER STATUS

As a non-accelerated filer, we were not required to obtain an opinion of our independent auditors with respect to our internal controls over financial reporting for the year ended December 31, 2022. On June 30, 2023, our public float exceeded $700.0 million and therefore since January 1, 2024, we are considered a large accelerated filer. This Annual Report on Form 10-K includes an opinion of Ernst & Young LLP, our independent auditors with respect to our internal control over financial reporting as of December 31, 2024.